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UNITED BANKSHARES INC/WV - Quarter Report: 2020 September (Form 10-Q)

Table of Contents
FORM
10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, 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, 2020
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, 2020
, the registrant had
129,762,348
shares of common stock, $2.50 par value per share, outstanding.

Table of Contents
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM
10-Q
TABLE OF CONTENTS
 
 
 
 
  
Page
 
  
Item 1.
 
  
  
 
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Item 2.
 
  
 
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Item 3.
 
  
 
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Item 4.
 
  
 
93
 
  
Item 1.
 
  
 
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Item 1A.
 
  
 
94
 
Item 2.
 
  
 
97
 
Item 3.
 
  
 
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Item 5.
 
  
 
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Item 6.
 
  
 
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2

Table of Contents
PART I - FINANCIAL INFORMATION
 
Item 1.
FINANCIAL STATEMENTS (UNAUDITED)
The September 30, 2020 and December 31, 2019, 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, 2020 and 2019, the related consolidated statement of changes in shareholders’ equity for the three and nine months ended September 30, 2020 and 2019, the related condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019, and the notes to consolidated financial statements appear on the following pages.
 
3

Table of Contents
CONSOLIDATED BALANCE SHEETS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except par value)
 
 
  
September 30
 
 
December 31
 
 
  
2020
 
 
2019
 
 
  
(Unaudited)
 
 
(Note 1)
 
Assets
  
 
Cash and due from banks
  
$
277,232
 
 
$
185,238
 
Interest-bearing deposits with other banks
  
 
1,378,478
 
 
 
651,435
 
Federal funds sold
  
 
823
 
 
 
820
 
  
 
 
   
 
 
 
Total cash and cash equivalents
  
 
1,656,533
 
 
 
837,493
 
Securities available for sale at estimated fair value (amortized cost-$2,697,548 at September 30, 2020 and $2,426,924 at December 31, 2019, allowance for credit losses of $
0
at September 30, 2020)
  
 
2,777,802
 
 
 
2,437,296
 
Securities held to maturity, net of allowance for credit losses of $
21
at September 30, 2020 (estimated fair value-$1,213 at September 30, 2020 and $1,447 at December 31, 2019)
  
 
1,214
 
 
 
1,446
 
Equity securities at estimated fair value
  
 
10,255
 
 
 
8,894
 
Other investment securities
  
 
217,992
 
 
 
222,161
 
Loans held for sale (at fair value-$784,457 at September 30, 2020 and $384,375 at December 31, 2019)
  
 
812,084
 
 
 
387,514
 
Loans and leases
  
 
17,967,520
 
 
 
13,713,548
 
Less: Unearned income
  
 
(37,289
 
 
(1,419
  
 
 
   
 
 
 
Loans and leases, net of unearned income
  
 
17,930,231
 
 
 
13,712,129
 
Less: Allowance for loan and lease losses
  
 
(225,812
 
 
(77,057
  
 
 
   
 
 
 
Net loans and leases
  
 
17,704,419
 
 
 
13,635,072
 
Bank premises and equipment
  
 
180,456
 
 
 
96,644
 
Operating lease
 
right-of-use
 
assets
  
 
72,789
 
 
 
57,783
 
Goodwill
  
 
1,794,886
 
 
 
1,478,014
 
Mortgage servicing rights, net of valuation allowance
  
 
20,413
 
 
 
0
 
Accrued interest receivable, net of allowance for credit losses of $435 at September 30, 2020
  
 
65,141
 
 
 
58,085
 
Other assets
  
 
617,324
 
 
 
441,922
 
  
 
 
   
 
 
 
TOTAL ASSETS
  
$
25,931,308
 
 
$
19,662,324
 
  
 
 
   
 
 
 
Liabilities
  
 
Deposits:
  
 
Noninterest-bearing
  
$
7,304,747
 
 
$
4,621,362
 
Interest-bearing
  
 
12,946,792
 
 
 
9,231,059
 
  
 
 
   
 
 
 
Total deposits
  
 
20,251,539
 
 
 
13,852,421
 
Borrowings:
  
 
Securities sold under agreements to repurchase
  
 
148,357
 
 
 
124,654
 
Federal Home Loan Bank (“FHLB”) borrowings
  
 
645,249
 
 
 
1,851,865
 
Other long-term borrowings
  
 
279,425
 
 
 
236,164
 
Reserve for lending-related commitments
  
 
15,960
 
 
 
1,733
 
Operating lease liabilities
  
 
76,604
 
 
 
61,342
 
Accrued expenses and other liabilities
  
 
246,733
 
 
 
170,312
 
  
 
 
   
 
 
 
TOTAL LIABILITIES
  
 
21,663,867
 
 
 
16,298,491
 
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-133,723,210
 
and 105,494,290 at September 30, 2020 and December 31, 2019, respectively, including 3,960,862 and 3,940,619 shares in treasury at September 30, 2020 and December 31, 2019, respectively
  
 
334,308
 
 
 
263,736
 
Surplus
  
 
2,891,746
 
 
 
2,140,175
 
Retained earnings
  
 
1,158,467
 
 
 
1,132,579
 
Accumulated other comprehensive gain (loss)
  
 
21,350
 
 
 
(34,869
Treasury stock, at cost
  
 
(138,430
 
 
(137,788
  
 
 
   
 
 
 
TOTAL SHAREHOLDERS’ EQUITY
  
 
4,267,441
 
 
 
3,363,833
 
  
 
 
   
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  
$
25,931,308
 
 
$
19,662,324
 
  
 
 
   
 
 
 
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
 
 
  
2020
 
  
2019
 
  
2020
 
  
2019
 
Interest income
  
  
  
  
Interest and fees on loans and leases
  
$
192,266
 
  
$
165,149
 
  
$
530,431
 
  
$
505,150
 
Interest on federal funds sold and other short-term investments
  
 
2,060
 
  
 
6,236
 
  
 
7,893
 
  
 
17,478
 
Interest and dividends on securities:
  
  
  
  
Taxable
  
 
14,448
 
  
 
18,168
 
  
 
47,658
 
  
 
53,279
 
Tax-exempt
  
 
1,495
 
  
 
798
 
  
 
3,486
 
  
 
2,786
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total interest income
  
 
210,269
 
  
 
190,351
 
  
 
589,468
 
  
 
578,693
 
Interest expense
  
  
  
  
Interest on deposits
  
 
17,726
 
  
 
36,368
 
  
 
64,452
 
  
 
104,461
 
Interest on short-term borrowings
  
 
172
 
  
 
539
 
  
 
826
 
  
 
1,838
 
Interest on long-term borrowings
  
 
6,707
 
  
 
11,526
 
  
 
26,406
 
  
 
35,755
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total interest expense
  
 
24,605
 
  
 
48,433
 
  
 
91,684
 
  
 
142,054
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Net interest income
  
 
185,664
 
  
 
141,918
 
  
 
497,784
 
  
 
436,639
 
Provision for credit losses
  
 
16,781
 
  
 
5,033
 
  
 
89,811
 
  
 
15,446
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Net interest income after provision for credit losses
  
 
168,883
 
  
 
136,885
 
  
 
407,973
 
  
 
421,193
 
Other income
  
  
  
  
Fees from trust services
  
 
3,574
 
  
 
3,574
 
  
 
10,318
 
  
 
10,276
 
Fees from brokerage services
  
 
3,066
 
  
 
2,378
 
  
 
8,633
 
  
 
7,668
 
Fees from deposit services
  
 
9,320
 
  
 
8,702
 
  
 
25,332
 
  
 
25,219
 
Bankcard fees and merchant discounts
  
 
1,226
 
  
 
1,262
 
  
 
2,937
 
  
 
3,520
 
Other service charges, commissions, and fees
  
 
715
 
  
 
568
 
  
 
1,843
 
  
 
1,665
 
Income from bank-owned life insurance
  
 
2,059
 
  
 
1,280
 
  
 
5,738
 
  
 
4,433
 
Income from mortgage banking activities
  
 
109,457
 
  
 
24,019
 
  
 
195,301
 
  
 
59,404
 
Mortgage loan servicing income
  
 
2,345
 
  
 
0
 
  
 
3,879
 
  
 
0
 
Net gain on the sale of bank premises
  
 
2,229
 
  
 
0
 
  
 
2,229
 
  
 
0
 
Net investment securities gains
  
 
860
 
  
 
116
 
  
 
2,566
 
  
 
66
 
Other income
  
 
617
 
  
 
325
 
  
 
1,888
 
  
 
991
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total other income
  
 
135,468
 
  
 
42,224
 
  
 
260,664
 
  
 
113,242
 
Other expense
  
  
  
  
Employee compensation
  
 
84,455
 
  
 
46,313
 
  
 
197,660
 
  
 
129,563
 
Employee benefits
  
 
13,202
 
  
 
8,615
 
  
 
36,767
 
  
 
26,624
 
Net occupancy expense
  
 
10,944
 
  
 
8,698
 
  
 
30,324
 
  
 
26,116
 
Other real estate owned (“OREO”) expense
  
 
1,166
 
  
 
1,837
 
  
 
2,679
 
  
 
3,886
 
Equipment expense
  
 
5,616
 
  
 
3,698
 
  
 
14,465
 
  
 
10,688
 
Data processing expense
  
 
6,708
 
  
 
5,776
 
  
 
28,140
 
  
 
16,505
 
Mortgage loan servicing expense and impairment
  
 
3,301
 
  
 
107
 
  
 
5,949
 
  
 
304
 
Bankcard processing expense
  
 
450
 
  
 
474
 
  
 
1,319
 
  
 
1,402
 
FDIC insurance expense
  
 
2,700
 
  
 
465
 
  
 
7,882
 
  
 
7,065
 
FHLB prepayment penalties
  
 
10,385
 
  
 
0
 
  
 
10,385
 
  
 
5,105
 
Other expense
  
 
32,666
 
  
 
20,151
 
  
 
86,530
 
  
 
58,496
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total other expense
  
 
171,593
 
  
 
96,134
 
  
 
422,100
 
  
 
285,754
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Income before income taxes
  
 
132,758
 
  
 
82,975
 
  
 
246,537
 
  
 
248,681
 
Income taxes
  
 
28,974
 
  
 
17,010
 
  
 
49,884
 
  
 
51,867
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Net income
  
$
103,784
 
  
$
65,965
 
  
$
196,653
 
  
$
196,814
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Earnings per common share:
  
  
  
  
Basic
  
$
0.80
 
  
$
0.65
 
  
$
1.68
 
  
$
1.93
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Diluted
  
$
0.80
 
  
$
0.65
 
  
$
1.68
 
  
$
1.93
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Average outstanding shares:
  
  
  
  
Basic
  
 
129,373,154
 
  
 
101,432,243
 
  
 
116,876,402
 
  
 
101,698,530
 
Diluted
  
 
129,454,966
 
  
 
101,711,740
 
  
 
116,944,594
 
  
 
101,967,135
 
See notes to consolidated unaudited financial statements
 
5

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
 
                                 
 
  
Three Months Ended
 
  
Nine Months Ended
 
 
  
September 30
 
  
September 30
 
 
  
2020
 
  
2019
 
  
2020
 
 
2019
 
Net income
  
$
103,784
 
  
$
65,965
 
  
$
196,653
 
 
$
196,814
 
Change in net unrealized gain on
available-for-sale
(“AFS”) securities, net of tax
  
 
8,180
 
  
 
3,637
 
  
 
53,600
 
 
 
38,420
 
Change in net unrealized gain (loss) on cash flow hedge, net of tax
  
 
678
 
  
 
0
 
  
 
(594
 
 
0
 
Change in pension plan assets, net of tax
  
 
988
 
  
 
949
 
  
 
3,213
 
 
 
2,768
 
  
 
 
    
 
 
    
 
 
   
 
 
 
Comprehensive income, net of tax
  
$
113,630
 
  
$
70,551
 
  
$
252,872
 
 
$
238,002
 
  
 
 
    
 
 
    
 
 
   
 
 
 
See notes to consolidated unaudited financial statements
 
6

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, 2020
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
  
Common Stock
 
  
 
 
 
 
 
 
Other
 
 
 
 
 
Total
 
 
  
 
 
  
Par
 
  
 
 
 
Retained
 
 
Comprehensive
 
 
Treasury
 
 
Shareholders’
 
 
  
Shares
 
  
Value
 
  
Surplus
 
 
Earnings
 
 
Income (Loss)
 
 
Stock
 
 
Equity
 
Balance at January 1, 2020
  
 
105,494,290
 
  
$
263,736
 
  
$
2,140,175
 
 
$
1,132,579
 
 
$
(34,869
 
$
(137,788
 
$
3,363,833
 
Cumulative effect of adopting Accounting Standard Update
2016-13
  
 
0
 
  
 
0
 
  
 
0
 
 
 
(44,331
 
 
0
 
 
 
0
 
 
 
(44,331
Comprehensive income:
  
  
  
 
 
 
 
Net income
  
 
0
 
  
 
0
 
  
 
0
 
 
 
40,183
 
 
 
0
 
 
 
0
 
 
 
40,183
 
Other comprehensive income, net of tax
  
 
0
 
  
 
0
 
  
 
0
 
 
 
0
 
 
 
18,698
 
 
 
0
 
 
 
18,698
 
                
 
 
 
Total comprehensive income, net of tax
  
  
  
 
 
 
 
 
58,881
 
Stock based compensation expense
  
 
0
 
  
 
0
 
  
 
1,253
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
1,253
 
Purchase of treasury stock (19,314 shares)
  
 
0
 
  
 
0
 
  
 
0
 
 
 
0
 
 
 
0
 
 
 
(608
 
 
(608
Cash dividends ($0.35 per share)
  
 
0
 
  
 
0
 
  
 
0
 
 
 
(35,604
 
 
0
 
 
 
0
 
 
 
(35,604
Grant of restricted stock (175,495 shares)
  
 
175,495
 
  
 
439
 
  
 
(439
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
Forfeiture of restricted stock (946 shares)
  
 
0
 
  
 
0
 
  
 
35
 
 
 
0
 
 
 
0
 
 
 
(35
 
 
0
 
Common stock options exercised (14,694 shares)
  
 
14,694
 
  
 
36
 
  
 
242
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
278
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at March 31, 2020
  
 
105,684,479
 
  
 
264,211
 
  
 
2,141,266
 
 
 
1,092,827
 
 
 
(16,171
 
 
(138,431
 
 
3,343,702
 
Comprehensive income:
  
  
  
 
 
 
 
Net income
  
 
0
 
  
 
0
 
  
 
0
 
 
 
52,686
 
 
 
0
 
 
 
0
 
 
 
52,686
 
Other comprehensive income, net of tax
  
 
0
 
  
 
0
 
  
 
0
 
 
 
0
 
 
 
27,675
 
 
 
0
 
 
 
27,675
 
                
 
 
 
Total comprehensive income, net of tax
  
  
  
 
 
 
 
 
80,361
 
Stock based compensation expense
  
 
0
 
  
 
0
 
  
 
1,369
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
1,369
 
Acquisition of Carolina Financial Corporation (28,031,501 shares)
  
 
28,031,501
 
  
 
70,079
 
  
 
747,751
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
817,830
 
Purchase of treasury stock (6 shares)
  
 
0
 
  
 
0
 
  
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
Cash dividends ($0.35 per share)
  
 
0
 
  
 
0
 
  
 
0
 
 
 
(45,416
 
 
0
 
 
 
0
 
 
 
(45,416
Common stock options exercised (300 shares)
  
 
300
 
  
 
1
 
  
 
8
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
9
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at June 30, 2020
  
 
133,716,280
 
  
 
334,291
 
  
 
2,890,394
 
 
 
1,100,097
 
 
 
11,504
 
 
 
(138,431
 
 
4,197,855
 
Comprehensive income:
  
  
  
 
 
 
 
Net income
  
 
0
 
  
 
0
 
  
 
0
 
 
 
103,784
 
 
 
0
 
 
 
0
 
 
 
103,784
 
Other comprehensive income, net of tax
  
 
0
 
  
 
0
 
  
 
0
 
 
 
0
 
 
 
9,846
 
 
 
0
 
 
 
9,846
 
                
 
 
 
Total comprehensive income, net of tax
  
  
  
 
 
 
 
 
113,630
 
Stock based compensation expense
  
 
0
 
  
 
0
 
  
 
1,369
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
1,369
 
Distribution of treasury stock for deferred compensation plan (29 shares)
  
 
0
 
  
 
0
 
  
 
0
 
 
 
0
 
 
 
0
 
 
 
1
 
 
 
1
 
Purchase of treasury stock (6 shares)
  
 
0
 
  
 
0
 
  
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
Cash dividends ($0.35 per share)
  
 
0
 
  
 
0
 
  
 
0
 
 
 
(45,414
 
 
0
 
 
 
0
 
 
 
(45,414
Grant of restricted stock (6,930 shares)
  
 
6,930
 
  
 
17
 
  
 
(17
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
Common stock options exercised (0 shares)
  
 
0
 
  
 
0
 
  
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2020
  
 
133,723,210
 
  
$
334,308
 
  
$
2,891,746
 
 
$
1,158,467
 
 
$
21,350
 
 
$
(138,430
 
$
4,267,441
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
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.
 
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
 
                 
 
  
Nine Months Ended
 
 
  
September 30
 
 
  
2020
 
 
2019
 
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
  
$
(45,337
 
$
90,956
 
INVESTING ACTIVITIES
  
 
Proceeds from maturities and calls of securities held to maturity
  
 
210
 
 
 
6,975
 
Proceeds from sales of securities available for sale
  
 
192,010
 
 
 
333,414
 
Proceeds from maturities and calls of securities available for sale
  
 
370,889
 
 
 
240,260
 
Purchases of securities available for sale
  
 
(278,082
 
 
(630,162
Proceeds from sales of equity securities
  
 
1,043
 
 
 
1,865
 
Purchases of equity securities
  
 
(896
 
 
(742
Proceeds from sales and redemptions of other investment securities
  
 
145,394
 
 
 
80,281
 
Purchases of other investment securities
  
 
(127,950
 
 
(114,156
Redemption of bank-owned life insurance policies
  
 
1,186
 
 
 
2,829
 
Purchases of bank premises and equipment
  
 
(14,348
 
 
(6,800
Proceeds from sales of bank premises and equipment
  
 
4,391
 
 
 
251
 
Proceeds from the sales of OREO properties
  
 
9,438
 
 
 
4,620
 
Acquisition of Carolina Financial Corporation, net of cash paid
  
 
629,107
 
 
 
0
 
Net change in loans and leases
  
 
(957,029
 
 
(205,480
  
 
 
   
 
 
 
NET CASH USED IN INVESTING ACTIVITIES
  
 
(24,637
 
 
(286,845
  
 
 
   
 
 
 
FINANCING ACTIVITIES
  
 
Cash dividends paid
  
 
(117,290
 
 
(104,421
Acquisition of treasury stock
  
 
(608
 
 
(34,499
Proceeds from exercise of stock options
  
 
288
 
 
 
672
 
Repayment of long-term Federal Home Loan Bank borrowings
  
 
(1,787,000
 
 
(1,115,000
Proceeds from issuance of long-term Federal Home Loan Bank borrowings
  
 
500,000
 
 
 
1,325,000
 
Distribution of treasury stock for deferred compensation plan
  
 
1
 
 
 
1
 
Changes in:
  
 
Deposits
  
 
2,519,920
 
 
 
101,255
 
Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings
  
 
(226,297
 
 
(21,361
  
 
 
   
 
 
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
  
 
889,014
 
 
 
151,647
 
  
 
 
   
 
 
 
Increase (decrease) in cash and cash equivalents
  
 
819,040
 
 
 
(44,242
Cash and cash equivalents at beginning of year
  
 
837,493
 
 
 
1,020,396
 
  
 
 
   
 
 
 
Cash and cash equivalents at end of period
  
$
1,656,533
 
 
$
976,154
 
  
 
 
   
 
 
 
Supplemental information
  
 
Noncash investing activities:
  
 
Transfers of loans to OREO
  
$
22,262
 
 
$
9,386
 
Transfer of held to maturity debt securities to available for sale debt securities
  
 
0
 
 
 
11,544
 
See notes to consolidated unaudited financial statements
.
 
