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UNITED BANKSHARES INC/WV - Quarter Report: 2019 September (Form 10-Q)

FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
W
ashington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the quarterly period ended
September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the transition period from
                    
to
                    
Commission File Number:    
002-86947
United Bankshares, Inc.
(Exact name of registrant as specified in its charter)
     
West Virginia
 
55-0641179
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
300 United Center
500 Virginia Street, East
Charleston, West Virginia
 
25301
(Address of principal executive offices)
 
Zip Code
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Registrant’s telephone number, including area code:
(304) 424-8716
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 $2.50 per share
 
UBSI
 
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 Data 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, 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 Act).    Yes  
    
No  
As of
October 31, 2019
, the registrant had
101,546,153
shares of common stock, $2.50 par value per share, outstanding. 

UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM
10-Q
TABLE OF CONTENTS
             
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
4
 
 
 
 
 
 
 
 
5
 
 
 
 
 
 
 
 
7
 
 
 
 
 
 
 
 
8
 
 
 
 
 
 
 
 
10
 
 
 
 
 
 
 
 
11
 
 
 
 
 
 
 
 
Item 2.
 
 
 
57
 
 
 
 
 
 
 
 
Item 3.
 
 
 
78
 
 
 
 
 
 
 
 
Item 4.
 
 
 
81
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
82
 
 
 
 
 
 
 
 
Item 1A.
 
 
 
82
 
 
 
 
 
 
 
 
Item 2.
 
 
 
82
 
 
 
 
 
 
 
 
Item 3.
 
 
 
83
 
 
 
 
 
 
 
 
Item 4.
 
 
 
83
 
 
 
 
 
 
 
 
Item 5.
 
 
 
83
 
 
 
 
 
 
 
 
Item 6.
 
 
 
83
 
 
 
 
 
 
 
 
84
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2
 

 
PART I - FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
The September 30, 2019 and December 31, 2018, consolidated balance sheets of United Bankshares, Inc. and Subsidiaries (“United” or the “Company”), consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2019 and 2018, the related consolidated statement of changes in shareholders’ equity for the three and nine months ended September 30, 2019 and 2018, the related condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018, and the notes to consolidated financial statements appear on the following pages.
 
3
 

CONSOLIDATED BALANCE SHEETS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except par value)
                 
 
September 30
 
 
December 31
 
 
2019
 
 
2018
 
 
(Unaudited)
   
(Note 1)
 
Assets
   
     
 
Cash and due from banks
  $
228,005
    $
187,886
 
Interest-bearing deposits with other banks
   
747,332
     
831,707
 
Federal funds sold
   
817
     
803
 
                 
Total cash and cash equivalents
   
976,154
     
1,020,396
 
Securities available for sale at estimated fair value (amortized cost-$2,425,849 at September 30, 2019 and $2,360,884 at December 31, 2018)
   
2,452,097
     
2,337,039
 
Securities held to maturity (estimated fair value-$1,472 at September 30, 2019 and $18,655 at December 31, 2018)
   
1,471
     
19,999
 
Equity securities at estimated fair value
   
8,914
     
9,734
 
Other investment securities
   
210,830
     
176,955
 
Loans held for sale (at fair value-$407,463 at September 30, 2019 and $247,104 at December 31, 2018)
   
412,194
     
249,846
 
Loans
   
13,637,238
     
13,429,532
 
Less: Unearned income
   
(3,811
)    
(7,310
)
                 
Loans net of unearned income
   
13,633,427
     
13,422,222
 
Less: Allowance for loan losses
   
(77,098
)    
(76,703
)
                 
Net loans
   
13,556,329
     
13,345,519
 
Bank premises and equipment
   
94,800
     
95,245
 
Operating lease
right-of-use
assets
   
60,318
     
0
 
Goodwill
   
1,478,014
     
1,478,014
 
Accrued interest receivable
   
57,626
     
60,597
 
Other assets
   
442,714
     
457,154
 
                 
TOTAL ASSETS
  $
19,751,461
    $
19,250,498
 
                 
                 
Liabilities
   
     
 
Deposits:
   
     
 
Noninterest-bearing
  $
4,572,122
    $
4,416,815
 
Interest-bearing
   
9,523,289
     
9,577,934
 
                 
Total deposits
   
14,095,411
     
13,994,749
 
Borrowings:
   
     
 
Federal funds purchased
   
0
     
23,400
 
Securities sold under agreements to repurchase
   
129,966
     
152,927
 
Federal Home Loan Bank (FHLB) borrowings
   
1,672,448
     
1,439,198
 
Other long-term borrowings
   
235,849
     
234,905
 
Reserve for lending-related commitments
   
1,776
     
1,389
 
Operating lease liabilities
   
63,987
     
0
 
Accrued expenses and other liabilities
   
197,682
     
152,306
 
                 
TOTAL LIABILITIES
   
16,397,119
     
15,998,874
 
                 
Shareholders’ Equity
   
     
 
Preferred stock, $1.00 par value;
Authorized-50,000,000
shares, none issued
   
0
     
0
 
Common stock, $2.50 par value;
Authorized-200,000,000
shares;
issued-105,464,161
and 105,239,121 at September 30, 2019 and December 31, 2018, respectively, including 3,908,465 and 2,915,633 shares in treasury at September 30, 2019 and December 31, 2018, respectively
   
263,660
     
263,098
 
Surplus
   
2,138,240
     
2,134,462
 
Retained earnings
   
1,104,837
     
1,013,037
 
Accumulated other comprehensive loss
   
(15,781
)    
(57,019
)
Treasury stock, at cost
   
(136,614
)    
(101,954
)
                 
TOTAL SHAREHOLDERS’ EQUITY
   
3,354,342
     
3,251,624
 
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $
19,751,461
    $
19,250,498
 
                 
 
 
 
 
 
 
 
 
 
 
See notes to consolidated unaudited financial statements.
 
4
 

Table of Contents
 
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
                                 
 
Three Months Ended
   
Nine Months Ended
 
 
September 30
   
September 30
 
 
2019
   
2018
   
2019
   
2018
 
Interest income
   
     
     
     
 
Interest and fees on loans
  $
165,149
    $
164,229
    $
505,150
    $
472,451
 
Interest on federal funds sold and other short-term investments
   
6,236
     
5,485
     
17,478
     
13,867
 
Interest and dividends on securities:
   
     
     
     
 
Taxable
   
18,168
     
13,994
     
53,279
     
39,679
 
Tax-exempt
   
798
     
1,322
     
2,786
     
4,218
 
                                 
Total interest income
   
190,351
     
185,030
     
578,693
     
530,215
 
                                 
Interest expense
   
     
     
     
 
Interest on deposits
   
36,368
     
26,368
     
104,461
     
61,101
 
Interest on short-term borrowings
   
539
     
618
     
1,838
     
1,503
 
Interest on long-term borrowings
   
11,526
     
9,269
     
35,755
     
25,671
 
                                 
Total interest expense
   
48,433
     
36,255
     
142,054
     
88,275
 
                                 
Net interest income
   
141,918
     
148,775
     
436,639
     
441,940
 
Provision for loan losses
   
5,033
     
4,808
     
15,446
     
16,190
 
                                 
Net interest income after provision for loan losses
   
136,885
     
143,967
     
421,193
     
425,750
 
                                 
Other income
   
     
     
     
 
Fees from trust services
   
3,574
     
3,350
     
10,276
     
9,545
 
Fees from brokerage services
   
2,378
     
2,787
     
7,668
     
6,964
 
Fees from deposit services
   
8,702
     
8,673
     
25,219
     
25,323
 
Bankcard fees and merchant discounts
   
1,262
     
1,549
     
3,520
     
4,384
 
Other service charges, commissions, and fees
   
568
     
532
     
1,665
     
1,640
 
Income from bank-owned life insurance
   
1,280
     
1,251
     
4,433
     
3,776
 
Income from mortgage banking activities
   
24,019
     
13,277
     
59,404
     
46,539
 
Net investment securities gains (losses)
   
116
     
(152
)    
66
     
(692
)
Other income
   
325
     
419
     
991
     
1,406
 
                                 
Total other income
   
42,224
     
31,686
     
113,242
     
98,885
 
                                 
Other expense
   
     
     
     
 
Employee compensation
   
46,313
     
41,312
     
129,563
     
125,268
 
Employee benefits
   
8,615
     
8,645
     
26,624
     
27,514
 
Net occupancy expense
   
8,698
     
9,273
     
26,116
     
27,776
 
Other real estate owned (OREO) expense
   
1,837
     
921
     
3,886
     
2,423
 
Equipment expense
   
3,698
     
3,892
     
10,688
     
10,328
 
Data processing expense
   
5,776
     
6,068
     
16,505
     
17,735
 
Bankcard processing expense
   
474
     
485
     
1,402
     
1,431
 
FDIC insurance expense
   
465
     
3,530
     
7,065
     
8,220
 
FHLB prepayment penalties
   
0
     
0
     
5,105
     
0
 
Other expense
   
20,258
     
19,189
     
58,800
     
56,482
 
                                 
Total other expense
   
96,134
     
93,315
     
285,754
     
277,177
 
                                 
Income before income taxes
   
82,975
     
82,338
     
248,681
     
247,458
 
Income taxes
   
17,010
     
17,926
     
51,867
     
55,066
 
                                 
Net income
  $
          65,965
    $
          64,412
    $
        196,814
    $
 
 
 
 
 
 
 
 
192,392
 
                                 
 
 
 
 
 
 
 
 
 
 
5
 

 
Table of Contents
 
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) - continued
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
 
                                 
 
Three Months Ended
   
Nine Months Ended
 
 
September 30
   
September 30
 
 
2019
   
2018
   
2019
   
2018
 
Earnings per common share:
   
     
     
     
 
Basic
  $
0.65
    $
0.62
    $
1.93
    $
1.84
 
                                 
Diluted
  $
0.65
    $
0.62
    $
1.93
    $
1.83
 
                                 
Average outstanding shares:
   
     
     
     
 
Basic
   
101,432,243
     
103,617,590
     
101,698,530
     
104,382,094
 
Diluted
   
101,711,740
     
103,933,959
     
101,967,135
     
104,679,876
 
 
 
 
 
See notes to consolidated unaudited financial statements
 
6
 

 
Table of Contents
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
                                 
 
Three Months Ended
   
Nine Months Ended
 
 
September 30
   
September 30
 
 
2019
   
2018
   
2019
   
2018
 
Net income
  $
65,965
    $
64,412
    $
196,814
    $
192,392
 
Change in net unrealized gain (loss) on
available-for-sale
(AFS) securities, net of tax
   
3,637
     
(7,579
)    
38,420
     
(30,853
)
Accretion of the net unrealized loss on the transfer of AFS securities to
held-to-maturity
(HTM) securities, net of tax
   
0
     
2
     
0
     
4
 
Change in pension plan assets, net of tax
   
949
     
918
     
2,768
     
2,703
 
                                 
Comprehensive income, net of tax
  $
70,551
    $
57,753
    $
238,002
    $
164,246
 
                                 
 
 
 
7
 

 
Table of Contents
 
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
                                                         
 
Nine Months Ended September 30, 2019
 
 
   
   
   
   
Accumulated
   
   
 
 
Common Stock
   
   
   
Other
   
   
Total
 
 
   
Par
   
   
Retained
   
Comprehensive
   
Treasury
   
Shareholders’
 
 
Shares
   
Value
   
Surplus
   
Earnings
   
Income (Loss)
   
Stock
   
Equity
 
Balance at January 1, 2019
   
105,239,121
    $
263,098
    $
2,134,462
    $
1,013,037
    $
(57,019
)   $
(101,954
)   $
3,251,624
 
Cumulative effect of adopting Accounting Standard Update
2016-02
   
0
     
0
     
0
     
(1,049
)    
0
     
0
     
(1,049
)
Reclass due to adopting Accounting Standard Update
2017-12
   
0
     
0
     
0
     
0
     
50
     
0
     
50
 
Comprehensive income
   
     
     
     
     
     
     
 
Net income
   
0
     
0
     
0
     
63,642
     
0
     
0
     
63,642
 
Other comprehensive income, net of tax
   
0
     
0
     
0
     
0
     
17,699
     
0
     
17,699
 
                                                         
Total comprehensive income, net of tax
   
     
     
     
     
     
     
81,341
 
Stock based compensation expense
   
0
     
0
     
1,113
     
0
     
0
     
0
     
1,113
 
Purchase of treasury stock (365,702 shares)
   
0
     
0
     
0
     
0
     
0
     
(12,072
)    
(12,072
)
Cash dividends ($0.34 per share)
   
0
     
0
     
0
     
(34,759
)    
0
     
0
     
(34,759
)
Grant of restricted stock (126,427 shares)
   
126,427
     
316
     
(316
)    
0
     
0
     
0
     
0
 
Common stock options exercised (33,816 shares)
   
33,816
     
84
     
559
     
0
     
0
     
0
     
643
 
                                                         
Balance at March 31, 2019
   
105,399,364
     
263,498
     
2,135,818
     
1,040,871
     
(39,270
)    
(114,026
)    
3,286,891
 
Comprehensive income:
   
     
     
     
     
     
     
 
Net income
   
0
     
0
     
0
     
67,207
     
0
     
0
     
67,207
 
Other comprehensive income, net of tax
   
0
     
0
     
0
     
0
     
18,903
     
0
     
18,903
 
                                                         
Total comprehensive income, net of tax
   
     
     
     
     
     
     
86,110
 
Stock based compensation expense
   
0
     
0
     
1,198
     
0
     
0
     
0
     
1,198
 
Purchase of treasury stock (166,604 shares)
   
0
     
0
     
0
     
0
     
0
     
(6,032
)    
(6,032
)
Cash dividends ($0.34 per share)
   
0
     
0
     
0
     
(34,688
)    
0
     
0
     
(34,688
)
Forfeiture of restricted stock (2,539 shares)
   
0
     
0
     
100
     
0
     
0
     
(100
)    
0
 
Common stock options exercised (14,144 shares)
   
14,144
     
36
     
343
     
0
     
0
     
0
     
379
 
                                                         
Balance at June 30, 2019
   
105,413,508
     
263,534
     
2,137,459
     
1,073,390
     
(20,367
)    
(120,158
)    
3,333,858
 
Comprehensive income:
   
     
     
     
     
     
     
 
Net income
   
0
     
0
     
0
     
65,965
     
0
     
0
     
65,965
 
Other comprehensive income, net of tax
   
0
     
0
     
0
     
0
     
4,586
     
0
     
4,586
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income, net of tax
   
     
     
     
     
     
     
70,551
 
Stock based compensation expense
   
0
     
0
     
1,194
     
0
     
0
     
0
     
1,194
 
Distribution of treasury stock for deferred compensation plan (27 shares)
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
1
 
 
 
1
 
Purchase of treasury stock (456,404 shares)
   
0
     
0
     
0
     
0
     
0
     
(16,395
)    
(16,395
)
Cash dividends ($0.34 per share)
   
0
     
0
     
0
     
(34,518
)    
0
     
0
     
(34,518
)
Forfeiture of restricted stock (1,610 shares)
   
0
     
0
     
62
     
0
     
0
     
(62
)    
0
 
Common stock options exercised (50,653 shares)
   
50,653
     
126
     
(475
)    
0
     
0
     
0
     
(349
)
                                                         
Balance at September 30, 2019
   
105,464,161
    $
263,660
    $
2,138,240
    $
1,104,837
    $
(15,781
)   $
(136,614
)   $
3,354,342
 
                                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
See notes to consolidated unaudited financial statements.
 
8
 

 
Table of Contents
 
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - continued
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
 
                                                         
 
Nine Months Ended September 30, 2018
 
 
   
   
   
   
Accumulated
   
   
 
 
Common Stock
   
   
   
Other
   
   
Total
 
 
   
Par
   
   
Retained
   
Comprehensive
   
Treasury
   
Shareholders’
 
 
Shares
   
Value
   
Surplus
   
Earnings
   
Income (Loss)
   
Stock
   
Equity
 
Balance at January 1, 2018
   
105,069,821
    $
262,675
    $
2,129,077
    $
891,816
   
$
(42,025
)  
$
(1,013
)   $
3,240,530
 
Cumulative effect of adopting Accounting Standard Update
2016-01
   
0
     
0
     
0
     
136
     
(136
)    
0
     
0
 
Reclass due to adopting Accounting Standard Update
2018-02
   
0
     
0
     
0
     
6,353
     
(6,353
)    
0
     
0
 
Comprehensive income:
   
     
     
     
     
     
     
 
Net income
   
0
     
0
     
0
     
61,706
     
0
     
0
     
61,706
 
Other comprehensive income, net of tax
   
0
     
0
     
0
     
0
     
(16,039
)    
0
     
(16,039
)
                                                         
Total comprehensive income, net of tax
   
     
     
     
     
     
     
45,667
 
Stock based compensation expense
   
0
     
0
     
968
     
0
     
0
     
0
     
968
 
Purchase of treasury stock (10,842 shares)
   
0
     
0
     
0
     
0
     
0
     
(404
)    
(404
)
Cash dividends ($0.34 per share)
   
0
     
     
     
(35,748
)    
0
     
0
     
(35,748
)
Grant of restricted stock (97,004 shares)
   
97,004
     
243
     
(243
)    
0
     
0
     
0
     
0
 
Forfeiture of restricted stock (683 shares)
   
0
     
0
     
27
     
0
     
0
     
(27
)    
0
 
Common stock options exercised (15,043 shares)
   
15,043
     
37
     
263
     
0
     
0
     
0
     
300
 
                                                         
Balance at March 31, 2018
   
105,181,868
     
262,955
     
2,130,092
     
924,263
     
(64,553
)    
(1,444
)    
3,251,313
 
Comprehensive income:
   
     
     
     
     
     
     
 
Net income
   
0
     
0
     
0
     
66,274
     
0
     
0
     
66,274
 
Other comprehensive income, net of tax
   
0
     
0
     
0
     
0
     
(5,448
)    
0
     
(5,448
)
                                                         
Total comprehensive income, net of tax
   
     
     
     
     
     
     
60,826
 
Stock based compensation expense
   
0
     
0
     
1,024
     
0
     
0
     
0
     
1,024
 
Purchase of treasury stock (962,504 shares)
   
0
     
0
     
0
     
0
     
0
     
(35,580
)    
(35,580
)
Cash dividends ($0.34 per share)
   
0
     
0
     
0
     
(35,584
)    
0
     
0
     
(35,584
)
Forfeiture of restricted stock (2,170 shares)
   
0
     
0
     
82
     
0
     
0
     
(82
)    
0
 
Common stock options exercised (27,046 shares)
   
27,046
     
67
     
499
     
0
     
0
     
0
     
566
 
                                                         
Balance at June 30, 2018
   
105,208,914
     
263,022
     
2,131,697
     
954,953
     
(70,001
)    
(37,106
)    
3,242,565
 
Comprehensive income:
   
     
     
     
     
     
     
 
Net income
   
0
     
0
     
0
     
64,412
     
0
     
0
     
64,412
 
Other comprehensive income, net of tax
   
0
     
0
     
0
     
0
     
(6,659
)    
0
     
(6,659
)
                                                         
Total comprehensive income, net of tax
   
     
     
     
     
     
     
57,753
 
Stock based compensation expense
   
0
     
0
     
1,024
     
0
     
0
     
0
     
1,024
 
Purchase of treasury stock (414,404 shares)
   
0
     
0
     
0
     
0
     
0
     
(15,339
)    
(15,339
)
Distribution of treasury stock from deferred compensation plan (26 shares)
   
0
     
0
     
0
     
0
     
0
     
1
     
1
 
Cash dividends ($0.34 per share)
   
0
     
0
     
0
     
(35,303
)    
0
     
0
     
(35,303
)
Forfeiture of restricted stock (1,400 shares)
   
0
     
0
     
55
     
0
     
0
     
(55
)    
0
 
Common stock options exercised (18,072 shares)
   
18,072
     
46
     
381
     
0
     
0
     
0
     
427
 
                                                         
Balance at September 30, 2018
   
105,226,986
    $
263,068
    $
2,133,157
    $
984,062
    $
(76,660
)  
$
(52,499
)   $
3,251,128
 
                                                         
 
 
 
 
 
 
 
 
 
 
 
 
See notes to consolidated unaudited financial statements.
 
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Table of Contents
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
                 
 
Nine Months Ended
 
 
September 30
 
 
2019
   
2018
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
  $
90,956
    $
218,771
 
                 
INVESTING ACTIVITIES
   
     
 
Proceeds from maturities and calls of securities held to maturity
   
6,975
     
2
 
Proceeds from sales of securities available for sale
   
333,414
     
86,061
 
Proceeds from maturities and calls of securities available for sale
   
240,260
     
201,107
 
Purchases of securities available for sale
   
(630,162
)    
(629,760
)
Proceeds from sales of equity securities
   
1,865
     
1,825
 
Purchases of equity securities
   
(742
)    
(598
)
Proceeds from sales and redemptions of other investment securities
   
80,281
     
35,987
 
Purchases of other investment securities
   
(114,156
)    
(45,075
)
Redemption of bank-owned life insurance policies
   
2,829
     
0
 
Purchases of bank premises and equipment
   
(6,800
)    
(4,439
)
Proceeds from sales of bank premises and equipment
   
251
     
2,171
 
Proceeds from the sales of OREO properties
   
4,620
     
9,105
 
Net change in loans
   
(205,480
)    
(248,623
)
                 
NET CASH USED IN INVESTING ACTIVITIES
   
(286,845
)    
(592,237
)
                 
                 
FINANCING ACTIVITIES
   
     
 
Cash dividends paid
   
(104,421
)    
(107,046
)
Acquisition of treasury stock
   
(34,499
)    
(51,323
)
Proceeds from exercise of stock options
   
672
     
1,277
 
Repayment of long-term Federal Home Loan Bank borrowings
   
(1,115,000
)    
(635,000
)
Proceeds from issuance of long-term Federal Home Loan Bank borrowings
   
1,325,000
     
650,000
 
Repayment of trust preferred issuance
   
0
     
(9,374
)
Distribution of treasury stock for deferred compensation plan
   
1
     
1
 
Changes in:
   
     
 
Deposits
   
101,255
     
261,529
 
Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings
   
(21,361
)    
(148,079
)
                 
NET CASH PROVIDED BY
(
USED IN
FINANCING ACTIVITIES
   
151,647
     
(38,015
)
                 
                 
Decrease in cash and cash equivalents
   
(44,242
)    
(411,481
)
                 
Cash and cash equivalents at beginning of year
   
1,020,396
     
1,666,167
 
                 
                 
Cash and cash equivalents at end of period
  $
976,154
    $
1,254,686
 
                 
Supplemental information
   
     
 
Noncash investing activities:
   
     
 
Transfers of loans to OREO
  $
9,386
    $
1,809
 
Transfer of held to maturity debt securities to available for sale debt securities
   
11,544
     
0
 
 
See notes to consolidated unaudited financial statements.
 
10
 

 
Table of Contents
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated interim financial statements of United Bankshares, Inc. and Subsidiaries (“United” or “the Company”) have been prepared in accordance with accounting principles for interim financial information generally accepted in the United States (GAAP) and with the instructions for Form
10-Q
and Article 10 of Regulation
S-X.
Accordingly, the financial statements do not contain all of the information and footnotes required by accounting principles generally accepted in the United States. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The financial statements presented as of September 30, 2019 and 2018 and for the three-month and nine-month periods then ended have not been audited. The consolidated balance sheet as of December 31, 2018 has been extracted from the audited financial statements included in United’s 2018 Annual Report to Shareholders. The accounting and reporting policies followed in the presentation of these financial statements are consistent with those applied in the preparation of the 2018 Annual Report of United on Form
10-K.
In the opinion of management, all adjustments necessary for a fair presentation of financial position and results of operations for the interim periods have been made. Such adjustments are of a normal and recurring nature.
The accompanying consolidated interim financial statements include the accounts of United and its wholly owned subsidiaries. United operates in two business segments: community banking and mortgage banking. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Information is presented in these notes to the unaudited consolidated interim financial statements with dollars expressed in thousands, except per share or unless otherwise noted.
New Accounting Standards
In April 2019, the Financial Accounting Standards Board (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.” The amendments clarify the scope of the credit losses standard and address issued related to accrued interest receivable balances, recoveries, variable interest rates and prepayments. The amendments also address partial-term fair valued hedges, fair value hedge basis adjustments. The amendments to the credit losses and hedging standards have the same effective dates as those standards, unless an entity has already adopted the standards. The amendments to recognition and measurement guidance are effective for fiscal years beginning after December 15, 2019; early adoption is permitted. Management is currently evaluating the possible impact this standard may have on the Company’s financial condition or results of operations.
In August 2018, the FASB issued ASU No.
 2018-14
“Compensation – Retirement Benefits
Defined Benefits – General (Topic
715-20):
Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans.” This update amends ASC Topic 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other post retirement plans. The ASU’s changes related to disclosures are part of the FASB’s disclosure framework project, which the FASB launched in 2014 to improve effectiveness of disclosures in notes to financial statements. ASU No.
 2018-14
is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2020; early adoption is permitted. ASU No.
 2018-14
is not expected to have a material impact on the Company’s financial condition or results of operations.
 
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Table of Contents
 
In August 2018, the FASB issued ASU No.
 2018-13
“Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This amendment changes the fair value measurement disclosure requirements of ASC Topic 820 and is the result of a broader disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements, which was finalized in August 2018. ASU No.
 2018-13
is effective for all entities for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2019; early adoption is permitted for any eliminated or modified disclosure upon issuance of this ASU. ASU No.
 2018-13
is not expected to have a material impact on the Company’s financial condition or results of operations.
In June 2018, the FASB issued Accounting Standards Update (ASU) No.
 2018-07
“Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” This update has been issued as part of a simplification initiative which will expand the scope of ASC Topic 718 to include share-based payment transactions for acquiring goods and services from
non-employees
and expands the scope through the amendments to address and improve aspects of the accounting for
non-employee
share-based payment transactions. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU No.
 2018-07
is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2018; early adoption is permitted. ASU No.
 2018-07
was adopted by United on January 1, 2019. The adoption did not have a material impact on the Company’s financial condition or results of operations.
In August 2017, the FASB issued ASU No.
 2017-12,
“Targeting Improvement to Accounting for Hedging Activities.” This ASU amends ASC 815 and its objectives are to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and reduce the complexity and simplify the application of hedge accounting by preparers. This ASU makes certain targeted improvements to simplify the application of the hedge accounting, including to derivative instruments as well as allow a
one-time
election to reclassify fixed-rate, prepayable debt securities from a held to maturity classification to an available for sale classification. ASU No.
 2017-12
is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. United adopted the standard on January 1, 2019 using the modified retrospective approach. As part of this adoption, the Company made a
one-time
election to transfer eligible HTM securities to the AFS category. The Company transferred HTM securities with a carrying amount of $11,544, which resulted in a decrease of $1,098 to AOCI.
In July 2017, the FASB issued ASU No.
 2017-11,
“Part I, Accounting for Certain Financial Instruments with Down Round Features and Part II, Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling interests with a Scope Exception.” Part I of this ASU simplifies the accounting for financial instruments that include down round features while the amendments in Part II, which do not have an accounting effect, address the difficulty of navigating the guidance in ASC 480, “Distinguishing Liabilities from Equity”, due to the existence of extensive pending content in the Codification. ASU No.
 2017-11
is effective for interim and annual reporting periods beginning after December 15, 2018. ASU No.
 2017-11
was adopted by United on January 1, 2019.
In March 2017, the FASB issued ASU No.
 2017-08,
“Receivables – Nonrefundable Fees and Other Costs (Subtopic
310-20):
Premium Amortization on Purchased Callable Debt Securities.” This update amends the amortization period for certain purchased callable debt securities held at a premium. FASB is shortening the amortization period for the premium to the earliest call date. The amendments in this update became effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods. ASU No.
 2017-08
was adopted by United on January 1, 2019. The adoption did not have a material impact on the Company’s financial condition or results of operations.
 