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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, 2020 and 2019 and for the three-month and nine-month periods then ended have not been audited. The consolidated balance sheet as of December 31, 2019 has been extracted from the audited financial statements included in United’s 2019 Annual Report to Shareholders. The Notes to Consolidated Financial Statements appearing in United’s 2019 Annual Report on Form
10-K,
which includes descriptions of significant accounting policies, should be read in conjunction with these interim financial statements. Please refer to Notes 2, 3, 5, 6 and 8 in these Notes to Consolidated Financial Statements for updated accounting policies for acquired loans and leases, investment securities, troubled debt restructurings (“TDRs”), the allowance for credit losses and mortgage servicing rights (“MSRs”). In the opinion of management, any 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 August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2020-06,
Debt – Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic
815-40).
The amendments in the ASU remove certain separation models for convertible debt instruments and convertible preferred stock that require the separation of a convertible debt instrument into a debt component and an equity or derivative component. The ASU also amends the derivative scope exception guidance for contracts in an entity’s own equity. The amendments remove three settlement conditions that are required for equity contracts to qualify for the derivative scope exception. In addition, the ASU expands disclosure requirements for convertible instruments and simplifies areas of the guidance for diluted
earnings-per-share
calculations that are impacted by the amendments. ASU
No. 2020-06
is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Entities may elect to adopt the amendments through either a modified retrospective method of transition or a fully retrospective method of transition. ASU
No. 2020-06
is not expected to have a material impact on the Company’s financial condition or results of operations.
In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides “optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.”
 
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ASU
No. 2020-04
is effective for public business entities on March 12, 2020 through December 31, 2022. United is implementing a transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company is assessing ASU
No. 2020-04
and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.
In February 2020, FASB issued ASU
No. 2020-03,
Codification Improvements to Financial Instruments. This update makes narrow-scope changes that are intended to improve the board’s standards for financial instruments accounting, including the credit losses standard issued in 2016, as part of FASB’s ongoing project to improve and clarify its Accounting Standards Codification and avoid unintended application. ASU
No. 2020-03
was effective for public business entities upon issuance of this final update in March 2020. ASU
No. 2020-03
did not have a material impact on the Company’s financial condition or results of operations.
In January 2020, the FASB issued ASU
No. 2020-01,
Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The new guidance addresses accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. ASU
No. 2020-01
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. 2020-01
is not expected to have a material impact on the Company’s financial condition or results of operations.
In November 2019, the FASB issued ASU
No. 2019-08,
Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements—Share-Based Consideration Payable to a Customer. ASU
No. 2019-08
requires companies to measure and classify (on the balance sheet) share-based payments to customers by applying the guidance in Topic 718, Compensation—Stock Compensation. As a result, the amount recorded as a reduction in revenue would be measured based on the grant-date fair value of the share-based payment. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. ASU
No. 2019-08
was adopted by United on January 1, 2020. The adoption did not have a material impact on the Company’s financial condition or results of operations.
In April 2019, the FASB issued ASU
No. 2019-04
“Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” The amendments clarify the scope of the credit losses standard and address issues 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. ASU
No. 2019-04
was adopted by United on January 1, 2020. The adoption did not have a material impact 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 statements.
 
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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
was adopted by United on January 1, 2020 and 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 in order to optimize the investment portfolio management for capital and risk management considerations. The Company transferred HTM securities with a carrying amount of $11,544, which resulted in a decrease of $1,098 to AOCI.
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
was adopted by United on January 1, 2020. The adoption of ASU
2017-04
did not have a material impact on the Company’s financial condition or results of operations.
In June 2016, the FASB issued ASU
No. 2016-13,
“Financial Instruments – Credit Losses.” ASU
No. 2016-13
changes the impairment model for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard replaces the “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost and requires 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 and leases. 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. United engaged a third-party service provider to assist with the implementation of the new accounting standard. ASU
No. 2016-13
was adopted by United on January 1, 2020 using a modified retrospective approach. At the January 1, 2020 date of adoption, based on forecasts of macroeconomic conditions and exposures at that time, the aggregate impact to United was a net increase to the allowance for credit losses of $57,442 and a decrease to retained earnings of $44,331, with the difference being an adjustment to deferred tax assets. United has elected to
phase-in
the impact to retained earnings using a five-year transition provision, allowed by the Federal Reserve Board and other federal banking agencies in response to the coronavirus
(COVID-19)
pandemic, to delay for two years the full impact of ASU
No. 2016-13
on regulatory capital, followed by a three-year transition period. The adoption of ASU
No. 2016-13
had an insignificant impact on the Company’s held to maturity and available for sale securities portfolios.
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.
 
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Table of Contents
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 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
differenc
e between these two amounts, $1,049 was recorded as an adjustment to retained earnings.
2. MERGERS AND ACQUISITIONS
On May 1, 2020 (“Acquisition Date”), United acquired 100% of the outstanding shares of Carolina Financial Corporation (“Carolina Financial”), a Delaware corporation headquartered in Charleston, South Carolina. Carolina Financial was merged with and into United (the “Merger”), pursuant to the terms of the Agreement and Plan of Merger, dated November 17, 2019, by and between United and Carolina Financial (the “Merger Agreement”). Upon completion of the Merger, Carolina Financial ceased to exist and United survived and continues to exist as a West Virginia corporation.
Under the terms of the Merger Agreement, each outstanding share of common stock of Carolina Financial was converted into the right to receive 1.13 shares of United common stock, par value $2.50 per share. Also pursuant to the Merger Agreement, as of the effective time of the Merger, each outstanding Carolina Financial stock option, whether vested or unvested as of the date of the Merger, at such option holder’s election, (i) vested and converted into an option to acquire United common stock adjusted based on the 1.13 exchange ratio, or (ii) was entitled to receive cash consideration equal to the difference between (a) the option’s exercise price and (b) $28.99, representing the volume weighted average trading price of the Carolina Financial common stock on NASDAQ for the twenty full trading days ending on the second trading day immediately preceding the closing date (the “CFC Closing Price”) multiplied by the number of shares of Carolina Financial common stock subject to such stock option. Also, at the effective time of the Merger, each restricted stock grant, restricted stock unit grant or any other award of a share of Carolina Financial common stock subject to vesting, repurchase or other lapse restriction under a Carolina Financial stock plan (other than a stock option) (each, a “Stock Award”) that was outstanding immediately prior to the effective time of the Merger, vested in accordance with the terms of the Carolina Financial stock plan and at the election of the holder (i) converted into the right to receive shares of United common stock based on the 1.13 exchange ratio or (ii) converted into cash in an amount equal to the CFC Closing Price multiplied by the shares of Carolina Financial common stock subject to the Stock Award.
 
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Immediately following the Merger, CresCom Bank, a wholly-owned subsidiary of Carolina Financial, merged with and into United Bank, a wholly-owned subsidiary of United (the “Bank Merger”). United Bank survived the Bank Merger and continues to exist as a Virginia banking corporation. CresCom Bank owned and operated Crescent Mortgage Company (“Crescent Mortgage”), which is based in Atlanta, Georgia. As a result of the Bank Merger, Crescent Mortgage Company is now a wholly-owned subsidiary of United Bank.
The Merger was accounted for under the acquisition method of accounting. The results of operations of Carolina Financial are included in the consolidated results of operations from the Acquisition Date. The acquisition of Carolina Financial affords United the opportunity to expand its existing footprint in North Carolina and South Carolina. As of the Acquisition Date, Carolina Financial had $5,004,542 in total assets, $3,292,635 in loans and leases, net of unearned income and $3,873,183 in deposits. Carolina Financial had banking locations in North Carolina and South Carolina.
The aggregate purchase price was approximately $817,877, including common stock valued at $815,997, stock options assumed valued at $1,833, and cash paid for fractional shares of $47. The number of shares issued in the transaction was 28,031,501, which were valued based on the closing market price of $29.11 for United’s common shares on May 1, 2020. The preliminary purchase price has been allocated to the identifiable tangible and intangible assets resulting in preliminary additions to goodwill, core deposit intangibles and the Crescent Mortgage trade name intangible of $316,872, $3,037 and $196, respectively. The core deposit intangible is expected to be amortized on an accelerated basis over ten years. The Crescent Mortgage trade name provides a source of market recognition to attract potential clients and retain existing relationships. United believes the Crescent Mortgage trade name provides a competitive advantage and is likely going to be used into perpetuity and thus will not be subject to amortization, but rather be evaluated for impairment.
Because the consideration paid was greater than the net fair value of the acquired assets and liabilities, the Company recorded goodwill as part of the acquisition. None of the goodwill from the Carolina Financial acquisition is expected to be deductible for tax purposes. United used an independent third party to help determine the fair values of the assets and liabilities acquired from Carolina Financial. As a result of the merger, United recorded preliminary fair value discounts of $47,425 on the loans and leases acquired, $620 on investment securities, $272 on OREO, $4,831 on trust preferred issuances and $135 on subordinated notes, respectively, and premiums of $8,848 on buildings acquired, $4,960 on land acquired, $12,818 on interest-bearing deposits, and $468 on long-term FHLB advances, respectively. United also recorded an allowance for credit losses, including a reserve for unfunded commitments, of $50,562 on the loans and commitments acquired split between $19,797 for purchased credit deteriorated (“PCD”) loans and $30,765 for
non-PCD
loans. The discounts and premium amounts, except for discount on the land and OREO acquired, are being accreted or amortized on an accelerated or straight-line basis over each asset’s or liability’s estimated remaining life at the time of acquisition. At September 30, 2020, the discounts on subordinated debt and trust preferred issuances had an average estimated remaining life of 6.50 years and 16.58 years, respectively, and the premiums on the buildings, interest-bearing deposits and the FHLB advances each had an average estimated remaining life of 31.25 years, 4.85 years and 0.33 years, respectively. The estimated fair values of the acquired assets and assumed liabilities, including identifiable intangible assets are preliminary as of September 30, 2020 and are subject to refinement as additional information relative to closing date fair values becomes available. Any subsequent adjustments to the fair values of acquired assets and liabilities assumed, identifiable intangible assets, or other purchase accounting adjustments will result in adjustments to goodwill within the measurement period following the date of acquisition.
Portfolio loans and leases acquired from Carolina Financial were recorded at their fair value at the Acquisition Date based on a discounted cash flow methodology. The estimated fair value incorporates adjustments related to expected credit losses, prevailing market interest rates for comparable assets and other market factors such as liquidity from the perspective of a market participant. Also, acquired portfolio loans and leases were evaluated upon acquisition and classified as either PCD, which indicates that the loan has experienced a more-than-insignificant deterioration in credit quality since origination, or non-PCD.
 
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United considered a variety of factors in evaluating the acquired loans and leases for a more-than-insignificant deterioration in credit quality, including but not limited to risk grades, delinquency, nonperforming status, current or previous troubled debt restructurings or bankruptcies, watch list credits and other qualitative factors that indicated a deterioration in credit quality since origination. For PCD loans and leases, an initial allowance is determined based on the same methodology as other portfolio loans and leases. This initial allowance for credit losses is allocated to individual PCD loans and leases and added to the acquisition date fair values to establish the initial amortized cost basis for the PCD loans and leases. The difference between the unpaid principal balance (“UPB”), or par value, of PCD loans and leases and the amortized cost basis is considered to relate to noncredit factors and resulted in a discount of $7,212 at Acquisition Date. This discount will be recognized through interest income on a level-yield method over the life of the loans which is estimated to be a weighted-average of 4.6 years. For
non-PCD
acquired loans and leases, the differences between the initial fair value and the UPB, or par value, are recognized as interest income on a level-yield basis over the lives of the related loans and leases which is estimated to be a weighted-average of 7.3 years. The total fair value mark on the
non-PCD
loans and leases at the Acquisition Date was $40,213. At the Acquisition Date, an initial allowance for expected credit losses of $28,948 was recorded with a corresponding charge to the provision for credit losses in the Consolidated Statements of Income. Subsequent changes in the allowance for credit losses related to PCD and
non-PCD
loans and leases are recognized in the provision for credit losses.
The following table provides a reconciliation of the difference between the purchase price and the par value of portfolio PCD loans and leases acquired from Carolina Financial as of the Acquisition Date:
 
Purchase price of PCD loans and leases at acquisition
  
$
1,023,531
 
Allowance for credit losses at acquisition
  
 
18,635
 
Non-credit
discount at acquisition
  
 
7,212
 
  
 
 
 
Par value (UPB) of acquired PCD loans and leases at acquisition
  
$
1,049,378
 
  
 
 
 
The consideration paid for Carolina Financial’s common equity and the preliminary amounts of acquired identifiable assets and liabilities assumed as of the Carolina Financial Acquisition Date were as follows:
 
Purchase price:
  
Value of common shares issued (28,031,501 shares)
  
$
815,997
 
Fair value of stock options assumed
  
 
1,833
 
Cash for fractional shares
  
 
47
 
  
 
 
 
Total purchase price
  
 
817,877
 
  
 
 
 
Identifiable assets:
  
Cash and cash equivalents
  
 
629,154
 
Investment securities
  
 
580,791
 
Loans held for sale
  
 
65,757
 
Net loans and leases
  
 
3,246,940
 
Premises and equipment
  
 
82,670
 
Operating lease
right-of-use
asset
  
 
9,861
 
Crescent Mortgage trade name intangible
  
 
196
 
Core deposit intangible
  
 
3,037
 
Mortgage servicing rights
  
 
20,123
 
Other assets
  
 
165,198
 
  
 
 
 
Total identifiable assets
  
$
4,803,727
 
Identifiable liabilities:
  
Deposits
  
$
3,884,977
 
Short-term borrowings
  
 
332,000
 
Long-term borrowings
  
 
42,738
 
Operating lease liability
  
 
9,861
 
Other liabilities
  
 
33,146
 
  
 
 
 
Total identifiable liabilities
  
 
4,302,722
 
  
 
 
 
Preliminary fair value of net assets acquired including identifiable intangible assets
  
 
501,005
 
  
 
 
 
Preliminary resulting goodwill
  
$
316,872
 
  
 
 
 
 
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The operating results of United for the nine months ended September 30, 2020 include operating results of acquired assets and assumed liabilities subsequent to the Carolina Financial Acquisition Date. The operations of United’s North Carolina and South Carolina geographic area, which includes the acquired operations of Carolina Financial, and Crescent Mortgage provided $102,766 in total revenues (net interest income plus other income), and $55,922 in net income from the period from the Carolina Financial Acquisition Date to September 30, 2020. These amounts are included in United’s consolidated financial statements as of and for the nine months ended September 30, 2020. Carolina Financial’s results of operations prior to the Carolina Financial Acquisition Date are not included in United’s consolidated results of operations.
The following table presents certain unaudited pro forma information for the results of operations for the nine months ended September 30, 2020 and 2019, as if the Carolina Financial merger had occurred on January 1, 2020 and 2019, respectively. These results combine the historical results of Carolina Financial into United’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on the indicated date nor are they intended to represent or be indicative of future results of operations. In particular, no adjustments have been made to eliminate the amount of Carolina Financial’s provision for credit losses for 2020 and 2019 that may not have been necessary had the acquired loans and leases been recorded at fair value as of the beginning of 2020 and 2019. Additionally, United expects to achieve operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts.
 
 
  
Proforma

Nine Months Ended

September 30
 
 
  
2020
 
  
2019
 
Total Revenues
(1)
  
$
810,476
 
  
$
706,872
 
Net Income
  
 
177,275
 
  
 
258,638
 
 
(1)
  
Represents net interest income plus other income
3. 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.
 
16

 
  
September 30, 2020
 
 
  
 
 
  
Gross
 
  
Gross
 
  
Allowance
 
  
Estimated
 
 
  
Amortized
 
  
Unrealized
 
  
Unrealized
 
  
For Credit
 
  
Fair
 
 
  
Cost
 
  
Gains
 
  
Losses
 
  
Losses
 
  
Value
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  
$
65,856
 
  
$
657
 
  
$
3
 
  
$
0
 
  
$
66,510
 
State and political subdivisions
  
 
513,380
 
  
 
23,104
 
  
 
329
 
  
 
0
 
  
 
536,155
 
Residential mortgage-backed securities
  
  
  
  
  
Agency
  
 
777,157
 
  
 
27,190
 
  
 
15
 
  
 
0
 
  
 
804,332
 
Non-agency
  
 
41,945
 
  
 
395
 
  
 
0
 
  
 
0
 
  
 
42,340
 
Commercial mortgage-backed securities
  
  
  
  
  
Agency
  
 
618,901
 
  
 
32,321
 
  
 
236
 
  
 
0
 
  
 
650,986
 
Asset-backed securities
  
 
291,690
 
  
 
19
 
  
 
8,120
 
  
 
0
 
  
 
283,589
 
Single issue trust preferred securities
  
 
18,221
 
  
 
170
 
  
 
1,643
 
  
 
0
 
  
 
16,748
 
Other corporate securities
  
 
370,398
 
  
 
7,036
 
  
 
292
 
  
 
0
 
  
 
377,142
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
2,697,548
 
  
$
90,892
 
  
$
10,638
 
  
$
0
 
  
$
2,777,802
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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December 31, 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
  
$
58,127
 
  
$
555
 
  
$
6
 
  
$
58,676
 
  
$
0
 
State and political subdivisions
  
 
272,014
 
  
 
3,644
 
  
 
3,296
 
  
 
272,362
 
  
 
0
 
Residential mortgage-backed securities
  
  
  
  
  
Agency
  
 
826,857
 
  
 
10,923
 
  
 
1,246
 
  
 
836,534
 
  
 
0
 
Non-agency
  
 
3,429
 
  
 
404
 
  
 
0
 
  
 
3,833
 
  
 
86
 
Commercial mortgage-backed securities
  
  
  
  
  
Agency
  
 
609,461
 
  
 
8,319
 
  
 
2,807
 
  
 
614,973
 
  
 
0
 
Asset-backed securities
  
 
284,390
 
  
 
0
 
  
 
8,251
 
  
 
276,139
 
  
 
0
 
Trust preferred collateralized debt obligations
  
 
6,045
 
  
 
0
 
  
 
1,342
 
  
 
4,703
 
  
 
842
 
Single issue trust preferred securities
  
 
18,196
 
  
 
170
 
  
 
1,592
 
  
 
16,774
 
  
 
0
 
Other corporate securities
  
 
348,405
 
  
 
4,897
 
  
 
0
 
  
 
353,302
 
  
 
0
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
2,426,924
 
  
$
28,912
 
  
$
18,540
 
  
$
2,437,296
 
  
$
928
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
Non-credit
related other-than-temporary impairment in accumulated other comprehensive income. Amounts are
before-tax.
United has made a policy election to exclude accrued interest from the amortized cost basis of
available-for-sale
debt securities and report accrued interest separately in “Accrued interest receivable” in the consolidated balance sheets.
Available-for-sale
debt securities are placed on
non-accrual
status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on
non-accrual
status. Accordingly, United does not currently recognize an allowance for credit loss against accrued interest receivable on
available-for-sale
debt securities . The table above excludes accrued interest receivable of $9,975 and $9,890 at September 30, 2020 and December 31, 2019, respectively, that is recorded in “Accrued interest receivable.”​​​​​​​
The following is a summary of securities available for sale which were in an unrealized loss position at September 30, 2020 and December 31, 2019.
 