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Table of Contents
 
In January 2017, the FASB issued ASU No.
 2017-04,
“Intangibles – Goodwill and Other (Topic 350).” ASU
2017-04
eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU
2017-04
is effective for United on January 1, 2020, with early adoption permitted, and management is currently evaluating the possible impact this standard may have on the Company’s financial condition or results of operations.
In June 2016, the FASB issued ASU No.
 2016-13,
“Financial Instruments – Credit Losses” which changes the impairment model for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost and require entities to record allowances for
available-for-sale
debt securities rather than reduce the carrying amount under the current other-than-temporary impairment (OTTI) model. ASU No.
 2016-13
also simplifies the accounting model for purchased credit-impaired debt securities and loans. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In May 2019, the FASB issued Accounting Standards Update (ASU) No.
 2019-05
“Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief” which amends ASU
2016-13
to allow companies to irrevocably elect, upon adoption of ASU
2016-13,
the fair value option on financial instruments that were previously recorded at amortized cost and are within the scope of ASC
326-20
if the instruments are eligible for the fair value option under ASC
825-10.
The fair value option election does not apply to
held-to-maturity
debt securities. Entities are required to make this election on an
instrument-by-instrument
basis. ASU No.
 2019-05
is effective on the same date as ASU No.
 2016-13,
which is January 1, 2020 for United, with early adoption permitted. To this point, United has engaged a third-party service provider to assist with the implementation of the new accounting standard. In addition, United has selected loss estimation methodologies for its allowance for credit losses, evaluated and addressed data gaps within the model, performed testing on the chosen methodologies and determined a qualitative adjustment methodology that aligns with the requirements of the new standard. Implementation, testing and validation is in process surrounding United’s reasonable methodologies and supportable forecast period, model assumptions and subsequent reversion period to historical loss rates. Progress continues regarding the documentation of the new standard and internal controls as well as changes to financial statement disclosures. United will address validation findings and perform parallel runs when appropriate to evaluate the impact that the adoption of ASU
2016-13
will have on the financial statements and disclosures.
In February 2016, the FASB issued ASU No.
 2016-02,
“Leases (Topic 842)”. ASU No.
 2016-02
includes a lessee accounting model that recognizes two types of leases, finance leases and operating leases, while lessor accounting will remain largely unchanged from the current GAAP. ASU No.
 2016-02
requires, amongst other things, that a lessee recognize on the balance sheet a
right-of-use
asset and a lease liability for leases with terms of more than twelve months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. In July 2018, the FASB issued ASU No.
 2018-11
“Leases (Topic 842), Targeted Improvements.” This update creates an additional transition method, and a lessor practical expedient to not separate lease and
non-lease
components if specified criteria are met. The new transition method allows companies to use the effective date of the new leases standard as the date of initial application transition. Companies that elect this transition option will not adjust their comparative period financial information for the effect of ASC Topic 842, nor will they make the new required lease disclosure for periods before the effective date. In addition, these companies will carry forward their ASC Topic 840 disclosures for comparative periods. The practical expedient permits lessors to make an accounting policy election by class of underlying asset to not separate lease and
non-lease
components if specified criteria are met. In July 2018, the FASB issued ASU No.
 2018-10
“Codification Improvements to ASC Topic 842, Leases.” This update includes narrow amendments to clarify how to apply certain aspects of the new leases standard. The amendments address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments. ASU
2018-10
does not make any substantive changes to the core provisions or principals of the new leases standard. United adopted
 
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Table of Contents
the standard using the modified retrospective transition method on January 1, 2019. The Company evaluated and elected the package of practical expedients, which allows for existing leases to be accounted for consistent with
 
current guidance, with the exception of the balance sheet recognition for lessees. The Company has also elected the practical expedient on not separating lease and nonlease components and instead treating them as a single lease component. Adoption of the standard resulted in the recognition of additional net lease assets and lease liabilities of $67,040 and $70,692, respectively, as of January 1, 2019. Of the difference between these two amounts, $1,049 was recorded as an adjustment to retained earnings.
2. INVESTMENT SECURITIES
Securities Available for Sale
Securities held for indefinite periods of time are classified as available for sale and carried at estimated fair value. The amortized cost and estimated fair values of securities available for sale are summarized as follows.
                                         
 
September 30, 2019
 
 
   
Gross
   
Gross
   
Estimated
   
Cumulative
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
   
OTTI in
 
 
Cost
   
Gains
   
Losses
   
Value
   
AOCI
(1)
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  $
63,444
    $
591
    $
1
    $
64,034
    $
0
 
State and political subdivisions
   
234,552
     
4,588
     
625
     
238,515
     
0
 
Residential mortgage-backed securities
   
     
     
     
     
 
Agency
   
853,521
     
14,493
     
733
     
867,281
     
0
 
Non-agency
   
3,533
     
462
     
0
     
3,995
     
86
 
Commercial mortgage-backed securities
   
     
     
     
     
 
Agency
   
611,038
     
11,751
     
1,137
     
621,652
     
0
 
Asset-backed securities
   
284,593
     
0
     
4,886
     
279,707
     
0
 
Trust preferred collateralized debt obligations
   
6,130
     
0
     
1,061
     
5,069
     
661
 
Single issue trust preferred securities
   
18,188
     
172
     
1,816
     
16,544
     
0
 
Other corporate securities
   
350,850
     
4,485
     
35
     
355,300
     
0
 
                                         
Total
  $
2,425,849
    $
36,542
    $
10,294
    $
2,452,097
    $
747
 
                                         
       
 
December 31, 2018
 
 
   
Gross
   
Gross
   
Estimated
   
Cumulative
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
   
OTTI in
 
 
Cost
   
Gains
   
Losses
   
Value
   
AOCI
(1)
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  $
86,285
    $
35
    $
430
    $
85,890
    $
0
 
State and political subdivisions
   
212,670
     
439
     
4,121
     
208,988
     
0
 
Residential mortgage-backed securities
   
     
     
     
     
 
Agency
   
1,047,345
     
3,235
     
14,930
     
1,035,650
     
0
 
Non-agency
   
3,927
     
332
     
0
     
4,259
     
86
 
Commercial mortgage-backed securities
   
     
     
     
     
 
Agency
   
560,634
     
996
     
7,030
     
554,600
     
0
 
Asset-backed securities
   
272,459
     
450
     
939
     
271,970
     
0
 
Trust preferred collateralized debt obligations
   
6,176
     
91
     
350
     
5,917
     
2,586
 
Single issue trust preferred securities
   
8,754
     
169
     
561
     
8,362
     
0
 
Other corporate securities
   
162,634
     
118
     
1,349
     
161,403
     
0
 
                                         
Total
  $
2,360,884
    $
5,865
    $
29,710
    $
2,337,039
    $
2,672
 
                                         
 
 
 
 
 
(1)
Non-credit
related other-than-temporary impairment in accumulated other comprehensive income. Amounts are
before-tax.
 
 
 
 
 
 
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The following is a summary of securities available for sale which were in an unrealized loss position at September 30, 2019 and December 31, 2018.
 
Less than 12 months
   
12 months or longer
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
 
 
Value
   
Losses
   
Value
   
Losses
 
September 30, 2019
   
     
     
     
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  $
1,420
    $
1
    $
0
    $
0
 
State and political subdivisions
   
62,394
     
614
     
2,946
     
11
 
Residential mortgage-backed securities
   
     
     
     
 
Agency
   
30,433
     
101
     
82,977
     
632
 
Non-agency
   
0
     
0
     
0
     
0
 
Commercial mortgage-backed securities
   
     
     
     
 
Agency
   
145,382
     
962
     
54,441
     
175
 
Asset-backed securities
   
243,909
     
4,084
     
35,798
     
802
 
Trust preferred collateralized debt obligations
   
2,969
     
661
     
2,100
     
400
 
Single issue trust preferred securities
   
0
     
0
     
13,332
     
1,816
 
Other corporate securities
   
8,978
     
35
     
0
     
0
 
                                 
Total
  $
495,485
    $
6,458
    $
191,594
    $
3,836
 
                                 
             
 
Less than 12 months
   
12 months or longer
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
 
 
Value
   
Losses
   
Value
   
Losses
 
December 31, 2018
   
     
     
     
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  $
66,072
    $
250
    $
7,374
    $
180
 
State and political subdivisions
   
53,421
     
544
     
94,337
     
3,577
 
Residential mortgage-backed securities
   
     
     
     
 
Agency
   
195,009
     
1,597
     
508,041
     
13,333
 
Non-agency
   
0
     
0
     
0
     
0
 
Commercial mortgage-backed securities
   
     
     
     
 
Agency
   
107,443
     
1,124
     
294,129
     
5,906
 
Asset-backed securities
   
151,427
     
939
     
0
     
0
 
Trust preferred collateralized debt obligations
   
0
     
0
     
2,150
     
350
 
Single issue trust preferred securities
   
0
     
0
     
5,163
     
561
 
Other corporate securities
   
129,709
     
1,233
     
6,879
     
116
 
                                 
Total
  $
703,081
    $
5,687
    $
918,073
    $
24,023
 
                                 
The following table shows the proceeds from maturities, sales and calls of available for sale securities and the gross realized gains and losses on sales and calls of those securities that have been included in earnings as a result of any sales and calls. Gains or losses on sales and calls of available for sale securities were recognized by the specific identification method. The realized losses relate to sales of securities within a rabbi trust for the payment of benefits under a deferred compensation plan for certain key officers and its subsidiaries.
 
15
 

 
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Three Months Ended
September 30
   
Nine Months Ended
September 30
 
 
2019
   
2018
   
2019
   
2018
 
Proceeds from sales and calls
  $
188,911
    $
109,093
    $
573,674
    $
283,953
 
Gross realized gains
   
412
     
93
     
1,166
     
1,314
 
Gross realized losses
   
346
     
207
     
1,318
     
1,604
 
At September 30, 2019, gross unrealized losses on available for sale securities were $10,294 on 145 securities of a total portfolio of 738 available for
 
sale securities. Securities with the most significant gross unrealized losses at September 30, 2019 consisted primarily of asset-backed securities, agency commercial mortgage-backed securities, single issue trust preferred securities
,
and trust preferred collateralized debt obligations.
 
The asset-backed securities are backed by Federal Family Education Loan Program
 (FFELP) student loan collateral which includes a minimum of a 97% government repayment guaranty, as well as additional credit support and subordination in excess of the government guaranteed portion.
 
The
 
agency 
commercial
 mortgage-backed securities relate to 
commercial
properties and provide a guaranty of full and timely payments of principal and interest by the issuing agency. The single issue trust preferred securities
and the trust preferred collateralized debt obligations 
relate
mainly 
to securities of financial institutions.
In determining whether or not a security is other-than-temporarily impaired (OTTI), management considered the severity and the duration of the loss in conjunction with United’s positive intent and the more likely than not ability to hold these securities to recovery of their cost basis or maturity.
State and political subdivisions
United’s state and political subdivisions portfolio relates to securities issued by various municipalities located throughout the United States. The total amortized cost of available for sale state and political subdivision securities was $234,552 at September 30, 2019. As of September 30, 2019, approximately 71% of the portfolio was supported by the general obligation of the issuing municipality, which allows for the securities to be repaid by any means available to the municipality. The majority of the portfolio was rated AA or higher, and less than one percent of the portfolio was rated below investment grade as of September 30, 2019. In addition to monitoring the credit ratings of these securities, management also evaluates the financial performance of the underlying issuers on an ongoing basis. Based upon management’s analysis and judgment, it was determined that none of the state and political subdivision securities were other-than-temporarily impaired at September 30, 2019.
Agency mortgage-backed securities
United’s agency mortgage-backed securities portfolio relates to securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae. The total amortized cost of available for sale agency mortgage-backed securities was $1,464,559 at September 30, 2019. Of the $1,464,559 amount, $611,038 was related to agency commercial mortgage-backed securities and $853,521 was related to agency residential mortgage-backed securities. Each of the agency mortgage-backed securities provides a guarantee of full and timely payments of principal and interest by the issuing agency. Based upon management’s analysis and judgment, it was determined that none of the agency mortgage-backed securities were other-tha​​​​​​​n-temporarily impaired at September 30, 2019.
Non-agency
residential mortgage-backed securities
United’s
non-agency
residential mortgage-backed securities portfolio relates to securities of various private label issuers. The total amortized cost of available for sale
non-agency
residential mortgage-backed securities was $3,533 at September 30, 2019. Of the $
3,533
 
amount, $2 was rated above investment grade and $3,531 was rated below investment grade. The entire portfolio of the
non-agency
residential mortgage-backed securities is either the senior or super-senior tranches of their respective structure. Based upon management’s analysis and judgment, it was determined that
n
one of the
non-agency
mortgage-backed securities w
ere
other-than-temporarily impaired at September 30, 2019.
 
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Single issue trust preferred securities
The majority of United’s single issue trust preferred portfolio consists of obligations from large cap banks (i.e. banks with market capitalization in excess of $10 billion). All single issue trust preferred securities are currently receiving interest payments. The amortized cost of available for sale single issue trust preferred securities as of September 30, 2019 consisted of $4,040 in investment grade bonds, $5,936 in split rated bonds, $2,480 in below investment grade rated bonds, and $5,732 in unrated bonds. Management reviews each issuer’s current and projected earnings trends, asset quality, capitalization levels, and other key factors. Upon completing the review for the third quarter of 2019, it was determined that none of the single issue trust preferred securities were other-than-temporarily impaired.
Trust preferred collateralized debt obligations (Trup Cdos)
The total amortized cost balance of United’s Trup Cdo portfolio was $6,130 as of September 30, 2019. For any securities in an unrealized loss position, the Company first assesses its intentions regarding any sale of securities as well as the likelihood that it would be required to sell prior to recovery of the amortized cost. As of September 30, 2019, the Company has determined that it does not intend to sell any Trup Cdo and that it is not more likely than not that the Company will be required to sell such securities before recovery of their amortized cost.
To determine a net realizable value and assess whether other-than-temporary impairment existed, management performed detailed cash flow analysis to determine whether, in management’s judgment, it was more likely that United would not recover the entire amortized cost basis of the security. Based on this review, management determined that one of the Trup Cdo securities was other-than-temporarily impaired as of September 30, 2019. The total amount of OTTI recognized in earnings on this security during the third quarter of 2019 was $9.
Corporate securities
As of September 30, 2019, United’s Corporate securities portfolio had a total amortized cost balance of $350,850. The majority of the portfolio consisted of debt issuances of corporations representing a variety of industries, including financial institutions. Of the $
350,850​​​​​​​
, 92% was investment grade rated and 8% was unrated. For corporate securities, management has evaluated the near-term prospects of the investment in relation to the severity and duration of any impairment. Based upon management’s analysis and judgment, it was determined that none of the other corporate securities were other-than-temporarily impaired at September 30, 2019.
Below is a progression of the credit losses on securities which United has recorded other-than-temporary charges. These charges were recorded through earnings and other comprehensive income.
 
Three Months Ended
September 30
   
Nine Months Ended
September 30
 
 
2019
   
2018
   
2019
   
2018
 
Balance of cumulative credit losses at beginning of period
  $
3,192
    $
3,199
    $
3,138
    $
18,060
 
Additional credit losses on securities for which OTTI was previously recognized
   
9
     
0
     
63
     
0
 
Reductions for securities sold or paid off during the period
   
0
     
0
     
0
     
(14,861
)
                                 
Balance of cumulative credit losses at end of period
  $
3,201
    $
3,199
    $
3,201
    $
3,199
 
                                 
 
 
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The amortized cost and estimated fair value of securities available for sale at September 30, 2019 and December 31, 2018 by contractual maturity are shown as follows. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations without penalties.
 
 
September 30, 2019
   
December 31, 2018
 
 
   
Estimated
   
   
Estimated
 
 
Amortized
   
Fair
   
Amortized
   
Fair
 
 
Cost
   
Value
   
Cost
   
Value
 
Due in one year or less
  $
110,865
    $
111,001
    $
77,534
    $
77,266
 
Due after one year through five years
   
568,839
     
576,687
     
518,975
     
514,734
 
Due after five years through ten years
   
549,442
     
558,540
     
483,567
     
477,135
 
Due after ten years
   
1,196,703
     
1,205,869
     
1,280,808
     
1,267,904
 
                                 
Total
  $
2,425,849
    $
2,452,097
    $
2,360,884
    $
2,337,039
 
                                 
Securities Held to Maturity
The amortized cost and estimated fair values of securities held to maturity are summarized as follows:
 
September 30, 2019
 
 
   
Gross
   
Gross
   
Estimated
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
Cost
   
Gains
   
Losses
   
Value
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  $
25
    $
0
    $
0
    $
25
 
State and political subdivisions
   
1,426
     
1
     
0
     
1,427
 
Residential mortgage-backed securities
   
     
     
     
 
Agency
   
0
     
0
     
0
     
0
 
Single issue trust preferred securities
   
0
     
0
     
0
     
0
 
Other corporate securities
   
20
     
0
     
0
     
20
 
                                 
Total
  $
1,471
    $
1
    $
0
    $
1,472
 
                                 
       
 
December 31, 2018
 
 
   
Gross
   
Gross
   
Estimated
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
Cost
   
Gains
   
Losses
   
Value
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  $
5,074
    $
90
    $
0
    $
5,164
 
State and political subdivisions
   
5,473
     
7
     
1
     
5,479
 
Residential mortgage-backed securities
   
     
     
     
 
Agency
   
20
     
2
     
0
     
22
 
Single issue trust preferred securities
   
9,412
     
0
     
1,442
     
7,970
 
Other corporate securities
   
20
     
0
     
0
     
20
 
                                 
Total
  $
19,999
    $
99
    $
1,443
    $
18,655
 
                                 
There were no gross realized gains or losses on calls and sales of held to maturity securities included in earnings for the third quarter and first nine months of 2019 and 2018.
The amortized cost and estimated fair value of debt securities held to maturity at September 30, 2019 and December 31, 2018 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations without penalties.​​​​​​​
 
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September 30, 2019
   
December 31, 2018
 
 
   
Estimated
   
   
Estimated
 
 
Amortized
   
Fair
   
Amortized
   
Fair
 
 
Cost
   
Value
   
Cost
   
Value
 
Due in one year or less
  $
235
    $
235
    $
7,913
    $
8,005
 
Due after one year through five years
   
216
     
217
     
1,059
     
1,061
 
Due after five years through ten years
   
0
     
0
     
8,030
     
7,134
 
Due after ten years
   
1,020
     
1,020
     
2,997
     
2,455
 
                                 
Total
  $
1,471
 
 
  $
1,472
   
 
$
19,999
    $
18,655
 
                                 
Equity securities at fair value
Equity securities consist mainly of equity securities of financial institutions and mutual funds within a rabbi trust for the payment of benefits under a deferred compensation plan for certain key officers of United and its subsidiaries. The fair value of United’s equity securities was $8,914 at September 30, 2019 and $9,734 at December 31, 2018.
 
Three Months
 
Ended
September 30
   
Nine Months 
Ended
September 30
 
 
2019
   
2018
   
2019
   
2018
 
Net gains (losses) recognized during the period
  $
59
    $
(38
)   $
302
    $
(102
)
Net gains (losses) recognized during the period on equity securities sold
   
(1
)    
(2
)    
133
     
(4
)
Unrealized gains recognized during the period on equity securities still held at period end
   
60
     
0
     
181
     
50
 
Unrealized losses recognized during the period on equity securities still held at period end
   
0
     
(36
)    
(12
)    
(148
)
Other investment securities
During the third quarter of 2019, United evaluated all of its cost method investments to determine if certain events or changes in circumstances during the third quarter of 2019 had a significant adverse effect on the fair value of any of its cost method securities. United determined that there was no individual security that experienced an adverse event during the
third
quarter. There were no other events or changes in circumstances during the third quarter which would have an adverse effect on the fair value of its cost method securities.
The carrying value of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law, approximated $1,568,888 and $1,887,176 at September 30, 2019 and December 31, 2018 respectively.
 
19
 

 
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3. LOANS
Major classes of loans are as follows:
 
 
September 30,
2019
   
December 31,
2018
 
Commercial, financial and agricultural:
   
     
 
Owner-occupied commercial real estate
  $
1,221,647
    $
1,291,790
 
Nonowner-occupied commercial real estate
   
4,241,682
     
4,303,613
 
Other commercial loans
   
2,107,865
     
1,957,641
 
                 
Total commercial, financial & agricultural
   
7,571,194
     
7,553,044
 
Residential real estate
   
3,644,568
     
3,501,393
 
Construction & land development
   
1,300,881
     
1,410,468
 
Consumer:
   
     
 
Bankcard
   
9,532
     
10,203
 
Other consumer
   
1,111,063
     
954,424
 
                 
Total gross loans
  $
13,637,238
    $
13,429,532
 
                 
The table above does not include loans held for sale of $412,194 and $249,846 at September 30, 2019 and December 31, 2018, respectively. Loans held for sale consist of single-family residential real estate loans originated for sale in the secondary market.
The outstanding balances in the table above include previously acquired impaired loans with a recorded investment of $103,017 or
 less th
an
 1% of total gross loans at September 30, 2019 and $149,737 or 1.12% of total gross loans at December 31, 2018. The contractual principal in these acquired impaired loans was $134,125 and $195,706 at September 30, 2019 and December 31, 2018, respectively. The balances above do not include future accretable net interest (i.e. the difference between the undiscounted expected cash flows and the recorded investment in the loan) on the acquired impaired loans.
Activity for the accretable yield for the first nine months of 2019 follows:
Accretable yield at the beginning of the period
  $
26,289
 
Accretion (including cash recoveries)
   
(8,303
)
Additions
   
0
 
Net reclassifications to accretable from
non-accretable
   
8,746
 
Disposals (including maturities, foreclosures, and charge-offs)
   
(4,649
)
         
Accretable yield at the end of the period
  $
22,083
 
         
United’s subsidiary bank has made loans to the directors and officers of United and its subsidiaries, and to their affiliates. The aggregate dollar amount of these loans was $45,800 and $93,282 at September 30, 2019 and December 31, 2018, respectively.
4. CREDIT QUALITY
Management monitors the credit quality of its loans on an ongoing basis. Measurement of delinquency and past due status are based on the contractual terms of each loan.
For all loan classes, past due loans are reviewed on a monthly basis to identify loans for nonaccrual status. Generally, when collection in full of the principal and interest is jeopardized, the loan is placed on nonaccrual status. The accrual of interest income on commercial and most consumer loans generally is discontinued when a loan becomes 90 to 120 days past due as to principal or interest. However, regardless of delinquency status, if a loan is fully secured and in the process of collection and resolution of collection is expected in the near term (generally less than 90​​​​​​​ days), then the loan will not be placed on nonaccrual status. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and unpaid interest accrued in prior years is charged to the allowance for loan
 
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losses. United’s method of income recognition for loans that are classified as nonaccrual is to recognize interest income on a cash basis or apply the cash receipt to principal when the ultimate collectibility of principal is in doubt. Nonaccrual loans will not normally be returned to accrual status unless all past due principal and interest has been paid and the borrower has evidenced their ability to meet the contractual provisions of the note.
A loan is categorized as a troubled debt restructuring (TDR) if a concession is granted and there is deterioration in the financial ​​​​​​​condition of the borrower. TDRs can take the form of a reduction of the stated interest rate, splitting a loan into separate loans with market terms on one loan and concessionary terms on the other loan, receipts of assets from a debtor in partial or full satisfaction of a loan, the extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk, the reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, the reduction of accrued interest or any other concessionary type of renegotiated debt. As of September 30, 2019, United had TDRs of $60,559 as compared to $59,425 as of December 31, 2018. Of the $60,559 aggregate balance of TDRs at September 30, 2019, $50,757 was on nonaccrual and $1,115 were
30-89
days past due. Of the $59,425 aggregate balance of TDRs at December 31, 2018, $48,899 were on nonaccrual and $690 were 90 days or more past due. All these amounts are included in the appropriate categories in the “Age Analysis of Past Due Loans” table on a subsequent page. As of September 30, 2019,
there was a commitment to lend additional funds of $293 to one debtor owing receivables whose terms have been modified in TDRs. During the third quarter of 2019, $24 was advanced to this debtor under a loan that had been previously modified
.
 
At September 30, 2019, United had restructured loans in the amount of $1,728 that were modified by a reduction in the interest rate, $1,784 that were modified by a combination of a reduction in the interest rate and the principal and $57,047 that were modified by a change in terms.
A loan acquired and accounted for under ASC Topic
310-30
“Loans and Debt Securities Acquired with Deteriorated Credit Quality” is reported as an accruing loan and a performing asset unless it does not perform in accordance with its restructured contractual provisions.
The following table sets forth United’s troubled debt restructurings that have been restructured during the three months ended September 30, 2019 and 2018, segregated by class of loans:
 
Troubled Debt Restructurings
 
 
For the Three Months Ended
 
 
September 30, 2019
   
September 30, 2018
 
 
Number of
Contracts
   
Pre-
Modification
Outstanding
Recorded
Investment
   
Post-
Modification
Outstanding
Recorded
Investment
   
Number of
Contracts
   
Pre-
Modification
Outstanding
Recorded
Investment
   
Post-
Modification
Outstanding
Recorded
Investment
 
Commercial real estate:
   
     
     
     
     
     
 
Owner-occupied
   
1
    $
1,030
    $
1,030
     
0
    $
0
    $
0
 
Nonowner-occupied
   
0
     
0
     
0
     
0
     
0
     
0
 
Other commercial
   
1
     
5,137
     
5,076
     
5
     
7,420
     
7,364
 
Residential real estate
   
0
     
0
     
0
     
1
     
272
     
272
 
Construction & land development
   
0
     
0
     
0
     
0
     
0
     
0
 
Consumer:
   
     
     
     
     
     
 
Bankcard
   
0
     
0
     
0
     
0
     
0
     
0
 
Other consumer
   
0
     
0
     
0
     
0
     
0
     
0
 
                                                 
Total
   
2
    $
6,167
    $
6,106
     
6
    $
7,692
    $
7,636
 
                                                 
 
21
 

 
Table of Contents
 
The following table sets forth United’s troubled debt restructurings that have been restructured during the nine months ended September 30, 2019 and 2018, segregated by class of loans:
 
Troubled Debt Restructurings
 
 
For the Nine Months Ended
 
 
September 30, 2019
   
September 30, 2018
 
 
Number of
Contracts
   
Pre-
Modification
Outstanding
Recorded
Investment
   
Post-
Modification
Outstanding
Recorded
Investment
   
Number of
Contracts
   
Pre-
Modification
Outstanding
Recorded
Investment
   
Post-
Modification
Outstanding
Recorded
Investment
 
Commercial real estate:
   
     
     
     
     
     
 
Owner-occupied
   
2
    $
1,179
    $
1,179
     
0
    $
0
    $
0
 
Nonowner-occupied
   
0
     
0
     
0
     
0
     
0
     
0
 
Other commercial
   
3
     
5,962
     
5,849
     
9
     
16,992
     
16,890
 
Residential real estate
   
3
     
2,258
     
2,022
     
3
     
7,225
     
7,225
 
Construction & land development
   
3
     
2,266
     
2,214
     
0
     
0
     
0
 
Consumer:
   
     
     
     
     
     
 
Bankcard
   
0
     
0
     
0
     
0
     
0
     
0
 
Other consumer
   
0
     
0
     
0
     
0
     
0
     
0
 
                                                 
Total
   
11
    $
11,665
    $
11,264
     
12
    $
24,217
    $
24,115
 
                                                 
During the third quarter of 2019, $6,106 of restructured loans were modified by a change in terms. For the first nine months of 2019, $246 thousand of restructured loans were modified by an interest rate reduction and $11,018 of restructured loans were modified by a change in terms. During the third quarter and first nine months of 2018, $7,636 and $24,115 of restructured loans were modified by a change in loan terms. In some instances, the post-modification balance on the restructured loans is larger than the
pre-modification
balance due to the advancement of monies for items such as delinquent taxes on real estate property. The loans were evaluated individually for allocation within United’s allowance for loan losses. The modifications had an immaterial impact on the financial condition and results of operations for United.
The following table presents troubled debt restructurings, by class of loan, that were restructured during the twelve-month period ended September 30, 2019 and had charge-offs during the
three and 
nine months ended September 30, 2019. 
 
Three
 Months Ended
September 30, 2019
 
 
Nine Months Ended
September 30, 2019
 
 
Number of
Contracts
   
Recorded
Investment
 
 
Number of
Contracts
 
 
Recorded
Investment
 
Troubled Debt Restructurings
   
     
 
 
 
 
 
 
 
 
 
Commercial real estate:
   
     
 
 
 
 
 
 
 
 
 
Owner-occupied
   
0
    $
0
 
 
 
0
 
 
$
0
 
Nonowner-occupied
   
0
     
0
 
 
 
0
 
 
 
0
 
Other commercial
   
1
     
534
 
 
 
2
 
 
 
1,477
 
Residential real estate
   
0
     
0
 
 
 
0
 
 
 
0
 
Construction & land development
   
0
     
0
 
 
 
0
 
 
 
0
 
Consumer:
   
     
 
 
 
 
 
 
 
 
 
Bankcard
   
0
     
0
 
 
 
0
 
 
 
0
 
Other consumer
   
0
     
0
 
 
 
0
 
 
 
0
 
               
 
 
 
 
 
 
 
 
 
Total
   
1
    $
534
 
 
 
 
2
 
 
$
 
1,477
 
               
 
 
 
 
 
 
 
 
 
 
22
 

 
Table of Contents
 
The following table presents troubled debt restructurings, by class of loan, that had charge-offs during the three months and nine months ended September 30, 2018.
 
 
Three Months Ended
September 30, 2018
   
Nine Months Ended
September 30, 2018
 
 
Number of
Contracts
   
Recorded
Investment
   
Number of
Contracts
   
Recorded
Investment
 
Troubled Debt Restructurings
   
     
     
     
 
Commercial real estate:
   
     
     
     
 
Owner-occupied
   
0
    $
0
     
0
    $
0
 
Nonowner-occupied
   
0
     
0
     
0
     
0
 
Other commercial
   
1
     
622
     
1
     
622
 
Residential real estate
   
0
     
0
     
0
     
0
 
Construction & land development
   
0
     
0
     
0
     
0
 
Consumer:
   
     
     
     
 
Bankcard
   
0
     
0
     
0
     
0
 
Other consumer
   
0
     
0
     
0
     
0
 
                                 
Total
   
1
    $
622
     
1
    $
622
 
                                 
The following table sets forth United’s age analysis of its past due loans, segregated by class of loans:
Age Analysis of Past Due Loans
As of September 30, 2019
 
 
30-89

Days
Past Due
   
90 Days or
more Past
Due
   
Total Past
Due
   
Current &
Other (1)
   
Total
Financing
Receivables
   
Recorded
Investment
>90 Days
 
&
Accruing
 
Commercial real estate:
   
     
     
     
     
     
 
Owner-occupied
  $
17,635
    $
13,463
    $
31,098
    $
1,190,549
    $
1,221,647
    $
1,105
 
Nonowner-occupied
   
14,171
     
19,342
     
33,513
     
4,208,169
     
4,241,682
     
471
 
Other commercial
   
11,446
     
53,250
     
64,696
     
2,043,169
     
2,107,865
     
533
 
Residential real estate
   
33,863
     
27,155
     
61,018
     
3,583,550
     
3,644,568
     
6,248
 
Construction & land development
   
5,299
     
16,024
     
21,323
     
1,279,558
     
1,300,881
     
478
 
Consumer:
   
     
     
     
     
     
 
Bankcard
   
303
     
155
     
458
     
9,074
     
9,532
     
155
 
Other consumer
   
8,959
     
1,092
     
10,051
     
1,101,012
     
1,111,063
     
850
 
                                                 
Total
  $
91,676
    $
130,481
    $
222,157
    $
13,415,081
    $
13,637,238
    $
9,840
 
                                                 
(1) Other includes loans with a recorded investment of $103,017 acquired and accounted for under ASC Topic
310-30
“Loans and Debt Securities Acquired with Deteriorated Credit Quality”.
Age Analysis of Past Due Loans
As of December 31, 2018
 
 
30-89
Days
Past Due
   
90 Days or
more Past
Due
   
Total Past
Due
   
Current &
Other (1)
   
Total
Financing
Receivables
   
Recorded
Investment
>90 Days
 
&
Accruing
 
Commercial real estate:
   
     
     
     
     
     
 
Owner-occupied
  $
9,224
    $
17,742
    $
26,966
    $
1,264,824
    $
1,291,790
    $
629
 
Nonowner-occupied
   
16,108
     
18,092
     
34,200
     
4,269,413
     
4,303,613
     
1,171
 
Other commercial
   
13,556
     
46,040
     
59,596
     
1,898,045
     
1,957,641
     
2,850
 
Residential real estate
   
37,111
     
30,278
     
67,389
     
3,434,004
     
3,501,393
     
9,141
 
Construction & land development
   
8,462
     
19,412
     
27,874
     
1,382,594
     
1,410,468
     
680
 
Consumer:
   
     
     
     
     
     
 
Bankcard
   
657
     
177
     
834
     
9,369
     
10,203
     
177
 
Other consumer
   
8,909
     
1,243
     
10,152
     
944,272
     
954,424
     
893
 
                                                 
Total
  $
94,027
    $
132,984
    $
227,011
    $
13,202,521
    $
13,429,532
    $
15,541
 
                                                 
(1) Other includes loans with a recorded investment of $149,737 acquired and accounted for under ASC Topic
310-30
“Loans and Debt Securities Acquired with Deteriorated Credit Quality”.
 
23
 

 
Table of Contents
 
The following table sets forth United’s nonaccrual loans, segregated by class of loans:
Loans on Nonaccrual Status
 
 
September 30,
2019
   
December 31,
2018
 
Commercial real estate:
   
     
 
Owner-occupied
  $
12,358
    $
17,113
 
Nonowner-occupied
   
18,871
     
16,921
 
Other commercial
   
52,717
     
43,190
 
Residential real estate
   
20,907
     
21,137
 
Construction & land development
   
15,546
     
18,732
 
Consumer:
   
     
 
Bankcard
   
0
     
0
 
Other consumer
   
242
     
350
 
                 
Total
  $
120,641
    $
117,443
 
                 
United assigns credit quality indicators of pass, special mention, substandard and doubtful to its loans. For United’s loans with a corporate credit exposure, United internally assigns a grade based on the creditworthiness of the borrower. For loans with a consumer credit exposure, United internally assigns a grade based upon an individual loan’s delinquency status. United reviews and updates, as necessary, these grades on a quarterly basis.
Special mention loans, with a corporate credit exposure, have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or in the Company’s credit position at some future date. Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a special mention rating. Nonfinancial reasons for rating a credit exposure special mention include management problems, pending litigation, an ineffective loan agreement or other material structural weakness, and any other significant deviation from prudent lending practices. For loans with a consumer credit exposure, loans that are past due
30-89 days
are generally considered special mention.
A substandard loan with a corporate credit exposure is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt by the borrower. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. They require more intensive supervision by management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. For some substandard loans, the likelihood of full collection of interest and principal may be in doubt and thus, placed on nonaccrual. For loans with a consumer credit exposure, loans that are 90 days or more past due or that have been placed on nonaccrual are considered substandard.
A loan with corporate credit exposure is classified as doubtful if it has all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. A doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the loan, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral, and refinancing. Generally, there are not any loans with a consumer credit exposure that are classified as doubtful. Usually, they are
charged-off
prior to such a classification. Loans classified as doubtful are also considered impaired.
 
24
 

 
Table of Contents
 
The following tables set forth United’s credit quality indicators information, by class of loans:
Credit Quality Indicators
Corporate Credit Exposure
As of September 30, 2019
 
 
Commercial Real Estate
   
Other
Commercial
   
Construction
 
&
Land
Development
 
 
Owner-
occupied
   
Nonowner-
occupied
 
Grade:
   
     
     
     
 
Pass
  $
1,147,536
    $
4,141,992
    $
1,964,260
    $
1,221,350
 
Special mention
   
20,588
     
27,493
     
62,015
     
10,105
 
Substandard
   
53,164
     
72,197
     
81,320
     
69,426
 
Doubtful
   
359
     
0
     
270
     
0
 
                                 
Total
  $
1,221,647
    $
4,241,682
    $
2,107,865
    $
 
 
 
1,300,881
 
                                 
   
As of December 31, 2018
 
 
Commercial Real Estate
   
Other
Commercial
   
Construction
 
&
Land
Development
 
 
Owner-
occupied
   
Nonowner-
occupied
 
Grade:
   
     
     
     
 
Pass
  $
1,201,387
    $
4,161,149
    $
1,858,821
    $
 
 
 
1,330,899
 
Special mention
   
34,487
     
46,442
     
14,424
     
28,629
 
Substandard
   
55,916
     
96,022
     
81,946
     
50,940
 
Doubtful
   
0
     
0
     
2,450
     
0
 
                                 
Total
  $
1,291,790
    $
4,303,613
    $
1,957,641
    $
1,410,468
 
                                 
Credit Quality Indicators
Consumer Credit Exposure
As of September 30, 2019
 
 
Residential
Real Estate
   
Bankcard
   
Other
Consumer
 
Grade:
   
     
     
 
Pass
  $
3,596,942
    $
9,073
    $
1,100,971
 
Special mention
   
9,776
     
304
     
8,962
 
Substandard
   
37,850
     
155
     
1,130
 
Doubtful
   
0
     
0
     
0
 
                         
Total
  $
3,644,568
    $
9,532
    $
1,111,063
 
                         
   
As of December 31, 2018
 
 
Residential
Real Estate
   
Bankcard
   
Other
Consumer
 
Grade:
   
     
     
 
Pass
  $
3,436,584
    $
9,369
    $
944,241
 
Special mention
   
19,051
     
657
     
8,914
 
Substandard
   
45,758
     
177
     
1,269
 
Doubtful
   
0
     
0
     
0
 
                         
Total
  $
3,501,393
    $
10,203
    $
954,424
 
                         
Loans are designated as impaired when, in the opinion of management, based on current information and events, the collection of principal and interest in accordance with the loan contract is doubtful. Typically, United does not consider loans for impairment unless a sustained period of delinquency (i.e. 90 days or more) is noted or there are subsequent events that impact repayment probability (i.e. negative financial trends, bankruptcy filings, eminent foreclosure proceedings, etc.). Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. Consistent with United’s existing method of income recognition for loans, interest on impaired loans, except those classified as nonaccrual, is recognized as income using the accrual method. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
 
25
 

 
Table of Contents
 
The following table sets forth United’s impaired loans information, by class of loans:
 
Impaired Loans
 
 
September 30, 2019
   
December 31, 2018
 
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
 
With no related allowance recorded:
   
     
     
     
     
     
 
Commercial real estate:
   
     
     
     
     
     
 
Owner-occupied
  $
68,541
    $
70,625
    $
0
    $
63,633
    $
63,798
    $
0
 
Nonowner-occupied
   
45,039
     
45,232
     
0
     
98,845
     
98,904
     
0
 
Other commercial
   
59,855
     
67,441
     
0
     
40,291
     
50,459
     
0
 
Residential real estate
   
31,992
     
33,864
     
0
     
28,207
     
29,279
     
0
 
Construction & land development
   
29,900
     
35,825
     
0
     
37,174
     
40,459
     
0
 
Consumer:
   
     
     
     
     
     
 
Bankcard
   
0
     
0
     
0
     
0
     
0
     
0
 
Other consumer
   
31
     
31
     
0
     
27
     
27
     
0
 
With an allowance recorded:
   
     
     
     
     
     
 
Commercial real estate:
   
     
     
     
     
     
 
Owner-occupied
  $
1,066
    $
1,066
    $
25
    $
10,004
    $
10,004
    $
2,542
 
Nonowner-occupied
   
13,515
     
13,623
     
1,900
     
15,720
     
15,720
     
2,715
 
Other commercial
   
40,866
     
43,250
     
10,491
     
61,266
     
62,812
     
17,581
 
Residential real estate
   
6,080
     
6,081
     
433
     
19,623
     
22,064
     
3,265
 
Construction & land development
   
14,877
     
16,927
     
1,937
     
14,742
     
19,446
     
2,254
 
Consumer:
   
     
     
     
     
     
 
Bankcard
   
0
     
0
     
0
     
0
     
0
     
0
 
Other consumer
   
0
     
0
     
0
     
0
     
0
     
0
 
Total:
   
     
     
     
     
     
 
Commercial real estate:
   
     
     
     
     
     
 
Owner-occupied
  $
69,607
    $
71,691
    $
25
    $
73,637
    $
73,802
    $
2,542
 
Nonowner-occupied
   
58,554
     
58,855
     
1,900
     
114,565
     
114,624
     
2,715
 
Other commercial
   
100,721
     
110,691
     
10,491
     
101,557
     
113,271
     
17,581
 
Residential real estate
   
38,072
     
39,945
     
433
     
47,830
     
51,343
     
3,265
 
Construction & land development
   
44,777
     
52,752
     
1,937
     
51,916
     
59,905
     
2,254
 
Consumer:
   
     
     
     
     
     
 
Bankcard
   
0
     
0
     
0
     
0
     
0
     
0
 
Other consumer
   
31
     
31
     
0
     
27
     
27
     
0
 
 
Impaired Loans
 
 
For the Three Months Ended
 
 
September 30, 2019
   
September 30, 2018
 
 
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With no related allowance recorded:
   
     
     
     
 
Commercial real estate:
   
     
     
     
 
Owner-occupied
  $
70,245
    $
425
    $
65,625
    $
365
 
Nonowner-occupied
   
47,633
     
261
     
99,005
     
311
 
Other commercial
   
61,488
     
257
     
56,489
     
313
 
Residential real estate
   
33,482
     
146
     
28,753
     
144
 
Construction & land development
   
33,384
     
193
     
41,036
     
278
 
Consumer:
   
     
     
     
 
Bankcard
   
0
     
0
     
0
     
0
 
Other consumer
   
31
     
0
     
23
     
0
 
 
26
 

 
Table of Contents
 
 
Impaired Loans
 
 
For the Three Months Ended
 
 
September 30, 2019
   
September 30, 2018
 
 
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With an allowance recorded:
   
     
     
     
 
Commercial real estate:
   
     
     
     
 
Owner-occupied
  $
3,004
    $
0
    $
7,378
    $
6
 
Nonowner-occupied
   
11,943
     
63
     
12,465
     
189
 
Other commercial
   
38,016
     
11
     
47,563
     
305
 
Residential real estate
   
9,047
     
9
     
14,975
     
57
 
Construction & land development
   
14,481
     
32
     
9,408
     
20
 
Consumer:
   
     
     
     
 
Bankcard
   
0
     
0
     
0
     
0
 
Other consumer
   
0
     
0
     
0
     
0
 
Total:
   
     
     
     
 
Commercial real estate:
   
     
     
     
 
Owner-occupied
  $
73,249
    $
425
    $
73,003
    $
371
 
Nonowner-occupied
   
59,576
     
324
     
111,470
     
500
 
Other commercial
   
99,504
     
268
     
104,052
     
618
 
Residential real estate
   
42,529
     
155
     
43,728
     
201
 
Construction & land development
   
47,865
     
225
     
50,444
     
298
 
Consumer:
   
     
     
     
 
Bankcard
   
0
     
0
     
0
     
0
 
Other consumer
   
31
     
0
     
23
     
0
 
       
 
Impaired Loans
 
 
For the Nine Months Ended
 
 
September 30, 2019
   
September 30, 2018
 
 
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With no related allowance recorded:
   
     
     
     
 
Commercial real estate:
   
     
     
     
 
Owner-occupied
  $
69,547
    $
1,354
    $
69,009
    $
1,101
 
Nonowner-occupied
   
60,594
     
914
     
105,199
     
928
 
Other commercial
   
55,058
     
790
     
55,124
     
1,020
 
Residential real estate
   
32,189
     
479
     
27,210
     
501
 
Construction & land development
   
34,403
     
602
     
43,464
     
707
 
Consumer:
   
     
     
     
 
Bankcard
   
0
     
0
     
0
     
0
 
Other consumer
   
30
     
0
     
29
     
0
 
With an allowance recorded:
   
     
     
     
 
Commercial real estate:
   
     
     
     
 
Owner-occupied
  $
3,830
    $
0
    $
6,876
    $
18
 
Nonowner-occupied
   
12,645
     
192
     
11,158
     
251
 
Other commercial
   
41,383
     
139
     
47,736
     
380
 
Residential real estate
   
11,661
     
73
     
13,946
     
247
 
Construction & land development
   
14,567
     
87
     
6,944
     
60
 
Consumer:
   
     
     
     
 
Bankcard
   
0
     
0
     
0
     
0
 
Other consumer
   
0
     
0
     
0
     
0
 
Total:
   
     
     
     
 
Commercial real estate:
   
     
     
     
 
Owner-occupied
  $
73,377
    $
1,354
    $
75,885
    $
1,119
 
Nonowner-occupied
   
73,239
     
1,106
     
116,357
     
1,179
 
Other commercial
   
96,441
     
929
     
102,860
     
1,400
 
Residential real estate
   
43,850
     
552
     
41,156
     
748
 
Construction & land development
   
48,970
     
689
     
50,408
     
767
 
Consumer:
   
     
     
     
 
Bankcard
   
0
     
0
     
0
     
0
 
Other consumer
   
30
     
0
     
29
     
0
 
 
27
 

 
 
At September 30, 2019 and December 31, 2018, other real estate owned (“OREO”) included in other assets in the Consolidated Balance Sheets was $
18,367
and $
16,865
​​​​​​​, respectively. OREO consists of real estate acquired in foreclosure or other settlement of loans. Such assets are carried at the lower of the investment in the assets or the fair
 
value of the assets less estimated selling costs. Any adjustment to the fair value at the date of transfer is charged against the allowance for loan losses. Any subsequent valuation ​​​​​​​adjustments as well as any costs relating to operating, holding or disposing of the property are recorded in other expense in the period incurred. At September 30, 2019 and December 31, 2018, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process was $1,454 and $520, respectively.
5. ALLOWANCE FOR CREDIT LOSSES
The allowance for loan losses is management’s estimate of the probable credit losses inherent in the loan portfolio. For purposes of determining the general allowance, the loan portfolio is segregated by product type to recognize differing risk profiles among categories. It is further segregated by credit grade for
non-homogenous
loan pools and delinquency for homogeneous loan pools. The outstanding principal balance within each pool is multiplied by historical loss data, the loss emergence period (which is the period of time between the event that triggers a loss and the confirmation and/or charge off of that loss) and certain qualitative factors to derive the general loss allocation per pool. Specific loss allocations are calculated for commercial loans in excess of $500,000 in accordance with ASC Topic 310. Risk characteristics of owner-occupied commercial real estate loans and other commercial loans are similar in that they are normally dependent upon the borrower’s internal cash flow from operations to service debt. Nonowner-occupied commercial real estate loans differ in that cash flow to service debt is normally dependent on external income from third parties for use of the real estate such as rents, leases and room rates. Residential real estate loans are dependent upon individual borrowers who are affected by changes in general economic conditions, demand for housing and resulting residential real estate valuation. Construction and land development loans are impacted mainly by demand whether for new residential housing or for retail, industrial, office and other types of commercial construction within a given area. Consumer loan pool risk characteristics are influenced by general, regional and local economic conditions.
Loans deemed to be uncollectible are charged against the allowance for loan losses, while recoveries of previously
charged-off
amounts are credited to the allowance for loan losses. For commercial loans, when a loan or a portion of a loan is identified to contain a loss, a
charge-off
recommendation is directed to management to
charge-off
all or a portion of that loan. Generally, any unsecured commercial loan more than six months delinquent in payment of interest must be
charged-off
in full. If secured, the
charge-off
is generally made to reduce the loan balance to a level equal to the liquidation value of the collateral when payment of principal and interest is six months delinquent. Any commercial loan, secured or unsecured, on which a principal or interest payment has not been made within 90 days, is reviewed monthly for appropriate action.
For consumer loans,
closed-end
retail loans that are past due 120 cumulative days delinquent from the contractual due date and
open-end
loans 180 cumulative days delinquent from the contractual due date are
charged-off.
Any consumer loan on which a principal or interest payment has not been made within 90 days is reviewed monthly for appropriate action. For a
one-to-four
family
open-end
or
closed-end
residential real estate loan, home equity loan, or
high-loan-to-value
loan that has reached 180 or more days past due, management evaluates the collateral position and
charges-off
any amount that exceeds the value of the collateral. On retail credits for which the borrower is in bankruptcy, all amounts deemed unrecoverable are charged off within 60 days of the receipt of the notification. On retail credits effected by fraud, a loan is
charged-off
within 90 days of the discovery of the fraud. In the event of the borrower’s death and if repayment within the required timeframe is uncertain, the loan is generally
charged-off
as soon as the amount of the loss is determined.
For loans acquired through the completion of a transfer, including loans acquired in a business combination, that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that United will be unable to collect all contractually required payment receivable are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized
 
28
 

 
Table of Contents
 
as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). For the three and nine months ended September 30, 2019, the amount of provision for loan losses related to loans acquired that have evidence of deterioration of credit quality resulted in provision for loan losses expense of $631 and $3,899, respectively, as compared to a provision for loan losses expense of $924 and $3,004, respectively, for the three and nine months ended September 30, 2018.
United maintains an allowance for loan losses and a reserve for lending-related commitments such as unfunded loan commitments and letters of credit. The reserve for lending-related commitments of $1,776 and $1,389 at September 30, 2019 and December 31, 2018, respectively, is separately classified on the balance sheet and is included in other liabilities. The combined allowance for loan losses and reserve for lending-related commitments are referred to as the allowance for credit losses.
A progression of the allowance for loan losses, by portfolio segment, for the periods indicated is summarized as follows:
Allowance for Loan Losses
For the Three Months Ended September 30, 2019
 
                                                                 
 
Commercial Real Estate
   
   
   
Construction
   
   
Allowance
for
   
 
 
Owner-
occupied
   
Nonowner-
occupied
   
Other
Commercial
   
Residential
Real Estate
   
& Land
Development
   
Consumer
   
Estimated
Imprecision
   
Total
 
Allowance for Loan Losses:
   
     
     
     
     
     
     
     
 
Beginning balance
  $
5,597
    $
6,041
    $
44,709
    $
10,172
    $
6,925
    $
2,723
    $
233
    $
76,400
 
Charge-offs
   
(1,340
)    
(509
)    
(2,135
)    
(942
)    
(0
)    
(478
)    
(0
)    
(5,404
)
Recoveries
   
145
     
16
     
703
     
69
     
12
     
124
     
0
     
1,069
 
Provision
   
786
     
1,118
     
3,464
     
14
     
(750
)    
529
     
(128
)    
5,033
 
                                                                 
Ending balance
  $
5,188
    $
6,666
    $
46,741
    $
9,313
    $
6,187
    $
2,898
    $
105
    $
77,098
 
                                                                 
   
Allowance for Loan Losses and Carrying Amount of Loans
 
For the Nine Months Ended September 30, 2019
 
 
 
Commercial Real Estate
   
   
   
Construction
   
   
Allowance
for
   
 
 
Owner-
occupied
   
Nonowner-
occupied
   
Other
Commercial
   
Residential
Real Estate
   
& Land
Development
   
Consumer
   
Estimated
Imprecision
   
Total
 
Allowance for Loan Losses:
   
     
     
     
     
     
     
     
 
Beginning balance
  $
5,063
    $
6,919
    $
41,341
    $
12,448
    $
7,992
    $
2,695
    $
245
    $
76,703
 
Charge-offs
   
(7,861
)    
(578
)    
(6,714
)    
(1,692
)    
(573
)    
(1,988
)    
(0
)    
(19,406
)
Recoveries
   
1,763
     
57
     
1,420
     
423
     
164
     
528
     
0
     
4,355
 
Provision
   
6,223
     
268
     
10,694
     
(1,866
)    
(1,396
)    
1,663
     
(140
)    
15,446
 
                                                                 
Ending balance
  $
5,188
    $
6,666
    $
46,741
    $
9,313
    $
6,187
    $
2,898
    $
105
    $
77,098
 
                                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
29
 

 
Table of Contents
 
                                                                 
Allowance for Loan Losses and Carrying Amount of Loans
 
For the Nine Months Ended September 30, 2019
 
 
 
Commercial Real Estate
   
   
   
Construction
   
   
Allowance
for
   
 
 
Owner-
occupied
   
Nonowner-
occupied
   
Other
Commercial
   
Residential
Real Estate
   
& Land
Development
   
Consumer
   
Estimated
Imprecision
   
Total
 
Ending Balance: individually evaluated for impairment
  $
25
    $
1,900
    $
10,490
    $
433
    $
1,937
    $
0
    $
0
    $
14,785
 
Ending Balance: collectively evaluated for impairment
  $
5,163
    $
4,766
    $
36,251
    $
8,880
    $
4,250
    $
2,898
    $
105
    $
62,313
 
Ending Balance: loans acquired with deteriorated credit quality
  $
0
    $
0
    $
0
    $
0
    $
0
    $
0
    $
0
    $
0
 
Financing receivables:
   
     
     
     
     
     
     
     
 
Ending balance
  $
1,221,647
    $
4,241,682
    $
2,107,865
    $
3,644,568
    $
1,300,881
    $
1,120,595
    $
0
    $
13,637,238
 
Ending Balance: individually evaluated for impairment
  $
21,913
    $
28,000
    $
57,465
    $
12,628
    $
14,877
    $
0
    $
0
    $
134,883
 
Ending Balance: collectively evaluated for impairment
  $
1,174,677
    $
4,197,103
    $
2,014,164
    $
3,621,758
    $
1,271,072
    $
1,120,564
    $
0
    $
13,399,338
 
Ending Balance: loans acquired with deteriorated credit quality
  $
25,057
    $
16,579
    $
36,236
    $
10,182
    $
14,932
    $
31
    $
0
    $
103,017
 
   
Allowance for Loan Losses and Carrying Amount of Loans
 
For the Year Ended December 31, 2018
 
 
 
Commercial Real Estate
   
   
   
Construction
   
   
Allowance
for
   
 
 
Owner-
occupied
   
Nonowner-
occupied
   
Other
Commercial
   
Residential
Real Estate
   
& Land
Development
   
Consumer
   
Estimated
Imprecision
   
Total
 
Allowance for Loan Losses:
   
     
     
     
     
     
     
     
 
Beginning balance
  $
5,401
    $
6,369
    $
45,189
    $
9,927
    $
7,187
    $
2,481
    $
73
    $
76,627
 
Charge-offs
   
(3,225
)    
(314
)    
(16,424
)    
(3,162
)    
(2,731
)    
(2,750
)    
(0
)    
(28,606
)
Recoveries
   
1,189
     
563
     
2,944
     
1,114
     
197
     
662
     
0
     
6,669
 
Provision
   
1,698
     
301
     
9,632
     
4,569
     
3,339
     
2,302
     
172
     
22,013
 
                                                                 
Ending balance
  $
5,063
    $
6,919
    $
41,341
    $
12,448
    $
7,992
    $
2,695
    $
245
    $
76,703
 
                                                                 
Ending Balance: individually evaluated for impairment
  $
2,543
    $
2,715
    $
17,581
    $
3,265
    $
2,254
    $
0
    $
0
    $
28,358
 
Ending Balance: collectively evaluated for impairment
  $
2,520
    $
4,204
    $
23,760
    $
9,183
    $
5,738
    $
2,695
    $
245
    $
48,345
 
Ending Balance: loans acquired with deteriorated credit quality
  $
0
    $
0
    $
0
    $
0
    $
0
    $
0
    $
0
    $
0
 
 
 
 
 
 
 
 
 
 
30
 

 
Table of Contents
   
Allowance for Loan Losses and Carrying Amount of Loans
 
For the Year Ended December 31, 2018
 
 
 
Commercial Real Estate
   
   
   
Construction
   
   
Allowance
for
   
 
 
Owner-
occupied
   
Nonowner-
occupied
   
Other
Commercial
   
Residential
Real Estate
   
& Land
Development
   
Consumer
   
Estimated
Imprecision
   
Total
 
Financing receivables:
   
     
     
     
     
     
     
     
 
Ending balance
  $
1,291,790
    $
4,303,613
    $
1,957,641
    $
3,501,393
    $
1,410,468
    $
964,627
    $
0
    $
13,429,532
 
Ending Balance: individually evaluated for impairment
  $
27,599
    $
25,231
    $
72,300
    $
21,998
    $
14,807
    $
0
    $
0
    $
161,935
 
Ending Balance: collectively evaluated for impairment
  $
1,234,919
    $
4,215,060
    $
1,860,085
    $
3,468,356
    $
1,374,840
    $
964,600
    $
0
    $
13,117,860
 
Ending Balance: loans acquired with deteriorated credit quality
  $
29,272
    $
63,322
    $
25,256
    $
11,039
    $
20,821
    $
27
    $
0
    $
149,737
 
6. INTANGIBLE ASSETS
The following is a summary of intangible assets subject to amortization and those not subject to amortization:
 
September 30, 2019
 
 
Community Banking
   
Mortgage Banking
   
Total
 
 
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Gross
Carrying
Amount
   
Accumulated
Amortization
 
Amortized intangible assets:
   
     
     
     
     
     
 
Core deposit intangible assets
  $
98,359
    $
(67,754
)   $
0
    $
0
    $
98,359
    $
(67,754
)
                                                 
Non-amortized
intangible assets:
   
     
     
     
     
     
 
George Mason trade name
  $
0
     
    $
1,080
     
    $
1,080
     
 
                                                 
Goodwill not subject to amortization
  $
1,472,699
     
    $
5,315
     
    $
1,478,014
     
 
                                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
Community Banking
   
Mortgage Banking
   
Total
 
 
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Gross
Carrying
Amount
   
Accumulated
Amortization
 
Amortized intangible assets:
   
     
     
     
     
     
 
Core deposit intangible assets
  $
98,359
    $
(62,492
)   $
0
    $
0
    $
98,359
    $
(62,492
)
                                                 
Non-amortized
intangible assets:
   
     
     
     
     
     
 
George Mason trade name
  $
0
     
    $
  1,080
     
    $
1,080
     
 
                                                 
Goodwill not subject to amortization
  $
1,472,699
     
    $
5,315
     
    $
1,478,014
     
 
                                                 
  
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The following table provides a reconciliation of goodwill:
 
Community
Banking
   
Mortgage
Banking
   
Total
 
Goodwill at December 31, 2018
  $
1,472,699
    $
  5,315
    $
1,478,014
 
Additions to goodwill
   
0
     
0
     
0
 
                         
Goodwill at September 30, 2019
  $
1,472,699
    $
5,315
    $
1,478,014
 
                         
United incurred amortization expense on intangible assets of $1,754 and $5,262 for the quarter and nine months ended September 30, 2019, respectively, and $2,009 and $6,029 for the quarter and nine months ended September 30, 2018, respectively.
The following table sets forth the anticipated amortization expense for intangible assets for the years subsequent to 2018:
Year
 
Amount
 
2019
  $
7,016
 
2020
   
6,309
 
2021
   
5,369
 
2022
   
4,581
 
2023 and thereafter
   
12,592
 
7. LEASES
United determines if an arrangement is a lease at inception. United and certain subsidiaries have entered into various noncancelable-operating leases for branch and loan production offices as well as operating facilities. Operating leases are included in operating lease
right-of-use
(“ROU”) assets and operating lease liabilities on the Consolidated Balance Sheets. Operating leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets. Presently, United does not have any finance leases.
United’s operating leases are subject to renewal options under various terms. United’s operating leases have remaining terms of 1 to 14 years, some of which include options to extend leases generally for periods of 5 years. United rents or subleases certain real estate to third parties. Our sublease portfolio consists of operating leases to other organizations for former branch offices.
ROU assets represent United’s right to use an underlying asset for the lease term and lease liabilities represent United’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of United’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend the lease when it is reasonably certain that United will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
 
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The components of lease expense were as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
 
Classification
   
September 30, 2019
   
September 30, 2019
 
Operating lease cost
   
Net occupancy expense         
    $
4,864
    $
14,571
 
Sublease income
   
Net occupancy expense
     
(197
)    
(671
)
                         
Net lease cost
   
    $
  4,667
    $
  13,900
 
                         
Supplemental balance sheet information related to leases was as follows:
 
Classification
   
September 30, 2019
 
Operating lease
right-of-use
assets
   
Operating lease
 right-of-use
 assets         
    $
  60,318
 
Operating lease liabilities
   
Operating lease liabilities
    $
63,987
 
Other information related to leases was as follows:
 
September 30, 2019
 
Weighted-average remaining lease term:
   
 
Operating leases
   
5.01
 years
 
Weighted-average discount rate:
   
 
Operating leases
   
3.23
%
Supplemental cash flow information related to leases was as follows:
 
Three Months Ended
   
Nine Months Ended
 
 
September 30, 2019
   
September 30, 2019
 
Cash paid for amounts in the measurement of lease liabilities:
   
     
 
Operating cash flows from operating leases
  $
  4,903
    $
14,552
 
ROU assets obtained in the exchange for lease liabilties
   
1,537
     
5,953
 
Maturities of lease liabilities by year and in the aggregate, under operating leases with initial or remaining terms of one year or more, for years subsequent to December 31, 2018, consists of the following as of September 30, 2019 and December 31, 2018:
 
Amount
 
Year
 
As of
September 30, 2019
   
As of
December 31, 2018
 
2019
  $
4,817
    $
18,590
 
2020
   
17,415
     
16,359
 
2021
   
14,868
     
13,850
 
2022
   
11,206
     
10,269
 
2023
   
8,431
     
7,600
 
Thereafter
   
12,798
     
10,640
 
                 
Total lease payments
   
69,535
     
77,308
 
Less: imputed interest
   
(5,548
)    
(0
)
                 
Total
  $
  63,987
    $
  77,308
 
                 
8. SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under agreements to repurchase are a significant source of funds for the Company. United has various unused lines of credit available from certain of its correspondent banks in the aggregate amount of $230,000. These lines of credit, which bear interest at prevailing market rates, permit United to borrow
 
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funds in the overnight market, and are renewable annually subject to certain conditions. At September 30, 2019, United did not have any federal funds purchased while total securities sold under agreements to repurchase (REPOs) were $129,966. The securities sold under agreements to repurchase were accounted for as collateralized financial transactions. They were recorded at the amounts at which the securities were acquired or sold plus accrued interest.
United has a $20,000 line of credit with an unrelated financial institution to provide for general liquidity needs. The line is an unsecured, revolving line of credit. The line will be renewable on a
360-day
basis and will carry an indexed, floating-rate of interest. The line requires compliance with various financial and nonfinancial covenants. At September 30, 2019, United had no outstanding balance under this line of credit.
 