 
  
Less than 12 months
 
  
12 months or longer
 
  
Total
 
 
  
Fair
 
  
Unrealized
 
  
Fair
 
  
Unrealized
 
  
Fair
 
  
Unrealized
 
 
  
Value
 
  
Losses
 
  
Value
 
  
Losses
 
  
Value
 
  
Losses
 
September 30, 2020
  
  
  
  
  
  
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  
$
329
 
  
$
3
 
  
$
0
 
  
$
0
 
  
$
329
 
  
$
3
 
State and political subdivisions
  
 
32,544
 
  
 
329
 
  
 
0
 
  
 
0
 
  
 
32,544
 
  
 
329
 
Residential mortgage-backed securities
  
  
  
  
  
  
Agency
  
 
2,782
 
  
 
7
 
  
 
4,057
 
  
 
8
 
  
 
6,839
 
  
 
15
 
Non-agency
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
Commercial mortgage-backed securities
  
  
  
  
  
  
Agency
  
 
48,410
 
  
 
236
 
  
 
0
 
  
 
0
 
  
 
48,410
 
  
 
236
 
Asset-backed securities
  
 
0
 
  
 
0
 
  
 
271,974
 
  
 
8,120
 
  
 
271,974
 
  
 
8,120
 
Trust preferred collateralized debt obligations
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
Single issue trust preferred securities
  
 
0
 
  
 
0
 
  
 
13,525
 
  
 
1,643
 
  
 
13,525
 
  
 
1,643
 
Other corporate securities
  
 
33,783
 
  
 
292
 
  
 
0
 
  
 
0
 
  
 
33,783
 
  
 
292
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
117,848
 
  
$
867
 
  
$
289,556
 
  
$
9,771
 
  
$
407,404
 
  
$
10,638
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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Less than 12 months
 
  
12 months or longer
 
  
Total
 
 
  
Fair
 
  
Unrealized
 
  
Fair
 
  
Unrealized
 
  
Fair
 
  
Unrealized
 
 
  
Value
 
  
Losses
 
  
Value
 
  
Losses
 
  
Value
 
  
Losses
 
December 31, 2019
  
  
  
  
  
  
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  
$
1,415
 
  
$
6
 
  
$
0
 
  
$
0
 
  
$
1,415
 
  
$
6
 
State and political subdivisions
  
 
144,307
 
  
 
3,291
 
  
 
885
 
  
 
5
 
  
 
145,192
 
  
 
3,296
 
Residential mortgage-backed securities
  
  
  
  
  
  
Agency
  
 
108,072
 
  
 
502
 
  
 
71,736
 
  
 
744
 
  
 
179,808
 
  
 
1,246
 
Non-agency
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
Commercial mortgage-backed securities
  
  
  
  
  
  
Agency
  
 
173,039
 
  
 
2,676
 
  
 
45,251
 
  
 
131
 
  
 
218,290
 
  
 
2,807
 
Asset-backed securities
  
 
135,174
 
  
 
3,252
 
  
 
140,965
 
  
 
4,999
 
  
 
276,139
 
  
 
8,251
 
Trust preferred collateralized debt obligations
  
 
2,703
 
  
 
842
 
  
 
2,000
 
  
 
500
 
  
 
4,703
 
  
 
1,342
 
Single issue trust preferred securities
  
 
0
 
  
 
0
 
  
 
13,562
 
  
 
1,592
 
  
 
13,562
 
  
 
1,592
 
Other corporate securities
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
564,710
 
  
$
10,569
 
  
$
274,399
 
  
$
7,971
 
  
$
839,109
 
  
$
18,540
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
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.
 
 
  
Three Months Ended

September 30
 
  
Nine Months Ended

September 30
 
 
  
2020
 
  
2019
 
  
2020
 
  
2019
 
Proceeds from sales and calls
  
$
149,193
 
  
$
188,911
 
  
$
562,899
 
  
$
573,674
 
Gross realized gains
  
 
2.800
 
  
 
412
 
  
 
4,618
 
  
 
1,166
 
Gross realized losses
  
 
(1,939
  
 
(346
  
 
(2,116
  
 
(1,318
At September 30, 2020, gross unrealized losses on available for sale securities were $10,638 on 64 securities of a total portfolio of 966 available for sale securities. Securities with the most significant gross unrealized losses at September 30, 2020 consisted primarily of asset-backed securities and single issue trust preferred securities. The asset-backed securities relate mainly to securities that 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 single issue trust preferred securities relate to securities of financial institutions.
In determining whether or not a security is impaired, management considered the severity 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 $513,380 at September 30, 2020. As of September 30, 2020, approximately 59% 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.
 
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The majority of the portfolio was rated AA or higher, and no securities within the portfolio were rated below investment grade as of September 30, 2020. 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 impaired at September 30, 2020.
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 $1,396,058 at September 30, 2020. Of the $1,396,058 amount, $618,901 was related to agency commercial mortgage-backed securities and $777,157 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 impaired at September 30, 2020.
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 $41,945 at September 30, 2020. Of the $41,945, 93% was rated AAA and 7% was unrated. As of September 30, 2020, none of the
non-agency
residential mortgage-backed securities were in an unrealized loss position and were therefore not considered to be impaired.
Asset-backed securities
As of September 30, 2020, United’s asset-backed securities portfolio had a total amortized cost balance of $291,690. Of the $291,690, 96% was rated AA+ or better and 4% was unrated. The majority of the portfolio relates to securities that 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. Upon reviewing this portfolio for the third quarter of 2020, it was determined that none of the asset-backed securities were impaired.
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, 2020 consisted of $11,498 in investment grade bonds, $978 in split rated bonds, and $5,745 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 2020, it was determined that none of the single issue trust preferred securities were impaired.
Corporate securities
As of September 30, 2020, United’s Corporate securities portfolio had a total amortized cost balance of $370,398. The majority of the portfolio consisted of debt issuances of corporations representing a variety of industries, including financial institutions. Of the $370,398, 87% was investment grade rated and 13% was unrated. For corporate securities, management has evaluated the near-term prospects of the investment in relation to the severity of any unrealized loss. Based upon management’s analysis and judgment, it was determined that none of the corporate securities were impaired at September 30, 2020.
 
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Table of Contents
The amortized cost and estimated fair value of securities available for sale at September 30, 2020 and December 31, 2019 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, 2020
 
  
December 31, 2019
 
 
  
 
 
  
Estimated
 
  
 
 
  
Estimated
 
 
  
Amortized
 
  
Fair
 
  
Amortized
 
  
Fair
 
 
  
Cost
 
  
Value
 
  
Cost
 
  
Value
 
Due in one year or less
  
$
144,830
 
  
$
146,326
 
  
$
92,422
 
  
$
92,473
 
Due after one year through five years
  
 
497,634
 
  
 
516,743
 
  
 
583,715
 
  
 
592,850
 
Due after five years through ten years
  
 
664,075
 
  
 
689,410
 
  
 
564,922
 
  
 
568,241
 
Due after ten years
  
 
1,391,009
 
  
 
1,425,323
 
  
 
1,185,865
 
  
 
1,183,732
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
2,697,548
 
  
$
2,777,802
 
  
$
2,426,924
 
  
$
2,437,296
 
  
 
 
    
 
 
    
 
 
    
 
 
 
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 $10,255 at September 30, 2020 and $8,894 at December 31, 2019.
 
 
  
Three Months Ended

September 30
 
  
Nine Months Ended

September 30
 
 
  
2020
 
  
2019
 
  
2020
 
  
2019
 
Net (losses) gains recognized during the period
  
$
0
 
  
$
59
 
  
$
65
 
  
$
302
 
Net gains recognized during the period on equity securities sold
  
 
2
 
  
 
(1
  
 
9
 
  
 
133
 
Unrealized gains recognized during the period on equity securities
still held at period end
  
 
0
 
  
 
60
 
  
 
114
 
  
 
181
 
Unrealized losses recognized during the period on equity securities
still held at period end
  
 
(2
  
 
0
 
  
 
(58
  
 
(12
Other investment securities
During the third quarter of 2020, United evaluated all of its cost method investments to determine if certain events or changes in circumstances during the third quarter of 2020 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 $1,976,740 and $1,540,717 at September 30, 2020 and December 31, 2019, respectively.
 
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Table of Contents
4. LOANS & LEASES
Major classes of loans and leases are as follows:
 
 
  
September 30,

2020
 
  
December 31,
2019
 
Commercial, financial and agricultural:
  
  
Owner-occupied commercial real estate
  
$
1,616,380
 
  
$
1,201,652
 
Nonowner-occupied commercial real estate
  
 
5,029,867
 
  
 
3,965,960
 
Other commercial loans and leases
  
 
4,211,490
 
  
 
2,285,037
 
  
 
 
    
 
 
 
Total commercial, financial & agricultural
  
 
10,857,737
 
  
 
7,452,649
 
Residential real estate
  
 
4,070,507
 
  
 
3,686,401
 
Construction & land development
  
 
1,824,303
 
  
 
1,408,205
 
Consumer:
  
  
Bankcard
  
 
8,373
 
  
 
10,074
 
Other consumer
  
 
1,206,600
 
  
 
1,156,219
 
  
 
 
    
 
 
 
Total gross loans and leases
  
$
17,967,520
 
  
$
13,713,548
 
  
 
 
    
 
 
 
Included in “Other commercial loans and leases” at September 30, 2020 are leases in the amount of $9,149. These leases, acquired by United in the Carolina Financial merger, are primarily on equipment utilized for business purposes with terms generally ranging from 12 to 60 months and include option to purchase the leased equipment at the end of the lease. The table above does not include loans held for sale of $812,084 and $387,514 at September 30, 2020 and December 31, 2019, respectively. Loans held for sale consist of single-family residential real estate loans originated for sale in the secondary market.
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 $36,082 and $38,558 at September 30, 2020 and December 31, 2019, respectively.
5. CREDIT QUALITY
Management monitors the credit quality of its loans and leases on an ongoing basis. Measurement of delinquency and past due status are based on the contractual terms of each loan. United considers a loan to be past due when it is 30 days or more past its contractual payment due date.
For all loan classes, past due loans and leases are reviewed on a monthly basis to identify loans and leases 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 credit losses. United’s method of income recognition for loans and leases 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 and leases 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 and leases 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.
 
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Table of Contents
Under United’s current loan policy, a loan is not recognized as a TDR until it becomes probable that the loan will be a TDR. In response to the coronavirus
(“COVID-19”)
pandemic and its economic impact on our customers, United has implemented a short-term modification program that complies with the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act to provide temporary payment relief to those borrowers directly impacted by
COVID-19
who were not more than 30 days past due as of December 31, 2019. This program allows for a deferral of payments from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the
COVID-19
outbreak declared by President Trump terminates. As provided for under the CARES Act, these loan modifications are exempt by law from classification as a TDR as defined by GAAP.
As of September 30, 2020, United had TDRs of $68,381 as compared to $58,369 as of December 31, 2019. Of the $68,381 aggregate balance of TDRs at September 30, 2020, $53,665 was on nonaccrual and $149 was
30-89
days past due. Of the $58,369 aggregate balance of TDRs at December 31, 2019, $48,387 was on nonaccrual and $902 was
30-89
days past due. All these amounts are included in the appropriate categories in the “Age Analysis of Past Due Loans and Leases” table on a subsequent page. As of September 30, 2020, there was a commitment to lend additional funds of $61 to a debtor owing a receivable whose terms have been modified in a TDR. During the third quarter and first nine months of 2020, $62 and $173, respectively, were advanced to this debtor under a loan that had been previously modified.
The following tables sets for
th
the balances of TDRs at September 30, 2020 and December 31, 2019 and the reasons for modification:
 
Reason for modification
  
September 30, 2020
 
  
December 31, 2019
 
Interest rate reduction
  
$
11,415
 
  
$
1,685
 
Interest rate reduction and change in terms
  
 
2,890
 
  
 
1,733
 
Forgiveness of principal
  
 
241
 
  
 
0
 
Transfer of asset
  
 
0
 
  
 
0
 
Concession of principal and term
  
 
23
 
  
 
0
 
Extended maturity
  
 
4,536
 
  
 
0
 
Change in terms
  
 
49,276
 
  
 
54,951
 
  
 
 
    
 
 
 
Total
  
$
68,381
 
  
$
58,369
 
  
 
 
    
 
 
 
The following table sets forth United’s troubled debt restructurings that have been restructured during the three months ended September 30, 2020 and 2019, segregated by class of loans and leases:
 
 
  
Troubled Debt Restructurings
 
 
  
For the Three Months Ended
 
 
  
September 30, 2020
 
  
September 30, 2019
 
 
  
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
  
 
0
 
  
$
0
 
  
$
0
 
  
 
1
 
  
$
1,030
 
  
$
1,030
 
Nonowner-occupied
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
Other commercial
  
 
1
 
  
 
39
 
  
 
38
 
  
 
1
 
  
 
5,137
 
  
 
5,076
 
Residential real estate
  
 
3
 
  
 
381
 
  
 
381
 
  
 
0
 
  
 
0
 
  
 
0
 
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
  
 
4
 
  
$
420
 
  
$
419
 
  
 
2
 
  
$
6,167
 
  
$
6,106
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
23

Table of Contents
The following table sets forth United’s troubled debt restructurings that have been restructured during the nine months ended September 30, 2020 and 2019, segregated by class of loans and leases:
 
 
  
Troubled Debt Restructurings
 
 
  
For the Nine Months Ended
 
 
  
September 30, 2020
 
  
September 30, 2019
 
 
  
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
  
 
21
 
  
$
18,579
 
  
$
17,210
 
  
 
2
 
  
$
1,179
 
  
$
1,179
 
Nonowner-occupied
  
 
6
 
  
 
2,258
 
  
 
2,225
 
  
 
0
 
  
 
0
 
  
 
0
 
Other commercial
  
 
19
 
  
 
3,706
 
  
 
2,873
 
  
 
3
 
  
 
5,962
 
  
 
5,849
 
Residential real estate
  
 
22
 
  
 
4,271
 
  
 
3,495
 
  
 
3
 
  
 
2,258
 
  
 
2,022
 
Construction & land development
  
 
12
 
  
 
4,607
 
  
 
4,392
 
  
 
3
 
  
 
2,266
 
  
 
2,214
 
Consumer:
  
  
  
  
  
  
Bankcard
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
Other consumer
  
 
3
 
  
 
69
 
  
 
21
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
 
83
 
  
$
33,490
 
  
$
30,216
 
  
 
11
 
  
$
11,665
 
  
$
11,264
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
The following table sets forth United’s troubled debt restructurings, based on their post-modification outstanding recorded balance, that have been restructured during the three and nine months ended September 30, 2020 and 2019, segregated by the reason for modification:
 
 
  
Three Months Ended
 
  
Nine Months Ended
 
Reason for modification
  
September 30,
2020
 
  
September 30,
2019
 
  
September 30,
2020
 
  
September 30,
2019
 
Interest rate reduction
  
$
0
 
  
$
0
 
  
$
9,856
 
  
$
246
 
Interest rate reduction and change in terms
  
 
0
 
  
 
0
 
  
 
1,201
 
  
 
0
 
Forgiveness of principal
  
 
0
 
  
 
0
 
  
 
241
 
  
 
0
 
Transfer of asset
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
Concession of principal and term
  
 
0
 
  
 
0
 
  
 
23
 
  
 
0
 
Extended maturity
  
 
0
 
  
 
0
 
  
 
4,536
 
  
 
0
 
Change in terms
  
 
419
 
  
 
6,106
 
  
 
14,359
 
  
 
11,018
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
419
 
  
$
6,106
 
  
$
30,216
 
  
$
11,264
 
  
 
 
    
 
 
    
 
 
    
 
 
 
The loans and leases 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, 2020 and had charge-offs during the three and nine months ended September 30, 2020.
 
 
  
Three Months Ended

September 30, 2020
 
  
Nine Months Ended

September 30, 2020
 
 
  
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
  
 
2
 
  
 
86
 
  
 
2
 
  
 
86
 
Residential real estate
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
Construction & land development
  
 
0
 
  
 
0
 
  
 
1
 
  
 
690
 
Consumer:
  
  
  
  
Bankcard
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
Other consumer
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
 
2
 
  
$
86
 
  
 
3
 
  
$
776
 
  
 
 
    
 
 
    
 
 
    
 
 
 
 
24

Table of Contents
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
 
  
 
 
    
 
 
    
 
 
    
 
 
 
The following table sets forth United’s age analysis of its past due loans and leases, segregated by class of loans and leases:
Age Analysis of Past Due Loans and Leases
As of September 30, 2020
 
 
 
  
30-89

Days
Past Due
 
  
90 Days or
more Past
Due
 
  
Total Past
Due
 
  
Current &
Other
 
  
Total

Financing
Receivables
 
  
90 Days or
More Past
Due
& Accruing
 
Commercial real estate:
  
  
  
  
  
  
Owner-occupied
  
$
5,643
 
  
$
30,421
 
  
$
36,064
 
  
$
1,580,316
 
  
$
1,616,380
 
  
$
1,898
 
Nonowner-occupied
  
 
37,201
 
  
 
30,395
 
  
 
67,596
 
  
 
4,962,271
 
  
 
5,029,867
 
  
 
1,198
 
Other commercial
  
 
9,829
 
  
 
39,712
 
  
 
49,541
 
  
 
4,161,949
 
  
 
4,211,490
 
  
 
830
 
Residential real estate
  
 
28,107
 
  
 
29,494
 
  
 
57,601
 
  
 
4,012,906
 
  
 
4,070,507
 
  
 
7,411
 
Construction & land development
  
 
10,711
 
  
 
6,209
 
  
 
16,920
 
  
 
1,807,383
 
  
 
1,824,303
 
  
 
27
 
Consumer:
  
  
  
  
  
  
Bankcard
  
 
252
 
  
 
70
 
  
 
322
 
  
 
8,051
 
  
 
8,373
 
  
 
70
 
Other consumer
  
 
7,870
 
  
 
1,259
 
  
 
9,129
 
  
 
1,197,471
 
  
 
1,206,600
 
  
 
1,149
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
99,613
 
  
$
137,560
 
  
$
237,173
 
  
$
17,730,347
 
  
$
17,967,520
 
  
$
12,583
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Age Analysis of Past Due Loans and Leases
As of December 31, 2019
 
 
 
  
30-89

Days
Past Due
 
  
90 Days or
more Past
Due
 
  
Total Past
Due
 
  
Current &
Other (1)
 
  
Total

Financing
Receivables
 
  
90 Days or
More Past
Due
& Accruing
 
Commercial real estate:
  
  
  
  
  
  
Owner-occupied
  
$
8,878
 
  
$
11,209
 
  
$
20,087
 
  
$
1,181,565
 
  
$
1,201,652
 
  
$
544
 
Nonowner-occupied
  
 
6,318
 
  
 
16,129
 
  
 
22,447
 
  
 
3,943,513
 
  
 
3,965,960
 
  
 
471
 
Other commercial
  
 
5,238
 
  
 
51,541
 
  
 
56,779
 
  
 
2,228,258
 
  
 
2,285,037
 
  
 
668
 
Residential real estate
  
 
31,727
 
  
 
24,343
 
  
 
56,070
 
  
 
3,630,331
 
  
 
3,686,401
 
  
 
6,256
 
Construction & land development
  
 
2,219
 
  
 
16,043
 
  
 
18,262
 
  
 
1,389,943
 
  
 
1,408,205
 
  
 
0
 
Consumer:
  
  
  
  
  
  
Bankcard
  
 
445
 
  
 
218
 
  
 
663
 
  
 
9,411
 
  
 
10,074
 
  
 
218
 
Other consumer
  
 
10,991
 
  
 
1,607
 
  
 
12,598
 
  
 
1,143,621
 
  
 
1,156,219
 
  
 
1,337
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
65,816
 
  
$
121,090
 
  
$
186,906
 
  
$
13,526,642
 
  
$
13,713,548
 
  
$
9,494
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
Other includes loans with a recorded investment of $96,004 acquired and accounted for under ASC Topic
310-30
“Loans and Debt Securities Acquired with Deteriorated Credit Quality”.
 