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9. LONG-TERM BORROWINGS
United’s subsidiary bank is a member of the Federal Home Loan Bank (“FHLB”). Membership in the FHLB makes available short-term and long-term borrowings from collateralized advances. All FHLB borrowings are collateralized by a mix of single-family residential mortgage loans, commercial loans and investment securities. At September 30, 2019, United had an unused borrowing amount of approximately $3,894,693 available subject to delivery of collateral after certain trigger points. Advances may be called by the FHLB or redeemed by United based on predefined factors and penalties.
At September 30, 2019, $1,672,448 of FHLB advances with a weighted-average interest rate of 2.11% are scheduled to mature within the next six years.
 Overnight funds of $200,000 with an interest rate of 2.15% are included in the FHLB advances of $1,672,448 at September 30, 2019.
The scheduled maturities of these FHLB borrowings are as follows:
Year
 
Amount
 
2019
  $
220,918
 
2020
   
591,837
 
2021
   
827,636
 
2022
   
20,918
 
2023 and thereafter
   
11,139
 
         
Total
  $
1,672,448
 
         
At September 30, 2019, United had a total of fourteen statutory business trusts that were formed for the purpose of issuing or participating in pools of trust preferred capital securities (“Capital Securities”) with the proceeds invested in junior subordinated debt securities (“Debentures”) of United. The Debentures, which are subordinate and junior in right of payment to all present and future senior indebtedness and certain other financial obligations of United, are the sole assets of the trusts and United’s payment under the Debentures is the sole source of revenue for the trusts. At September 30, 2019 and December 31, 2018, the outstanding balance of the Debentures was $235,849 and $234,905, respectively, and was included in the category of long-term debt on the Consolidated Balance Sheets entitled “Other long-term borrowings.” The Capital Securities are not included as a component of shareholders’ equity in the Consolidated Balance Sheets. United fully and unconditionally guarantees each individual trust’s obligations under the Capital Securities.
Under the provisions of the subordinated debt, United has the right to defer payment of interest on the subordinated debt at any time, or from time to time, for periods not exceeding
five years.
If interest payments on the subordinated debt are deferred, the dividends on the Capital Securities are also deferred. Interest on the subordinated debt is cumulative.
In accordance with the fully-phased in “Basel III Capital Rules” as published by United’s primary federal regulator, the Federal Reserve, United is unable to consider the Capital Securities as Tier 1 capital, but rather the Capital Securities are included as a component of United’s Tier 2 capital. United can include the Capital Securities in its Tier 2 capital on a permanent basis.
 
10. COMMITMENTS AND CONTINGENT LIABILITIES
United is a party to financial instruments with
off-balance-sheet
risk in the normal course of business to meet the financing needs of its customers and to alter its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby letters of credit, and interest rate swap agreements. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.
 
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United’s maximum exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for the loan commitments and standby letters of credit is the contractual or notional amount of those instruments. United uses the same policies in making commitments and conditional obligations as it does for
on-balance
sheet instruments. Collateral may be obtained, if deemed necessary, based on management’s credit evaluation of the counterparty.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily, and historically do not, represent future cash requirements. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on management’s credit evaluation of the counterparty. United had approximately $3,831,866 and $3,826,370 of loan commitments outstanding as of September 30, 2019 and December 31, 2018, respectively, approximately half of which contractually expire within one year. Included in the September 30, 2019 amount are commitments to extend credit of $311,366 related to George Mason’s mortgage loan funding commitments and are of a short-term nature.
Commercial and standby letters of credit are agreements used by United’s customers as a means of improving their credit standing in their dealings with others. Under these agreements, United guarantees certain financial commitments of its customers. A commercial letter of credit is issued specifically to facilitate trade or commerce. Typically, under the terms of a commercial letter of credit, a commitment is drawn upon when the underlying transaction is consummated as intended between the customer and a third party. As of September 30, 2019, United had $5,092 of commercial letters of credit outstanding. As of December 31, 2018, United had no outstanding commercial letters of credit. A standby letter of credit is generally contingent upon the failure of a customer to perform according to the terms of an underlying contract with a third party. United has issued standby letters of credit of $136,962 and $141,032 as of September 30, 2019 and December 31, 2018, respectively. In accordance with the Contingencies Topic of the FASB Accounting Standards Codification, United has determined that substantially all of its letters of credit are renewed on an annual basis and the fees associated with these letters of credit are immaterial.
George Mason provides for its estimated exposure to repurchase loans previously sold to investors for which borrowers failed to provide full and accurate information on their loan application or for which appraisals have not been acceptable or where the loan was not underwritten in accordance with the loan program specified by the loan investor, and for other exposure to its investors related to loan sales activities. United evaluates the merits of each claim and estimates its reserve based on actual and expected claims received and considers the historical amounts paid to settle such claims. George Mason has a reserve of $1,173 as of September 30, 2019.
United has derivative counter-party risk that may arise from the possible inability of George Mason’s third party investors to meet the terms of their forward sales contracts. George Mason works with third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk. United does not expect any third-party investor to fail to meet its obligation.
United and its subsidiaries are currently involved in various legal proceedings in the normal course of business. Management is vigorously pursuing all its legal and factual defenses and, after consultation with legal counsel, believes that all such litigation will be resolved with no material effect on United’s financial position.
 
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11. DERIVATIVE FINANCIAL INSTRUMENTS
United uses derivative instruments to help aid against adverse price changes or interest rate movements on the value of certain assets or liabilities and on future cash flows. These derivatives may consist of interest rate swaps, caps, floors, collars, futures, forward contracts, written and purchased options. United also executes derivative instruments with its commercial banking customers to facilitate its risk management strategies.
United accounts for its derivative financial instruments in accordance with ASC Topic 815 which requires all derivative instruments to be carried at fair value on the balance sheet. United has designated certain derivative instruments used to manage interest rate risk as hedge relationships with certain assets, liabilities or cash flows being hedged. Certain derivatives used for interest rate risk management are not designated in a hedge relationship.
Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
For a fair value hedge, the fair value of the interest rate swap is recognized on the balance sheet as either a freestanding asset or liability with a corresponding adjustment to the hedged financial instrument. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a fair value hedge are recorded in income in the same period and in the same income statement line as changes in the fair values of the hedged items that relate to the hedged risk(s). For a cash flow hedge, the fair value of the interest rate swap is recognized on the balance sheet as either a freestanding asset or liability with a corresponding adjustment to other comprehensive income within shareholders’ equity, net of tax. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a cash flow hedge are recorded as a component of other comprehensive income, net of deferred taxes, and reclassified to earnings when the hedged transaction affects earnings. The portion of a hedge that is ineffective is recognized immediately in earnings.
At inception of a hedge relationship, United formally documents the hedged item, the particular risk management objective, the nature of the risk being hedged, the derivative being used, how effectiveness of the hedge will be assessed and how the ineffectiveness of the hedge will be measured. United also assesses hedge effectiveness at inception and on an ongoing basis using regression analysis. Hedge ineffectiveness is measured by using the change in fair value method. The change in fair value method compares the change in the fair value of the hedging derivative to the change in the fair value of the hedged exposure, attributable to changes in the benchmark rate. The portion of a hedge that is ineffective is recognized immediately in earnings.
United through George Mason enters into interest rate lock commitments to finance residential mortgage loans with its customers. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by United. Interest rate risk arises on these commitments and subsequently closed loans if interest rates change between the time of the interest rate lock and the delivery of the loan to the investor. Market risk on interest rate lock commitments and mortgage loans held for sale is managed using corresponding forward mortgage loan sales contracts. United is a party to these forward mortgage loan sales contracts to sell loans servicing released and short sales of mortgage-backed securities. When the interest rate is locked with the borrower, the rate lock commitment, forward sale agreement, and mortgage-backed security position are undesignated derivatives and marked to fair value through earnings. The fair value of the rate lock derivative includes the servicing premium and the interest spread for the difference between retail and wholesale mortgage rates. Income from mortgage banking activities includes the gain recognized for the period presented and associated elements of fair value.
 
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United sells mortgage loans on either a best efforts or mandatory delivery basis. For loans sold on a mandatory delivery basis, United enters into forward mortgage-backed securities (the “residual hedge”) to mitigate the effect of interest rate risk. Both the rate lock commitment under mandatory delivery and the residual hedge are recorded at fair value through earnings and are not designated as accounting hedges. At the closing of the loan, the loan commitment derivative expires and United records a loan held for sale at fair value and continues to mark these assets to market under the election of fair value option. United closes out of the trading mortgage-backed securities assigned within the residual hedge and replaces the securities with a forward sales contract once a price has been accepted by an investor and recorded at fair value. For those loans selected to be sold under best efforts delivery, at the closing of the loan, the rate lock commitment derivative expires and the Company records a loan held for sale at fair value under the election of fair value option and continues to be obligated under the same forward loan sales contract entered into at inception of the rate lock commitment.
The derivative portfolio also includes derivative financial instruments not included in hedge relationships. These derivatives consist of interest rate swaps used for interest rate management purposes and derivatives executed with commercial banking customers to facilitate their interest rate management strategies. For derivatives that are not designated in a hedge relationship, changes in the fair value of the derivatives are recognized in earnings in the same period as the change in fair value. Gains and losses on other derivative financial instruments are included in noninterest income and noninterest expense, respectively.
The following tables disclose the derivative instruments’ location on the Company’s Consolidated Balance Sheets and the notional amount and fair value of those instruments at September 30, 2019 and December 31, 2018.
 
Asset Derivatives
 
 
September 30, 2019
   
December 31, 2018
 
 
Balance
Sheet
Location
   
Notional
Amount
   
Fair
Value
   
Balance
Sheet
Location
   
Notional
Amount
   
Fair
Value
 
Derivatives designated as hedging instruments
 
Fair Value Hedges:
   
     
     
     
     
     
 
Interest rate swap contracts (hedging commercial loans)
   
Other assets
    $
0
    $
0
     
Other assets
    $
85,623
    $
1,859
 
                                                 
Total derivatives designated as hedging instruments
   
    $
0
    $
0
     
    $
85,623
    $
1,859
 
                                                 
Derivatives not designated as hedging instruments
   
     
     
     
     
     
 
Interest rate swap contracts
   
Other assets
    $
0
    $
0
     
Other assets
    $
0
    $
0
 
Forward loan sales commitments
   
Other assets
     
30,969
     
44
     
Other assets
     
21,604
     
542
 
Interest rate lock commitments
   
Other assets
     
262,313
     
7,030
     
Other assets
     
93,955
     
4,103
 
                                                 
Total derivatives not designated as hedging instruments
   
    $
293,282
    $
7,074
     
    $
115,559
    $
4,645
 
                                                 
Total asset derivatives
   
    $
293,282
    $
7,074
     
    $
201,182
    $
6,504
 
                                                 
 
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Liability Derivatives
 
 
September 30, 2019
   
December 31, 2018
 
 
Balance
Sheet
Location
   
Notional
Amount
   
Fair
Value
   
Balance
Sheet
Location
   
Notional
Amount
   
Fair
Value
 
Derivatives designated as hedging instruments
 
Fair Value Hedges:
   
     
     
     
     
     
 
Interest rate swap contracts (hedging commercial loans)
   
Other liabilities
    $
83,328
    $
3,921
     
Other liabilities
    $
0
    $
0
 
                                                 
Total derivatives designated as hedging instruments
   
    $
83,328
    $
3,921
     
    $
0
    $
0
 
                                                 
Derivatives not designated as hedging instruments
   
     
     
     
     
     
 
Interest rate swap contracts
   
Other liabilities
    $
0
    $
0
     
Other liabilities
    $
0
    $
0
 
TBA mortgage-backed securities
   
Other liabilities
     
427,500
     
835
     
Other liabilities
     
200,281
     
3,002
 
Interest rate lock commitments
   
Other liabilities
     
0
     
0
     
Other liabilities
     
0
     
0
 
                                                 
Total derivatives not designated as hedging instruments
   
    $
427,500
    $
835
     
    $
200,281
    $
3,002
 
                                                 
Total liability derivatives
   
    $
510,828
    $
4,756
     
    $
 
 
200,281
    $
3,002
 
                                                 
The following table represents the carrying amount of the hedged assets/(liabilities) and the cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets/(liabilities) that are designated as a fair value accounting relationship as of September 30, 2019.
 
   
September 30, 2019
 
Derivatives in Fair Value
Hedging Relationships
 
Location in the Statement
of Condition
   
Carrying Amount
of the Hedged
Assets/(Liabilities)
   
Cumulative Amount
of Fair Value
Hedging Adjustment
Included in the
Carrying Amount of
the Hedged
Assets/(Liabilities)
   
Cumulative Amount of
Fair Value Hedging
Adjustment Remaining
for any Hedged Assets/
(Liabilities) for which
Hedge Accounting has
been Discontinued
 
Interest rate swaps
   
Loans, net of unearned income
    $
82,470
    $
(3,921
)   $
0
 
Derivative contracts involve the risk of dealing with both bank customers and institutional derivative counterparties and their ability to meet contractual terms. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. United’s exposure is limited to the replacement value of the contracts rather than the notional amount of the contract. The Company’s agreements generally contain provisions that limit the unsecured exposure up to an agreed upon threshold. Additionally, the Company attempts to minimize credit risk through certain approval processes established by management.
 
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The effect of United’s derivative financial instruments on its unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018 are presented as follows:
 
 
Three Months Ended
 
 
Income Statement
Location
 
September 30,
2019
   
September 30,
2018
 
Derivatives in hedging relationships
 
Fair Value Hedges:
 
   
     
 
Interest rate swap contracts
 
Interest income/(expense)
  $
(187
)   $
(24
)
                     
Total derivatives in hedging relationships
 
  $
(187
)   $
(24
)
                     
Derivatives not designated as hedging instruments
 
   
     
 
Forward loan sales commitments
 
Income from Mortgage Banking Activities
   
44
     
(197
)
TBA mortgage-backed securities
 
Income from Mortgage Banking Activities
   
2,641
     
2,583
 
Interest rate lock commitments
 
Income from Mortgage Banking Activities
   
602
     
(3,262
)
                     
Total derivatives not designated as hedging instruments
 
  $
3,287
    $
(876
)
                     
Total derivatives
 
  $
3,100
    $
(900
)
                     
           
 
 
Nine Months Ended
 
 
Income Statement
Location
 
September 30,
2019
   
September 30,
2018
 
Derivatives in fair value hedging relationships Fair Value Hedges: 
 
   
     
 
Interest rate swap contracts
 
Interest income/(expense)
  $
(285
)   $
(42
)
Cash Flow Hedges:
 
   
     
 
Forward loan sales commitments
 
Other income
   
0
     
0
 
                     
Total derivatives in hedging relationships
 
  $
(285
)   $
(42
)
                     
Derivatives not designated as hedging instruments
 
   
     
 
Forward loan sales commitments
 
Income from Mortgage Banking Activities
   
916
     
(12
)
TBA mortgage-backed securities
 
Income from Mortgage Banking Activities
   
2,167
     
1,473
 
Interest rate lock commitments
 
Income from Mortgage Banking Activities
   
6,472
     
(1,643
)
                     
Total derivatives not designated as hedging instruments
 
  $
9,555
    $
(182
)
                     
Total derivatives
 
  $
9,270
    $
(224
)
                     
12. FAIR VALUE MEASUREMENTS
United determines the fair values of its financial instruments based on the fair value hierarchy established by ASC Topic 820, which also clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
The Fair Value Measurements and Disclosures Topic specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect United’s market assumptions.
 
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The three levels of the fair value hierarchy, based on these two types of inputs, are as follows:
Level 1
 
-  
 
Valuation is based on quoted prices in active markets for identical assets and liabilities.
         
Level 2
 
-  
 
Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
         
Level 3
 
-  
 
Valuation is based on prices, inputs and model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
When determining the fair value measurements for assets and liabilities, United looks to active and observable markets to price identical assets or liabilities whenever possible and classifies such items in Level 1. When identical assets and liabilities are not traded in active markets, United looks to market observable data for similar assets and liabilities and classifies such items as Level 2. Nevertheless, certain assets and liabilities are not actively traded in observable markets and United must use alternative valuation techniques using unobservable inputs to determine a fair value and classifies such items as Level 3. For assets and liabilities that are not actively traded, the fair value measurement is based primarily upon estimates that require significant judgment. Therefore, the results may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there are inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. The level within the fair value hierarchy is based on the lowest level of input that is significant in the fair value measurement.
In accordance with ASC Topic 820, the following describes the valuation techniques used by United to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements.
Securities available for sale and equity securities
: Securities available for sale and equity securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Using a market approach valuation methodology, third party vendors compile prices based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, and “To Be Announced” prices (Level 2). Management internally reviews the fair values provided by third party vendors on a monthly basis. Management also performs a quarterly price testing analysis at the individual security level which compares the pricing provided by the third party vendors to an independent pricing source’s valuation of the same securities. Variances that are deemed to be material are reviewed by management. Additionally, to further assess the reliability of the information received from third party vendors, management obtains documentation from third party vendors related to the sources, methodologies, and inputs utilized in valuing securities classified as Level 2. Management analyzes this information to ensure the underlying assumptions appear reasonable. Management also obtains an independent service auditor’s report from third party vendors to provide reasonable assurance that appropriate controls are in place over the valuation process. Upon completing its review of the pricing from third party vendors at September 30, 2019, management determined that the prices provided by its third party pricing source were reasonable and in line with management’s expectations for the market values of these securities. Therefore, prices obtained from third party vendors that did not reflect forced liquidation or distressed sales were not adjusted by management at September 30, 2019. Management utilizes a number of factors to determine if a market is inactive, all of which may require a significant level of judgment. Factors that management considers include: a significant widening of the
bid-ask
spread, a considerable decline in the volume and level of trading activity in the instrument, a
 
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significant variance in prices among market participants, and a significant reduction in the level of observable inputs. Any securities available for sale not valued based upon quoted market prices or third party pricing models that consider observable market data are considered Level 3. Currently, United considers its valuation of available for sale Trup Cdos as Level 3. Based upon management’s review of the market conditions for Trup Cdos, it was determined that an income approach valuation technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs is the most representative measurement technique for these securities. The present value technique discounts expected future cash flows of a security to arrive at a present value. Management considers the following items when calculating the appropriate discount rate: the implied rate of return when the market was last active, changes in the implied rate of return as markets moved from very active to inactive, recent changes in credit ratings, and recent activity showing that the market has built in increased liquidity and credit premiums. Management’s internal credit review of each security was also factored in to determine the appropriate discount rate. The credit review considered each security’s collateral, subordination, excess spread, priority of claims, principal and interest.
Loans held for sale
: For residential mortgage loans sold in the mortgage banking segment, the loans closed are recorded at fair value as management has elected the fair value option which is measured using valuations from investors for loans with similar characteristics adjusted for the Company’s actual sales experience versus the investor’s indicated pricing. These valuations fall into the Level 3 category. The unobservable input is the Company’s historical sales prices. The range of historical sales prices increased the investor’s indicated pricing by a range of 0.25% to 0.59% with a weighted average increase of 0.40%.
Derivatives
: United utilizes interest rate swaps to hedge exposure to interest rate risk and variability of cash flows associated to changes in the underlying interest rate of the hedged item. These hedging interest rate swaps are classified as either a fair value hedge or a cash flow hedge. United’s derivative portfolio also includes derivative financial instruments not included in hedge relationships. These derivatives consist of interest rate swaps used for interest rate management purposes and derivatives executed with commercial banking customers to facilitate their interest rate management strategies. United utilizes third-party vendors for derivative valuation purposes. These vendors determine the appropriate fair value based on a net present value calculation of the cash flows related to the interest rate swaps using primarily observable market inputs such as interest rate yield curves (Level 2). Valuation adjustments to derivative fair values for liquidity and credit risk are also taken into consideration, as well as the likelihood of default by United and derivative counterparties, the net counterparty exposure and the remaining maturities of the positions. Values obtained from third party vendors are typically not adjusted by management. Management internally reviews the derivative values provided by third party vendors on a quarterly basis. All derivative values are tested for reasonableness by management utilizing a net present value calculation.
For a fair value hedge, the fair value of the interest rate swap is recognized on the balance sheet as either a freestanding asset or liability with a corresponding adjustment to the hedged financial instrument. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a fair value hedge are offset in current period earnings either in interest income or interest expense depending on the nature of the hedged financial instrument. For a cash flow hedge, the fair value of the interest rate swap is recognized on the balance sheet as either a freestanding asset or liability with a corresponding adjustment to other comprehensive income within shareholders’ equity, net of tax. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a cash flow hedge are offset to other comprehensive income, net of tax. The portion of a hedge that is ineffective is recognized immediately in earnings.
The Company records its interest rate lock commitments and forward loan sales commitments at fair value determined as the amount that would be required to settle each of these derivative financial instruments at the balance sheet date. In the normal course of business, George Mason enters into contractual interest rate lock commitments to extend credit to borrowers with fixed expiration dates. The commitments become effective when the borrowers
“lock-in”
a specified interest rate within the timeframes established by the mortgage companies. All borrowers are evaluated for credit
 
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worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to the investor. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, George Mason enters into either a forward sales contract to sell loans to investors when using best efforts or a TBA mortgage-backed security under mandatory delivery. As TBA mortgage-backed securities are actively traded in an open market, TBA mortgage-backed securities fall into a Level 2 category. The forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments. Under the Company’s best efforts model, the rate lock commitments to borrowers and the forward sales contracts to investors through to the date the loan closes are undesignated derivatives and accordingly, are marked to fair value through earnings. These valuations fall into a Level 2 category. For residential mortgage loans sold in the mortgage banking segment, the interest rate lock commitments are recorded at fair value which is measured using valuations from investors for loans with similar characteristics adjusted for the Company’s actual sales experience versus the investor’s indicated pricing. These valuations fall into the Level 3 category. The unobservable input is the Company’s historical sales prices. The range of historical sales prices increased the investor’s indicated pricing by a range of 0.25% to 0.59% with a weighted average increase of 0.40%.
For interest rate swap derivatives that are not designated in a hedge relationship, changes in the fair value of the derivatives are recognized in earnings in the same period as the change in the fair value. Unrealized gains and losses due to changes in the fair value of other derivative financial instruments not in hedge relationship are included in noninterest income and noninterest expense, respectively.
The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, segregated by the level of the valuation inputs within the fair value hierarchy.
 
   
Fair Value at September 30, 2019 Using
 
Description
 
Balance as of
September 30,
2019
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Assets
   
     
     
     
 
Available for sale debt securities:
   
     
     
     
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  $
64,034
    $
0
    $
64,034
    $
0
 
State and political subdivisions
   
238,515
     
0
     
238,515
     
0
 
Residential mortgage-backed securities
   
     
     
     
 
Agency
   
867,281
     
0
     
867,281
     
0
 
Non-agency
   
3,995
     
0
     
3,995
     
0
 
Commercial mortgage-backed securities
   
     
     
     
 
Agency
   
621,652
     
0
     
621,652
     
0
 
Asset-backed securities
   
279,707
     
0
     
279,707
     
0
 
Trust preferred collateralized debt obligations
   
5,069
     
0
     
0
     
5,069
 
Single issue trust preferred securities
   
16,544
     
0
     
16,544
     
0
 
Other corporate securities
   
355,300
     
6,673
     
348,627
     
0
 
                                 
Total available for sale securities
   
2,452,097
     
6,673
     
2,440,355
     
5,069
 
Equity securities:
   
     
     
     
 
Financial services industry
   
159
     
159
     
0
     
0
 
Equity mutual funds (1)
   
3,965
     
3,965
     
0
     
0
 
Other equity securities
   
4,790
     
4,790
     
0
     
0
 
                                 
Total equity securities
   
8,914
     
8,914
     
0
     
0
 
 
Loans held for sale
 
 
407,463
 
 
 
0
 
 
 
0
 
 
 
407,463
 
 
Derivative financial assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Fair Value at September 30, 2019 Using
 
Description
 
Balance as of
September 30,
2019
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Interest rate swap contracts
   
0
     
0
     
0
     
0
 
Forward sales commitments
   
44
     
0
     
44
     
0
 
Interest rate lock commitments
   
7,030
     
0
     
0
     
7,030
 
                                 
Total derivative financial assets
   
7,074
     
0
     
44
     
7,030
 
Liabilities
   
     
     
     
 
Derivative financial liabilities:
   
     
     
     
 
Interest rate swap contracts
   
3,921
     
0
     
3.921
     
0
 
TBA mortgage-backed securities
   
835
     
0
     
835
     
0
 
                                 
Total derivative financial liabilities
   
4,756
     
0
     
4,756
     
0
 
(1) The equity mutual funds are within a rabbi trust for the payment of benefits under a deferred compensation plan for certain key officers of United and its subsidiaries.
 
   
Fair Value at December 31, 2018 Using
 
Description
 
Balance as of
December 31,
2018
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Assets
   
     
     
     
 
Available for sale debt securities:
   
     
     
     
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  $
85,890
    $
0
    $
85,890
    $
0
 
State and political subdivisions
   
208,988
     
0
     
208,988
     
0
 
Residential mortgage-backed securities
   
     
     
     
 
Agency
   
1,035,650
     
0
     
1,035,650
     
0
 
Non-agency
   
4,259
     
0
     
4,259
     
0
 
Commercial mortgage-backed securities
   
     
     
     
 
Agency
   
554,600
     
0
     
554,600
     
0
 
Asset-backed securities
   
271,970
     
0
     
271,970
     
0
 
Trust preferred collateralized debt obligations
   
5,917
     
0
     
0
     
5,917
 
Single issue trust preferred securities
   
8,362
     
0
     
8,362
     
0
 
Other corporate securities
   
161,403
     
6,822
     
154,581
     
0
 
                                 
Total available for sale securities
   
2,337,039
     
6,822
     
2,324,300
     
5,917
 
Equity securities:
   
     
     
     
 
Financial services industry
   
140
     
140
     
0
     
0
 
Equity mutual funds (1)
   
4,954
     
4,954
     
0
     
0
 
Other equity securities
   
4,640
     
4,640
     
0
     
0
 
                                 
Total equity securities
   
9,734
     
9,734
     
0
     
0
 
Loans held for sale
   
247,104
     
0
     
0
     
247,104
 
Derivative financial assets:
   
     
     
     
 
Interest rate swap contracts
   
1,859
     
0
     
1,859
     
0
 
Forward sales commitments
   
542
     
0
     
542
     
0
 
Interest rate lock commitments
   
4,103
     
0
     
0
     
4,103
 
                                 
Total derivative financial assets
   
6,504
     
0
     
2,401
     
4,103
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
TBA mortgage-backed securities
 
 
3,002
 
 
 
0
 
 
 
3,002
 
 
 
0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative financial liabilities
 
 
3,002
 
 
 
0
 
 
 
3,002
 
 
 
0
 
 
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(1) The equity mutual funds are within a rabbi trust for the payment of benefits under a deferred compensation plan for certain key officers of United and its subsidiaries.
There were no transfers between Level 1 and Level 2 for financial assets and liabilities measured at fair value on a recurring basis during the nine months ended September 30, 2019 and the year ended December 31, 2018.
The following table presents additional information about financial assets and liabilities measured at fair value at September 30, 2019 and December 31, 2018 on a recurring basis and for which United has utilized Level 3 inputs to determine fair value:
 
Available for sale
Securities
 
 
Trust preferred
collateralized debt obligations
 
 
September 30,
2019
   
December 31,
2018
 
Balance, beginning of period
  $
5,917
    $
34,269
 
Total gains or losses (realized/unrealized):
   
     
 
Included in earnings (or changes in net assets)
   
(62
)    
28
 
Included in other comprehensive income
   
(786
)    
920
 
Purchases, issuances, and settlements
   
0
     
0
 
Sales
   
0
     
(29,300
)
Transfers in and/or out of Level 3
   
0
     
0
 
                 
Balance, end of period
  $
5,069
    $
5,917
 
                 
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at reporting date
  $
0
    $
0
 
       
 
Loans held for sale
 
 
September 30,
2019
   
December 31,
2018
 
Balance, beginning of period
  $
247,104
    $
263,308
 
Originations
   
2,164,410
     
2,619,454
 
Sales
   
(2,067,954
)    
(2,676,797
)
Total gains or losses during the period recognized in earnings
   
63,903
     
68,555
 
Transfers in and/or out of Level 3
   
0
     
(27,416
)
                 
Balance, end of period
  $
407,463
    $
247,104
 
                 
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at reporting date
  $
0
    $
0
 
 
Derivative Financial Assets
Interest Rate Lock Commitments
 
 
September 30,
2019
 
 
December 31,
2018
 
Balance, beginning of period
 
$
4,103
 
 
$
4,559
 
Transfers other
 
 
2,927
 
 
 
(456
)
 
 
 
 
 
 
 
 
 
Balance, end of period
 
$
7,030
 
 
$
4,103
 
 
 
 
 
 
 
 
 
 
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unre​​​​​​​alized gains or losses relating to assets still held at reporting date
 
$
0
 
 
$
0
 
 
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Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of
lower-of-cost-or
-market
accounting or write-downs of individual assets.
Fair Value Option
United elected the fair value option for the loans held for sale in its mortgage banking segment to mitigate a divergence between accounting losses and economic exposure.
The following table reflects the change in fair value included in earnings of financial instruments for which the fair value option has been elected:
                 
Description
 
Three Months Ended
September 30, 2019
   
Three Months Ended
September 30, 2018
 
Assets
   
     
 
Loans held for sale
   
     
 
Income from mortgage banking activities
  $
(1,304
)   $
(5,929
)
             
Description
 
Nine Months Ended
September 30, 2019
   
Nine Months Ended
September 30, 2018
 
Assets
   
     
 
Loans held for sale
   
     
 
Income from mortgage banking activities
  $
5,238
    $
(2,838
)
 
 
 
 
 
 
 
The following table reflects the difference between the aggregate fair value and the remaining contractual principal outstanding for financial instruments for which the fair value option has been elected:
                                                 
 
September 30, 2019
   
December 31, 2018
 
Description
 
Unpaid
Principal
Balance
   
Fair Value
   
Fair Value
Over/(Under)
Unpaid
Principal
Balance
   
Unpaid
Principal
Balance
   
Fair Value
   
Fair Value
Over/(Under)
Unpaid
Principal
Balance
 
Assets
   
     
     
     
     
     
 
Loans held for sale
  $
399,341
    $
407,463
    $
8,122
    $
241,293
    $
247,104
    $
5,811
 
 
 
 
 
 
 
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following describes the valuation techniques used by United to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements.
Loans held for sale
: Loans held for sale within the community banking segment that are delivered on a best efforts basis are carried at the lower of cost or fair value. The fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, United records any fair value adjustments for these loans held for sale on a nonrecurring basis.
No
nonrecurring fair value adjustments were recorded on loans held for sale during the nine months ended September 30, 2019. Gains and losses on sale of loans are recorded within income from mortgage banking activities on the Consolidated Statements of Income.
Impaired Loans
: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Impairment is measured based upon the present value of expected future cash flows from the loan discounted at the loan’s effective rate and the loan’s observable market price or the fair value of collateral, if the loan is collateral dependent. Fair value is measured using a market approach based on the value of the collateral securing
 
 
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the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an appraisal conducted by an independent, licensed appraiser outside of the Company using comparable property sales (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). For impaired loans, a specific reserve is established through the Allowance for Loan Losses, if necessary, by estimating the fair value of the underlying collateral on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for credit losses expense on the Consolidated Statements of Income.
OREO
: OREO consists of real estate acquired in foreclosure or other settlement of loans. Such assets are carried on the balance sheet at the lower of the investment in the assets or the fair value of the assets less estimated selling costs. Fair value is determined by one of two market approach methods depending on whether the property has been vacated and an appraisal can be conducted. If the property has yet to be vacated and thus an appraisal cannot be performed, a Brokers Price Opinion (i.e. BPO), is obtained. A BPO represents a best estimate valuation performed by a realtor based on knowledge of current property values and a visual examination of the exterior condition of the property. Once the property is subsequently vacated, a formal appraisal is obtained and the recorded asset value appropriately adjusted. On the other hand, if the OREO property has been vacated and an appraisal can be conducted, the fair value of the property is determined based upon the appraisal using a market approach. An authorized independent appraiser conducts appraisals for United. Appraisals for property other than ongoing construction are based on consideration of comparable property sales (Level 2). In contrast, valuation of ongoing construction assets requires some degree of professional judgment. In conducting an appraisal for ongoing construction property, the appraiser develops two appraised amounts: an “as is” appraised value and a “completed” value. Based on professional judgment and their knowledge of the particular situation, management determines the appropriate fair value to be utilized for such property (Level 3). As a matter of policy, valuations are reviewed at least annually and appraisals are generally updated on a
bi-annual
basis with values lowered as necessary.
Intangible Assets:
For United, intangible assets consist of goodwill and core deposit intangibles. Goodwill is tested for impairment at least annually or sooner if indicators of impairment exist. Goodwill impairment would be defined as the difference between the recorded value of goodwill (i.e. book value) and the implied fair value of goodwill. In determining the implied fair value of goodwill for purposes of evaluating goodwill impairment, United determines the fair value of the reporting unit using a market approach and compares the fair value to its carrying value. If the carrying value exceeds the fair value, a step two test is performed whereby the implied fair value is computed by deducting the fair value of all tangible and intangible net assets from the fair value of the reporting unit. Core deposit intangibles relate to the estimated value of the deposit base of acquired institutions. Management reviews core deposit intangible assets on an annual basis, or sooner if indicators of impairment exist, and evaluates changes in facts and circumstances that may indicate impairment in the carrying value.
No
other fair value measurement of intangible assets was made during the first nine months of 2019 and 2018.
 
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The following table summarizes United’s financial assets that were measured at fair value on a nonrecurring basis during the period:
Description
 
   
Carrying value at September 30, 2019
   
 
Balance as of
September 30,
2019
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
YTD Gains
(Losses)
 
Assets
   
     
     
     
     
 
Loans held for sale
  $
4,731
    $
0
    $
4,731
    $
0
    $
(4
)
Impaired Loans
   
76,404
     
0
     
69,560
     
6,844
     
2,795
 
OREO
   
18,367
     
0
     
18,291
     
76
     
(1,453
)
                   
Description
 
   
Carrying value at December 31, 2018
   
 
Balance as of
December 31,
2018
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
YTD Gains
(Losses)
 
Assets
   
     
     
     
     
 
Loans held for sale
  $
2,742
    $
0
    $
2,742
    $
0
    $
(3
)
Impaired Loans
   
121,355
     
0
     
108,899
     
12,456
     
(12,301
)
OREO
   
16,865
     
0
     
16,865
     
0
     
(910
)
Fair Value of Other Financial Instruments
The following methods and assumptions were used by United in estimating its fair value disclosures for other financial instruments:
Cash and Cash Equivalents:
The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values.
Securities held to maturity and other securities
: The estimated fair values of securities held to maturity are based on quoted market prices, where available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data. Any securities held to maturity, not valued based upon the methods above, are valued based on a discounted cash flow methodology using appropriately adjusted discount rates reflecting nonperformance and liquidity risks. Other securities consist mainly of shares of Federal Home Loan Bank and Federal Reserve Bank stock that do not have readily determinable fair values and are carried at cost.
Loans
: The fair values of certain mortgage loans (e.g.,
one-to-four
family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values of other loans (e.g., commercial real estate and rental property mortgage loans, commercial and industrial loans, financial institution loans and agricultural loans) are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar creditworthiness, which include adjustments for liquidity concerns. For acquired impaired loans, fair value is assumed to equal United’s carrying value, which represents the present value of expected future principal and interest cash flows, as adjusted for any Allowance for Loan Losses recorded for these loans.
 
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Deposits
: The fair values of demand deposits (e.g., interest and noninterest checking, regular savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-term Borrowings:
The carrying amounts of federal funds purchased, borrowings under repurchase agreements and any other short-term borrowings approximate their fair values.
Long-term Borrowings:
The fair values of United’s Federal Home Loan Bank borrowings and trust preferred securities are estimated using discounted cash flow analyses, based on United’s current incremental borrowing rates for similar types of borrowing arrangements.
Summary of Fair Values for All Financial Instruments
The estimated fair values of United’s financial instruments, including those measured at amortized cost on the balance sheet, are summarized below:
 
   
   
Fair Value Measurements
 
 
Carrying
Amount
   
Fair Value
   
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
September 30, 2019
   
     
     
     
     
 
Cash and cash equivalents
  $
976,154
    $
976,154
    $
0
    $
976,154
    $
0
 
Securities available for sale
   
2,452,097
     
2,452,097
     
6,673
     
2,440,355
     
5,069
 
Securities held to maturity
   
1,471
     
1,472
     
0
     
452
     
1,020
 
Equity securities
   
8,914
     
8,914
     
8,914
     
0
     
0
 
Other securities
   
210,830
     
200,288
     
0
     
0
     
200,288
 
Loans held for sale
   
412,194
     
412,194
     
0
     
4,731
     
407,463
 
Net l
oans
   
13,556,427
     
13,051,670
     
0
     
0
     
13,051,670
 
Derivative financial assets
   
7,074
     
7,074
     
0
     
44
     
7,030
 
Deposits
   
14,095,411
     
14,071,344
     
0
     
14,071,344
     
0
 
Short-term borrowings
   
329,966
     
329,966
     
0
     
329,966
     
0
 
Long-term borrowings
   
1,708,297
     
1,688,577
     
0
     
1,688,577
     
0
 
Derivative financial liabilities
   
4,756
     
4,756
     
0
     
4,756
     
0
 
December 31, 2018
   
     
     
     
     
 
Cash and cash equivalents
  $
1,020,396
    $
1,020,396
    $
0
    $
1,020,396
    $
0
 
Securities available for sale
   
2,337,039
     
2,337,039
     
6,822
     
2,324,300
     
5,917
 
Securities held to maturity
   
19,999
     
18,655
     
0
     
15,635
     
3,020
 
Equity securities
   
9,734
     
9,734
     
9,734
     
0
     
0
 
Other securities
   
176,955
     
168,107
     
0
     
0
     
168,107
 
Loans held for sale
   
249,846
     
249,846
     
0
     
2,742
     
247,104
 
Net l
oans
   
13,345,519
     
12,657,073
     
0
     
0
     
12,657,073
 
Derivative financial assets
   
6,504
     
6,504
     
0
     
2,401
     
4,103
 
Deposits
   
13,994,749
     
13,954,574
     
0
     
13,954,574
     
0
 
Short-term borrowings
   
351,327
     
351,327
     
0
     
351,327
     
0
 
Long-term borrowings
   
1,499,103
     
1,475,237
     
0
     
1,475,237
     
0
 
Derivative financial liabilities
   
3,002
     
3,002
     
0
     
3,002
     
0
 
 
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13. STOCK BASED COMPENSATION
On May 18, 2016, United’s shareholders approved the 2016 Long-Term Incentive Plan (2016 LTI Plan). The 2016 LTI Plan became effective as of May 18, 2016. An award granted under the 2016 LTI Plan may consist of any
non-qualified
stock options or incentive stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, performance units or other-stock-based award. These awards all relate to the common stock of United. The maximum number of shares of United common stock which may be issued under the 2016 LTI Plan is 1,700,000. The 2016 LTI Plan will be administered by a board committee appointed by United’s Board of Directors (the Board). Unless otherwise determined by the Board, the Compensation Committee of the Board (the Committee) shall administer the 2016 LTI Plan. Any and all shares may be issued in respect of any of the types of Awards, provided that (1) the aggregate number of shares that may be issued in respect of restricted stock awards, and restricted stock unit awards which are settled in shares is 500,000, and (2) the aggregate number of shares that may be issued pursuant to stock options is 1,200,000. The shares to be offered under the 2016 LTI Plan may be authorized and unissued shares or treasury shares. The maximum number of options and SARs, in the aggregate, which may be awarded to any individual key employee during any calendar year is 100,000. The maximum number of stock options and SARs, in the aggregate, which may be awarded to any
non-employee
director during any calendar year is 10,000. The maximum number of shares of restricted stock or shares subject to a restricted stock units award that may be granted during any calendar year is 50,000 shares to any individual key employee and 5,000 shares to any individual
non-employee
director. Subject to certain change in control provisions, the 2016 LTI Plan provides that awards of restricted stock and restricted stock units will vest as the Committee determines in the award agreement, provided that no awards will vest sooner than 1/3 per year over the first three anniversaries of the award. Awards granted to executive officers of United typically will have performance based vesting conditions. A Form
S-8
was filed on July 29, 2016 with the Securities and Exchange Commission to register all the shares which were available for the 2016 LTI Plan.
Compensation expense of $1,194 and $3,505 related to the nonvested awards under United’s Long-Term Incentive Plans was incurred for the third quarter and first nine months of 2019, respectively, as compared to the compensation expense of $1,024 and $3,016 related to the nonvested awards under United’s Long-Term Incentive Plans incurred for the third quarter and first nine months of 2018, respectively. Compensation expense was included in employee compensation in the unaudited Consolidated Statements of Income.
Stock Options
United currently has options outstanding from various option plans other than the 2016 LTI Plan (the Prior Plans); however, no common shares of United stock are available for grants under the Prior Plans as these plans have expired. Awards outstanding under the Prior Plans will remain in effect in accordance with their respective terms. The maximum term for options granted under the plans is ten (10) years.
A summary of activity under United’s stock option plans as of September 30, 2019, and the changes during the first nine months of 2019 are presented below:
 
Nine Months Ended September 30, 2019
 
 
   
   
Weighted Average
 
 
   
Aggregate
   
Remaining
   
 
 
   
Intrinsic
   
Contractual
   
Exercise
 
 
Shares
   
Value
   
Term (Yrs.)
   
Price
 
Outstanding at January 1, 2019
   
1,730,389
     
     
    $
32.43
 
Granted
   
240,205
     
     
     
38.49
 
Exercised
   
(98,613
)    
     
     
22.86
 
Forfeited or expired
   
(116,561
)    
     
     
25.20
 
                                 
Outstanding at September 30, 2019
   
1,755,420
    $
 
8,251,397
     
5.8
    $
34.27
 
                                 
Exercisable at September 30, 2019
   
1,165,233
    $
 
 
8,074,702
     
4.4
    $
 
 
31.71
 
                                 
 
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The following table summarizes the status of United’s nonvested stock option awards during the first nine months of 2019:
 
Shares
   
Weighted-Average
Grant Date Fair Value
Per Share
 
Nonvested at January 1, 2019
   
575,672
    $
7.86
 
Granted
   
240,205
     
7.16
 
Vested
   
(210,876
)    
7.74
 
Forfeited or expired
   
(14,814
)    
7.55
 
                 
Nonvested at September 30, 2019
   
590,187
    $
7.62
 
                 
During the nine months ended September 30, 2019 and 2018, 98,613 and 60,161 shares, respectively, were issued in connection with stock option exercises. All shares issued in connection with stock option exercises for the nine months ended September 30, 2019 and 2018 were issued from authorized and unissued stock. The total intrinsic value of options exercised under the Plans during the nine months ended September 30, 2019 and 2018 was $1,463 and $851 respectively.
Restricted Stock
Under the 2011 LTI Plan, United may award restricted common shares to key employees and
non-employee
directors. Restricted shares granted to participants have a four-year time-based vesting period. Recipients of restricted shares do not pay any consideration to United for the shares, have the right to vote all shares subject to such grant and receive all dividends with respect to such shares, whether or not the shares have vested. Presently, these nonvested participating securities have an immaterial impact on diluted earnings per share.
The following summarizes the changes to United’s restricted common shares for the period ended September 30, 2019:
 
Number of
Shares
   
Weighted-Average
Grant Date Fair Value
Per Share
 
Outstanding at January 1, 2019
   
199,303
    $
39.67
 
Granted
   
126,427
     
38.49
 
Vested
   
(73,535
)    
39.28
 
Forfeited
   
(4,149
)    
39.08
 
                 
Outstanding at September 30, 2019
   
248,046
    $
39.19
 
                 
14. EMPLOYEE BENEFIT PLANS
United has a defined benefit retirement plan covering qualified employees. Pension benefits are based on years of service and the average of the employee’s highest five consecutive plan years of basic compensation paid during the ten plan years preceding the date of determination. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. During the first nine months of 2018, United made discretionary contributions of $7,000. No discretionary contributions were made during the first nine months of 2019.
In September of 2007, after a recommendation by United’s Pension Committee and approval by United’s Board of Directors, the United Bankshares, Inc. Pension Plan (the Plan) was amended to change the participation rules. The decision to change the participation rules for the Plan followed current industry trends, as many large and medium size companies had taken similar steps. The amendment provides that employees hired on or after October 1, 2007, will not be eligible to participate in the Plan. However, new employees will be eligible to participate in United’s Savings and Stock Investment 401(k) plan. This change had no impact on current employees hired prior to October 1, 2007 as they will continue to participate in the Plan, with no change in benefit provisions, and will continue to be eligible to participate in United’s Savings and Stock Investment 401(k) plan.
 
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Included in accumulated other comprehensive income at December 31, 2018 are unrecognized actuarial losses of $55,535 ($42,595 net of tax) that have not yet been recognized in net periodic pension cost. The amortization of this item expected to be recognized in net periodic pension cost during the fiscal year ended December 31, 2019 is $4,744 ($3,639 net of tax).
Net periodic pension cost for the three and nine months ended September 30, 2019 and 2018 included the following components:
                                 
 
Three Months Ended
September 30
   
Nine Months Ended
September 30
 
 
2019
   
2018
   
2019
   
2018
 
Service cost
  $
567
    $
673
    $
1,683
    $
1,997
 
Interest cost
   
1,474
     
1,324
     
4,375
     
3,927
 
Expected return on plan assets
   
(2,382
)    
(2,578
)    
(7,068
)    
(7,651
)
Recognized net actuarial loss
   
1,198
     
1,174
     
3,553
     
3,485
 
                                 
Net periodic pension (benefit) cost
  $
857
    $
593
    $
2,543
    $
1,758
 
                                 
Weighted-Average Assumptions:
   
     
     
     
 
Discount rate
   
4.52
%    
3.83
%    
4.52
%    
3.83
%
Expected return on assets
   
7.00
%    
7.00
%    
7.00
%    
7.00
%
Rate of compensation increase (prior to age 45)
   
3.50
%    
3.50
%    
3.50
%    
3.50
%
Rate of compensation increase
   
3.00
%    
3.00
%    
3.00
%    
3.00
%
 
 
 
 
 
 
 
15. INCOME TAXES
United records a liability for uncertain income tax positions based on a recognition threshold of
more-likely-than-not,
and a measurement attribute for all tax positions taken on a tax return, in order for those tax positions to be recognized in the financial statements.
As of September 30, 2019 and 2018, the total amount of accrued interest related to uncertain tax positions was $641 and $649, respectively. United accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes.
United is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2016, 2017 and 2018 and certain State Taxing authorities for the years ended December 31, 2016 through 2018.
United’s effective tax rate was 20.50% and 20.86% for the third quarter and first nine months of 2019 and 21.77% and 22.25% for the third quarter and first nine months of 2018.
 
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16. COMPREHENSIVE INCOME
The components of total comprehensive income for the three and nine months ended September 30, 2019 and 2018 are as follows:
                                 
 
Three Months Ended
   
Nine Months Ended
 
 
September 30
   
September 30
 
 
2019
   
2018
   
2019
   
2018
 
Net Income
 
$
 
 
65,965
   
$
 
 
64,412
   
$
 
 
196,814
   
$
 
 
192,392
 
Available for sale (“AFS”) securities:
   
     
     
     
 
AFS securities with OTTI charges during the period
   
(272
)    
0
     
(347
)    
0
 
Related income tax effect
   
64
     
0
     
81
     
0
 
Less: OTTI charges recognized in net income
   
9
     
0
     
84
     
0
 
Related income tax benefit
   
(3
)    
0
     
(20
)    
0
 
Reclassification of previous noncredit OTTI to credit OTTI
   
0
     
0
     
2,188
     
0
 
Related income tax benefit
   
(0
)    
0
     
(510
)    
0
 
                                 
Net unrealized (losses) gains on AFS securities with OTTI
   
(202
)    
0
     
1,476
     
0
 
AFS securities – all other:
   
     
     
     
 
Change in net unrealized gain on AFS securities arising during the period
   
5,070
     
(9,995
)    
48,014
     
(42,696
)
Related income tax effect
   
(1,181
)    
2,329
     
(11,187
)    
11,621
 
Net reclassification adjustment for (gains) losses included in net income
   
(66
)    
114
     
152
     
290
 
Related income tax expense (benefit)
   
16
     
(27
)    
(35
)    
(68
)
                                 
   
3,839
     
(7,579
)    
36,944
     
(30,853
)
                                 
Net effect of AFS securities on other comprehensive income
   
3,637
     
(7,579
)
   
38,420
     
(30,853
)
Held to maturity (“HTM”) securities:
   
     
     
     
 
Accretion on the unrealized loss for securities transferred from AFS to the HTM
 
investment
portfolio prior to call or maturity
   
0
     
2
     
0
     
6
 
Related income tax expense
   
(0
)    
(0
)    
(0
)    
(2
)
                                 
Net effect of HTM securities on other comprehensive income
   
0
     
2
     
0
     
4
 
Pension plan:
   
     
     
     
 
Recognized net actuarial loss
   
1,198
     
1,174
     
3,553
     
3,485
 
Related income tax benefit
   
(249
)    
(256
)    
(785
)    
(782
)
                                 
Net effect of change in pension plan asset on other comprehensive income
   
949
     
918
     
2,768
     
2,703
 
                                 
Total change in other comprehensive income
   
4,586
     
(6,659
)
   
41,188
     
(28,146
)
                                 
Total Comprehensive Income
 
$
70,551
   
$
57,753
   
$
238,002
   
$
164,246
 
                                 
 
 
 
 
 
 
 
The components of accumulated other comprehensive income for the nine months ended September 30, 2019 are as follows:
                                 
Changes in Accumulated Other Comprehensive Income (AOCI) by Component 
(a)
 
For the Nine Months Ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
                                 
 
Unrealized
Gains/Losses
on AFS
Securities
   
Accretion on
the unrealized
loss for
securities
transferred
from AFS to
the HTM
   
Defined
Benefit
Pension
Items
   
Total
 
Balance at January 1, 2019
  $
(18,289
)   $
(50
)   $
(38,680
)   $
(57,019
)
Reclass due to adopting Accounting Standard Update
2017-12
   
0
     
50
     
0
     
50
 
Other comprehensive income before reclassification
   
36,625
     
0
     
0
     
36,625
 
Amounts reclassified from accumulated other comprehensive income
   
1,795
     
0
     
2,768
     
4,563
 
                                 
Net current-period other comprehensive income, net of tax
   
38,420
     
0
     
2,768
     
41,188
 
                                 
Balance at September 30, 2019
  $
20,131
    $
0
    $
(35,912
)   $
(15,781
)
                                 
 
 
 
 
 
 
 
 
(a) All amounts are
net-of-tax.
 
 
 
 
 
 
 
 
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Reclassifications out of Accumulated Other Comprehensive Income (AOCI)
 
For the Nine Months Ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
             
Details about AOCI Components
 
Amount
Reclassified
from AOCI
   
Affected Line Item in the Statement Where
Net Income is Presented
Available for sale (“AFS”) securities:
   
   
Reclassification of previous noncredit OTTI to credit OTTI
  $
2,188
   
Net investment securities (losses) gains
Net reclassification adjustment for losses (gains) included in net income
   
152
   
Net investment securities (losses) gains
             
   
2,340
   
Total before tax
Related income tax effect
   
(545
)  
Tax expense
             
   
1,795
   
Net of tax
Pension plan:
   
   
Recognized net actuarial loss
   
3,553
(a)  
             
   
3,553
   
Total before tax
Related income tax effect
   
(785
)  
Tax expense
             
   
2,768
   
Net of tax
             
Total reclassifications for the period
  $
  4,563
   
             
 
 
 
 
 
 
 
 
 
 
 
 
(a) This AOCI component is included in the net periodic pension cost (see Note 14, Employee Benefit Plans)
 
 
 
 
 
 
 
 
 
 
 
 
17. EARNINGS PER SHARE
The reconciliation of the numerator and denominator of basic earnings per share with that of diluted earnings per share is presented as follows:
                                 
 
Three Months Ended
   
Nine Months Ended
 
 
September 30
   
September 30
 
 
2019
   
2018
   
2019
   
2018
 
Distributed earnings allocated to common stock
  $
34,434
    $
35,234
    $
103,711
    $
106,429
 
Undistributed earnings allocated to common stock
   
31,378
     
29,060
     
92,654
     
85,617
 
                                 
Net earnings allocated to common shareholders
  $
65,812
    $
64,294
    $
196,365
    $
192,046
 
                                 
Average common shares outstanding
   
101,432,243
     
103,617,590
     
101,698,530
     
104,382,094
 
Equivalents from stock options
   
279,497
     
316,369
     
268,605
     
297,782
 
                                 
Average diluted shares outstanding
   
101,711,740
     
103,933,959
     
101,967,135
     
104,679,876
 
                                 
Earnings per basic common share
  $
0.65
    $
0.62
    $
1.93
    $
1.84
 
Earnings per diluted common share
  $
0.65
    $
0.62
    $
1.93
    $
1.83
 
 
 
 
 
 
 
 
 
 
 
 
 
18. VARIABLE INTEREST ENTITIES
Variable interest entities (VIEs) are entities that either have a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest (i.e., ability to make significant decisions, through voting rights, right to receive the expected residual returns of the entity, and obligation to absorb the expected losses of the entity). VIEs can be structured as corporations, trusts, partnerships, or other legal entities. United’s business practices include relationships with certain VIEs. For United, the business purpose of these relationships primarily consists of funding activities in the form of issuing trust preferred securities.
 
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United currently sponsors fourteen statutory business trusts that were created for the purpose of raising funds that originally qualified for Tier I regulatory capital. As previously discussed, these trusts now are considered Tier II regulatory capital. These trusts, of which several were acquired through bank acquisitions, issued or participated in pools of trust preferred capital securities to third-party investors with the proceeds invested in junior subordinated debt securities of United. The Company, through a small capital contribution, owns 100% of the voting equity shares of each trust. The assets, liabilities, operations, and cash flows of each trust are solely related to the issuance, administration, and repayment of the preferred equity securities held by third-party investors. United fully and unconditionally guarantees the obligations of each trust and is obligated to redeem the junior subordinated debentures upon maturity.
United does not consolidate these trusts as it is not the primary beneficiary of these entities because United’s wholly owned and indirect wholly owned statutory trust subsidiaries do not have a controlling financial interest in the VIEs. A controlling financial interest is present when an enterprise has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE.
Information related to United’s statutory trusts is presented in the table below:
 
                     
Description
 
Issuance Date
 
Amount of
Capital
Securities Issued
   
Interest Rate
 
Maturity Date
United Statutory Trust III
 
December 17, 2003
  $
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20,000
   
3-month LIBOR + 2.85%
 
December 17, 2033
United Statutory Trust IV
 
December 19, 2003
  $
25,000
   
3-month LIBOR + 2.85%
 
January 23, 2034
United Statutory Trust V
 
July 12, 2007
  $
50,000
   
3-month LIBOR + 1.55%
 
October 1, 2037
United Statutory Trust VI
 
September 20, 2007
  $
30,000
   
3-month LIBOR + 1.30%
 
December 15, 2037
Premier Statutory Trust II
 
September 25, 2003
  $
6,000
   
3-month LIBOR + 3.10%
 
October 8, 2033
Premier Statutory Trust III
 
May 16, 2005
  $
8,000
   
3-month LIBOR + 1.74%
 
June 15, 2035
Premier Statutory Trust IV
 
June 20, 2006
  $
14,000
   
3-month LIBOR + 1.55%
 
September 23, 2036
Premier Statutory Trust V
 
December 14, 2006
  $
10,000
   
3-month LIBOR + 1.61%
 
March 1, 2037
Centra Statutory Trust I
 
September 20, 2004
  $
10,000
   
3-month LIBOR + 2.29%
 
September 20, 2034
Centra Statutory Trust II
 
June 15, 2006
  $
10,000
   
3-month LIBOR + 1.65%
 
July 7, 2036
Virginia Commerce Trust II
 
December 19, 2002
  $
15,000
   
6-month LIBOR + 3.30%
 
December 19, 2032
Virginia Commerce Trust III
 
December 20, 2005
  $
25,000
   
3-month LIBOR + 1.42%
 
February 23, 2036
Cardinal Statutory Trust I
 
July 27, 2004
  $
20,000
   
3-month LIBOR + 2.40%
 
September 15, 2034
UFBC Capital Trust I
 
December 30, 2004
  $
5,000
   
3-month LIBOR + 2.10%
 
March 15, 2035
 
 
 
 
 
 
 
 
 
 
 
 
United, through its banking subsidiary, also makes limited partner equity investments in various low income housing and community development partnerships sponsored by independent third-parties. United invests in these partnerships to either realize tax credits on its consolidated federal income tax return or for purposes of earning a return on its investment. These partnerships are considered VIEs as the limited partners lack a controlling financial interest in the entities through their inability to make decisions that have a significant effect on the operations and success of the partnerships. United’s limited partner interests in these entities is immaterial, however; these partnerships are not consolidated as United is not deemed to be the primary beneficiary.
The following table summarizes quantitative information about United’s significant involvement in unconsolidated VIEs:
                                                 
 
As of September 30, 2019
   
As of December 31, 2018
 
 
Aggregate
Assets
   
Aggregate
Liabilities
   
Risk Of
Loss 
(1)
   
Aggregate
Assets
   
Aggregate
Liabilities
   
Risk Of
Loss 
(1)
 
Trust preferred securities
  $
  258,123
    $
  248,918
    $
  9,205
    $
  257,754
    $
  248,741
    $
  9,013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Represents investment in VIEs.
 