25

Table of Contents
The following table sets forth United’s nonaccrual loans and leases, segregated by class of loans and leases:
 
 
  
At September 30, 2020
 
  
At December 31,
2019
 
  
Interest Income
Recognized
 
 
 
  
Nonaccruals
 
  
With No
Related
Allowance
for Credit
Losses
 
  
90 Days or
More Past
Due &
Accruing
 
  
Nonaccruals
 
  
For The Three
Months Ended
September 30,
2020
 
  
For The Nine
Months Ended
September 30,
2020
 
Commercial Real Estate:
  
  
  
  
  
  
Owner-occupied
  
$
28,523
 
  
$
26,562
 
  
$
1,898
 
  
$
10,665
 
  
$
0
 
  
$
32
 
Nonowner-occupied
  
 
29,197
 
  
 
18,686
 
  
 
1,198
 
  
 
15,658
 
  
 
59
 
  
 
61
 
Other Commercial
  
 
38,882
 
  
 
13,015
 
  
 
830
 
  
 
50,873
 
  
 
16
 
  
 
16
 
Residential Real Estate
  
 
22,083
 
  
 
20,202
 
  
 
7,411
 
  
 
18,087
 
  
 
0
 
  
 
3
 
Construction
  
 
6,182
 
  
 
4,100
 
  
 
27
 
  
 
16,043
 
  
 
0
 
  
 
0
 
Consumer:
  
  
  
  
  
  
Bankcard
  
 
0
 
  
 
0
 
  
 
70
 
  
 
0
 
  
 
0
 
  
 
0
 
Other consumer
  
 
110
 
  
 
110
 
  
 
1,149
 
  
 
270
 
  
 
0
 
  
 
0
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
124,977
 
  
$
82,675
 
  
$
12,583
 
  
$
111,596
 
  
$
75
 
  
$
112
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
For the adoption of ASU
2016-13,
United elected the practical expedient to measure expected credit losses on collateral dependent loans and leases based on the difference between the loan’s amortized cost and the collateral’s fair value, adjusted for selling costs. The following table presents the amortized cost basis of collateral-dependent loans and leases in which repayment is expected to be derived substantially through the operation or sale of the collateral and where the borrower is experiencing financial difficulty, by class of loans and leases as of September 30, 2020:
 
 
  
Collateral Dependent Loans and Leases
 
 
  
At September 30, 2020
 
 
  
Residential
Property
 
  
Business
Assets
 
  
Land
 
  
Commercial
Property
 
  
Other
 
  
Total
 
Commercial real estate:
 
  
  
  
  
  
Owner-occupied
  
$
1,533
 
  
$
148
 
  
$
0
 
  
$
18,523
 
  
$
27,790
 
  
$
47,994
 
Nonowner-occupied
  
 
8,851
 
  
 
0
 
  
 
2,936
 
  
 
15,639
 
  
 
19,203
 
  
 
46,629
 
Other commercial
  
 
5,424
 
  
 
33,272
 
  
 
0
 
  
 
270
 
  
 
2,638
 
  
 
41,604
 
Residential real estate
  
 
27,555
 
  
 
229
 
  
 
36
 
  
 
0
 
  
 
808
 
  
 
28,628
 
Construction & land development
  
 
9,938
 
  
 
0
 
  
 
8,183
 
  
 
0
 
  
 
746
 
  
 
18,867
 
Consumer:
  
  
  
  
  
  
Bankcard
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
Other consumer
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
5
 
  
 
5
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
53,301
 
  
$
33,649
 
  
$
11,155
 
  
$
34,432
 
  
$
51,190
 
  
$
183,727
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
26

Table of Contents
United categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt: current financial information, historical payment experience, credit documentation, underlying collateral (if any), public information and current economic trends, among other factors.
United uses the following definitions for risk ratings:
 
 
 
Pass
 
 
 
Special Mention
 
 
 
Substandard
 
 
 
Doubtful
For United’s loans with a corporate credit exposure, United analyzes loans individually to classify the loans as to credit risk. Review and analysis of criticized (special mention-rated loans in the amount of $1,000 or greater) and classified (substandard-rated and worse in the amount of $500 and greater) loans is completed once per quarter. Review of notes with committed exposure of $2,000 or greater is completed at least annually. 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. 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.
 
27

Table of Contents
Based on the most recent analysis performed, the risk category of loans and leases by class of loans and leases is as follows:
 
Commercial Real Estate – Owner-occupied
 
 
 
 
  
Revolving

loans

converted
to term
loans
 
  
 
 
 
 
  
Term Loans
 
 
Revolving
loans amortized
cost basis
 
  
Total
 
 
  
Origination Year
 
As of September 30, 2020
  
2020
 
  
2019
 
  
2018
 
  
2017
 
  
2016
 
  
Prior
 
Internal Risk Grade:
  
  
  
  
  
  
 
  
  
Pass
  
$
218,978
 
  
$
152,647
 
  
$
156,778
 
  
$
229,875
 
  
$
286,193
 
  
$
459,311
 
 
$
23,868
 
  
$
0
 
  
$
1,527,650
 
Special Mention
  
 
0
 
  
 
1,216
 
  
 
3,922
 
  
 
770
 
  
 
2,048
 
  
 
23,386
 
 
 
0
 
  
 
466
 
  
 
31,808
 
Substandard
  
 
1,965
 
  
 
68
 
  
 
0
 
  
 
1,160
 
  
 
3,698
 
  
 
48,676
 
 
 
864
 
  
 
149
 
  
 
56,580
 
Doubtful
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
342
 
 
 
0
 
  
 
0
 
  
 
342
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
Total
  
$
 220,943
 
  
$
 153,931
 
  
$
 160,700
 
  
$
 231,805
 
  
$
  291,939
 
  
$
  531,715
 
 
$
24,732
 
  
$
   615
 
  
$
1,616,380
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
YTD charge-offs
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
(2,162
 
 
0
 
  
 
0
 
  
 
(2,162
YTD recoveries
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
374
 
 
 
0
 
  
 
0
 
  
 
374
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
YTD net charge-offs
  
$
0
 
  
$
0
 
  
$
0
 
  
$
0
 
  
$
0
 
  
$
(1,788
 
$
0
 
  
$
0
 
  
$
(1,788
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
 
 
Commercial Real Estate – Nonowner-occupied
 
 
 
 
  
Revolving

loans

converted
to term
loans
 
  
 
 
 
 
  
Term Loans
 
 
Revolving
loans
amortized
cost basis
 
  
Total
 
 
  
Origination Year
 
As of September 30, 2020
  
2020
 
 
2019
 
  
2018
 
  
2017
 
  
2016
 
 
Prior
 
Internal Risk Grade:
  
 
  
  
  
 
 
  
  
Pass
  
$
   667,054
 
 
$
606,862
 
  
$
665,234
 
  
$
526,479
 
  
$
536,583
 
 
$
1,714,920
 
 
$
108,539
 
  
$
2,129
 
  
$
4,827,800
 
Special Mention
  
 
0
 
 
 
118,823
 
  
 
0
 
  
 
395
 
  
 
3,343
 
 
 
20,973
 
 
 
0
 
  
 
0
 
  
 
143,534
 
Substandard
  
 
73
 
 
 
1,120
 
  
 
8,637
 
  
 
1,693
 
  
 
13,374
 
 
 
33,636
 
 
 
0
 
  
 
0
 
  
 
58,533
 
Doubtful
  
 
0
 
 
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
 
 
0
 
 
 
0
 
  
 
0
 
  
 
0
 
  
 
 
   
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
Total
  
$
667,127
 
 
$
   726,805
 
  
$
   673,871
 
  
$
   528,567
 
  
$
   553,300
 
 
$
  1,769,529
 
 
$
   108,539
 
  
$
   2,129
 
  
$
  5,029,867
 
  
 
 
   
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
YTD charge-offs
  
 
(38
 
 
0
 
  
 
0
 
  
 
0
 
  
 
(1,161
 
 
(1,683
 
 
0
 
  
 
0
 
  
 
(2,882
YTD recoveries
  
 
0
 
 
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
 
 
747
 
 
 
0
 
  
 
0
 
  
 
747
 
  
 
 
   
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
YTD net charge-offs
  
$
(38
 
$
0
 
  
$
0
 
  
$
0
 
  
$
(1,161
 
$
(936
 
$
0
 
  
$
0
 
  
$
(2,135
  
 
 
   
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
 
Other commercial
 
 
 
 
  
Revolving

loans and leases

converted to
term loans
 
  
 
 
 
 
  
Term Loans and leases
 
 
Revolving
loans and
leases
amortized
cost basis
 
  
Total
 
 
  
Origination Year
 
As of September 30, 2020
  
2020
 
  
2019
 
  
2018
 
 
2017
 
 
2016
 
 
Prior
 
Internal Risk Grade:
  
  
  
 
 
 
 
  
  
Pass
  
$
1,216,780
 
  
$
411,925
 
  
$
220,230
 
 
$
141,490
 
 
$
136,961
 
 
$
286,612
 
 
$
1,652,999
 
  
$
2,948
 
  
$
4,069,945
 
Special Mention
  
 
91
 
  
 
224
 
  
 
3,232
 
 
 
1,327
 
 
 
184
 
 
 
58,774
 
 
 
3,399
 
  
 
94
 
  
 
67,325
 
Substandard
  
 
103
 
  
 
879
 
  
 
2,372
 
 
 
2,810
 
 
 
6,671
 
 
 
44,913
 
 
 
15,884
 
  
 
397
 
  
 
74,029
 
Doubtful
  
 
0
 
  
 
0
 
  
 
0
 
 
 
0
 
 
 
38
 
 
 
153
 
 
 
0
 
  
 
0
 
  
 
191
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
Total
  
$
1,216,974
 
  
$
413,028
 
  
$
225,834
 
 
$
145,627
 
 
$
143,854
 
 
$
390,452
 
 
$
1,672,282
 
  
$
3,439
 
  
$
4,211,490
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
YTD charge-offs
  
 
0
 
  
 
0
 
  
 
(834
 
 
(12
 
 
(3,505
 
 
(7,109
 
 
0
 
  
 
0
 
  
 
(11,460
YTD recoveries
  
 
0
 
  
 
864
 
  
 
18
 
 
 
6
 
 
 
116
 
 
 
1,507
 
 
 
0
 
  
 
0
 
  
 
2,511
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
YTD net charge-offs
  
$
0
 
  
$
864
 
  
$
(816
 
$
(6
 
$
(3,389
 
$
(5,602
 
$
0
 
  
$
0
 
  
$
(8,949
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
 
Residential Real Estate
 
 
 
 
  
Revolving

loans

converted
to term
loans
 
  
 
 
 
 
  
Term Loans
 
 
Revolving
loans
amortized
cost basis
 
  
Total
 
 
  
Origination Year
 
As of September 30, 2020
  
2020
 
  
2019
 
  
2018
 
  
2017
 
  
2016
 
 
Prior
 
Internal Risk Grade:
  
  
  
  
  
 
 
  
  
Pass
  
$
428,397
 
  
$
670,300
 
  
$
746,727
 
  
$
336,210
 
  
$
318,886
 
 
$
1,061,352
 
 
$
457,605
 
  
$
4,291
 
  
$
4,023,768
 
Special Mention
  
 
0
 
  
 
269
 
  
 
0
 
  
 
220
 
  
 
2,338
 
 
 
6,304
 
 
 
827
 
  
 
0
 
  
 
9,958
 
Substandard
  
 
0
 
  
 
220
 
  
 
444
 
  
 
3,728
 
  
 
5,033
 
 
 
26,381
 
 
 
465
 
  
 
231
 
  
 
36,502
 
Doubtful
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
 
 
279
 
 
 
0
 
  
 
0
 
  
 
279
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
Total
  
$
   428,397
 
  
$
   670,789
 
  
$
   747,171
 
  
$
   340,158
 
  
$
   326,257
 
 
$
   1,094,316
 
 
$
   458,897
 
  
$
   4,522
 
  
$
   4,070,507
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
YTD charge-offs
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
  
 
(1
 
 
(1,379
 
 
0
 
  
 
0
 
  
 
(1,380
YTD recoveries
  
 
0
 
  
 
0
 
  
 
0
 
  
 
101
 
  
 
0
 
 
 
649
 
 
 
0
 
  
 
0
 
  
 
750
 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
YTD net charge-offs
  
$
0
 
  
$
0
 
  
$
0
 
  
$
101
 
  
$
(1
 
$
(730
 
$
0
 
  
$
0
 
  
$
(630
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
    
 
 
    
 
 
 
  
  
  
  
  
 
 
  
  
 
28

Table of Contents
Construction and Land Development
 
 
 
 
 
Revolving

loans

converted to
term loans
 
  
 
 
 
 
  
Term Loans
 
 
Revolving loans
amortized cost
basis
 
  
Total
 
 
  
Origination Year
 
As of September 30,
2020
  
2020
 
 
2019
 
 
2018
 
 
2017
 
 
2016
 
 
Prior
 
Internal Risk Grade:
  
 
 
 
 
 
 
 
  
Pass
  
$
275,238
 
 
$
711,704
 
 
$
339,542
 
 
$
145,216
 
 
$
119,650
 
 
$
61,975
 
 
$
141,784
 
 
$
140
 
  
$
1,795,249
 
Special Mention
  
 
0
 
 
 
0
 
 
 
4,128
 
 
 
0
 
 
 
0
 
 
 
2,871
 
 
 
996
 
 
 
0
 
  
 
7,995
 
Substandard
  
 
0
 
 
 
207
 
 
 
1,543
 
 
 
0
 
 
 
216
 
 
 
18,347
 
 
 
746
 
 
 
0
 
  
 
21,059
 
Doubtful
  
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
  
 
0
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
Total
  
$
275,238
 
 
$
711,911
 
 
$
345,213
 
 
$
145,216
 
 
$
119,866
 
 
$
83,193
 
 
$
143,526
 
 
$
140
 
  
$
1,824,303
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
YTD charge-offs
  
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
(1,998
 
 
0
 
 
 
0
 
  
 
(1,998
YTD recoveries
  
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
1,429
 
 
 
0
 
 
 
0
 
  
 
1,429
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
YTD net charge-offs
  
$
0
 
 
$
0
 
 
$
0
 
 
$
0
 
 
$
0
 
 
$
(569
 
$
0
 
 
$
0
 
  
$
(569
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
Bankcard
 
 
 
 
 
Revolving

loans

converted to
term loans
 
  
 
 
 
 
  
Term Loans
 
 
Revolving loans
amortized cost
basis
 
  
Total
 
 
  
Origination Year
 
As of September 30,
2020
  
2020
 
 
2019
 
 
2018
 
 
2017
 
 
2016
 
 
Prior
 
Internal Risk Grade:
  
 
 
 
 
 
 
 
  
Pass
  
$
            0
 
 
$
            0
 
 
$
            0
 
 
$
             0
 
 
$
            0
 
 
$
            0
 
 
$
8,051
 
 
$
0
 
  
$
8,051
 
Special Mention
  
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
252
 
 
 
0
 
  
 
252
 
Substandard
  
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
70
 
 
 
0
 
  
 
70
 
Doubtful
  
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
  
 
0
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
Total
  
$
0
 
 
$
0
 
 
$
0
 
 
$
0
 
 
$
0
 
 
$
0
 
 
$
8,373
 
 
$
0
 
  
$
8,373
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
YTD charge-offs
  
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
(187
 
 
0
 
  
 
(187
YTD recoveries
  
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
34
 
 
 
0
 
  
 
34
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
YTD net charge-offs
  
$
0
 
 
$
0
 
 
$
0
 
 
$
0
 
 
$
0
 
 
$
0
 
 
$
(153
 
$
0
 
  
$
(153
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
Other Consumer
 
 
 
 
 
Revolving

loans

converted to
term loans
 
  
 
 
 
 
  
Term Loans
 
 
Revolving loans
amortized cost
basis
 
  
Total
 
 
  
Origination Year
 
As of September 30,
2020
  
2020
 
 
2019
 
 
2018
 
 
2017
 
 
2016
 
 
Prior
 
Internal Risk Grade:
  
 
 
 
 
 
 
 
  
Pass
  
$
351,396
 
 
$
446,270
 
 
$
263,145
 
 
$
88,080
 
 
$
43,680
 
 
$
5,523
 
 
$
8,480
 
 
$
            0
 
  
$
1,206,574
 
Special Mention
  
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
7
 
 
 
6
 
 
 
0
 
  
 
13
 
Substandard
  
 
3
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
5
 
 
 
0
 
 
 
0
 
  
 
8
 
Doubtful
  
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
5
 
 
 
0
 
 
 
0
 
  
 
5
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
Total
  
$
   351,399
 
 
$
   446,270
 
 
$
   263,145
 
 
$
   88,080
 
 
$
   43,680
 
 
$
   5,540
 
 
$
   8,486
 
 
$
0
 
  
$
1,206,600
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
YTD charge-offs
  
 
(43
 
 
(820
 
 
(922
 
 
(337
 
 
(207
 
 
(463
 
 
(2
 
 
0
 
  
 
(2,794
YTD recoveries
  
 
0
 
 
 
63
 
 
 
42
 
 
 
25
 
 
 
23
 
 
 
185
 
 
 
0
 
 
 
0
 
  
 
338
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
YTD net charge-offs
  
$
(43
 
$
(757
 
$
(880
 
$
(312
 
$
(184
 
$
(278
 
$
(2
 
$
0
 
  
$
(2,456
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
The following tables set forth United’s credit quality indicators information, by class of loans, as of December 31, 2019:
Credit Quality Indicators
Corporate Credit Exposure
 
 
 
As of December 31, 2019
 
 
  
Commercial Real Estate
 
  
 
 
  
Construction
& Land
Development
 
 
  
Owner-
occupied
 
  
Nonowner-
occupied
 
  
Other
Commercial
 
Grade:
  
  
  
  
Pass
  
$
1,136,589
 
  
$
3,850,886
 
  
$
2,136,266
 
  
$
1,334,950
 
Special mention
  
 
14,449
 
  
 
44,134
 
  
 
75,511
 
  
 
4,614
 
Substandard
  
 
50,346
 
  
 
70,940
 
  
 
72,451
 
  
 
68,641
 
Doubtful
  
 
268
 
  
 
0
 
  
 
809
 
  
 
0
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
1,201,652
 
  
$
3,965,960
 
  
$
2,285,037
 
  
$
1,408,205
 
  
 
 
    
 
 
    
 
 
    
 
 
 
 
29

Table of Contents
Credit Quality Indicators
Consumer Credit Exposure
 
As of December 31, 2019
 
 
  
Residential
Real Estate
 
  
Bankcard
 
  
Other
Consumer
 
Grade:
  
  
  
Pass
  
$
3,645,654
 
  
$
9,411
 
  
$
1,143,608
 
Special mention
  
 
12,038
 
  
 
445
 
  
 
10,993
 
Substandard
  
 
28,572
 
  
 
218
 
  
 
1,618
 
Doubtful
  
 
137
 
  
 
0
 
  
 
0
 
  
 
 
    
 
 
    
 
 
 
Total
  
$
3,686,401
 
  
$
10,074
 
  
$
1,156,219
 
  
 
 
    
 
 
    
 
 
 
At September 30, 2020 and December 31, 2019, other real estate owned (“OREO”) included in other assets in the Consolidated Balance Sheets was $25,696 and $15,515, 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, 2020 and December 31, 2019, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process was $266 and $890, respectively.
6. ALLOWANCE FOR CREDIT LOSSES
United adopted the CECL methodology for measuring credit losses as of January 1, 2020. All disclosures as of and for the three months and nine months ended September 30, 2020 are presented in accordance with ASC 326. The Company did not recast comparative financial periods and has presented those disclosures under previously applicable GAAP.
The allowance for loan losses is an estimate of the expected credit losses on financial assets measured at amortized cost to present the net amount expected to be collected as of the balance sheet date. Such allowance is based on the credit losses expected to arise over the life of the asset (contractual term). Assets are charged off when United determines that such financial assets are deemed uncollectible or based on regulatory requirements, whichever is earlier. Charge-offs are recognized as a deduction from the allowance for credit losses. Expected recoveries of amounts previously
charged-off,
not to exceed the aggregate of the amount previously
charged-off,
are included in determining the necessary reserve at the balance sheet date.
United made a policy election to present the accrued interest receivable balance separately in its consolidated balance sheets from the amortized cost of a loan. Accrued interest receivable was $54,716 (net of an allowance for credit losses of $435) and $48,130 at September 30, 2020 and December 31, 2019, respectively, related to loans and leases are included separately in “Accrued interest receivable” in the consolidated balance sheets. Due to loan interest payment deferrals granted by United under the CARES Act, United assessed the collectability of the accrued interest receivables on these deferring loans and leases. As a result of this assessment, United recorded an allowance for credit losses of $435 for accrued interest receivables not expected to be collected as of September 30, 2020. For all classes of loans and leases receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due, unless the loan is well secured and in the process of collection. Interest received on nonaccrual loans and leases, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal.
 