 
 
 
 
 
 
 
 
 
 
 
 
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19. SEGMENT INFORMATION
United operates in two business segments: community banking and mortgage banking. Through its community banking segment, United offers a full range of products and services through various delivery channels. In particular, the community banking segment includes both commercial and consumer lending and provides customers with such products as commercial loans, real estate loans, business financing and consumer loans. In addition, this segment provides customers with several choices of deposit products including demand deposit accounts, savings accounts and certificates of deposit as well as investment and financial advisory services to businesses and individuals, including financial planning, retirement/estate planning, and investment management. The mortgage banking segment engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market though George Mason.
The community banking segment provides the mortgage banking segment (George Mason) with short-term funds to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest based on the
30-day
LIBOR rate. These transactions are eliminated in the consolidation process.
The Company does not have any operating segments other than those reported. The “Other” category consists of financial information not directly attributable to a specific segment, including interest income from investments and net securities gains or losses of parent companies and their
non-banking
subsidiaries, interest expense related to subordinated notes of unconsolidated subsidiaries as well as the elimination of
non-segment
related intercompany transactions such as management fees. The “Other” represents an overhead function rather than an operating segment.
Information about the reportable segments and reconciliation of this information to the consolidated financial statements at and for the three and nine months ended September 30, 2019 and 2018 is as follows:
                                         
 
At and For the Three Months Ended September 30, 2019
 
 
Community
Banking
   
Mortgage
Banking
   
Other
   
Intersegment
Eliminations
   
Consolidated
 
Net interest income
  $
143,615
    $
203
    $
  (3,052
)   $
1,152
    $
141,918
 
Provision for loans losses
   
5,033
     
0
     
0
     
0
     
5,033
 
Other income
   
18,696
     
24,331
     
87
     
(890
)    
42,224
 
Other expense
   
77,312
     
20,256
     
(1,696
)    
262
     
96,134
 
Income taxes
   
16,393
     
877
     
(260
)    
0
     
17,010
 
                                         
Net income (loss)
  $
63,573
    $
3,401
    $
  (1,009
)   $
0
    $
65,965
 
                                         
Total assets (liabilities)
  $
19,593,009
    $
  491,832
    $
  17,120
    $
  (350,500
)   $
19,751,461
 
Average assets (liabilities)
   
19,579,180
     
398,880
     
16,925
     
(328,377
)    
19,666,608
 
       
 
At and For the Three Months Ended September 30, 2018
 
 
Community
Banking
   
Mortgage
Banking
   
Other
   
Intersegment
Eliminations
   
Consolidated
 
Net interest income
  $
149,770
    $
388
    $
(3,168
)   $
1,785
    $
148,775
 
Provision for loans losses
   
4,808
     
0
     
0
     
0
     
4,808
 
Other income
   
18,717
     
16,478
     
58
     
(3,567
)    
31,686
 
Other expense
   
75,255
     
17,957
     
1,885
     
(1,782
)    
93,315
 
Income taxes
   
19,296
     
(246
)    
(1,124
)    
0
     
17,926
 
                                         
Net income (loss)
  $
69,128
    $
(845
)   $
(3,871
)   $
0
    $
64,412
 
                                         
Total assets (liabilities)
  $
19,080,734
    $
288,638
    $
12,545
    $
  (194,274
)   $
19,187,643
 
Average assets (liabilities)
   
18,982,530
     
303,556
     
5,468
     
(243,867
)    
19,047,689
 
 
 
 
 
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At and For the Nine Months Ended September 30, 2019
 
 
Community
Banking
   
Mortgage
Banking
   
Other
   
Intersegment
Eliminations
   
Consolidated
 
Net interest income
  $
442,022
    $
 
369
    $
  (9,584
)   $
3,832
    $
436,639
 
Provision for loans losses
   
15,446
     
0
     
0
     
0
     
15,446
 
Other income
   
54,746
     
63,938
     
342
     
(5,784
)    
113,242
 
Other expense
   
235,610
     
53,869
     
(1,773
)    
(1,952
)    
285,754
 
Income taxes
   
51,266
     
2,163
     
(1,562
)    
0
     
51,867
 
                                         
Net income (loss)
  $
194,446
    $
8,275
    $
  (5,907
)   $
0
    $
196,814
 
Total assets (liabilities)
  $
19,593,009
    $
491,832
    $
 
17,120
    $
(350,500
)   $
19,751,461
 
Average assets (liabilities)
   
19,410,636
     
330,668
     
6,926
     
(269,306
)    
19,478,924
 
       
 
At and For the Nine Months Ended September 30, 2018
 
 
Community
Banking
   
Mortgage
Banking
   
Other
   
Intersegment
Eliminations
   
Consolidated
 
Net interest income
  $
444,840
    $
1,028
    $
  (8,794
)   $
4,866
    $
441,940
 
Provision for loans losses
   
16,190
     
0
     
0
     
0
     
16,190
 
Other income
   
53,952
     
54,829
     
(696
)    
(9,200
)    
98,885
 
Other expense
   
224,240
     
57,566
     
(295
)    
(4,334
)    
277,177
 
Income taxes
   
57,519
     
(385
)    
(2,068
)    
0
     
55,066
 
                                         
Net income (loss)
  $
200,843
    $
 
 
(1,324
)   $
 
 (7,127
)   $
0
    $
192,392
 
Total assets (liabilities)
  $
19,080,734
    $
288,638
    $
12,545
    $
(194,274
)   $
19,187,643
 
Average assets (liabilities)
   
18,718,295
     
284,100
     
8,043
     
(240,505
)    
18,769,934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FORWARD-LOOKING STATEMENTS
Congress passed the Private Securities Litigation Act of 1995 to encourage corporations to provide investors with information about the company’s anticipated future financial performance, goals, and strategies. The act provides a safe harbor for such disclosure, in other words, protection from unwarranted litigation if actual results are not the same as management expectations.
United desires to provide its shareholders with sound information about past performance and future trends. Consequently, any forward-looking statements contained in this report, in a report incorporated by reference to this report, or made by management of United in this report, in any other reports and filings, in press releases and in oral statements, involve numerous assumptions, risks and uncertainties. Actual results could differ materially from those contained in or implied by United’s statements for a variety of factors including, but not limited to: changes in economic conditions; business conditions in the banking industry; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature and extent of governmental actions and reforms; and rapidly changing technology and evolving banking industry standards.
INTRODUCTION
The following discussion and analysis presents the significant changes in financial condition and the results of operations of United and its subsidiaries for the periods indicated below. This discussion and the unaudited consolidated financial statements and the notes to unaudited Consolidated Financial Statements include the accounts of United Bankshares, Inc. and its wholly-owned subsidiaries, unless otherwise indicated. Management has evaluated all significant events and transactions that occurred after September 30, 2019, but prior to the date these financial statements were issued, for potential recognition or disclosure required in these financial statements.
 
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This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and accompanying notes thereto, which are included elsewhere in this document.
RECENT DEVELOPMENTS
United adopted the new accounting standard for leases effective January 1, 2019. Therefore, beginning in fiscal year 2019, our financial results reflect the adoption of this standard. This new standard impacted our Consolidated Balance Sheet as of September 30, 2019 by increasing total assets by $60.32 million and total liabilities by $63.99 million. Prior periods were not restated. See Note 1, Summary of Significant Accounting Policies of the unaudited Notes to Consolidated Financial Statements for a further discussion.
USE OF
NON-GAAP
FINANCIAL MEASURES
This discussion and analysis contains certain financial measures that are not recognized under GAAP. Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each
“non-GAAP”
financial measure, certain additional information, including a reconciliation of the
non-GAAP
financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the
non-GAAP
financial measure.
Generally, United has presented a
non-GAAP
financial measure because it believes that this measure provides meaningful additional information to assist in the evaluation of United’s results of operations or financial position. Presentation of a
non-GAAP
financial measure is consistent with how United’s management evaluates its performance internally and this
non-GAAP
financial measure is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the banking industry. Specifically, this discussion contains certain references to financial measures identified as
tax-equivalent
(FTE) net interest income and return on average tangible equity. Management believes these
non-GAAP
financial measures to be helpful in understanding United’s results of operations or financial position.
Net interest income is presented in this discussion on a
tax-equivalent
basis. The
tax-equivalent
basis adjusts for the
tax-favored
status of income from certain loans and investments. Although this is a
non-GAAP
measure, United’s management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and
tax-exempt
sources. United uses this measure to monitor net interest income performance and to manage its balance sheet composition.
Average tangible equity is calculated as GAAP total shareholders’ equity minus total intangible assets. Tangible equity can thus be considered the most conservative valuation of the company. When considering net income, a return on average tangible equity can be calculated. Management provides a return on average equity to facilitate the understanding of as well as to assess the quality and composition of United’s capital structure. By removing the effect of intangible assets that result from merger and acquisition activity, the “permanent” items of shareholders’ equity are presented. This measure, along with others, is used by management to analyze capital adequacy and performance.
However, this
non-GAAP
information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP. Where the
non-GAAP
financial measure is used, the comparable GAAP financial measure, as well as reconciliation to that comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the
non-GAAP
financial measure, can be found within this discussion and analysis. Investors should recognize that United’s presentation of this
non-GAAP
financial measure might not be comparable to a similarly titled measure at other companies.
 
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APPLICATION OF CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of United conform with U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments, which are reviewed with the Audit Committee of the Board of Directors, are based on information available as of the date of the financial statements. Actual results could materially differ from those estimates. United’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of September 30, 2019 were unchanged from the policies disclosed in United’s Annual Report on Form
10-K
for the year ended December 31, 2018 within the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
FINANCIAL CONDITION
United’s total assets as of September 30, 2019 were $19.75 billion, which was an increase of $500.96 million or 2.60% from December 31, 2018. The increase was mainly due to an increase of $211.21 million or 1.57% in portfolio loans, an increase of $162.35 million or 64.98% in loans held for sale, and an increase of $129.59 million or 5.09% in investment securities. In addition, United adopted the new accounting standard for leases effective January 1, 2019, as previously mentioned, resulting in a $60.32 million operating lease
right-of-use
asset as of September 30, 2019. Partially offsetting these increases in total assets was a $44.24 million or 4.34% decrease in cash and cash equivalents and a $14.44 million or 3.16% decrease in other assets. Total liabilities increased $398.25 million or 2.49% from
year-end
2018. Deposits increased $100.66 million or less than 1%. Borrowings increased $187.83 million or 10.15% while accrued expenses and other liabilities increased $45.38 million or 29.79%. As a result of the adoption of the leases accounting standard, United also recorded a $63.99 million operating lease liability as of September 30, 2019. Shareholders’ equity increased $102.72 million or 3.16%.
The following discussion explains in more detail the changes in financial condition by major category.
Cash and Cash Equivalents
Cash and cash equivalents at September 30, 2019 decreased $44.24 million or 4.34% from
year-end
2018. In particular, interest-bearing deposits with other banks decreased $84.38 million or 10.14% as United placed less cash in an interest-bearing account with the Federal Reserve. Partially offsetting this decrease in interest-bearing deposits is a $40.12 million or 21.35% increase in cash and due from banks. Federal funds sold increased $14 thousand or 1.74%. During the first nine months of 2019, net cash of $90.96 million and $151.65 million were provided by operating and financing activities, respectively, while net cash of $286.85 million was used in investing activities. See the unaudited Consolidated Statements of Cash Flows for data on cash and cash equivalents provided and used in operating, investing and financing activities for the first nine months of 2019 and 2018.
Securities
Total investment securities at September 30, 2019 increased $129.59 million or 5.09% from
year-end
2018. Securities available for sale increased $115.06 million or 4.92%. This change in securities available for sale reflects $573.83 million in sales, maturities and calls of securities, $630.16 million in purchases, and an increase of $48.17 million in market value. The majority of the purchase activity was related to corporate securities which were almost exclusively issued by investment grade rated, single-name issuers, and have maturity dates of less than five years. Securities held to maturity declined $18.53 million or 92.64% from
year-end
2018 due mainly to the transfer of $11.54 million of investment securities to available for sale securities upon the adoption of ASU No.
 2017-12.
Equity securities were $8.91 million at September 30, 2019, a decrease of $820 thousand or 8.42% due mainly to net sales. Other investment securities increased $33.88 million or 19.14% from
year-end
2018 due mainly to purchases of an equity security without a readily determinable fair value, investment tax credits, and FHLB stock.
 
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The following table summarizes the changes in the available for sale securities since
year-end
2018:
                                 
 
September 30
 
 
December 31
 
 
 
 
 
(Dollars in thousands)
 
2019
 
 
2018
 
 
$ Change
 
 
% Change
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
 
$
64,034
 
 
$
85,890
 
 
$
(21,856
)
 
 
(25.45
%)
State and political subdivisions
 
 
238,515
 
 
 
208,988
 
 
 
29,527
 
 
 
14.13
%
Mortgage-backed securities
 
 
1,492,928
 
 
 
1,594,509
 
 
 
(101,581
)
 
 
(6.37
%)
Asset-backed securities
 
 
279,707
 
 
 
271,970
 
 
 
7,737
 
 
 
2.84
%
Trust preferred collateralized debt obligations
 
 
5,069
 
 
 
5,917
 
 
 
(848
)
 
 
(14.33
%)
Single issue trust preferred securities
 
 
16,544
 
 
 
8,362
 
 
 
8,182
 
 
 
97.85
%
Corporate securities
 
 
355,300
 
 
 
161,403
 
 
 
193,897
 
 
 
120.13
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total available for sale securities, at fair value
 
$
  2,452,097
 
 
$
  2,337,039
 
 
$
115,058
 
 
 
4.92
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following table summarizes the changes in the held to maturity securities since
year-end
2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30
 
 
December 31
 
 
 
 
 
(Dollars in thousands)
 
2019
 
 
2018
 
 
$ Change
 
 
% Change
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
 
$
25
 
 
$
5,074
 
 
$
(5,049
)
 
 
(99.51
%)
State and political subdivisions
 
 
1,426
 
 
 
5,473
 
 
 
(4,047
)
 
 
(73.94
%)
Mortgage-backed securities
 
 
0
 
 
 
20
 
 
 
(20
)
 
 
(100.00
%)
Single issue trust preferred securities
 
 
0
 
 
 
9,412
 
 
 
(9,412
)
 
 
(100.00
%)
Other corporate securities
 
 
20
 
 
 
20
 
 
 
0
 
 
 
0.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total held to maturity securities, at amortized cost
 
$
1,471
 
 
$
19,999
 
 
$
(18,528
)
 
 
(92.64
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2019, gross unrealized losses on available for sale securities were $10.29 million. Securities with the most significant gross unrealized losses at September 30, 2019 consisted primarily of asset-backed securities, agency commercial mortgage-backed securities, single issue trust preferred securities, and trust preferred collateralized debt obligations. The asset-backed securities are backed by Federal Family Education Loan Program (FFELP) student loan collateral which includes a minimum of a 97% government repayment guaranty, as well as additional credit support and subordination in excess of the government guaranteed portion. The agency commercial mortgage-backed securities relate to commercial properties and provide a guaranty of full and timely payments of principal and interest by the issuing agency. The single issue trust preferred securities and the trust preferred collateralized debt obligations relate mainly to securities of financial institutions.
As of September 30, 2019, United’s mortgage-backed securities had an amortized cost of $1.47 billion, with an estimated fair value of $1.49 billion. The portfolio consisted primarily of $853.52 million in agency residential mortgage-backed securities with a fair value of $867.28 million, $3.53 million in
non-agency
residential mortgage-backed securities with an estimated fair value of $4.00 million, and $611.04 million in commercial agency mortgage-backed securities with an estimated fair value of $621.65 million.
As of September 30, 2019, United’s corporate securities had an amortized cost of $659.78 million, with an estimated fair value of $656.64 million. The portfolio consisted of $6.13 million in Trup Cdos with a fair value of $5.07 million and $18.19 million in single issue trust preferred securities with an estimated fair value of $16.54 million. In addition to the trust preferred securities, the Company held positions in various other corporate securities, including asset-backed securities with an amortized cost of $284.59 million and a fair value of $279.71 million and other corporate securities, with an amortized cost of $350.87 million and a fair value of $355.32 million.
 
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The Trup Cdos consisted of pools of trust preferred securities issued by trusts related to financial institutions. As of September 30, 2019, all of the Trup Cdos were rated below investment grade. United’s single issue trust preferred securities had a fair value of $16.54 million as of September 30, 2019. Of the $16.54 million, $3.95 million or 23.91% were investment grade; $5.48 million or 33.10% were split rated; $2.31 million or 13.98% were below investment grade; and $4.80 million or 29.01% were unrated. The two largest exposures accounted for 71.25% of the $16.54 million. These included SunTrust Bank at $6.99 million and Emigrant Bank at $4.80 million. All single-issue trust preferred securities are currently receiving full scheduled principal and interest payments.
The following is a summary of available for sale single-issue trust preferred securities as of September 30, 2019:
                                                 
Security
 
Moodys
 
 
S&P
 
 
Fitch
 
 
Amortized Cost
 
 
Fair Value
 
 
Unrealized
Loss/
(Gain)
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
Emigrant Bank
   
NR
     
NR
     
WD
    $
5,732
    $
4,800
    $
932
 
SunTrust Bank
   
Baa2
     
NR
     
BB+
     
4,959
     
4,675
     
284
 
M&T Bank
   
NR
     
BBB-
     
BBB-
     
3,040
     
3,212
     
(172
)
SunTrust Bank
   
NR
     
BB+
     
BB+
     
2,480
     
2,313
     
167
 
HSBC
   
Baa2
     
BBB+
     
NR
     
1,000
     
743
     
257
 
Royal Bank of Scotland
   
Baa3
     
BB+
     
BBB
     
977
     
801
     
176
 
                                                 
   
     
     
    $
  18,188
    $
  16,544
    $
  1,644
 
                                                 
 
 
 
 
During the third quarter of 2019, United recognized other-than-temporary impairment totaling $9 thousand on one investment security. With the exception of this security, management does not believe that any other individual security with an unrealized loss as of September 30, 2019 is other-than-temporarily impaired. United believes the decline in value resulted from changes in market interest rates, credit spreads and liquidity, not an adverse change in the expected contractual cash flows. Based on a review of each of the securities in the investment portfolio, management concluded that it was not probable that it would be unable to realize the cost basis investment and appropriate interest payments on such securities. United has the intent and the ability to hold these securities until such time as the value recovers or the securities mature. However, United acknowledges that any impaired securities may be sold in future periods in response to significant, unanticipated changes in asset/liability management decisions, unanticipated future market movements or business plan changes.
Further information regarding the amortized cost and estimated fair value of investment securities, including remaining maturities as well as a more detailed discussion of management’s other-than-temporary impairment analysis, is presented in Note 2 to the unaudited Notes to Consolidated Financial Statements.
Loans held for sale
Loans held for sale increased $162.35 million or 64.98%. Loan originations in the secondary market exceeded sales during the first nine months of 2019. Loan originations for the first nine months of 2019 were $1.92 billion while loans sales were $1.76 billion. Loans held for sale were $412.19 million at September 30, 2019 as compared to $249.85 million at
year-end
2018.
Portfolio Loans
Loans, net of unearned income, increased $211.21 million or 1.57%. Since
year-end
2018, commercial, financial and agricultural loans increased $18.15 million or less than 1% as commercial loans (not secured by real estate) increased $150.22 million or 7.67% which was partially offset by a $132.08 million or 2.36% decrease in commercial real estate loans. In addition, residential real estate loans increased $143.18 million or 4.09% due mainly to an increase in first lien mortgage loans, and consumer loans increased $155.97 million or 16.17% due to an increase in indirect automobile financing. Partially offsetting these increases in portfolio loans is a $109.59 million or 7.77% decrease in construction and land development loans mainly due to a decline in commercial construction loans.
 
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The following table summarizes the changes in the major loan classes since
year-end
2018:
                                 
 
September 30
 
 
December 31
 
 
 
 
 
(Dollars in thousands)
 
2019
 
 
2018
 
 
$ Change
 
 
% Change
 
Loans held for sale
  $
412,194
    $
249,846
    $
162,348
     
64.98
%
                                 
Commercial, financial, and agricultural:
   
     
     
     
 
Owner-occupied commercial real estate
  $
1,221,647
    $
1,291,790
    $
(70,143
)    
(5.43
%)
Nonowner-occupied commercial real estate
   
4,241,682
     
4,303,613
     
(61,931
)    
(1.44
%)
Other commercial loans
   
2,107,865
     
1,957,641
     
150,224
     
7.67
%
                                 
Total commercial, financial, and agricultural
  $
7,571,194
    $
7,553,044
    $
18,150
     
0.24
%
Residential real estate
   
3,644,568
     
3,501,393
     
143,175
     
4.09
%
Construction & land development
   
1,300,881
     
1,410,468
     
(109,587
)    
(7.77
%)
Consumer:
   
     
     
     
 
Bankcard
   
9,532
     
10,203
     
(671
)    
(6.58
%)
Other consumer
   
1,111,063
     
954,424
     
156,639
     
16.41
%
                                 
Total gross loans
  $
  13,637,238
    $
  13,429,532
    $
207,706
     
1.55
%
Less: Unearned income
   
(3,811
)    
(7,310
)    
3,499
     
(47.87
%)
                                 
Total Loans, net of unearned income
  $
13,633,427
    $
13,422,222
    $
211,205
     
1.57
%
                                 
 
 
 
 
The following table summarizes the outstanding balances of portfolio loans originated and acquired, by type, as of September 30, 2019 and December 31, 2018:
                                         
 
September 30, 2019
 
(In thousands)
 
Commercial,
financial and
agricultural
 
 
Residential
real estate
 
 
Construction & land
development
 
 
Consumer
 
 
Total
 
 
Originated
  $
  5,306,132
    $
  2,952,405
    $
  1,154,930
    $
  1,116,488
    $
  10,529,955
 
Acquired
   
2,265,062
     
692,163
     
145,951
     
4,107
     
3,107,283
 
                                         
Total gross loans
  $
7,571,194
    $
3,644,568
    $
1,300,881
    $
1,120,595
    $
13,637,238
 
                                         
       
 
December 31, 2018
 
(In thousands)
 
Commercial,
financial and
agricultural
 
 
Residential
real estate
 
 
Construction & land
development
 
 
Consumer
 
 
Total
 
 
Originated
  $
4,887,688
    $
2,686,817
    $
1,179,676
    $
959,392
    $
9,713,573
 
Acquired
   
2,665,356
     
814,576
     
230,792
     
5,235
     
3,715,959
 
                                         
Total gross loans
  $
7,553,044
    $
3,501,393
    $
1,410,468
    $
964,627
    $
13,429,532
 
                                         
 
 
 
 
For a further discussion of loans see Note 4 to the unaudited Notes to Consolidated Financial Statements.
Other Assets
Other assets decreased $14.44 million or 3.16% from
year-end
2018, mainly due to deferred tax assets decreasing $19.83 million. In addition, core deposit intangibles decreased $5.26 million due to amortization. Partially offsetting these decreases were increases of $4.15 million in accounts receivables, $4.68 million in prepaid assets and $1.50 million in other real estate owned (OREO) due to write-downs of fair value for the first nine months of 2019.
 
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Deposits
Deposits represent United’s primary source of funding. Total deposits at September 30, 2019 increased $100.66 million or less than 1%. In terms of composition, interest-bearing deposits decreased $54.65 million or less than 1% while noninterest-bearing deposits increased $155.31 million or 3.52% from December 31, 2018.
Noninterest-bearing deposits consist of demand deposit and noninterest bearing money market (MMDA) account balances. The $155.31 million increase in noninterest-bearing deposits was due mainly to increases in commercial noninterest-bearing deposits of $49.40 million or 2.19% and public funds noninterest-bearing deposits of $23.89 million or 21.62%. In addition, in process items increased $43.17 million.
Interest-bearing deposits consist of interest-bearing checking (NOW), regular savings, interest-bearing MMDA, and time deposit account balances. Interest-bearing MMDAs decreased $205.23 million or 3.45% while NOW accounts decreased $15.40 million or 4.11% since
year-end
2018. In particular, interest-bearing MMDAs decreased $205.23 million as commercial MMDAs decreased $97.22 million, brokered MMDAs decreased $87.07 million, and public funds MMDAs decreased $32.24 million. Excluding sweep activity from NOW accounts to interest-bearing MMDAs to reduce United’s reserve requirement at its Federal Reserve Bank, NOW accounts decreased $140.26 million or 7.09% mainly due to a decrease of $169.95 million in personal NOW accounts and a $18.42 million decrease in public funds NOW accounts. Partially offsetting these decreases was an increase of $48.12 million in commercial NOW accounts.
Regular savings decreased $77.33 million or 8.10% from
year-end
2018 mainly due to a $69.89 million decrease in personal savings accounts and a $7.11 million decrease in commercial savings accounts.
Time deposits under $100,000 increased $17.81 million or 2.50% from
year-end
2018. This increase in time deposits under $100,000 is the result of a $4.24 million increase in Certificate of Deposit Account Registry Service (CDARS) balances and a $12.54 million increase in fixed CDs under $100,000.
Since
year-end
2018, time deposits over $100,000 increased $225.51 million or 14.25% as fixed rate CDs increased $168.29 million and CDARS increased $81.48 million. In addition, brokered certificates of deposits (CDs) increased $15.90 million. These increases in time deposits over $100,000 were partially offset by a $40.16 million decrease in public funds CDs over $100,000.
The following table summarizes the changes in the deposit categories since
year-end
2018:
                                 
 
September 30
 
 
December 31
 
 
 
 
 
(Dollars in thousands)
 
2019
 
 
2018
 
 
$ Change
 
 
% Change
 
Demand deposits
  $
3,282,679
    $
3,212,878
    $
69,801
     
2.17
%
Interest-bearing checking
   
359,100
     
374,495
     
(15,395
)    
-4.11
%
Regular savings
   
877,630
     
954,961
     
(77,331
)    
-8.10
%
Money market accounts
   
7,037,300
     
7,157,028
     
(119,728
)    
-1.67
%
Time deposits under $100,000
   
730,118
     
712,313
     
17,805
     
2.50
%
Time deposits over $100,000 
(1)
   
1,808,584
     
1,583,074
     
225,510
     
14.25
%
                                 
Total deposits
  $
  14,095,411
    $
  13,994,749
    $
100,662
     
0.72
%
                                 
 
 
 
 
(1) Includes time deposits of $250,000 or more of $1,058,940 and $979,707 at September 30, 2019 and December 31, 2018, respectively.
 
 
 
 
 
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Borrowings
Total borrowings at September 30, 2019 increased $187.83 million or 10.15% since
year-end
2018. During the first nine months of 2019, short-term borrowings decreased $21.36 million or 6.08% due to a $22.96 million decrease in short-term securities sold under agreements to repurchase and a $23.40 million decrease in federal funds purchased. These decreases in short-term borrowings were partially offset by a $25.00 million increase short-term FHLB advances. Long-term borrowings increased $209.19 million or 13.95% from
year-end
2018 due to a $208.25 million increase in long-term FHLB advances as new borrowings exceeded repayments for the first nine months of 2019.
The table below summarizes the change in the borrowing categories since
year-end
2018:
                                 
 
September 30
 
 
December 31
 
 
 
 
 
(Dollars in thousands)
 
2019
 
 
2018
 
 
$ Change
 
 
% Change
 
Federal funds purchased
  $
0
    $
23,400
    $
(23,400
)    
-100.00
%
Short-term securities sold under agreements to repurchase
   
129,966
     
152,927
     
(22,961
)    
-15.01
%
Short-term FHLB advances
   
200,000
     
175,000
     
25,000
     
14.29
%
Long-term FHLB advances
   
1,472,448
     
1,264,198
     
208,250
     
16.47
%
Issuances of trust preferred capital securities
   
235,849
     
234,905
     
944
     
0.40
%
                                 
Total borrowings
  $
  2,038,263
    $
  1,850,430
    $
  187,833
     
10.15
%
                                 
 
 
 
 
For a further discussion of borrowings see Notes 8 and 9 to the unaudited Notes to Consolidated Financial Statements.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at September 30, 2019 increased $45.38 million or 29.79% from
year-end
2018. In particular, accounts payable associated with George Mason increased $43.27 million, interest payable increased $2.32 million, accrued mortgage escrow liabilities increased $3.49 million and derivative liabilities increased $1.75 million. Partially offsetting these increases was a decrease of $2.18 million in business franchise taxes payable and a $3.19 million decrease in deferred compensation due to payments.
Shareholders’ Equity
Shareholders’ equity at September 30, 2019 was $3.35 billion, which was an increase of $102.72 million or 3.16% from
year-end
2018.
Retained earnings increased $91.80 million or 9.06% from
year-end
2018. Earnings net of dividends for the first nine months of 2019 were $92.85 million. Amount recognized in retained earnings for the adoption of ASU No.
 2016-02
was $1.05 million.
Accumulated other comprehensive income increased $41.24 million or 72.32% from
year-end
2018 due mainly to an increase of $38.42 million in the
after-tax
fair value adjustment on AFS securities. The
after-tax
accretion of pension costs was $2.77 million for the first nine months of 2019.
During the second quarter of 2018, United began repurchasing its common stock on the open market under repurchase plans approved by United’s Board of Directors. United repurchased 977,000 shares in the first nine months of 2019 at a cost of $34.05 million or an average price per share of $34.85.
 
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RESULTS OF OPERATIONS
Overview
Net income for the third quarter of 2019 was $65.97 million or $0.65 per diluted share, as compared to $64.41 million or $0.62 per diluted share for the prior year third quarter. Net income for the first nine months of 2019 was $196.81 million or $1.93 per diluted share compared to $192.39 million or $1.83 per diluted share for the first nine months of 2018.
For the third quarter of 2019, United’s annualized return on average assets was 1.33% and its annualized return on average shareholders’ equity was 7.79% as compared to 1.34% and 7.83% for the third quarter of 2018. United’s annualized return on average assets for the first nine months of 2019 was 1.35% and its annualized return on average shareholders’ equity was 7.93% as compared to 1.37% and 7.86% for the first nine months of 2018. United’s Federal Reserve peer group’s (bank holding companies with total assets over $10 billion) most recently reported average return on assets and average return on equity were 1.23% and 10.08%, respectively, for the first six months of 2019. For the third quarter and first nine months of 2019, United’s annualized return on average tangible equity was 14.16% and 14.56%, respectively, as compared to 14.65% and 14.69% for the third quarter and first nine months of 2018, respectively.
                                 
 
Three Months Ended
   
Nine Months Ended
 
(Dollars in thousands)
 
September 30,
2019
 
 
September 30,
2018
 
 
September 30,
2019
 
 
September 30,
2018
 
Return on Average Tangible Equity:
   
     
     
     
 
(a) Net Income (GAAP)
  $
65,965
    $
64,412
    $
196,814
    $
192,392
 
(b) Number of days
   
92
     
92
     
273
     
273
 
Average Total Shareholders’ Equity (GAAP)
  $
3,359,437
    $
3,262,949
    $
3,319,420
    $
3,270,789
 
Less: Average Total Intangibles
   
(1,510,653
)    
(1,518,119
)    
(1,512,394
)    
(1,520,244
)
                                 
(c) Average Tangible Equity
(non-GAAP)
  $
1,848,784
    $
1,744,830
    $
1,807,026
    $
1,750,545
 
Return on Tangible Equity
(non-GAAP)
[(a) / (b)] x 365 / (c)
   
14.16
%    
14.65
%    
14.56
%    
14.69
%
 
 
 
 
Net interest income for the third quarter of 2019 was $141.92 million which was a decrease of $6.86 million or 4.61% from the third quarter of 2018. The decrease in net interest income occurred because total interest income increased $5.32 million while total interest expense increased $12.18 million from the third quarter of 2018. Net interest income for the first nine months of 2019 was $436.64 which was a decrease of $5.30 million or 1.20% from the prior year’s first nine months. The decrease in net interest income occurred because total interest income increased $48.48 million while total interest expense increased $53.78 million from the first nine months of 2018.
The provision for credit losses was $5.03 million and $15.45 million for the third quarter and first nine months of 2019, respectively, as compared to $4.81 million and $16.19 million for the third quarter and first nine months of 2018, respectively. For the third quarter of 2019, noninterest income was $42.22 million, which was an increase of $10.54 million or 33.26% from the third quarter of 2018. Noninterest income for the first nine months of 2019 was $113.24 million which was an increase of $14.36 million or 14.52% from the first nine months of 2018. These increases from 2018 were mainly due to additional income from mortgage banking activities. For the third quarter of 2019, noninterest expense increased $2.82 million or 3.02% from the third quarter of 2018 due mainly to an increase in employee compensation resulting from higher commissions expense from increased production and sales from mortgage banking activities. For the first nine months of 2019, noninterest expense increased $8.58 million or 3.09% from the first nine months of 2018 due primarily to penalties incurred during the second quarter of 2019 on the prepayment of FHLB advances.
Income taxes for the third quarter of 2019 were $17.01 million as compared to $17.93 million for the third quarter of 2018. For the first nine months of 2019 and 2018, income tax expense was $51.87 million and $55.07 million, respectively. For the quarters ended September 30, 2019 and 2018, United’s effective tax rate was 20.50% and 21.77%, respectively. The effective tax rate for the first nine months of 2019 and 2018 was 20.86% and 22.25%, respectively.
 
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The following discussion explains in more detail the results of operations by major category.
Business Segments
United operates in two business segments: community banking and mortgage banking.
Community Banking
Net income attributable to the community banking segment for the third quarter of 2019 was $63.57 million compared to net income of $69.13 million for the third quarter of 2018.
Net interest income decreased $6.16 million to $143.62 million for the third quarter of 2019, compared to $149.77 million for the same period of 2018. Net interest income for the third quarter of 2019 decreased from the third quarter of 2018 due mainly to an increase in the average cost of funds due to higher market interest rates and a decline in the average yield on earning assets due mainly to lower accretion on acquired loans. Provision for loan losses was $5.03 million for the three months ended September 30, 2019 compared to a provision of $4.81 million for the same period of 2018. Noninterest income for the third quarter of 2019 was $18.70 million, which was flat from the $18.72 million recorded for the third quarter of 2018. Noninterest expense was $77.31 million for the third quarter of 2019, compared to $75.26 million for the same period of 2018. The increase of $2.06 million in noninterest expense was primarily attributable to increases in employee compensation, net occupancy expense, other real estate owned (OREO) expense and other expenses mainly related to the
write-off
of income tax credits partially offset by a decline in Federal Deposit Insurance Corporation (FDIC) insurance expense resulting from a small bank assessment credit.
Net income attributable to the community banking segment for the first nine months of 2019 was $194.45 million compared to net income of $200.84 million for the first nine months of 2018.
Net interest income decreased $2.82 million to $442.02 million for the first nine months of 2019, compared to $444.84 million for the same period of 2018. Net interest income for the first nine months of 2019 decreased from the first nine months of 2018 due mainly to an increase in the average cost of funds primarily as a result of higher market interest rates and a change in the mix of interest bearing liabilities. Provision for loan losses was $15.45 million for the nine months ended September 30, 2019 compared to a provision of $16.19 million for the same period of 2018. Noninterest income for the first nine months of 2019 increased $794 thousand to $54.75 million for the first nine months of 2019 as compared to $53.95 million for the first nine months of 2018. The increase was due mainly to increased fees from trust and brokerage services and higher income from bank-owned life insurance due to death benefits received in the first quarter of 2019. Noninterest expense was $235.61 million for the nine months ended September 30, 2019, compared to $224.24 million for the same period of 2018. The increase of $11.37 million in noninterest expense was primarily attributable to penalties on the prepayment of FHLB advances, increases in employee compensation due mainly to higher employee incentives, OREO expense due to a decline in the fair values of OREO properties and other expense due to an increase in the
write-off
of income tax credits. Partially offsetting these increases were decreases in net occupancy expense due mainly to a decline in building rental expense, data processing fees due to lower fees under a new contract, FDIC insurance expense resulting from the small bank assessment credit, and employee benefits due mainly to a decline in pension expense.
 
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Mortgage Banking
The mortgage banking segment reported net income of $3.40 million and $8.28 million for the third quarter and the first nine months of 2019, respectively, as compared to net losses of $845 thousand and $1.33 million for the third quarter and first nine months of 2018, respectively. Noninterest income, which consists mainly of realized and unrealized gains associated with the fair value of commitments and loans held for sale, was $24.33 million and $63.94 million for the third quarter and first nine months of 2019 as compared to $16.48 million and $54.83 million for the third quarter and first nine months of 2018. Noninterest expense was $20.26 million and $53.87 million for the third quarter and first nine months of 2019 as compared $17.96 million and $57.57 million for the third quarter and first nine months of 2018. Noninterest expense consists mainly of salaries, commissions and benefits of mortgage segment employees.
The following discussion explains in more detail the consolidated results of operations by major category.
Net Interest Income
Net interest income represents the primary component of United’s earnings. It is the difference between interest income from earning assets and interest expense incurred to fund these assets. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in market interest rates. Such changes, and their impact on net interest income in 2019 and 2018, are presented below.
Net interest income for the third quarter of 2019 was $141.92 million, which was a decrease of $6.86 million or 4.61% from the third quarter of 2018. The $6.86 million decrease in net interest income occurred because total interest income increased $5.32 million while total interest expense increased $12.18 million from the third quarter of 2018. Net interest income for the first nine months of 2019 was $436.64 million, which was a decrease of $5.30 million or 1.20% from the first nine months of 2018. The $5.30 million decrease in net interest income occurred because total interest income increased $48.48 million while total interest expense increased $53.78 million from the first nine months of 2018. On a linked-quarter basis, net interest income for the third quarter of 2019 decreased $8.64 million or 5.74% from the second quarter of 2019. The $8.64 million decrease in net interest income occurred because total interest income decreased $8.89 million while total interest expense only decreased $259 thousand from the second quarter of 2019.
Generally, interest income for the first nine months of 2019 increased from the first nine months of 2018 due to a higher level of earning assets. The increase in interest expense for the first nine months of 2019 from the first nine months of 2018 was due to higher market interest rates on interest-bearing liabilities. For the purpose of this remaining discussion, net interest income is presented on a
tax-equivalent
basis to provide a comparison among all types of interest earning assets. The
tax-equivalent
basis adjusts for the
tax-favored
status of income from certain loans and investments. Although this is a
non-GAAP
measure, United’s management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and
tax-exempt
sources. United uses this measure to monitor net interest income performance and to manage its balance sheet composition.
Tax-equivalent
net interest income, which adjusts for the
tax-favored
status of income from certain loans and investments, for the third quarter of 2019 was $142.83 million, which was a decrease of $6.99 million or 4.67% from the third quarter of 2018 due mainly to an increase in the average cost of funds and a decline in the yield on earning assets. The average cost of funds increased 37 basis points from the third quarter of 2018 due to higher market interest rates. The average yield on earning assets declined 4 basis points from the third quarter of 2018 due in large part to a decline in loan accretion on acquired loans of $4.39 million or 38.00%. Loan accretion on acquired loans was $7.17 million and $11.56 million for the third quarter of 2019 and 2018, respectively. Partially offsetting these decreases to
tax-equivalent
net interest income for the third quarter of 2019 was an increase in average earning assets of $609.43 million or 3.64%. The increase in average earning assets was due mainly to increases of $365.29 million or 15.99% and $325.05 million or 2.40% in average investment securities and average loans, respectively. The net interest margin of 3.27% for the third quarter of 2019 was a decrease of 29 basis points from the net interest margin of 3.56% for the third quarter of 2018.
 
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Tax-equivalent
net interest income for the first nine months of 2019 was $439.52 million, which was a decrease of $5.69 million or 1.28% from the first nine months of 2018 due mainly to an increase in the average cost of funds. The average cost of funds for the first nine months of 2019 increased 57 basis points from the first nine months of 2018 due to higher market interest rates and a change in the mix of interest bearing liabilities. Partially offsetting these decreases to
tax-equivalent
net interest income for the first nine months of 2019 were increases in average earning assets and the average yield on those average earning assets. For the first nine months of 2019, average earning assets increased $687.26 million or 4.17% from the first nine months of 2018 due mainly to increases of $400.86 million or 3.00% in average net loans and $352.58 million or 15.65% in average investment securities. Average short-term investments decreased $66.18 million or 7.82%. The average yield on earning assets for the first nine months of 2019 increased 20 basis points from the first nine months of 2018 due to higher market rates. Loan accretion on acquired loans was $30.16 million and $34.38 million for the first nine months of 2019 and 2018, respectively, decreasing $4.22 million or 12.27%. The net interest margin of 3.42% for the first nine months of 2019 was a decrease of 19 basis points from the net interest margin of 3.61% for the first nine months of 2018.
On a linked-quarter basis, United’s
tax-equivalent
net interest income for the third quarter of 2019 decreased $8.70 million or 5.74% from the second quarter of 2019 as well due to a decrease in the average yield on earning assets. The average yield on earning assets for the third quarter of 2019 decreased 29 basis points from the second quarter of 2019 due to a decrease of $7.28 million in loan accretion on acquired loans. Loan accretion on acquired loans was $7.17 million and $14.45 million for the third quarter and second quarter of 2019, respectively. Partially offsetting the decline in the average yield on earning assets was a decrease of 2 basis points in the average cost of funds due to change in the mix of interest-bearing liabilities. Average earning assets were relatively flat for the quarter, increasing $158.22 million or less than 1% from the second quarter of 2019 as average net loans were also relatively flat, increasing $63.85 million or less than 1%. Average investment securities increased $34.49 million or 1.32% and average short-term investments increased $59.88 million or 7.77% for the linked quarter. The net interest margin of 3.27% for the third quarter of 2019 decreased 26 basis points from the net interest margin of 3.53% for the second quarter of 2019.
United’s
tax-equivalent
net interest income also includes the impact of acquisition accounting fair value adjustments.
The following table provides the discount/premium and net accretion impact to
tax-equivalent
net interest income for the three months ended September 30, 2019, September 30, 2018 and June 30, 2019 and the nine months ended September 30, 2019 and September 30, 2018:
                         
 
Three Months Ended
 
 
September 30
 
 
September 30
 
 
June 30
 
(Dollars in thousands)
 
2019
 
 
2018
 
 
2019
 
Loan accretion
  $
7,167
    $
11,559
    $
14,451
 
Certificates of deposit
   
198
     
311
     
197
 
Long-term borrowings
   
269
     
269
     
269
 
                         
Total
  $
7,634
    $
12,139
    $
14,917
 
                         
 
 
 
 
                 
 
Nine Months Ended
 
 
September 30
 
 
September 30
 
(Dollars in thousands)
 
2019
 
 
2018
 
Loan accretion
  $
30,162
    $
34,381
 
Certificates of deposit
   
593
     
948
 
Long-term borrowings
   
806
     
806
 
                 
Tax-equivalent
net interest income
  $
31,561
    $
36,135
 
                 
 
 
 
 
 
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The following tables reconcile the difference between net interest income and
tax-equivalent
net interest income for the three months ended September 30, 2019, September 30, 2018 and June 30, 2019 and the nine months ended September 30, 2019 and September 30, 2018.
                         
 
Three Months Ended
 
 
September 30
 
 
September 30
 
 
June 30
 
(Dollars in thousands)
 
2019
 
 
2018
 
 
2019
 
Net interest income, GAAP basis
  $
141,918
    $
148,775
    $
150,553
 
Tax-equivalent
adjustment (1)
   
914
     
1,049
     
977
 
                         
Tax-equivalent
net interest income
  $
142,832
    $
149,824
    $
151,530
 
                         
 
 
 
 
                 
 
Nine Months Ended
 
 
September 30
 
 
September 30
 
(Dollars in thousands)
 
2019
 
 
2018
 
Net interest income, GAAP basis
  $
436,639
    $
441,940
 
Tax-equivalent
adjustment (1)
   
2,884
     
3,268
 
                 
Tax-equivalent
net interest income
  $
439,523
    $
445,208
 
                 
 
 
 
 
(1) The
tax-equivalent
adjustment combines amounts of interest income on federally nontaxable loans and investment securities using the statutory federal income tax rate of 21% for the three months and nine months ended September 30, 2019 and 2018 and the three months ended June 30, 2019. All interest income on loans and investment securities was subject to state income taxes.
 
 
 
 
 
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The following tables show the unaudited consolidated daily average balance of major categories of assets and liabilities for the three-month and nine-month periods ended September 30, 2019 and 2018, respectively, with the interest and rate earned or paid on such amount. The interest income and yields on federally nontaxable loans and investment securities are presented on a
tax-equivalent
basis using the statutory federal income tax rate of 21% for the three-month and nine-month period ended September 30, 2019 and 2018. Interest income on all loans and investment securities was subject to state income taxes.
                                                 
 
Three Months Ended
   
Three Months Ended
 
 
September 30, 2019
   
September 30, 2018
 
(Dollars in thousands)
 
Average
Balance
 
 
Interest
(1)
 
 
Avg. Rate
(1)
 
 
Average
Balance
 
 
Interest
(1)
 
 
Avg. Rate
(1)
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earning Assets:
   
     
     
     
     
     
 
Federal funds sold and securities purchased under agreements to resell and other short-term investments
  $
830,502
    $
6,236
     
2.98
%   $
911,414
    $
5,485
     
2.39
%
Investment Securities:
   
     
     
     
     
     
 
Taxable
   
2,525,682
     
18,168
     
2.88
%    
2,064,332
     
13,994
     
2.71
%
Tax-exempt
   
124,141
     
1,011
     
3.26
%    
220,197
     
1,673
     
3.04
%
                                                 
Total Securities
   
2,649,823
     
19,179
     
2.90
%    
2,284,529
     
15,667
     
2.74
%
Loans, net of unearned income (2)
   
13,952,287
     
165,850
     
4.72
%    
13,627,932
     
164,927
     
4.81
%
Allowance for loan losses
   
(76,408
)    
     
     
(77,103
)    
     
 
                                                 
Net loans
   
13,875,879
     
     
4.75
%    
13,550,829
     
     
4.83
%
                                                 
Total earning assets
   
17,356,204
    $
191,265
     
4.38
%    
16,746,772
    $
186,079
     
4.42
%
                                                 
Other assets
   
2,310,404
     
     
     
2,300,917
     
     
 
                                                 
TOTAL ASSETS
  $
19,666,608
     
     
    $
19,047,689
     
     
 
                                                 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-Bearing Funds:
   
     
     
     
     
     
 
Interest-bearing deposits
  $
9,692,296
    $
36,368
     
1.49
%   $
9,588,327
    $
26,368
     
1.09
%
Short-term borrowings
   
120,155
     
539
     
1.78
%    
212,566
     
618
     
1.15
%
Long-term borrowings
   
1,870,944
     
11,526
     
2.44
%    
1,543,004
     
9,269
     
2.38
%
                                                 
Total Interest-Bearing Funds
   
11,683,395
     
48,433
     
1.64
%    
11,343,897
     
36,255
     
1.27
%
                                                 
Noninterest-bearing deposits
   
4,440,399
     
     
     
4,338,309
     
     
 
Accrued expenses and other liabilities
   
183,377
     
     
     
102,534
     
     
 
                                                 
TOTAL LIABILITIES
   
16,307,171
     
     
     
15,784,740
     
     
 
SHAREHOLDERS’ EQUITY
   
3,359,437
     
     
     
3,262,949
     
     
 
                                                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $
19,666,608
     
     
    $
19,047,689
     
     
 
                                                 
NET INTEREST INCOME
   
    $
142,832
     
     
    $
149,824
     
 
                                                 
INTEREST SPREAD
   
     
     
2.74
%    
     
     
3.15
%
NET INTEREST MARGIN
   
     
     
3.27
%    
     
     
3.56
%
 
 
 
 
(1) The interest income and the yields on federally nontaxable loans and investment securities are presented on a
tax-equivalent
basis using the statutory federal income tax rate of 21%.
 
 
 
 
(2) Nonaccruing loans are included in the daily average loan amounts outstanding.
 
 
 
 
 
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Table of Contents
                                                 
 
Nine Months Ended
   
Nine Months Ended
 
 
September 30, 2019
   
September 30, 2018
 
(Dollars in thousands)
 
Average
Balance
 
 
Interest
(1)
 
 
Avg. Rate
(1)
 
 
Average
Balance
 
 
Interest
(1)
 
 
Avg. Rate
(1)
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earning Assets:
   
     
     
     
     
     
 
Federal funds sold and securities repurchased under agreements to resell and other short-term investments
  $
780,355
    $
17,478
     
2.99
%   $
846,537
    $
13,867
     
2.19
%
Investment Securities:
   
     
     
     
     
     
 
Taxable
   
2,455,085
     
53,279
     
2.89
%    
2,012,841
     
39,679
     
2.63
%
Tax-exempt
   
149,956
     
3,527
     
3.14
%    
239,617
     
5,339
     
2.97
%
                                                 
Total Securities
   
2,605,041
     
56,806
     
2.91
%    
2,252,458
     
45,018
     
2.66
%
Loans, net of unearned income (2)
   
13,851,974
     
507,293
     
4.89
%    
13,451,316
     
474,598
     
4.72
%
Allowance for loan losses
   
(76,616
)    
     
     
(76,819
)    
     
 
                                                 
Net loans
   
13,775,358
     
     
4.92
%    
13,374,497
     
     
4.74
%
                                                 
Total earning assets
   
17,160,754
    $
581,577
     
4.53
%    
16,473,492
    $
533,483
     
4.33
%
                                                 
Other assets
   
2,318,170
     
     
     
2,296,442
     
     
 
                                                 
TOTAL ASSETS
  $
19,478,924
     
     
    $
18,769,934
     
     
 
                                                 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-Bearing Funds:
   
     
     
     
     
     
 
Interest-bearing deposits
  $
9,713,567
    $
104,461
     
1.44
%   $
9,384,890
    $
61,101
     
0.87
%
Short-term borrowings
   
143,132
     
1,838
     
1.72
%    
235,388
     
1,503
     
0.85
%
Long-term borrowings
   
1,816,476
     
35,755
     
2.63
%    
1,518,997
     
25,671
     
2.26
%
                                                 
Total Interest-Bearing Funds
   
11,673,175
     
142,054
     
1.63
%    
11,139,275
     
88,275
     
1.06
%
                                                 
Non-interest
bearing deposits
   
4,301,300
     
     
     
4,256,707
     
     
 
Accrued expenses and other liabilities
   
185,029
     
     
     
103,163
     
     
 
                                                 
TOTAL LIABILITIES
   
16,159,504
     
     
     
15,499,145
     
     
 
SHAREHOLDERS’ EQUITY
   
3,319,420
     
     
     
3,270,789
     
     
 
                                                 
TOTAL LIABILITIES AND
   
     
     
     
     
     
 
SHAREHOLDERS’ EQUITY
  $
19,478,924
     
     
    $
18,769,934
     
     
 
                                                 
NET INTEREST INCOME
   
    $
439,523
     
     
    $
445,208
     
 
                                                 
INTEREST SPREAD
   
     
     
2.90
%    
     
     
3.27
%
NET INTEREST MARGIN
   
     
     
3.42
%    
     
     
3.61
%
 
 
 
 
(1) The interest income and the yields on federally nontaxable loans and investment securities are presented on a
tax-equivalent
basis using the statutory federal income tax rate of 21%.
 
 
 
 
(2) Nonaccruing loans are included in the daily average loan amounts outstanding.
 
 
 
 
Provision for Loan Losses
For the quarters ended September 30, 2019 and 2018, the provision for loan losses was $5.03 million and $4.81 million, respectively. The provision for loan losses for the first nine months of 2019 and 2018 was $15.45 million and $16.19 million, respectively. Net charge-offs were $4.34 million for the third quarter of 2019 as compared to net charge-offs of $5.00 million for the same quarter in 2018. Net charge-offs for the first nine months of 2019 were $15.05 million as compared to $15.88 million for the first nine months of 2018. These lower amounts of provision expense and net charge-offs for the first nine months of 2019 compared to the first nine months of 2018 were due to the recognition of losses on several large commercial relationships in 2018. On a linked-quarter basis, the provision
 
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Table of Contents
for loan losses decreased $384 thousand while net charge-offs decreased $1.57 million from the second quarter of 2019. The decrease in the provision for loan losses was due to reduced general allocation requirements for several portfolio segments due to improvements in historical loss rates, reductions in the loss emergence periods and changes in the calculated qualitative adjustments factors. Annualized net charge-offs as a percentage of average loans was 0.13% and 0.15% for the third quarter and first nine months of 2019, respectively.
At September 30, 2019, nonperforming loans were $140.28 million or 1.03% of loans, net of unearned income compared to nonperforming loans of $142.82 million or 1.06% of loans, net of unearned income at December 31, 2018. The components of nonperforming loans include: 1) nonaccrual loans, 2) loans which are contractually past due 90 days or more as to interest or principal, but have not been put on a nonaccrual basis and 3) loans whose terms have been restructured for economic or legal reasons due to financial difficulties of the borrowers.
Loans past due 90 days or more were $9.84 million at September 30, 2019, a decrease of $5.01 million or 33.74% from $14.85 million at
year-end
2018. This decrease was primarily due to transfer of a large nonperforming commercial relationship to nonaccrual status as well as renewal of administratively delinquent loans outstanding at
year-end.
    At September 30, 2019, nonaccrual loans were $69.88 million, an increase of $1.34 million or 1.96% from $68.54 million at
year-end
2018. This increase was due to the transfer to nonaccrual status of a large nonperforming relationship while the borrower awaits settlement of a lawsuit. Restructured loans were $60.56 million at September 30, 2019, an increase of $1.13 million or 1.91% from $59.43 million at
year-end
2018. Eleven loans totaling $11.66 million were restructured during the first nine months of 2019. Partially offsetting these new restructured loans were repayments on previously restructured loans as well as partial charge-offs of the outstanding balance on two restructured relationships. The loss potential on these loans has been properly evaluated and allocated within the Company’s allowance for loan losses.
Nonperforming assets include nonperforming loans and real estate acquired in foreclosure or other settlement of loans (OREO). Total nonperforming assets of $158.65 million, including OREO of $18.37 million at September 30, 2019, represented 0.80% of total assets.
The following table summarizes nonperforming assets for the indicated periods.
                                                 
 
September 30,
 
 
December 31,
 
(In thousands)
 
2019
 
 
2018
 
 
2017
 
 
2016
 
 
2015
 
 
2014
 
Nonaccrual loans 
(1)
   
     
     
     
     
     
 
Originated
  $
60,942
    $
57,258
    $
97,971
    $
77,111
    $
83,146
    $
64,312
 
Acquired
   
8,942
     
11,286
     
10,832
     
6,414
     
8,043
     
10,739
 
Loans which are contractually past due 90 days or more as to interest or principal and are still accruing interest 
(1)
   
     
     
     
     
     
 
Originated
   
7,015
     
11,945
     
7,288
     
7,763
     
11,462
     
10,868
 
Acquired
   
2,825
     
2,906
     
2,515
     
823
     
166
     
807
 
Restructured loans 
(1)
   
     
     
     
     
     
 
Originated
   
57,025
     
58,101
     
48,709
     
21,115
     
23,890
     
22,234
 
Acquired
   
3,534
     
1,324
     
1,420
     
37
     
0
     
0
 
                                                 
Total nonperforming loans
  $
140,283
    $
142,820
    $
168,835
    $
113,263
    $
126,707
    $
108,960
 
Other real estate owned
   
18,367
     
16,865
     
24,348
     
31,510
     
32,228
     
38,778
 
                                                 
TOTAL NONPERFORMING ASSETS
  $
158,650
    $
159,685
    $
193,083
    $
144,773
    $
158,935
    $
147,738
 
                                                 
 
 
 
 
(1) Restructured loans that were contractually past due 90 days or more as to interest or principal and are still accruing interest or on nonaccrual status for the indicated periods are included in “Restructured loans” and not “Loans which are contractually past due 90 days or more as to interest or principal and are still accruing interest” or “Nonaccrual loans” (see Note 4 to the unaudited Consolidated Financial Statements for further information).
 