30

Table of Contents
The following table represents the accrued interest receivable as of September 30, 2020 and the accrued interest receivables written off by reversing interest income as of September 30, 2020:
 
 
  
Accrued Interest
Receivable
 
  
Accrued Interest Receivables Written Off by Reversing
Interest Income
 
 
 
  
At September 30, 2020
 
  
For the Three Months Ended
September 30, 2020
 
  
For the Nine Months Ended
September 30, 2020
 
Commercial Real Estate:
  
  
  
Owner-occupied
  
$
4,388
 
  
$
16
 
  
$
116
 
Nonowner-occupied
  
 
14,745
 
  
 
30
 
  
 
75
 
Other Commercial
  
 
13,221
 
  
 
40
 
  
 
85
 
Residential Real Estate
  
 
13,225
 
  
 
31
 
  
 
165
 
Construction
  
 
6,887
 
  
 
508
 
  
 
508
 
Consumer:
  
  
  
Bankcard
  
 
0
 
  
 
0
 
  
 
0
 
Other consumer
  
 
2,685
 
  
 
29
 
  
 
96
 
  
 
 
    
 
 
    
 
 
 
  
$
55,151
 
  
$
654
 
  
$
1,045
 
     
 
 
    
 
 
 
Less: Allowance for credit losses
  
 
(435
  
  
  
 
 
       
Total
  
$
54,716
 
  
  
  
 
 
       
United estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors. A reversion to historical loss data occurs via a straight-line method during the year following the
one-year
reasonable and supportable forecast period.
United pools its loans and leases based on similar risk characteristics in estimating expected credit losses. United has identified the following portfolio segments and measures the allowance for credit losses using the following methods:
 
 
 
Method: Probability of Default/Loss Given Default (PD/LGD)
 
 
 
Commercial Real Estate Owner-Occupied
 
 
 
Commercial Real Estate Nonowner-Occupied
 
 
 
Commercial Other
 
 
 
Method: Cohort
 
 
 
Residential Real Estate
 
 
 
Construction & Land Development
 
 
 
Consumer
 
 
 
Bankcard
Risk characteristics of commercial real estate owner-occupied loans and commercial other loans and leases are similar in that they are normally dependent upon the borrower’s internal cash flow from operations to service debt. Commercial real estate nonowner-occupied 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.
 
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Table of Contents
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
Expected credit losses are estimated over the contractual term of the loans and leases, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancelable by United.
For past loans and leases acquired through the completion of a transfer, including loans and leases acquired in a business combination, that had evidence of deterioration of credit quality since origination (“PCI”) and accounted for under ASC Topic 310, an entity did not have to reassess whether any loans and leases previously accounted for as PCI meet the definition of purchased credit deteriorated (“PCD”) loans and leases upon adoption of ASC Topic 326. Any changes in the allowance for credit losses for these loans and leases were accounted for as an adjustment to the loan’s amortized cost basis and not as a cumulative-effect adjustment to United’s beginning retained earnings.
Non-PCI
loans and leases are now classified as
non-PCD
loans and leases with the adoption of ASC Topic 326. In accordance with ASC Topic 326 guidance, United calculated a PCD rate adjustment for all PCD loans and leases at adoption. Such adjustment created a deferred fee balance for any excess amount not deemed to be credit-related between the PCD recorded balance at the adoption date and the contractual principal and interest balances outstanding.
For allowance for credit losses under ASC Topic 326 calculation purposes, all acquired loans and leases will be included in their relevant pool and subject to legacy loss rates for that applicable pool unless they meet the criteria for specific review.
For loans and leases acquired after the adoption of ASC Topic 326, United will likely take several factors into consideration when determining if loans and leases meet the definition of PCD. ASC Topic 326 lists some, but not all, factors for consideration in the bifurcation of PCD versus
non-PCD
assets:
 
 
 
Financial assets that are delinquent as of the acquisition date
 
 
 
Financial assets that have been downgraded since origination
 
 
 
Financial assets that have been placed on nonaccrual status
 
 
 
Financial assets for which, after origination, credit spreads have widened beyond the threshold specified in its policy
United maintains an allowance for loan losses and a reserve for lending-related commitments such as unfunded loan commitments and letters of credit. United estimates expected credit losses over the contractual period in which United is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by United. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Methodology is based on a loss rate approach that starts with the probability of funding based on historical experience. Similar to methodology discussed above related to the loans and leases receivable portfolio, adjustments are made to the historical losses for current conditions and reasonable and supportable forecast. Adjustments to the reserve for lending-related commitments on
off-balance
sheet credit exposures is recorded as other expense in the income statement. The reserve for lending-related commitments of $15,960 and $1,733 at September 30, 2020 and December 31, 2019, 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 is considered the allowance for credit losses.
 
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For the nine months ended September 30, 2020 the allowance for credit losses increased significantly from the year ended December 31, 2019 primarily due to the adoption of the current expected credit loss (CECL) model under ASC 326 on January 1, 2020 and the macroeconomic factors surrounding the
COVID-19
pandemic considered in the determination of the allowance for loan and lease losses at September 30, 2020. Reserves are initially determined based on losses identified from the PD/LGD and Cohort models which utilize the Company’s historical information. Then qualitative adjustments are applied which include analyses of the following for the first nine months of 2020:​​​​​​​
 
 
 
Past events
– This includes portfolio trends related to business conditions; past due, nonaccrual, and graded loans and leases; and concentrations.
 
 
 
Current conditions
– United considered the impact of
COVID-19
on the economy as well as loan deferrals and modifications made in light of the pandemic when making determinations related to factor adjustments, such as collateral values and past due loans and leases, and the reasonable and supportable forecast. This is in contrast with the CECL adoption date (January 1, 2020) estimate as neither of these items were relevant for United’s footprint at the beginning of the year. Additional considerations were made for the Carolina Financial acquisition, such as the experience of lending management and staff and the nature and volume of the portfolio.
 
 
 
Reasonable and supportable forecasts
– The forecast is determined on a
portfolio-by-portfolio
basis by relating the correlation of real GDP and the unemployment rate to loss rates to forecasts of those variables. The reasonable and supportable forecast selection is subjective in nature and requires more judgment compared to the other components of the allowance. Assumptions for the economic variables were the following:
 
 
 
The ranges for the economic variables of GDP and the unemployment rate have narrowed in the third quarter as compared to the second.
 
 
 
The forecast is less severe than second quarter; however, projections show a more gradual recovery pace over a longer period compared to the second quarter.
 
 
 
Reversion to historical loss data occurs via a straight-line method during the year following the
one-year
reasonable and supportable forecast period.
A progression of the allowance for loan losses, by portfolio segment, for the periods indicated is summarized as follows:
 
Allowance for Loan and Lease Losses and Carrying Amount of Loans and Leases
 
For the Three Months Ended September 30, 2020
 
 
 
  
Commercial Real Estate
 
 
 
 
 
 
 
 
Construction
 
 
 
 
 
 
 
 
Allowance
for
 
  
 
 
  
Owner-
occupied
 
 
Nonowner-
occupied
 
 
Other
Commercial
 
 
Residential
Real Estate
 
 
& Land
Development
 
 
Bankcard
 
 
Other
Consumer
 
 
Estimated
Imprecision
 
  
Total
 
Allowance for Loan and Lease Losses:
  
 
 
 
 
 
 
 
  
Beginning balance
  
$
22,738
 
 
$
25,777
 
 
$
79,404
 
 
$
38,883
 
 
$
32,303
 
 
$
280
 
 
$
15,736
 
 
$
0
  
$
215,121
 
Initial allowance for PCD loans (acquired during the period)
  
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
  
 
0
 
Charge-offs
  
 
(1,627
 
 
(945
 
 
(4,432
 
 
(490
 
 
(29
 
 
(59
 
 
(886
 
 
0
 
  
 
(8,468
Recoveries
  
 
64
 
 
 
25
 
 
 
2,065
 
 
 
448
 
 
 
68
 
 
 
22
 
 
 
128
 
 
 
0
 
  
 
2,820
 
Provision
  
 
2,570
 
 
 
9,841
 
 
 
1,994
 
 
 
(2,108
 
 
2,699
 
 
 
40
 
 
 
1,303
 
 
 
0
 
  
 
16,339
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
Ending balance
  
$
23,745
 
 
$
34,698
 
 
$
79,031
 
 
$
36,733
 
 
$
35,041
 
 
$
283
 
 
$
16,281
 
 
$
0
 
  
$
225,812
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
    
 
 
 
  
 
 
 
 
 
 
 
  
 
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Allowance for Loan and Lease Losses and Carrying Amount of Loans and Leases
 
For the Nine Months Ended September 30, 2020
 
 
 
  
Commercial Real Estate
 
 
 
 
 
 
 
Construction
 
 
 
 
 
 
 
 
Allowance
for
 
 
 
 
  
Owner-
occupied
 
 
Nonowner-
occupied
 
 
Other
Commercial
 
 
Residential
Real Estate
 
 
& Land
Development
 
 
Bankcard
 
 
Other
Consumer
 
 
Estimated
Imprecision
 
 
Total
 
Allowance for Loan and Lease Losses:
  
 
 
 
 
 
 
 
 
Beginning balance
  
$
5,554
 
 
$
8,524
 
 
$
47,325
 
 
$
8,997
 
 
$
3,353
 
 
$
74
 
 
$
2,933
 
 
$
297
 
$
77,057
 
Impact of the adoption of ASU
2016-13
on January 1, 2020
  
 
9,737
 
 
 
9,023
 
 
 
(4,829
 
 
13,097
 
 
 
14,817
 
 
 
28
 
 
 
10,745
 
 
 
(297
 
 
52,321
 
Impact of the adoption of ASU
2016-13
for PCD loans on January 1, 2020
  
 
1,843
 
 
 
121
 
 
 
938
 
 
 
174
 
 
 
2,045
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
5,121
 
Initial allowance for PCD loans (acquired during the period)
  
 
1,955
 
 
 
6,418
 
 
 
7,032
 
 
 
652
 
 
 
2,570
 
 
 
0
 
 
 
8
 
 
 
0
 
 
 
18,635
 
Charge-offs
  
 
(2,162
 
 
(2,882
 
 
(11,460
 
 
(1,380
 
 
(1,998
 
 
(187
 
 
(2,794
 
 
0
 
 
 
(22,863
Recoveries
  
 
374
 
 
 
747
 
 
 
2,511
 
 
 
750
 
 
 
1,429
 
 
 
34
 
 
 
338
 
 
 
0
 
 
 
6,183
 
Provision
  
 
6,444
 
 
 
12,747
 
 
 
37,514
 
 
 
14,443
 
 
 
12,825
 
 
 
334
 
 
 
5,051
 
 
 
0
 
 
 
89,358
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
  
$
23,745
 
 
$
34,698
 
 
$
79,031
 
 
$
36,733
 
 
$
35,041
 
 
$
283
 
 
$
16,281
 
 
$
0
 
 
$
225,812
 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
  
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses and Carrying Amount of Loans
 
For the Year Ended December 31, 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
 
 
(7,905
 
 
(1,093
 
 
(12,975
 
 
(2,967
 
 
(1,303
 
 
(2,867
 
 
0
 
 
(29,110
Recoveries
 
 
3,733
 
 
80
 
 
2,599
 
 
858
 
 
175
 
 
706
 
 
0
 
 
8,151
Provision
 
 
4,663
 
 
2,618
 
 
16,360
 
 
(1,342
 
 
(3,511
 
 
2,473
 
 
52
 
 
21,313
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
 
$
5,554
 
$
8,524
 
$
47,325
 
$
8,997
 
$
3,353
 
$
3,007
 
$
297
 
$
77,057
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending Balance: individually evaluated for impairment
 
$
973
 
 
$
2,979
 
 
$
11,931
 
 
$
354
 
 
$
262
 
 
$
0
 
 
$
0
 
 
$
16,499
 
Ending Balance: collectively evaluated for impairment
 
$
4,581
 
 
$
5,545
 
 
$
35,394
 
 
$
8,643
 
 
$
3,091
 
 
$
3,007
 
 
$
297
 
 
$
60,558
 
Ending Balance: loans acquired with deteriorated credit quality
 
$
0
 
$
0
 
$
0
 
$
0
 
$
0
 
$
0
 
$
0
 
$
0
Financing receivables:
 
 
 
 
 
 
 
 
Ending balance
 
$
1,201,652
 
$
3,965,960
 
$
2,285,037
 
$
3,686,401
 
$
1,408,205
 
$
1,166,293
 
 
$
0
 
$
13,713,548
 
Ending Balance: individually evaluated for impairment
 
$
16,703
 
$
27,121
 
$
54,108
 
$
11,526
 
$
14,047
 
$
0
 
$
0
 
$
123,505
 
Ending Balance: collectively evaluated for impairment
 
$
1,160,556
 
$
3,925,249
 
$
2,194,432
 
$
3,665,140
 
$
1,382,369
 
$
1,166,293
 
 
$
0
 
$
13,494,039
 
Ending Balance: loans acquired with deteriorated credit quality
 
$
24,393
 
$
13,590
 
$
36,497
 
$
9,735
 
$
11,789
 
$
0
 
$
0
 
$
96,004
 
 
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7. INTANGIBLE ASSETS
The following is a summary of intangible assets subject to amortization and those not subject to amortization:
 
 
  
September 30, 2020
 
 
  
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
  
$
101,396
 
  
$
(74,429
 
$
0
 
  
$
0
 
  
$
101,396
 
  
$
(74,429
  
 
 
    
 
 
   
 
 
    
 
 
    
 
 
    
 
 
 
Non-amortized
intangible assets:
  
  
 
  
  
  
George Mason trade name
  
$
0
 
  
 
$
1,080
 
  
  
$
1,080
 
  
Crescent Mortgage trade name
  
 
0
 
  
 
 
196
 
  
  
 
196
 
  
  
 
 
      
 
 
       
 
 
    
Total
  
$
0
 
  
 
$
1,276
 
  
  
$
1,276
 
  
  
 
 
      
 
 
       
 
 
    
Goodwill not subject to amortization
  
$
1,789,571
 
  
 
$
5,315
 
  
  
$
1,794,886
 
  
  
 
 
      
 
 
       
 
 
    
 
  
December 31, 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
 
  
$
(69,508
 
$
0
 
  
$
0
 
  
$
98,359
 
  
$
(69,508
  
 
 
    
 
 
   
 
 
    
 
 
    
 
 
    
 
 
 
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, 2019
  
$
1,472,699
 
  
$
5,315
 
  
$
1,478,014
 
Preliminary addition to goodwill from Carolina Financial acquisition
  
 
316,872
 
  
 
0
 
  
 
316,872
 
  
 
 
    
 
 
    
 
 
 
Goodwill at September 30, 2020
  
$
1,789,571
 
  
$
5,315
 
  
$
1,794,886
 
  
 
 
    
 
 
    
 
 
 
United incurred amortization expense of $1,691 and $4,914 for the three and nine months ended September 30, 2020 as compared to $1,754 and $5,262 for the three and nine months ended September 30, 2019, respectively.
The following table sets forth the anticipated amortization expense for intangible assets for the years subsequent to 2019:
 
Year
  
Amount
 
2020
  
$
6,612
 
2021
  
 
5,780
 
2022
  
 
4,939
 
2023
  
 
4,641
 
2024 and thereafter
  
 
9,916
 
8. MORTGAGE SERVICING RIGHTS
Mortgage loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The value of mortgage servicing rights (“MSRs”) is included on the Company’s Consolidated Balance Sheets.
The Company initially measures servicing assets and liabilities retained related to the sale of residential loans held for sale at fair value. For subsequent measurement purposes, the Company measures servicing assets and liabilities based on the lower of cost or market using the amortization method. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income. The amortization of the mortgage servicing rights is analyzed periodically and is adjusted to reflect changes in prepayment rates and other estimates.
The Company evaluates potential impairment of mortgage servicing rights based on the difference between the carrying amount and current estimated fair value of the servicing rights. The valuation of mortgage servicing rights, and the determination of any potential impairment, is performed by aggregating all servicing rights and stratifying them into tranches based on predominant risk characteristics. Generally, loan servicing becomes more valuable when interest rates rise (as prepayments typically decrease) and less valuable when interest rates decline (as prepayments typically increase).
If impairment exists, a valuation allowance is established for any excess of amortized cost over the current estimated fair value by a charge to income. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.
Service fee income is recorded for fees earned for servicing mortgage loans under servicing agreements with the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), Government National Mortgage Association (“GNMA”) and certain private investors. The fees are based on a contractual percentage of the outstanding principal balance of the loans serviced and are recorded in noninterest income. Amortization of mortgage servicing rights and mortgage servicing costs are charged to expense when incurred.
The unpaid principal balances of loans serviced for others were approximately $3,551,157 at September 30, 2020.
 
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The estimated fair value of the mortgage servicing rights was $20,413 at September 30, 2020. The estimated fair value of servicing rights at September 30, 2020 was determined using a net servicing fee of 0.26%, average discount rates ranging from 9.50% to 13.93% with a weighted average discount rate of 10.62%, average constant prepayment rates (“CPR”) ranging from 7.59% to 17.80% with a weighted average prepayment rate of 15.08%, depending upon the stratification of the specific servicing right, and a delinquency rate, including loans on forbearance of 3.75%. Please refer to Note 14 in these Notes to Consolidated Financial Statements for additional information concerning the fair value of MSRs.
As disclosed in Note 2 of these Notes to Consolidated Financial Statements, the Company acquired $20,123 of mortgage servicing rights from its acquisition of Carolina Financial Corporation on May 1, 2020. The following presents the activity in mortgage servicing rights, including their valuation allowance for the three and nine months ended September 30, 2020:
 
 
  
Three Months Ended
September 30, 2020
 
  
Nine Months Ended

September 30, 2020
 
MSRs beginning balance
  
$
20,910
 
  
$
0
 
Addition from acquisition of subsidiary
  
 
0
 
  
 
20,123
 
Amount capitalized
  
 
2,500
 
  
 
4,391
 
Purchased servicing
  
 
0
 
  
 
0
 
Amount amortized
  
 
(1,887
  
 
(2,991
  
 
 
    
 
 
 
MSRs ending balance
  
$
21,523
 
  
$
21,523
 
  
 
 
    
 
 
 
MSRs valuation allowance beginning balance
  
$
(710
)
 
  
$
0
 
MSRs impairment
  
 
(400
  
 
(1,110
  
 
 
    
 
 
 
MSRs valuation allowance ending balance
  
$
(1,110
  
$
(1,110
  
 
 
    
 
 
 
MSRs, net of valuation allowance
  
$
20,413
 
  
$
20,413
 
  
 
 
    
 
 
 
The Company recorded temporary impairments of $400 and $1,110 on mortgage servicing rights for the three months and nine months ended September 30, 2020. The Company does not hedge the mortgage servicing rights positions and the impact of falling long-term interest rates increased prepayment speed assumptions reducing the value of the MSR asset.
The estimated amortization expense is based on current information regarding future loan payments and prepayments. Amortization expense could change in future periods based on changes in the volume of prepayments and economic factors.
9. 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 12 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.
 
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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.
The components of lease expense were as follows:
 
 
  
 
  
Three Months Ended
 
  
Three Months Ended
 
 
  
Classification
  
September 30, 2020
 
  
September 30, 2019
 
Operating lease cost
  
Net occupancy expense
  
$
5,704
 
  
$
4,864
 
Sublease income
  
Net occupancy expense
  
 
(102
  
 
(197
     
 
 
    
 
 
 
Net lease cost
  
  
$
5,602
 
  
$
4,667
 
     
 
 
    
 
 
 
 
 
  
 
 
  
Nine Months Ended
 
  
Nine Months Ended
 
 
  
Classification
 
  
 September 30, 2020 
 
  
 September 30, 2019 
 
Operating lease cost
  
 
Net occupancy expense
 
  
$
16,665
 
  
$
14,571
 
Sublease income
  
 
Net occupancy expense
 
  
 
(496
  
 
(671
     
 
 
    
 
 
 
Net lease cost
  
  
$
16,169
 
  
$
13,900
 
     
 
 
    
 
 
 
Supplemental balance sheet information related to leases was as follows:
 
 
  
Classification
  
September 30, 2020
 
  
December 31, 2019
 
Operating lease
right-of-use
assets
  
Operating lease right-of-use assets
  
$
72,789
 
  
$
57,783
 
Operating lease liabilities
  
Operating lease liabilities
  
$
76,604
 
  
$
61,342
 
Other information related to leases was as follows:
 
 
  
September 30, 2020
 
Weighted-average remaining lease term:
  
Operating leases
  
 
5.72
 years
 
Weighted-average discount rate:
  
Operating leases
  
 
2.53
Supplemental cash flow information related to leases was as follows:
 
 
  
Three Months Ended
 
 
  
September 30, 2020
 
 
September 30, 2019
 
Cash paid for amounts in the measurement of lease liabilities:
  
 
Operating cash flows from operating leases
  
$
5,854
 
 
$
4,903
 
ROU assets obtained in the exchange for lease liabilities
  
 
7,148
 
 
 
1,537
 
 
 
  
Nine Months Ended
 
 
  
September 30, 2020
 
  
September 30, 2019
 
Cash paid for amounts in the measurement of lease liabilities:
  
  
Operating cash flows from operating leases
  
$
16,593
 
  
$
14,552
 
ROU assets obtained in the exchange for lease liabilities
  
 
19,480
 
  
 
5,953
 
 
38

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, 2019, consists of the following as of September 30, 2020 and December 31, 2019:
 
 
  
Amount
 
Year
  
As of

September 30, 2020
 
  
As of

December 31, 2019
 
2020
  
$
5,467
 
  
$
17,725
 
2021
  
 
19,994
 
  
 
15,180
 
2022
  
 
15,706
 
  
 
11,522
 
2023
  
 
12,224
 
  
 
8,751
 
2024
  
 
8,010
 
  
 
5,127
 
Thereafter
  
 
20,607
 
  
 
8,190
 
  
 
 
    
 
 
 
Total lease payments
  
 
82,008
 
  
 
66,495
 
Less: imputed interest
  
 
(5,404
  
 
(5,153
  
 
 
    
 
 
 
Total
  
$
76,604
 
  
$
61,342
 
  
 
 
    
 
 
 
10. 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 funds in the overnight market, and are renewable annually subject to certain conditions. At September 30, 2020, United did not have any federal funds purchased while total securities sold under agreements to repurchase (“REPOs”) were $148,357. 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, 2020, United had no outstanding balance under this line of credit.
11. 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, 2020, United had an unused borrowing amount of approximately $6,685,985 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, 2020, $645,249 of FHLB advances with a weighted-average interest rate of 0.65% are scheduled to mature within the next five years.
The scheduled maturities of these FHLB borrowings are as follows:
 
Year
  
Amount
 
2020
  
$
561,003
 
2021
  
 
52,429
 
2022
  
 
20,869
 
2023
  
 
0
 
2024 and thereafter
  
 
10,948
 
  
 
 
 
Total
  
$
645,249
 
  
 
 
 
 
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At September 30, 2020, United had a total of nineteen 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. United also assumed $10,000 in aggregate principal amount of
fixed-to-floating
rate subordinated notes in the Carolina Financial acquisition. At September 30, 2020, the outstanding balance of the Debentures and the assumed subordinated notes was $279,425 and the outstanding balance of the Debentures was $236,164 at December 31, 2019. These amounts are 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 junior subordinated debt, United has the right to defer payment of interest on the junior subordinated debt at any time, or from time to time, for periods not exceeding five years. If interest payments on the junior subordinated debt are deferred, the dividends on the Capital Securities are also deferred. Interest on the junior 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.
12. COMMITMENTS AND CONTINGENT LIABILITIES
Lending-related Commitments
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.
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 $5,800,813 and $3,610,777 of loan commitments outstanding as of September 30, 2020 and December 31, 2019, respectively, approximately 35% of which contractually expire within one year. Included in the September 30, 2020 amount are commitments to extend credit of $293,229 related to mortgage loan funding commitments of United’s mortgage banking segment and are of a short-term nature.
 
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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, 2020 and December 31, 2019, United had $5,092 of commercial letters of credit outstanding. 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 $136,275 and $145,105 as of September 30, 2020 and December 31, 2019, 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.
Mortgage Repurchase Reserve
United’s mortgage banking segment 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. United’s mortgage banking segment has a reserve of $1,230 as of September 30, 2020.
United has derivative counter-party risk that may arise from the possible inability of United’s mortgage banking segment’s third party investors to meet the terms of their forward sales contracts. United’s mortgage banking segment 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.
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.
Regulatory Matters
A variety of consumer products, including mortgage and deposit products, and certain fees and charges related to such products, have come under increased regulatory scrutiny. It is possible that regulatory authorities could bring enforcement actions, including civil money penalties, or take other actions against United in regard to these consumer products. United could also determine of its own accord, or be required by regulators, to refund or otherwise make remediation payments to customers in connection with these products. It is not possible at this time for management to assess the probability of a material adverse outcome or reasonably estimate the amount of any potential loss related to such matters.
13. 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.
 
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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 offset in current period earnings. 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 accumulated 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 accumulated other comprehensive income, net of tax and reclassified into earnings in the same line associated with the forecasted transaction when the forecasted transaction affects earnings.
During the second quarter of 2020, United entered into a new interest rate swap derivative designated as a cash flow hedge. The notional amount of the cash flow hedge derivative totaled $250,000. The derivative is intended to hedge the changes in cash flows associated with floating rate FHLB borrowings. United is required to
pay-fixed
0.59% and receive-variable
1-month
LIBOR with monthly resets. The tenor of the interest rate swap derivative is 10 years with an expiration date in June 2030. During the third quarter of 2020, United entered into an additional interest rate swap derivative designated as a cash flow hedge. The notional amount of the cash flow hedge derivative totaled $250,000. The derivative is intended to hedge the changes in cash flows associated with floating rate FHLB borrowings. United is required to
pay-fixed
0.19% and receive-variable
1-month
LIBOR with monthly resets. The tenor of the interest rate swap derivative is 4 years with an expiration date in August 2024. As of September 30, 2020, United has determined that no forecasted transactions related to its cash flow hedges resulted in gains or losses pertaining to cash flow hedge reclassification from AOCI to income because the forecasted transactions became probable of not occurring. United estimates that $1,262 will be reclassified from AOCI as an increase to interest expense over the next
12-months
following September 30, 2020 related to the cash flow hedges. As of September 30, 2020, the maximum length of time over which forecasted transactions are hedged is ten years.
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 is subject to the Dodd-Frank Act clearing requirement for eligible derivatives. United has executed and cleared eligible derivatives through the London Clearing House (“LCH”). Variation margin at the LCH is distinguished as
settled-to-market
and settled daily based on the prior day value, rather than
collateralized-to-market.
The total notional amount of interest rate swap derivatives cleared through the LCH include $500,000 for liability derivatives as of September 30, 2020. The related fair value on a net basis approximate zero.
 
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United through its mortgage banking subsidiaries 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.
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 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, 2020 and December 31, 2019.
 
 
  
Asset Derivatives
 
 
  
September 30, 2020
 
  
December 31, 2019
 
 
  
Balance

Sheet

Location
 
  
Notional

Amount
 
  
Fair

Value
 
  
Balance

Sheet

Location
 
  
Notional

Amount
 
  
Fair

Value
 
Derivatives not designated as hedging instruments
  
  
  
  
  
  
Forward loan sales commitments
  
 
Other assets
 
  
$
75,431
 
  
$
1,990
 
  
 
Other assets
 
  
$
27,260
 
  
$
9
 
TBA mortgage-backed securities
  
 
Other assets
 
  
 
229,000
 
  
 
95
 
  
 
Other assets
 
  
 
0
 
  
 
0
 
Interest rate lock commitments
  
 
Other assets
 
  
 
1,399,936
 
  
 
49,810
 
  
 
Other assets
 
  
 
117,252
 
  
 
4,518
 
     
 
 
    
 
 
       
 
 
    
 
 
 
Total derivatives not designated as hedging instruments
  
  
$
1,704,367
 
  
$
51,895
 
  
  
$
144,512
 
  
$
4,527
 
     
 
 
    
 
 
       
 
 
    
 
 
 
Total asset derivatives
  
  
$
1,704,367
 
  
$
51,895
 
  
  
$
144,512
 
  
$
4,527
 
     
 
 
    
 
 
       
 
 
    
 
 
 
 
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Liability Derivatives
 
 
  
September 30, 2020
 
  
December 31, 2019
 
 
  
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
 
  
$
78,126
 
  
$
7,878
 
  
 
Other liabilities
 
  
$
82,243
 
  
$
2,394
 
     
 
 
    
 
 
       
 
 
    
 
 
 
Total Fair Value Hedges
  
  
$
78,126
 
  
$
7,878
 
  
  
$
82,243
 
  
$
2,394
 
Cash Flow Hedge:
  
  
  
  
  
  
Interest rate swap contract (hedging FHLB borrowing)
  
 
Other liabilities
 
  
$
500,000
 
  
$
775
 
  
 
Other liabilities
 
  
$
0
 
  
$
0
 
     
 
 
    
 
 
       
 
 
    
 
 
 
Total Cash Flow Hedge
  
  
$
500,000
 
  
$
775
 
  
  
$
0
 
  
$
0
 
     
 
 
    
 
 
       
 
 
    
 
 
 
Total derivatives designated as hedging instruments
  
  
$
578,126
 
  
$
8,653
 
  
  
$
82,243
 
  
$
2,394
 
     
 
 
    
 
 
       
 
 
    
 
 
 
Derivatives not designated as hedging instruments
  
  
  
  
  
  
TBA mortgage-backed securities
  
 
Other liabilities
 
  
$
775,000
 
  
$
2,713
 
  
 
Other liabilities
 
  
$
274,000
 
  
$
671
 
     
 
 
    
 
 
       
 
 
    
 
 
 
Total derivatives not designated as hedging instruments
  
  
$
775,000
 
  
$
2,713
 
  
  
$
274,000
 
  
$
671
 
     
 
 
    
 
 
       
 
 
    
 
 
 
Total liability derivatives
  
  
$
1,353,126
 
  
$
11,366
 
  
  
$
356,243
 
  
$
3,065
 
     
 
 
    
 
 
       
 
 
    
 
 
 
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, 2020 and December 31, 2019.
 
Derivatives in Fair Value
Hedging Relationships
  
Location in the Statement
of Condition
  
September 30, 2020
 
  
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 and leases, net of
unearned income
  
$
78,937
 
  
$
(7,878
 
$
0
 
Derivatives in Fair Value
Hedging Relationships
  
Location in the Statement
of Condition
  
December 31, 2019
 
  
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 and leases, net of
unearned income
  
$
81,397
 
  
$
(2,394
 
$
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, 2020 and 2019 are presented as follows:
 
 
  
 
 
  
Three Months Ended
 
 
  
Income Statement

Location
 
  
September 30,
2020
 
 
September 30,
2019
 
Derivatives in hedging relationships
  
  
 
Fair Value Hedges:
  
  
 
Interest rate swap contracts
  
 
Interest and fees on loans
and leases
 
 
  
$
(409
 
$
(187
     
 
 
   
 
 
 
Total derivatives in hedging relationships
  
  
$
(409
 
$
(187
     
 
 
   
 
 
 
Derivatives not designated as hedging instruments
  
  
 
Forward loan sales commitments
  
 
Income from Mortgage
Banking Activities
 
 
  
 
246
 
 
 
44
 
TBA mortgage-backed securities
  
 
Income from Mortgage
Banking Activities
 
 
  
 
1,604
 
 
 
2,641
 
Interest rate lock commitments
  
 
Income from Mortgage
Banking Activities
 
 
  
 
20,915
 
 
 
602
 
     
 
 
   
 
 
 
Total derivatives not designated as hedging instruments
  
  
$
22,765
 
 
$
3,287
 
     
 
 
   
 
 
 
Total derivatives
  
  
$
22,356
 
 
$
3,100
 
     
 
 
   
 
 
 
 
 
  
 
 
  
Nine Months Ended
 
 
  
Income Statement

Location
 
  
September 30,
2020
 
 
September 30,
2019
 
Derivatives in fair value hedging relationships
  
  
 
Fair Value Hedges:
  
  
 
Interest rate swap contracts
  
 
Interest and fees on loans
and leases
 
 
  
$
(1,129
 
$
(285
     
 
 
   
 
 
 
Total derivatives in hedging relationships
  
  
$
(1,129
 
$
(285
     
 
 
   
 
 
 
Derivatives not designated as hedging instruments
  
  
 
Forward loan sales commitments
  
 
Income from Mortgage
Banking Activities
 
 
  
 
(315
 
 
916
 
TBA mortgage-backed securities
  
 
Income from Mortgage
Banking Activities
 
 
  
 
(167
 
 
2,167
 
Interest rate lock commitments
  
 
Income from Mortgage
Banking Activities
 
 
  
 
33,084
 
 
 
6,472
 
     
 
 
   
 
 
 
Total derivatives not designated as hedging instruments
  
  
$
32,602
 
 
$
9,555
 
     
 
 
   
 
 
 
Total derivatives
  
  
$
31,473
 
 
$
9,270
 
     
 
 
   
 
 
 
14. 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.
 
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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.
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, 2020, 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, 2020. Management utilizes a number of factors to determine if a market is inactive, all of which may require a significant level of judgment.
 
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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 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 does not have any
available-for-sale
securities considered as Level 3.
Loans held for sale
: For residential mortgage loans sold in the mortgage banking segment, the loans closed are recorded at fair value using the fair value option which is measured using valuations from investors for loans with similar characteristics (Level 2) with some adjusted for the Company’s actual sales experience versus the investor’s indicated pricing (Level 3). The unobservable input for Level 3 valuations is the Company’s historical sales prices. For September 30, 2020, the range of historical sales prices increased the investor’s indicated pricing by a range of 0.02% to 0.27% with a weighted average increase of 0.17%.
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 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 accumulated 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 accumulated other comprehensive income, net of tax and reclassified into earnings in the same line associated with the forecasted transaction when the forecasted transaction affects 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, United’s mortgage banking subsidiaries enter 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 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, United’s mortgage banking subsidiaries enter 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 1 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.
 
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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 (Level 2) with some adjusted for the Company’s actual sales experience versus the investor’s indicated pricing (Level 3). The unobservable input for Level 3 valuations is the Company’s historical sales prices. For September 30, 2020, the range of historical sales prices increased the investor’s indicated pricing by a range of 0.02% to 0.27% with a weighted average increase of 0.17%.
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, 2020 and December 31, 2019, segregated by the level of the valuation inputs within the fair value hierarchy.
 
 
  
 
 
  
Fair Value at September 30, 2020 Using
 
Description
  
Balance as of

September 30,

2020
 
  
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
  
$
66,510
 
  
$
0
 
  
$
66,510
 
  
$
0
 
State and political subdivisions
  
 
536,155
 
  
 
0
 
  
 
536,155
 
  
 
0
 
Residential mortgage-backed securities Agency
  
 
804,332
 
  
 
0
 
  
 
804,332
 
  
 
0
 
Non-agency
  
 
42,340
 
  
 
0
 
  
 
42,340
 
  
 
0
 
Commercial mortgage-backed securities Agency
  
 
650,986
 
  
 
0
 
  
 
650,986
 
  
 
0
 
Asset-backed securities
  
 
283,589
 
  
 
0
 
  
 
283,589
 
  
 
0
 
Trust preferred collateralized debt obligations
  
 
0
 
  
 
0
 
  
 
0
 
  
 
0
 
Single issue trust preferred securities
  
 
16,748
 
  
 
0
 
  
 
16,748
 
  
 
0
 
Other corporate securities
  
 
377,142
 
  
 
6,282
 
  
 
370,860
 
  
 
0
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total available for sale securities
  
 
2,777,802
 
  
 
6,282
 
  
 
2,771,520
 
  
 
0
 
Equity securities:
  
  
  
  
Financial services industry
  
 
100
 
  
 
100
 
  
 
0
 
  
 
0
 
Equity mutual funds (1)
  
 
4,160
 
  
 
4,160
 
  
 
0
 
  
 
0
 
Other equity securities
  
 
5,995
 
  
 
5,995
 
  
 
0
 
  
 
0
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total equity securities
  
 
10,255
 
  
 
10,255
 
  
 
0
 
  
 
0
 
Loans held for sale
  
 
784,457
 
  
 
0
 
  
 
59,663
 
  
 
724,794
 
Derivative financial assets:
  
  
  
  
Forward sales commitments
  
 
1,990
 
  
 
0
 
  
 
1,990
 
  
 
0
 
TBA mortgage-backed securities
  
 
95
 
  
 
0
 
  
 
95
 
  
 
0
 
Interest rate lock commitments
  
 
49,810
 
  
 
0
 
  
 
9,936
 
  
 
39,874
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total derivative financial assets
  
 
51,895
 
  
 
0
 
  
 
12,021
 
  
 
39,874
 
Liabilities
  
  
  
  
Derivative financial liabilities:
  
  
  
  
Interest rate swap contracts
  
 
8,653
 
  
 
0
 
  
 
8,653
 
  
 
0
 
TBA mortgage-backed securities
  
 
2,713
 
  
 
0
 
  
 
2,713
 
  
 
0
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total derivative financial liabilities
  
 
11,366
 
  
 
0
 
  
 
11,366
 
  
 
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.
 
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Fair Value at December 31, 2019 Using
 
Description
  
Balance as of

December 31,

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
  
$
58,676
 
  
$
0
 
  
$
58,676
 
  
$
0
 
State and political subdivisions
  
 
272,362
 
  
 
0
 
  
 
272,362
 
  
 
0
 
Residential mortgage-backed securities Agency
  
 
836,534
 
  
 
0
 
  
 
836,534
 
  
 
0
 
Non-agency
  
 
3,833
 
  
 
0
 
  
 
3,833
 
  
 
0
 
Commercial mortgage-backed securities Agency
  
 
614,973
 
  
 
0
 
  
 
614,973
 
  
 
0
 
Asset-backed securities
  
 
276,139
 
  
 
0
 
  
 
276,139
 
  
 
0
 
Trust preferred collateralized debt obligations
  
 
4,703
 
  
 
0
 
  
 
0
 
  
 
4,703
 
Single issue trust preferred securities
  
 
16,774
 
  
 
0
 
  
 
16,774
 
  
 
0
 
Other corporate securities
  
 
353,302
 
  
 
6,586
 
  
 
346,716
 
  
 
0
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total available for sale securities
  
 
2,437,296
 
  
 
6,586
 
  
 
2,426,007
 
  
 
4,703
 
Equity securities:
  
  
  
  
Financial services industry
  
 
154
 
  
 
154
 
  
 
0
 
  
 
0
 
Equity mutual funds (1)
  
 
3,971
 
  
 
3,971
 
  
 
0
 
  
 
0
 
Other equity securities
  
 
4,769
 
  
 
4,769
 
  
 
0
 
  
 
0
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total equity securities
  
 
8,894
 
  
 
8,894
 
  
 
0
 
  
 
0
 
Loans held for sale
  
 
384,375
 
  
 
0
 
  
 
0
 
  
 
384,375
 
Derivative financial assets:
  
  
  
  
Interest rate swap contracts
  
 
9
 
  
 
0
 
  
 
9
 
  
 
0
 
Forward sales commitments
  
 
4,518
 
  
 
0
 
  
 
0
 
  
 
4,518
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total derivative financial assets
  
 
4,527
 
  
 
0
 
  
 
9
 
  
 
4,518
 
Liabilities
  
  
  
  
Derivative financial liabilities:
  
 
2,394
 
  
 
0
 
  
 
2,394
 
  
 
0
 
TBA mortgage-backed securities
  
 
671
 
  
 
0
 
  
 
671
 
  
 
0
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Total derivative financial liabilities
  
 
3,065
 
  
 
0
 
  
 
3,065
 
  
 
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.
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, 2020 and the year ended December 31, 2019.
 