 
 
 
 
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Table of Contents
Loans are designated as impaired when, in the opinion of management, the collection of principal and interest in accordance with the loan contract is doubtful. At September 30, 2019, impaired loans were $311.76 million, which was a decrease of $77.77 million or 19.96% from the $389.53 million in impaired loans at December 31, 2018. This decrease was due mainly to the payoff of a large acquired loan relationship and a large originated loan relationship. Acquired impaired loans are accounted for under ASC Subtopic
310-30.
The recorded investment balance and the contractual principal balance of the acquired impaired loans were $103.02 million and $134.12 million at September 30, 2019, respectively, as compared to $149.74 million and $195.71 million, respectively, at December 31, 2018. For the acquired impaired loans accounted for under ASC
310-30,
the difference between the contractually required payments due and the cash flows expected to be collected, considering the impact of prepayments, is referred to as the
non-accretable
difference (the credit mark). The credit mark is not recognized in income. The remaining credit mark was $30.60 million and $38.53 million at September 30, 2019 and December 31, 2018, respectively. For further details regarding impaired loans, see Note 4 to the unaudited Notes to Consolidated Financial Statements.
United maintains an allowance for loan losses and a reserve for lending-related commitments. The combined allowance for loan losses and reserve for lending-related commitments are referred to as the allowance for credit losses. At September 30, 2019, the allowance for credit losses was $78.87 million as compared to $78.09 million at December 31, 2018.
At September 30, 2019, the allowance for loan losses was $77.10 million as compared to $76.70 million at December 31, 2018. As a percentage of loans, net of unearned income, the allowance for loan losses was 0.57% at September 30, 2019 and 0.57% at December 31, 2018. The ratio of the allowance for loan losses to nonperforming loans or coverage ratio was 54.96% and 53.71% at September 30, 2019 and December 31, 2018, respectively. The Company’s detailed methodology and analysis indicated a minimal increase in the allowance for loan losses primarily because of the offsetting factors of changes within historical loss rates and reduced loss allocations on impaired loans.
Allocations are made for specific commercial loans based upon management’s estimate of the borrowers’ ability to repay and other factors impacting collectibility. Other commercial loans not specifically reviewed on an individual basis are evaluated based on historical loss percentages applied to loan pools that have been segregated by risk. Allocations for loans other than commercial loans are made based upon historical loss experience adjusted for current environmental conditions. The allowance for credit losses includes estimated probable inherent but unidentified losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet fully manifested themselves in loss allocation factors. In addition, a portion of the allowance accounts for the inherent imprecision in the allowance for credit losses analysis.
United’s review of the allowance for loan losses at September 30, 2019 produced increased allocations in two of the four loan categories. The allocation related to the commercial, financial and agricultural loan pool increased $5.27 million due to an increase in historical loss rates as a result of several significant charge-offs recognized in the first nine months of 2019 as well as downgrade of a $46.80 million relationship from a pass-rating to a special mention-rating with a higher loss rate. The consumer loan pool experienced an increase of $203 thousand due to an increase in outstanding loan balances. Offsetting these increases was a decrease in the residential real estate loan pool allocation of $3.14 million due to a decrease in historical loss rates as well as reduction in specific allocations associated with improved collateral position on a large relationship. The real estate construction and development loan pool allocation decreased $1.81 million primarily due to a decrease in historical loss rates. In summary, the overall level of the allowance for loan losses was relatively stable in comparison to
year-end
2018 as a result of offsetting factors within the portfolio as described above.
 
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An allowance is established for probable credit losses on impaired loans via specific allocations. Nonperforming commercial loans and leases are regularly reviewed to identify impairment. A loan or lease is impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts contractually due. Measuring impairment of a loan requires judgment and estimates, and the eventual outcomes may differ from those estimates. Impairment is measured based upon the present value of expected future cash flows from the loan discounted at the loan’s effective rate, the loan’s observable market price or the fair value of collateral if the loan is collateral dependent. When the selected measure is less than the recorded investment in the loan, an impairment has occurred. The allowance for impaired loans was $14.79 million at September 30, 2019 and $28.36 million at December 31, 2018. In comparison to the prior
year-end,
this element of the allowance decreased by $13.57 million primarily due to decreased specific allocations for commercial, financial & agricultural loans.
Management believes that the allowance for credit losses of $78.88 million at September 30, 2019 is adequate to provide for probable losses on existing loans and lending-related commitments based on information currently available. United’s loan administration policies are focused on the risk characteristics of the loan portfolio in terms of loan approval and credit quality. The commercial loan portfolio is monitored for possible concentrations of credit in one or more industries. Management has lending limits as a percentage of capital per type of credit concentration in an effort to ensure adequate diversification within the portfolio. Most of United’s commercial loans are secured by real estate located in West Virginia, southeastern Ohio, Pennsylvania, Virginia, Maryland and the District of Columbia. It is the opinion of management that these commercial loans do not pose any unusual risks and that adequate consideration has been given to these loans in establishing the allowance for credit losses.
Management is not aware of any potential problem loans, trends or uncertainties, which it reasonably expects, will materially impact future operating results, liquidity, or capital resources which have not been disclosed. Additionally, management has disclosed all known material credits, which cause management to have serious doubts as to the ability of such borrowers to comply with the loan repayment schedules.
Other Income
Other income consists of all revenues, which are not included in interest and fee income related to earning assets. Noninterest income has been and will continue to be an important factor for improving United’s profitability. Recognizing the importance, management continues to evaluate areas where noninterest income can be enhanced.
Noninterest income for the third quarter of 2019 was $42.22 million, an increase of $10.54 million or 33.26% from the third quarter of 2018. Noninterest income for the first nine months of 2019 was $113.24 million, which was an increase of $14.36 million or 14.52% from the first nine months of 2018.
Income from mortgage banking activities totaled $24.02 million for the third quarter of 2019 compared to $13.28 million for the same period of 2018. The increase for the third quarter of 2019 was due primarily to increased production and sales of mortgage loans in the secondary market by United’s mortgage banking subsidiary, George Mason Mortgage, LLC (George Mason). For the three months ended September 30, 2019 and 2018, mortgage loan sales were $821.03 million and $528.43 million, respectively. For the first nine months of 2019 and 2018, income from mortgage banking activities was $59.40 million and $46.54 million, respectively. The increase for the first nine months of 2019 was due mainly to an increase of $12.87 million in income from mortgage banking activities primarily due to increased loan originations and a higher realized gain on sale margin by George Mason. For the nine months ended September 30, 2019 and 2018, mortgage loan sales were $1.76 billion and $1.58 billion, respectively.
Fees from trust services for the first nine months of 2019 increased $731 thousand from the first nine months of 2018 due to an increase in managed assets.
Fees from brokerage services for first nine months of 2019 increased $704 thousand from the first nine months of 2018 due to increased volume.
 
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Income from bank-owned life insurance for first nine months of 2019 increased $657 thousand due to the recognition of $600 thousand in death benefits in the first quarter of 2019.
Bankcard fees for the first nine months of 2019 decreased $864 thousand from the first nine months of 2018 due to a decline in interchange income from decreased volume.
On a linked-quarter basis, noninterest income for the third quarter of 2019 increased $2.43 million or 6.10% from the second quarter of 2019. The increase was due mainly to an increase of $2.32 million in income from mortgage banking activities due mainly to increased production and sales of mortgage loans in the secondary market by George Mason.
Other Expenses
Just as management continues to evaluate areas where noninterest income can be enhanced, it strives to improve the efficiency of its operations to reduce costs. Other expenses include all items of expense other than interest expense, the provision for loan losses, and income taxes. Noninterest expense increased $2.82 million or 3.02% for the third quarter of 2019 compared to the same period in 2018 due primarily to increased employee compensation. For the first nine months of 2019, noninterest expense increased $8.58 million or 3.09% from the first nine months of 2018 due mainly to the recognition of $5.11 million in penalties to prepay FHLB advances during the second quarter of 2019.
Employee compensation for the third quarter of 2019 increased $5.00 million or 12.11% from the third quarter of 2018. The increase in employee compensation for the third quarter of 2019 was due mainly to higher employee incentives. Employee compensation for the first nine months of 2019 increased $4.30 million or 3.43% from the first nine months of 2018 due mainly to higher employee incentives expense.
Employee benefits expense for first nine months of 2019 decreased $890 thousand or 3.23% from the same time period in 2018. The decrease was due primarily to a decline in pension expense.
Net occupancy expense decreased $575 thousand or 6.20% and $1.66 million or 5.98% for the third quarter and first nine months of 2019, respectively, as compared to the same periods in the prior year. The decreases were due mainly to a decline in building rental expense due to fewer offices.
Data processing expense decreased $1.23 million or 6.94% for the first nine months of 2019 as compared to the first nine months of 2018 due to lower fees from a new contract.
Federal Deposit Insurance Corporation (FDIC) insurance expense for the third quarter and first nine months of 2019 decreased $3.07 million and $1.16 million, respectively, from the same periods in 2018 resulting from a small bank assessment credit.
Other real estate owned (OREO) expense for the third quarter and first nine months of 2019 increased $916 thousand or 99.46% and $1.46 million or 60.38% from the third quarter and first nine months of 2018 due to a decline in the fair value of OREO properties.
Other expense for the third quarter and first nine months of 2019 increased $1.07 million or 5.57% and $2.32 million or 4.10% from the third quarter and first nine months of 2018, respectively due mainly to the
write-off
of income tax credits.
 
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On a linked-quarter basis, noninterest expense for the third quarter of 2019 decreased $4.06 million or 4.05% from the second quarter of 2019 due in large part to the previously mentioned prepayment penalties on FHLB advances of $5.11 million in the second quarter. In addition, FDIC insurance expense declined $2.84 million resulting from the small bank assessment credit. Partially offsetting these decreases were increases of $2.01 million in employee compensation due mainly to an increase in employee commissions expense related to the increase in production and sales of mortgage loans at George Mason and $1.20 million in OREO expense due to declines in the values of OREO properties.
Income Taxes
For the third quarter and first nine months of 2019, income tax expense was $17.01 million and $51.87 million, respectively, as compared to $17.93 million and $55.07 million, respectively, for third quarter and first nine months of 2018. The decreases in 2019 were mainly due to a decline in the effective tax rate due in large part to the previously mentioned income tax credits. On a linked-quarter basis, income tax expense for the third quarter of 2019 decreased $519 thousand from the second quarter of 2019 due to a combination of lower earnings and a slightly lower effective tax rate. United’s effective tax rate was 20.50% for the third quarter of 2019, 21.77% for the third quarter of 2018 and 20.69% for the second quarter of 2019. For the first nine months of 2019 and 2018, United’s effective tax rate was 20.86% and 22.25%, respectively. For further details related to income taxes, see Note 15 of the unaudited Notes to Consolidated Financial Statements contained within this document.
Contractual Obligations, Commitments, Contingent Liabilities and
Off-Balance
Sheet Arrangements
United has various financial obligations, including contractual obligations and commitments, that may require future cash payments. Please refer to United’s Annual Report on Form
10-K
for the year ended December 31, 2018 for disclosures with respect to United’s fixed and determinable contractual obligations. There have been no material changes outside the ordinary course of business since
year-end
2018 in the specified contractual obligations disclosed in United’s Annual Report on Form
10-K.
United also enters into derivative contracts, mainly to protect against adverse interest rate movements on the value of certain assets or liabilities, under which it is required to either pay cash to or receive cash from counterparties depending on changes in interest rates. Derivative contracts are carried at fair value and not notional value on the consolidated balance sheet. Because the derivative contracts recorded on the balance sheet at September 30, 2019 do not present the amounts that may ultimately be paid under these contracts, they are excluded from the contractual obligations table in the 2018 Form
10-K
report. Further discussion of derivative instruments is presented in Note 11 to the unaudited Notes to Consolidated Financial Statements.
United is a 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 loan commitments and standby letters of credit. United’s maximum exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for the loan commitments and standby letters of credit is the contractual or notional amount of those instruments. United uses the same policies in making commitments and conditional obligations as it does for
on-balance
sheet instruments. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Further discussion of
off-balance
sheet commitments is included in Note 10 to the unaudited Notes to Consolidated Financial Statements.
Liquidity
In the opinion of management, United maintains liquidity that is sufficient to satisfy its depositors’ requirements and the credit needs of its customers. Like all banks, United depends upon its ability to renew maturing deposits and other liabilities on a daily basis and to acquire new funds in a variety of markets. A significant source of funds available to United is “core deposits”. Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable, and they are the lowest cost source of funds available to United.
 
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Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase as well as advances from the FHLB. Repurchase agreements represent funds which are obtained as the result of a competitive bidding process.
Liquid assets are cash and those items readily convertible to cash. All banks must maintain sufficient balances of cash and near-cash items to meet the
day-to-day
demands of customers and United’s cash needs. Other than cash and due from banks, the available for sale securities portfolio and maturing loans are the primary sources of liquidity.
The goal of liquidity management is to ensure the ability to access funding which enables United to efficiently satisfy the cash flow requirements of depositors and borrowers and meet United’s cash needs. Liquidity is managed by monitoring funds’ availability from a number of primary sources. Substantial funding is available from cash and cash equivalents, unused short-term borrowing and a geographically dispersed network of branches providing access to a diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of outside sources such as correspondent and downstream correspondent federal funds and utilization of Federal Home Loan Bank advances.
Other sources of liquidity available to United to provide long-term as well as short-term funding alternatives, in addition to FHLB advances, are long-term certificates of deposit, lines of credit, borrowings that are secured by bank premises or stock of United’s subsidiaries and issuances of trust preferred securities. In the normal course of business, United through its Asset Liability Committee evaluates these as well as other alternative funding strategies that may be utilized to meet short-term and long-term funding needs.
For the nine months ended September 30, 2019, cash of $90.96 million was provided by operating activities due mainly to net income of $196.81 million for the first nine months. Partially offsetting net income were net originations of $102.94 million in mortgage loans held for sale. Net cash of $286.85 million was used in investing activities which was primarily due to net loan growth of $205.48 million and net purchases of $82.27 million in investments over net proceeds from sales. During the first nine months of 2019, net cash of $151.65 million was provided by financing activities due primarily to net growth of $101.26 million in deposits and net advances of $210.00 million in long-term FHLB advances. These funding activities were partially offset by cash paid of $104.42 million for dividends and $34.50 million for the repurchase of common stock for the first nine months of 2019. The net effect of the cash flow activities was a decrease in cash and cash equivalents of $44.24 million for the first nine months of 2019.
United anticipates it can meet its obligations over the next 12 months and has no material commitments for capital expenditures. There are no known trends, demands, commitments, or events that will result in or that are reasonably likely to result in United’s liquidity increasing or decreasing in any material way. United also has lines of credit available. See Notes 8 and 9 to the accompanying unaudited Notes to Consolidated Financial Statements for more details regarding the amounts available to United under lines of credit.
The Asset Liability Committee monitors liquidity to ascertain that a liquidity position within certain prescribed parameters is maintained. No changes are anticipated in the policies of United’s Asset Liability Committee.
Capital Resources
United’s capital position is financially sound. United seeks to maintain a proper relationship between capital and total assets to support growth and sustain earnings. United has historically generated attractive returns on shareholders’ equity. United is well-capitalized based upon regulatory guidelines. United’s risk-based capital ratio is 14.44% at September 30, 2019 while its Common Equity Tier 1 capital, Tier 1 capital and leverage ratios are 12.28%, 12.28% and 10.20%, respectively. The regulatory requirements for a well-capitalized financial institution are a risk-based capital ratio of 10.0%, a Common Equity Tier 1 capital ratio of 6.5%, a Tier 1 capital ratio of 8.0% and a leverage ratio of 5.0%.
 
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Total shareholders’ equity was $3.35 billion at September 30, 2019, which was an increase of $102.72 million or 3.16% from December 31, 2018. This increase was primarily due to the retention of earnings.
United’s equity to assets ratio was 16.98% at September 30, 2019 as compared to 16.89% at December 31, 2018. The primary capital ratio, capital and reserves to total assets and reserves, was 17.31% at September 30, 2019 as compared to 17.23% at December 31, 2018. United’s average equity to average asset ratio was 17.08% for the third quarter of 2019 as compared to 17.13% the third quarter of 2018. United’s average equity to average asset ratio was also 17.04% for the first nine months of 2019 as compared to 17.43% for the first nine months of 2018. All of these financial measurements reflect a financially sound position.
During the third quarter of 2019, United’s Board of Directors declared a cash dividend of $0.34 per share. Cash dividends were $1.02 per common share for the first nine months of 2019. Total cash dividends declared were $34.52 million for the third quarter of 2019 and $103.97 million for the first nine months of 2019 as compared to $35.30 million for the third quarter of 2018 and $106.64 million for the first nine months of 2018.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
The objective of United’s Asset Liability Management function is to maintain consistent growth in net interest income within United’s policy guidelines. This objective is accomplished through the management of balance sheet liquidity and interest rate risk exposures due to changes in economic conditions, interest rate levels and customer preferences.
Interest Rate Risk
Management considers interest rate risk to be United’s most significant market risk. Interest rate risk is the exposure to adverse changes in United’s net interest income as a result of changes in interest rates. United’s earnings are largely dependent on the effective management of interest rate risk.
Management of interest rate risk focuses on maintaining consistent growth in net interest income within Board-approved policy limits. United’s Asset/Liability Management Committee (ALCO), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. Policy established for interest rate risk is stated in terms of the change in net interest income over a
one-year
and
two-year
horizon given an immediate and sustained increase or decrease in interest rates. The current limits approved by the Board of Directors are structured on a staged basis with each stage requiring specific actions.
United employs a variety of measurement techniques to identify and manage its exposure to changing interest rates. One such technique utilizes an earnings simulation model to analyze the sensitivity of net interest income to movements in interest rates. The model is based on actual cash flows and repricing characteristics for on and
off-balance
sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. The model also includes executive management projections for activity levels in product lines offered by United. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. Rate scenarios could involve parallel or nonparallel shifts in the yield curve, depending on historical, current, and expected conditions, as well as the need to capture any material effects of explicit or embedded options. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management’s strategies.
 
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Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or are repriced within a designated time frame. The principal function of managing interest rate risk is to maintain an appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. The difference between rate sensitive assets and rate sensitive liabilities for specified periods of time is known as the “GAP.” Earnings-simulation analysis captures not only the potential of these interest sensitive assets and liabilities to mature or reprice, but also the probability that they will do so. Moreover, earnings-simulation analysis considers the relative sensitivities of these balance sheet items and projects their behavior over an extended period of time. United closely monitors the sensitivity of its assets and liabilities on an
on-going
basis and projects the effect of various interest rate changes on its net interest margin.
The following table shows United’s estimated earnings sensitivity profile as of September 30, 2019 and December 31, 2018:
                 
Change in Interest Rates (basis points)
 
Percentage Change in Net Interest Income
 
September 30, 2019
 
 
December 31, 2018
 
+200
   
(1.09
%)    
(2.71
%)
+100
   
(0.33
%)    
(1.29
%)
-100
   
0.21
%    
0.97
%
-200
   
(1.26
%)    
(0.97
%)
 
 
At September 30, 2019, given an immediate, sustained 100 basis point upward shock to the yield curve used in the simulation model, net interest income for United is estimated to decrease by 0.33% over one year as compared to a decrease of 1.29% at December 31, 2018. A 200 basis point immediate, sustained upward shock in the yield curve would decrease net interest income by an estimated 1.09% over one year as of September 30, 2019, as compared to a decrease of 2.71% as of December 31, 2018. A 100 basis point immediate, sustained downward shock in the yield curve would increase net interest income by an estimated 0.21% over one year as of September 30, 2019 as compared to an increase of 0.97%, over one year as of December 31, 2018. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 1.26% over one year as of September 30, 2019 as compared to a decrease of 0.97% over one year as of December 31, 2018.
In addition to the one year earnings sensitivity analysis, a
two-year
analysis is also performed. Compared to the one year analysis, United is projected to show improved performance in year two within the upward rate shock scenarios. Given an immediate, sustained 100 basis point upward shock to the yield curve used in the simulation model, net interest income for United is estimated to increase by 1.93% in year two as of September 30, 2019. A 200 basis point immediate, sustained upward shock in the yield curve would increase net interest income by an estimated 3.04% in year two as of September 30, 2019. A 100 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 2.90% in year two as of September 30, 2019. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 6.82% in year two as of September 30, 2019.
This analysis does not include the potential increased refinancing activities, which should lessen the negative impact on net income from falling rates. While it is unlikely market rates would immediately move 100 or 200 basis points upward or downward on a sustained basis, this is another tool used by management and the Board of Directors to gauge interest rate risk. All of these estimated changes in net interest income are and were within the policy guidelines established by the Board of Directors.
To further aid in interest rate management, United’s subsidiary bank is a member of the Federal Home Loan Bank (FHLB). The use of FHLB advances provides United with a low risk means of matching maturities of earning assets and interest-bearing funds to achieve a desired interest rate spread over the life of the earning assets. In addition, United uses credit with large regional banks and trust preferred securities to provide funding.
 
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As part of its interest rate risk management strategy, United may use derivative instruments to protect against adverse price or interest rate movements on the value of certain assets or liabilities and on future cash flows. These derivatives commonly consist of interest rate swaps, caps, floors, collars, futures, forward contracts, written and purchased options. Interest rate swaps obligate two parties to exchange one or more payments generally calculated with reference to a fixed or variable rate of interest applied to the notional amount. United accounts for its derivative activities in accordance with the provisions of ASC Topic 815, “Derivatives and Hedging.”
Extension Risk
A key feature of most mortgage loans is the ability of the borrower to repay principal earlier than scheduled. This is called a prepayment. Prepayments arise primarily due to sale of the underlying property, refinancing, or foreclosure. In general, declining interest rates tend to increase prepayments, and rising interest rates tend to slow prepayments. Like other fixed-income securities, when interest rates rise, the value of mortgage- related securities generally declines. The rate of prepayments on underlying mortgages will affect the price and volatility of mortgage-related securities and may shorten or extend the effective maturity of the security beyond what was anticipated at the time of purchase. If interest rates rise, United’s holdings of mortgage-related securities may experience reduced returns if the borrowers of the underlying mortgages pay off their mortgages later than anticipated. This is generally referred to as extension risk.
At September 30, 2019, United’s mortgage related securities portfolio had an amortized cost of $1.5 billion, of which approximately $1.1 billion or 75% were fixed rate collateralized mortgage obligations (CMOs). These fixed rate CMOs consisted primarily of planned amortization class (PACs),
sequential-pay
and accretion directed (VADMs) bonds having an average life of approximately 3.6 years and a weighted average yield of 2.70%, under current projected prepayment assumptions. These securities are expected to have very little extension risk in a rising rate environment. Current models show that an immediate, sustained upward shock of 300 basis points, the average life of these securities would only extend to 4.5 years. The projected price decline of the fixed rate CMO portfolio in rates up 300 basis points would be 10.3%, or less than the price decline of a
4-
year treasury note. By comparison, the price decline of a
30-year
current coupon mortgage backed security (MBS) given an immediate, sustained upward shock of 300 basis points would be approximately 15.1%.
United had approximately $162 million in balloon and other securities with a projected yield of 2.56% and a projected average life of 4.3 years on September 30, 2019. This portfolio consisted primarily of Fannie Mae Delegated Underwriting and Servicing (DUS) mortgage backed securities (MBS) with a weighted average loan age (WALA) of 5 years and a weighted average maturity (WAM) of 4.7 years.
United had approximately $22 million in
15-year
mortgage backed securities with a projected yield of 2.99% and a projected average life of 3.1 years as of September 30, 2019. This portfolio consisted of seasoned
15-year
mortgage paper with a weighted average loan age (WALA) of 7.3 years and a weighted average maturity (WAM) of 9.9 years.
United had approximately $45 million in
20-year
mortgage backed securities with a projected yield of 2.70% and a projected average life of 4.2 years on September 30, 2019. This portfolio consisted of seasoned
20-year
mortgage paper with a weighted average loan age (WALA) of 6.1 years and a weighted average maturity (WAM) of 13.4 years.
United had approximately $53 million in
30-year
mortgage backed securities with a projected yield of 2.87% and a projected average life of 4.9 years on September 30, 2019. This portfolio consisted of seasoned
30-year
mortgage paper and Home Equity Conversion Mortgages with a weighted average loan age (WALA) of 2.9 years and a weighted average maturity (WAM) of 27.3 years.
The remaining 7% of the mortgage related securities portfolio at September 30, 2019, included adjustable rate securities (ARMs),
10-year
mortgage backed pass-through securities and other fixed rate mortgage backed securities.
 
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Item 4.
CONTROLS AND PROCEDURES
 
 
 
 
 
 
 
 
 
 
Evaluation of Disclosure Controls and Procedures
As of September 30, 2019, an evaluation was performed under the supervision of and with the participation of United’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of United’s disclosure controls and procedures. Based on that evaluation, United’s management, including the CEO and CFO, concluded that United’s disclosure controls and procedures as of September 30, 2019 were effective in ensuring that information required to be disclosed in the Quarterly Report on Form
10-Q
was recorded, processed, summarized and reported within the time period required by the Securities and Exchange Commission’s rules and forms.
Limitations on the Effectiveness of Controls
United’s management, including the CEO and CFO, does not expect that United’s disclosure controls and internal controls will prevent all errors and fraud. While United’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objective, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
Changes in Internal Controls
There have been no changes in United’s internal control over financial reporting that occurred during the quarter ended September 30, 2019, or in other factors that have materially affected or are reasonably likely to materially affect United’s internal control over financial reporting.
 
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PART II - OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS
 
 
 
 
 
 
 
 
 
 
United and its subsidiaries are currently involved in various legal proceedings in the normal course of business. Management is vigorously pursuing all its legal and factual defenses and, after consultation with legal counsel, believes that all such litigation will be resolved with no material effect on United’s financial position.
Item 1A.
RISK FACTORS
 
 
 
 
 
 
 
 
 
 
In addition to the other information set forth in this report, please refer to United’s Annual Report on Form
10-K
for the year ended December 31, 2018 for disclosures with respect to United’s risk factors which could materially affect United’s business, financial condition or future results. The risks described in the Annual Report on Form
10-K
are not the only risks facing United. Additional risks and uncertainties not currently known to United or that United currently deems to be immaterial also may materially adversely affect United’s business, financial condition and/or operating results. There are no material changes from the risk factors disclosed in United’s Annual Report on Form
10-K
for the year ended December 31, 2018.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
 
 
 
 
 
 
 
There have been no United equity securities sales during the quarter ended September 30, 2019 that were not registered. The table below includes certain information regarding United’s purchase of its common shares during the quarter ended September 30, 2019:
                                 
Period
 
Total Number
of Shares
Purchased
(1) (2)
 
 
Average Price
Paid
per Share
 
 
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans (3)
 
 
Maximum Number
of Shares that May
Yet be Purchased
Under the Plans (3)
 
7/01 – 7/31/2019
   
95,100
    $
36.35
     
95,100
     
1,866,300
 
8/01 – 8/31/2019
   
326,104
    $
35.78
     
326,100
     
1,504,200
 
9/01 – 9/30/2019
   
35,200
    $
36.06
     
35,200
     
1,505,000
 
                                 
Total
   
456,404
    $
35.92
     
456,400
     
 
                                 
 
 
 
 
 
 
 
 
 
 
(1) Includes shares exchanged in connection with the exercise of stock options and the vesting of restricted shares under United’s long-term incentive plans. Shares are purchased or vested pursuant to the terms of the applicable plan and not pursuant to a publicly announced stock repurchase plan. For the quarter ended September 30, 2019, 93,117 shares were exchanged by participants in United’s stock option plans at an average price of $38.97.
 
 
 
 
 
 
 
 
 
 
(2) Includes shares purchased in open market transactions by United for a rabbi trust to provide payment of benefits under a deferred compensation plan for certain key officers of United and its subsidiaries. For the quarter ended September 30, 2019, the following shares were purchased for the deferred compensation plan: August 2019 – 4 shares at an average price of $36.92.
 
 
 
 
 
 
 
 
 
 
(3) In November of 2018, United’s Board of Directors approved a repurchase plan to repurchase up to 3,352,000 shares of United’s common stock on the open market (the 2018 Plan). The timing, price and quantity of purchases under the plans are at the discretion of management and the plan may be discontinued, suspended or restarted at any time depending on the facts and circumstances. The 2018 Plan has an expiration date of November 7, 2019. In October of 2019, United’s Board of Directors approved a new repurchase plan to repurchase up to 4,000,000 shares of United’s common stock on the open market (the 2019 Plan) once the 2018 Plan expires.
 
 
 
 
 
 
 
 
 
 
 
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Table of Contents
Item 3.
DEFAULTS UPON SENIOR SECURITIES
 
 
 
 
 
 
 
 
 
 
None.
Item 4.
MINE SAFETY DISCLOSURES
 
 
 
 
 
 
 
 
 
 
None.
Item 5.
OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
  (a) None.
 
 
 
 
 
 
 
 
 
 
  (b) No changes were made to the procedures by which security holders may recommend nominees to United’s Board of Directors.
 
 
 
 
 
 
 
 
 
 
Item 6.
EXHIBITS
 
Index to exhibits required by Item 601 of Regulation
S-K
         
Exhibit
No.
 
 
Description
         
 
  2.1
   
         
 
  3.1
   
         
 
  3.2
   
         
 
31.1
   
         
 
31.2
   
         
 
32.1
   
         
 
32.2
   
         
 
101
   
Interactive data file (Inline XBRL) (filed herewith)
         
 
104
   
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 has been formatted in Inline XBRL
 
 
83
 

Table of Contents
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 BANKSHARES, INC.
 
 
 
(Registrant)
             
Date:
 
November 8, 2019
 
 
/s/ Richard M. Adams
 
 
 
Richard M. Adams, Chairman of the Board and Chief
Executive Officer
             
Date:
 
November 8, 2019
 
 
/s/ W. Mark Tatterson
 
 
 
W. Mark Tatterson, Executive Vice President and Chief
Financial Officer
 
 
 
 
 
 
 
 
 
 
 
84