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The following table presents additional information about financial assets and liabilities measured at fair value at September 30, 2020 and December 31, 2019 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,

2020
 
 
December 31,
2019
 
Balance, beginning of period
  
$
4,703
 
 
$
5,917
 
Total gains or losses (realized/unrealized):
  
 
Included in earnings (or changes in net assets)
  
 
309
 
 
 
(155
Included in other comprehensive income
  
 
0
 
 
 
(1,059
Sales
  
 
(5,012
 
 
0
 
  
 
 
   
 
 
 
Balance, end of period
  
$
0
 
 
$
4,703
 
  
 
 
   
 
 
 
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,

2020
 
 
December 31,
2019
 
Balance, beginning of period
  
$
384,375
 
 
$
247,104
 
Originations
  
 
4,088,247
 
 
 
2,941,722
 
Sales
  
 
(3,915,328
 
 
(2,888,257
Total gains or losses during the period recognized in earnings
  
 
167,500
 
 
 
83,806
 
  
 
 
   
 
 
 
Balance, end of period
  
$
724,794
 
 
$
384,375
 
  
 
 
   
 
 
 
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,

2020
 
 
December 31,
2019
 
Balance, beginning of period
  
$
4,518
 
 
$
4,103
 
Transfers other
  
 
35,356
 
 
 
415
 
  
 
 
   
 
 
 
Balance, end of period
  
$
39,874
 
 
$
4,518
 
  
 
 
   
 
 
 
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
 
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.
 
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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, 2020
 
  
 Three Months Ended 

September 30, 2019
 
Assets
  
  
Loans held for sale
  
  
Income from mortgage banking activities
  
$
7,807
 
  
$
(1,304
 
Description
  
Nine Months Ended

September 30, 2020
 
  
Nine Months Ended

September 30, 2019
 
Assets
  
  
Loans held for sale
  
  
Income from mortgage banking activities
  
$
18,278
 
  
$
5,238
 
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, 2020
 
  
December 31, 2019
 
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
  
$
759,737
 
  
$
784,457
 
  
$
24,720
 
  
$
375,274
 
  
$
384,375
 
  
$
9,101
 
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 three months ended September 30, 2020. Gains and losses on sale of loans are recorded within income from mortgage banking activities on the Consolidated Statements of Income.
Individually assessed loans
: In the determination of the allowance for loan losses, loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. Fair value is measured using a market approach based on the value of the collateral securing 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.
 
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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 individually assessed 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 and compares the fair value to its carrying value. United may elect to perform a qualitative analysis to determine whether or not it is more-likely-than not that the fair value of a reporting unit is less than its carrying amount. If United elects to bypass this qualitative analysis, or concludes via qualitative analysis that it is
more-likely-than-not
that the fair value of a reporting unit is less than its carrying value, United may use either a market or income quantitative approach, whichever is more practical, to determine the fair value of the reporting unit to compare to its carrying value as step one. If the fair value is greater than the carrying value, then the reporting unit’s goodwill is deemed not to be impaired. If the fair value is less than the carrying value, then a second step is performed which measures the amount of impairment by comparing the carrying amount of the goodwill to its implied fair value. If the implied fair value of the goodwill exceeds the carrying amount, there is no impairment. If the carrying amount exceeds the implied fair value of goodwill, an impairment charge is recorded for the excess. At each reporting date, the Company considers potential indicators of impairment. United performed its annual goodwill impairment test on the Company’s reporting units as of September 30, 2020. The goodwill impairment test did not identify any goodwill impairment. In subsequent periods, economic uncertainty and volatility surrounding
COVID-19
and the performance of the Company’s stock as well as possible other impairment indicators could cause us to perform a goodwill impairment test which could result in an impairment charge being recorded for that period if the carrying value of goodwill was found to exceed fair value. 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. Other than those intangible assets recorded in the acquisition of Carolina Financial in the second quarter of 2020, no other fair value measurement of intangible assets was made during the first nine months of 2020 and 2019.
 
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Table of Contents
 
Mortgage Servicing Rights (
MSRs
):
A mortgage servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans are expected to more than adequately compensate the Company for performing the servicing. The Company initially measures servicing assets and liabilities retained related to the sale of residential loans held for sale (“mortgage servicing rights”) at fair value, if practicable. For subsequent measurement purposes, the Company measures servicing assets and liabilities based on the lower of cost or market quarterly on a nonrecurring basis. The quarterly determination of fair value of servicing rights is provided by a third party and is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy. The unobservable inputs for Level 3 valuations are market discount rates, anticipated prepayment speeds, projected delinquency rates, and ancillary fee income net of servicing costs. For September 30, 2020, the average range of discount rates was 9.50% to 13.93% with a weighted average discount rate of 10.62%; the average range of constant prepayment rates was 7.59% to 17.80% with a weighted average prepayment rate of 15.08%; the net servicing fee was 0.26%; and the delinquency rate, including loans on forbearance was 3.75%.
The Company recorded a $400 temporary impairment of mortgage servicing rights in the quarter ended September 30, 2020. The Company does not hedge the mortgage servicing rights positions and the impact of falling long-term interest rates increased prepayment speed assumptions reducing the value of MSRs asset.
The following table summarizes United’s financial assets that were measured at fair value on a nonrecurring basis during the period:
 
 
  
 
 
  
Carrying value at September 30, 2020
 
  
 
 
Description
  
Balance as of
September 30,
2020
 
  
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
  
$
27,627
 
  
$
0
 
  
$
27,627
 
  
$
0
 
  
$
(5
Individually assessed loans
  
 
52,921
 
  
 
0
 
  
 
40,285
 
  
 
12,636
 
  
 
1,242
 
OREO
  
 
25,696
 
  
 
0
 
  
 
25,645
 
  
 
51
 
  
 
(445
Mortgage servicing rights
  
 
20,413
 
  
 
0
 
  
 
0
 
  
 
20,413
 
  
 
(1,110
 
 
  
 
 
  
Carrying value at December 31, 2019
 
  
 
 
Description
  
Balance as of
December 31,
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
  
$
3,139
 
  
$
0
 
  
$
3,139
 
  
$
0
 
  
$
(4
Impaired Loans
  
 
68,213
 
  
 
0
 
  
 
55,792
 
  
 
12,421
 
  
 
1,831
 
OREO
  
 
15,515
 
  
 
0
 
  
 
15,495
 
  
 
20
 
  
 
(785
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.
 
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Table of Contents
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 consider 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 and leases
: 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 and leases (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 and leases with similar terms to borrowers of similar creditworthiness, which include adjustments for liquidity concerns. For acquired PCD 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 Credit Losses recorded for these loans.
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.
 
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Summary of Fair Values for All Financial Instruments
The estimated fair values of United’s financial instruments 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, 2020
  
  
  
  
  
Cash and cash equivalents
  
$
1,656,533
 
  
$
1,656,533
 
  
$
0
 
  
$
1,656,533
 
  
$
0
 
Securities available for sale
  
 
2,777,802
 
  
 
2,777,802
 
  
 
6,282
 
  
 
2,771,520
 
  
 
0
 
Securities held to maturity
  
 
1,214
 
  
 
1,213
 
  
 
0
 
  
 
194
 
  
 
1,019
 
Equity securities
  
 
10,255
 
  
 
10,255
 
  
 
10,255
 
  
 
0
 
  
 
0
 
Other securities
  
 
217,992
 
  
 
207,093
 
  
 
0
 
  
 
0
 
  
 
207,093
 
Loans held for sale
  
 
812,084
 
  
 
812,084
 
  
 
0
 
  
 
87,290
 
  
 
724,794
 
Net loans and leases
  
 
17,704,419
 
  
 
16,925,002
 
  
 
0
 
  
 
0
 
  
 
16,925,002
 
Derivative financial assets
  
 
51,895
 
  
 
51,895
 
  
 
0
 
  
 
12,021
 
  
 
39,874
 
Mortgage servicing rights
  
 
20,413
 
  
 
20,413
 
  
 
0
 
  
 
0
 
  
 
20,413
 
Deposits
  
 
20,251,539
 
  
 
20,248,507
 
  
 
0
 
  
 
20,248,507
 
  
 
0
 
Short-term borrowings
  
 
148,357
 
  
 
148,357
 
  
 
0
 
  
 
148,357
 
  
 
0
 
Long-term borrowings
  
 
924,674
 
  
 
875,217
 
  
 
0
 
  
 
875,217
 
  
 
0
 
Derivative financial liabilities
  
 
11,366
 
  
 
11,366
 
  
 
0
 
  
 
11,366
 
  
 
0
 
December 31, 2019
  
  
  
  
  
Cash and cash equivalents
  
$
837,493
 
  
$
837,493
 
  
$
0
 
  
$
837,493
 
  
$
0
 
Securities available for sale
  
 
2,437,296
 
  
 
2,437,296
 
  
 
6,586
 
  
 
2,426,007
 
  
 
4,703
 
Securities held to maturity
  
 
1,446
 
  
 
1,447
 
  
 
0
 
  
 
427
 
  
 
1,020
 
Equity securities
  
 
8,894
 
  
 
8,894
 
  
 
8,894
 
  
 
0
 
  
 
0
 
Other securities
  
 
222,161
 
  
 
211,053
 
  
 
0
 
  
 
0
 
  
 
211,053
 
Loans held for sale
  
 
387,514
 
  
 
387,514
 
  
 
0
 
  
 
3,139
 
  
 
384,375
 
Net loans
  
 
13,635,072
 
  
 
13,185,955
 
  
 
0
 
  
 
0
 
  
 
13,185,955
 
Derivative financial assets
  
 
4,527
 
  
 
4,527
 
  
 
0
 
  
 
9
 
  
 
4,518
 
Deposits
  
 
13,852,421
 
  
 
13,843,077
 
  
 
0
 
  
 
13,843,077
 
  
 
0
 
Short-term borrowings
  
 
374,654
 
  
 
374,654
 
  
 
0
 
  
 
374,654
 
  
 
0
 
Long-term borrowings
  
 
1,838,029
 
  
 
1,820,297
 
  
 
0
 
  
 
1,820,297
 
  
 
0
 
Derivative financial liabilities
  
 
3,065
 
  
 
3,065
 
  
 
0
 
  
 
3,065
 
  
 
0
 
15. STOCK BASED COMPENSATION
On May 12, 2020, United’s shareholders approved the 2020 Long-Term Incentive Plan (“2020 LTI Plan”). The 2020 LTI Plan became effective May 13, 2020. An award granted under the 2020 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 2020 LTI Plan is 2,300,000. The 2020 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 2020 LTI Plan. The maximum number of options and stock appreciation rights, in the aggregate, which may be awarded to any individual key employee during any calendar year is 100,000. The maximum number of options and stock appreciation rights, in the aggregate, which may be awarded to any
non-employee
director during any calendar year is 10,000 or, if such Award is payable in cash, the Fair Market Value equivalent thereof. 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 10,000 shares to any individual
non-employee
director. Subject to certain change in control provisions, the 2020 LTI Plan provides that all awards of 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. United adopted a clawback policy that applies to named executive officers and other executive officers and permits the Committee to cancel certain awards and to recoup gains realized from previous awards should United be required to prepare an accounting restatement due to materially inaccurate performance metrics. A Form
S-8
was filed on May 29, 2020 with the Securities and Exchange Commission to register all the shares which were available for the 2020 LTI Plan. The 2020 LTI Plan replaces the 2016 LTI Plan.
 
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Compensation expense of $1,369 and $3,991 related to the nonvested awards under United’s Long-Term Incentive Plans was incurred for the third quarter and first nine months of 2020, respectively, as compared to the compensation expense of $1,194 and $3,505 related to the nonvested awards under United’s Long-Term Incentive Plans incurred for the third quarter and first nine months of 2019, 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 2020 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, 2020, and the changes during the first nine months of 2020 are presented below:
 
 
  
Nine Months Ended September 30, 2020
 
 
  
 
 
  
 
 
  
Weighted Average
 
 
  
Shares
 
  
Aggregate

Intrinsic

Value
 
  
Remaining

Contractual

Term (Yrs.)
 
  
Exercise

Price
 
Outstanding at January 1, 2020
  
 
1,715,316
 
  
  
  
$
34.49
 
Assumed in Carolina Financial merger
  
 
117,116
 
  
  
  
 
12.14
 
Granted
  
 
183,551
 
  
  
  
 
32.51
 
Exercised
  
 
(14,994
  
  
  
 
20.48
 
Forfeited or expired
  
 
(8,915
  
  
  
 
28.47
 
  
 
 
          
 
 
 
Outstanding at September 30, 2020
  
 
1,992,074
 
  
$
1,182
 
  
 
5.3
 
  
$
33.13
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Exercisable at September 30, 2020
  
 
1,446,719
 
  
$
1,182
 
  
 
4.1
 
  
$
31.67
 
  
 
 
    
 
 
    
 
 
    
 
 
 
The following table summarizes the status of United’s nonvested stock option awards during the first nine months of 2020:
 
 
  
Shares
 
  
Weighted-Average

Grant Date Fair Value
Per Share
 
Nonvested at January 1, 2020
  
 
589,737
 
  
$
7.62
 
Granted
  
 
183,551
 
  
 
5.65
 
Vested
  
 
(225,582
  
 
7.68
 
Forfeited or expired
  
 
(2,351
  
 
7.32
 
  
 
 
    
 
 
 
Nonvested at September 30, 2020
  
 
545,355
 
  
$
6.93
 
  
 
 
    
 
 
 
During the nine months ended September 30, 2020 and 2019, 14,994 and 98,613 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, 2020 and 2019 were issued from authorized and unissued stock. The total intrinsic value of options exercised under the Plans during the nine months ended September 30, 2020 and 2019 was $249 and $1,463 respectively.
Restricted Stock
Under the 2020 LTI Plan, United may award restricted common shares to key employees and
non-employee
directors. Restricted shares granted to participants will vest no sooner than 1/3 per year over the first three anniversaries of the award. Unless determined by the Committee or the Board and provided in the award agreement, 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.
 
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The following summarizes the changes to United’s restricted common shares for the period ended September 30, 2020:
 
 
  
Number of
Shares
 
  
Weighted-Average

Grant Date Fair Value
Per Share
 
Outstanding at January 1, 2020
  
 
247,896
 
  
$
39.20
 
Granted
  
 
182,425
 
  
 
32.19
 
Vested
  
 
(88,671
  
 
39.32
 
Forfeited
  
 
(946
  
 
36.58
 
  
 
 
    
 
 
 
Outstanding at September 30, 2020
  
 
340,704
 
  
$
35.42
 
  
 
 
    
 
 
 
16. 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. United made a discretionary contribution of $20,000 during the first nine months of 2020. No discretionary contribution was 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.
Included in accumulated other comprehensive income at December 31, 2019 are unrecognized actuarial losses of $60,894 ($46,706 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, 2020 is $5,802 ($4,450 net of tax).
Net periodic pension cost for the three and nine months ended September 30, 2020 and 2019 included the following components:
 
 
  
Three Months Ended

September 30
 
 
Nine Months Ended

September 30
 
 
  
2020
 
 
2019
 
 
2020
 
 
2019
 
Service cost
  
$
722
 
 
$
567
 
 
$
2,152
 
 
$
1,683
 
Interest cost
  
 
1,301
 
 
 
1,474
 
 
 
3,874
 
 
 
4,375
 
Expected return on plan assets
  
 
(2,658
 
 
(2,382
 
 
(7,917
 
 
(7,068
Recognized net actuarial loss
  
 
1,458
 
 
 
1,198
 
 
 
4,342
 
 
 
3,553
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net periodic pension cost
  
$
823
 
 
$
857
 
 
$
2,451
 
 
$
2,543
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Weighted-Average Assumptions:
  
 
 
 
Discount rate
  
 
3.42
 
 
4.52
 
 
3.42
 
 
4.52
Expected return on assets
  
 
6.75
 
 
7.00
 
 
6.75
 
 
7.00
Rate of compensation increase (prior to age 40)
  
 
5.00
 
 
n/a
 
 
 
5.00
 
 
n/a
 
Rate of compensation increase (ages
40-54)
  
 
4.00
 
 
n/a
 
 
 
4.00
 
 
n/a
 
Rate of compensation increase (prior to age 45)
  
 
n/a
 
 
 
3.50
 
 
n/a
 
 
 
3.50
Rate of compensation increase (otherwise)
  
 
3.50
 
 
3.00
 
 
3.50
 
 
3.00
 
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17. 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, 2020 and 2019, the total amount of accrued interest related to uncertain tax positions was $931 and $641, 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 21.82% and 20.23% for the third quarter and first nine months of 2020 and 20.50% and 20.86% for the third quarter and first nine months of 2019.
18. COMPREHENSIVE INCOME
The components of total comprehensive income for the three and nine months ended September 30, 2020 and 2019 are as follows:
 
 
  
Three Months Ended
 
 
Nine Months Ended
 
 
  
September 30
 
 
September 30
 
 
  
2020
 
 
2019
 
 
2020
 
 
2019
 
Net Income
  
$
103,784
 
 
$
65,965
 
 
$
196,653
 
 
$
196,814
 
Available for sale (“AFS”) securities:
  
 
 
 
AFS securities with OTTI charges during the period
  
 
0
 
 
 
(272
 
 
0
 
 
 
(347
Related income tax effect
  
 
0
 
 
 
64
 
 
 
0
 
 
 
81
 
Less: OTTI charges recognized in net income
  
 
0
 
 
 
9
 
 
 
0
 
 
 
84
 
Related income tax benefit
  
 
0
 
 
 
(3
 
 
0
 
 
 
(20
Reclassification of previous noncredit OTTI to credit OTTI
  
 
0
 
 
 
0
 
 
 
0
 
 
 
2,188
 
Related income tax benefit
  
 
0
 
 
 
0
 
 
 
0
 
 
 
(510
  
 
 
   
 
 
   
 
 
   
 
 
 
Net unrealized (losses) gains on AFS securities with OTTI
  
 
0
 
 
 
(202
 
 
0
 
 
 
1,476
 
AFS securities – all other:
  
 
 
 
Change in net unrealized gain on AFS securities arising during the period
  
 
11,526
 
 
 
5,070
 
 
 
72,385
 
 
 
48,014
 
Related income tax effect
  
 
(2,686
 
 
(1,181
 
 
(16,866
 
 
(11,187
Net reclassification adjustment for (gains) losses included in net income
  
 
(861
 
 
(66
 
 
(2,502
 
 
152
 
Related income tax expense (benefit)
  
 
201
 
 
 
16
 
 
 
583
 
 
 
(35
  
 
 
   
 
 
   
 
 
   
 
 
 
  
 
8,180
 
 
 
3,839
 
 
 
53,600
 
 
 
36,944
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net effect of AFS securities on other comprehensive income
  
 
8,180
 
 
 
3,637
 
 
 
53,600
 
 
 
38,420
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Cash flow hedge derivatives:
  
 
 
 
Unrealized gain (loss) on cash flow hedge
  
 
884
 
 
 
0
 
 
 
(775
 
 
0
 
Related income tax effect
  
 
(206
 
 
0
 
 
 
181
 
 
 
0
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net effect of cash flow hedge derivatives on other comprehensive income
  
 
678
 
 
 
0
 
 
 
(594
 
 
0
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Pension plan:
  
 
 
 
Recognized net actuarial loss
  
 
1,458
 
 
 
1,198
 
 
 
4,342
 
 
 
3,553
 
Related income tax benefit
  
 
(470
 
 
(249
 
 
(1,129
 
 
(785
  
 
 
   
 
 
   
 
 
   
 
 
 
Net effect of change in pension plan asset on other comprehensive income
  
 
988
 
 
 
949
 
 
 
3,213
 
 
 
2,768
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total change in other comprehensive income
  
 
9,846
 
 
 
4,586
 
 
 
56,219
 
 
 
41,188
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total Comprehensive Income
  
$
113,630
 
 
$
70,551
 
 
$
252,872
 
 
$
238,002
 
  
 
 
   
 
 
   
 
 
   
 
 
 
 
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The components of accumulated other comprehensive income for the nine months ended September 30, 2020 are as follows:
Changes in Accumulated Other Comprehensive Income (AOCI) by Component
(a)
For the Nine Months Ended September 30, 2020
 
 
 
  
Unrealized
Gains/Losses
on AFS
Securities
 
 
Unrealized
Gains/Losses
on Cash
Flow Hedge
 
 
Defined

Benefit
Pension

Items
 
 
Total
 
Balance at January 1, 2020
  
$
7,956
 
 
$
0
 
 
$
(42,825
 
$
(34,869
Other comprehensive income before reclassification
  
 
55,519
 
 
 
(594
 
 
0
 
 
 
54,925
 
Amounts reclassified from accumulated other comprehensive income
  
 
(1,919
 
 
0
 
 
 
3,213
 
 
 
1,294
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net current-period other comprehensive income, net of tax
  
 
53,600
 
 
 
(594
 
 
3,213
 
 
 
56,219
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Balance at September 30, 2020
  
$
61,556
 
 
$
(594
 
$
(39,612
 
$
21,350
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Reclassifications out of Accumulated Other Comprehensive Income (AOCI)
For the Nine Months Ended September 30, 2020
 
Details about AOCI Components
  
Amount
Reclassified
from AOCI
 
 
Affected Line Item in the Statement Where
Net Income is Presented
Available for sale (“AFS”) securities:
  
 
Net reclassification adjustment for losses (gains) included in net income
  
$
(2,502
 
Net investment securities losses
  
 
 
   
  
 
(2,502
 
Total before tax
Related income tax effect
  
 
583
 
 
Tax expense
  
 
 
   
  
 
(1,919
 
Net of tax
Cash flow hedge:
  
 
Net reclassification adjustment for losses (gains) included in net income
  
$
0
 
 
Interest expense
  
 
 
   
  
 
0
 
 
Total before tax
Related income tax effect
  
 
0
 
 
Tax expense
  
 
 
   
Pension plan:
  
 
Recognized net actuarial loss
  
 
4,342
(a) 
 
  
 
 
   
  
 
4,342
 
 
Total before tax
Related income tax effect
  
 
(1,129
 
Tax expense
  
 
 
   
  
 
3,213
 
 
Net of tax
  
 
 
   
Total reclassifications for the period
  
$
1,294
 
 
  
 
 
   
 
(a)
This AOCI component is included in the computation of net periodic pension cost (see Note 16, Employee Benefit Plans)
 
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19. 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
 
 
  
2020
 
  
2019
 
  
2020
 
  
2019
 
Distributed earnings allocated to common stock
  
$
45,295
 
  
$
34,434
 
  
$
126,080
 
  
$
103,711
 
Undistributed earnings allocated to common stock
  
 
58,229
 
  
 
31,378
 
  
 
70,064
 
  
 
92,654
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Net earnings allocated to common shareholders
  
$
103,524
 
  
$
65,812
 
  
$
196,144
 
  
$
196,365
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Average common shares outstanding
  
 
129,373,154
 
  
 
101,432,243
 
  
 
116,876,402
 
  
 
101,698,530
 
Equivalents from stock options
  
 
81,812
 
  
 
279,497
 
  
 
68,192
 
  
 
268,605
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Average diluted shares outstanding
  
 
129,454,966
 
  
 
101,711,740
 
  
 
116,944,594
 
  
 
101,967,135
 
  
 
 
    
 
 
    
 
 
    
 
 
 
Earnings per basic common share
  
$
0.80
 
  
$
0.65
 
  
$
1.68
 
  
$
1.93
 
Earnings per diluted common share
  
$
0.80
 
  
$
0.65
 
  
$
1.68
 
  
$
1.93
 
20. 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.
United currently sponsors nineteen 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.
 
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Information related to United’s statutory trusts is presented in the table below:
 
Description
  
Issuance Date
  
Amount of
Capital
Securities Issued
 
  
Stated 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
Carolina Financial Capital Trust I
  
December 19, 2002
  
$
5,000
 
  
Prime + 0.50%
  
December 31, 2032
Carolina Financial Capital Trust II
  
November 5, 2003
  
$
10,000
 
  
3-month
LIBOR + 3.05%
  
January 7, 2034
Greer Capital Trust I
  
October 12, 2004
  
$
6,000
 
  
3-month
LIBOR + 2.20%
  
October 18, 2034
Greer Capital Trust II
  
December 28, 2006
  
$
5,000
 
  
3-month
LIBOR + 1.73%
  
January 30, 2037
First South Preferred Trust I
  
September 26, 2003
  
$
10,000
 
  
3-month
LIBOR + 2.95%
  
September 30, 2033
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, 2020
 
  
As of December 31, 2019
 
 
  
Aggregate

Assets
 
  
Aggregate

Liabilities
 
  
Risk Of

Loss
(1)
 
  
Aggregate

Assets
 
  
Aggregate

Liabilities
 
  
Risk Of

Loss
(1)
 
Trust preferred securities
  
$
295,581
 
  
$
284,939
 
  
$
10,642
 
  
$
257,941
 
  
$
248,680
 
  
$
9,261
 
 
(1)
Represents investment in VIEs.
21. 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 United’s mortgage banking subsidiaries, George Mason and Crescent Mortgage. Crescent Mortgage may retain servicing rights on their mortgage loans sold. At certain times, Crescent may purchase rights to service loans from third parties. These rights are known as mortgage servicing rights provide the owner with the contractual right to receive a stream of cash flows in exchange for performing specified mortgage servicing functions.
 
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The community banking segment provides the mortgage banking segment (George Mason and Crescent Mortgage) 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, 2020 and 2019 is as follows:
 
 
  
At and For the Three Months Ended September 30, 2020
 
 
  
Community
Banking
 
  
Mortgage
Banking
 
  
Other
 
 
Intersegment

Eliminations
 
 
Consolidated
 
Net interest income
  
$
182,187
 
  
$
2,740
 
  
$
(2,241
 
$
2,978
 
 
$
185,664
 
Provision for loans losses
  
 
16,781
 
  
 
0
 
  
 
0
 
 
 
0
 
 
 
16,781
 
Other income
  
 
26,615
 
  
 
110,900
 
  
 
33
 
 
 
(2,080
 
 
135,468
 
Other expense
  
 
125,681
 
  
 
43,417
 
  
 
1,597
 
 
 
898
 
 
 
171,593
 
Income taxes
  
 
15,053
 
  
 
14,823
 
  
 
(902
 
 
0
 
 
 
28,974
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Net income (loss)
  
$
51,287
 
  
$
55,400
 
  
$
(2,903
 
$
0
 
 
$
103,784
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Total assets (liabilities)
  
$
  25,620,814
 
  
$
  953,531
 
  
$
  27,841
 
 
$
(670,878
 
$
  25,931,308
 
Average assets (liabilities)
  
 
26,148,305
 
  
 
763,170
 
  
 
22,239
 
 
 
(518,091
 
 
26,415,623
 
 
 
  
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 Nine Months Ended September 30, 2020
 
 
  
Community
Banking
 
  
Mortgage
Banking
 
  
Other
 
 
Intersegment

Eliminations
 
 
Consolidated
 
Net interest income
  
$
490,311
 
  
$
5,935
 
  
$
(7,487
 
$
9,025
 
 
$
497,784
 
Provision for loans losses
  
 
89,811
 
  
 
0
 
  
 
0
 
 
 
0
 
 
 
89,811
 
Other income
  
 
66,483
 
  
 
203,103
 
  
 
89
 
 
 
(9,011
 
 
260,664
 
Other expense
  
 
312,621
 
  
 
99,435
 
  
 
10,030
 
 
 
14
 
 
 
422,100
 
Income taxes
  
 
31,245
 
  
 
22,042
 
  
 
(3,403
 
 
0
 
 
 
49,884
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Net income (loss)
  
$
123,117
 
  
$
87,561
 
  
$
(14,025
 
$
0
 
 
$
196,653
 
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Total assets (liabilities)
  
$
  25,620,814
 
  
$
  953,531
 
  
$
  27,841
 
 
$
(670,878
 
$
  25,931,308
 
Average assets (liabilities)
  
 
23,294,069
 
  
 
597,057
 
  
 
4,101
 
 
 
(422,920
 
 
23,472,307
 
 
 
  
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
 
 
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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. Forward-looking statements can be identified by the use of the words “expect,” “may,” “could,” “intend,” “project,” “estimate,” “believe,” “anticipate,” and other words of similar meaning. Such forward-looking statements are based on assumptions and estimates, which although believed to be reasonable, may turn out to be incorrect, such as statements about the potential impacts of the
COVID-19
pandemic. Therefore, undue reliance should not be placed upon these estimates and statements. United cannot assure that any of these statements, estimates, or beliefs will be realized and actual results may differ from those contemplated in these “forward-looking statements.” United undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.
CORONAVIRUS
(“COVID-19”)
PANDEMIC
As of December 31, 2019, there were reported cases of a “pneumonia of unknown cause” that were limited to one region of the world. By January 7, 2020, the exact strain, a new type of coronavirus, was identified, and initially named 2019-nCoV. On January 21, 2020 the first case of the new coronavirus was reported in the U.S. On January 30, 2020, the World Health Organization (“WHO”) declared the outbreak a “Public Health Emergency of International Concern.” In February of 2020, the WHO officially began calling the disease
COVID-19.
On March 11, 2020, the WHO characterized the
COVID-19
outbreak as a pandemic. In the U.S., President Trump declared the
COVID-19
pandemic a national emergency on March 13, 2020.
The
COVID-19
pandemic has had a severe disruptive impact on the U.S. and global economy with businesses closing in response to the pandemic. The economic disruption caused by the virus outbreak has caused downturns and increased uncertainty and volatility in financial markets. Individual state governmental responses to the pandemic have included orders closing
“non-essential”
businesses temporarily and directing individuals to restrict their movements, observe social distancing and “shelter-
in-place.”
These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices, disrupted global supply chains, changes in consumer behavior because of the potential exposure to the virus, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.
 
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On March 29, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which authorized approximately $2 trillion in relief to businesses and workers that have been affected by events related to COVID-19. The CARES Act includes the Paycheck Protection Program (PPP), a nearly $350 billion program designed to aid small- and
medium-sized
businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. The CARES Act marked the third federal legislative response to the ongoing coronavirus outbreak, following the enactment on March 6, 2020 of supplemental appropriations in the “Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020” and the enactment on March 18, 2020 of provisions relating to, among other things, paid sick leave and
COVID-19
testing in the “Families First Coronavirus Response Act.”
On April 16, 2020, the Small Business Administration (“SBA”) announced that all available funds under the PPP had been exhausted and applications were no longer being accepted. In response, President Trump signed into law the “Paycheck Protection Program and Health Care Enhancement Act” on April 24, 2020. This legislation provides additional fiscal year (“FY”) 2020 emergency supplemental funding to increase by $310 billion, the amount authorized and appropriated for commitments for the PPP authorized under section 7(a) of the Small Business Act, economic injury disaster loans and emergency grants under the CARES Act, to fund hospital and provider recovery and testing, and for other purposes. On June 5, 2020, President Trump signed into law the “Paycheck Protection Program Flexibility Act of 2020 (PPPFA),” which amends the PPP to give borrowers more freedom in how and when loan funds are spent while retaining the possibility of full forgiveness. Key components of the PPPFA are summarized below:
 
 
 
The PPPFA amends the PPP to give borrowers more time to spend loan funds and still obtain forgiveness.
 
 
 
Borrowers now have 24 weeks to spend loan proceeds, up from 8 weeks.
 
 
 
The Act also reduces mandatory payroll spending from 75% to 60%.
 
 
 
Two new exceptions let borrowers obtain full forgiveness even without fully restoring their workforce.
 
 
 
Changes made by the PPPFA have been incorporated in new forgiveness applications released by the SBA.
 
 
 
Time to pay off the loan has been extended to five years from the original two.
 
 
 
The Act now allows businesses to delay paying payroll taxes even if they took a PPP loan.
New legislation signed by the President July 4, 2020, extends the deadline to apply for a PPP loan through August 8, 2020. The original application deadline was June 30, 2020. The new legislation involves $134 billion in unspent PPP funds when the application process shut down at the end of June. Those funds were once again available giving Congress time to decide how to
re-appropriate
anything left after August 8.
Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. On October 8, 2020, the SBA released a simpler loan forgiveness application for PPP loans of $50,000 or less to streamline the PPP forgiveness process. The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA.
In return for processing and booking the loan, the SBA will pay the lender a processing fee tiered by the size of the loan (5% for loans of not more than $350 thousand; 3% for loans of more than $350 thousand and less than $2 million; and 1% for loans of at least $2 million). As of September 30, 2020, United had processed almost 9,000 loans totaling over $1.29 billion under the PPP and recognized $5.3 million and $10.1 million of fee income during the third quarter and first nine months of 2020, respectively, related to the PPP loans.
 
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Impact on our Operations
. In the states where United operates, many jurisdictions have declared health emergencies. The resulting closures of
non-essential
businesses and related economic disruption has impacted our operations as well as the operations of our customers. Financial services have been identified as a Critical Infrastructure Sector by the Department of Homeland Security. Accordingly, our business remains open. To address the issues arising as a result of
COVID-19,
and in order to facilitate the continued delivery of essential services while maintaining a high level of safety for our customers as well as our employees, United has implemented the following policies:
 
 
 
Restricted all
non-essential
travel and large external gatherings and have instituted a mandatory quarantine period for anyone that has traveled to an impacted area.
 
 
 
Temporarily closed all of our financial center lobbies and other corporate facilities to
non-employees,
except for certain limited cases by appointment only. United continues to serve our consumer and business customers through our drive-through facilities, ATMs, internet banking, mobile app and telephone customer service capabilities.
 
 
 
Expanded remote-access availability so that our work-force has the capability to work from home or other remote locations. All activities are performed in accordance with our compliance and information security policies designed to ensure customer data and other information is properly safeguarded.
 
 
 
Instituted mandatory social distancing policies for those employees not working remotely. Members of certain operations teams have been split into separate buildings or locations to create redundancy for key functions across the organization.
United is currently unable to fully assess or predict the extent of the effects of
COVID-19
on our operations as the ultimate impact will depend on factors that are currently unknown and/or beyond our control.
Impact on our Financial Position and Results of Operations
. Significant uncertainties as to future economic conditions exist. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. For the first nine months of 2020, the economic pressures, existing and forecasted, as of end of the first, second and third quarters, coupled with the implementation of an expected loss methodology for determining United’s provision for credit losses as required by CECL contributed to an increased provision for credit losses for the first nine months. Also, in United’s mortgage banking segment, a market disruption caused by the
COVID-19
pandemic resulted in significant losses on mortgage banking derivatives in the first quarter of 2020.
In addition, the economic pressures and uncertainties arising from the
COVID-19
pandemic may result in specific changes in consumer and business spending and borrowing and saving habits, affecting the demand for loans and other products and services United offers. Consumers affected by
COVID-19
may continue to demonstrate changed behavior even after the crisis is over. For example, consumers may decrease discretionary spending on a permanent or long-term basis, certain industries may take longer to recover (particularly those that rely on travel or large gatherings) as consumers may be hesitant to return to full social interaction, United lends to customers operating in such industries including energy, restaurants, hotels/lodging, aviation, entertainment, retail and commercial real estate, among others, that have been significantly impacted by
COVID-19
and we are continuing to monitor these customers closely. In response to the
COVID-19
pandemic, United has taken deliberate actions to increase
on-balance
sheet liquidity and increase capital ratio levels. In keeping with guidance from regulators, United is also actively working with
COVID-19
affected customers to waive fees from a variety of sources (overdraft fees, ATM fees, account maintenance fees, etc.) as well as affected borrowers to defer their payments, interest, and fees. These measures are thought, at this time, to be temporary in conjunction with the length of the expected
COVID-19
pandemic related economic crisis. Through September 30, 2020, United has made 5,910 eligible loan modifications on approximately $3.30 billion of loans outstanding under section 4013, “Temporary Relief from Troubled Debt Restructurings”, of the CARES Act. Of those amounts made, 1,433 of eligible loan modifications remain on approximately $1.19 billion of loans outstanding as of September 30, 2020. The Company continues to monitor the impact of the
COVID-19
pandemic closely, as well as any effects that may result from the CARES Act and any subsequent legislation; however, the extent to which the
COVID-19
pandemic will impact United’s operations and financial results during the remainder of 2020 is highly uncertain.
 
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For a discussion of the United’s liquidity and capital resources in light of the
COVID-19
pandemic please refer to the sections with the captions of “Liquidity” and “Capital Resources” included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
ADOPTION OF THE CURRENT EXPECTED CREDIT LOSSES STANDARD
The Company has adopted Accounting Standards Update (“ASU”)
2016-13,
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as amended, on January 1, 2020, as required by the Financial Accounting Standards Board (“FASB”). ASU
No. 2016-13
was adopted by United using a modified retrospective approach. At the January 1, 2020 date of adoption, based on forecasts of macroeconomic conditions and exposures at that time, the aggregate impact to United was a net increase to the allowance for credit losses of $57.44 million and a decrease to retained earnings of $44.33 million, with the difference being an adjustment to deferred tax assets. United has elected to
phase-in
the impact to retained earnings using a five-year transition provision, allowed by the Federal Reserve Board and other federal banking agencies in response to the
COVID-19
pandemic, to delay for two years the full impact of ASU
No. 2016-13
on regulatory capital, followed by a three-year transition period. The adoption of ASU
No. 2016-13
had an insignificant impact on the Company’s held to maturity and available for sale securities portfolios.
ASU
2016-13
requires entities to report “expected” credit losses on financial instruments measured at amortized cost and other commitments to extend credit rather than the prior “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. Based on poor economic conditions at September 30, 2020, June 30, 2020 and March 31, 2020, management recorded $16.34 million, $27.12 million and $16.96 million in provision for credit losses related to United’s loan portfolio for the third quarter, second quarter and first quarter of 2020, respectively. In addition, United recorded a provision for loan losses of $28.95 million during the second quarter of 2020 on purchased
non-credit
deteriorated
(“non-PCD”)
loans and leases from the Carolina Financial acquisition. For a further discussion, see the “Provision for Credit Losses” section in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
ACQUISITION
On May 1, 2020, United acquired 100% of the outstanding common stock of Carolina Financial Corporation (“Carolina Financial”), headquartered in Charleston, South Carolina. Immediately following the Merger, CresCom Bank, a wholly-owned subsidiary of Carolina Financial, merged with and into United Bank, a wholly-owned subsidiary of United (the Bank Merger). United Bank survived the Bank Merger and continues to exist as a Virginia banking corporation. The acquisition of Carolina Financial affords United the opportunity to expand its existing footprint in North Carolina and South Carolina. The merger resulted in a combined company with more than 200 locations in some of the best banking markets in the United States. CresCom Bank owned and operated Crescent Mortgage Company, which is based in Atlanta. Crescent Mortgage Company is approved to originate loans in 48 states partnering with community banks, credit unions and mortgage brokers. As a result of the merger, Crescent Mortgage became an indirectly-owned subsidiary of United. The Carolina Financial merger was accounted for under the acquisition method of accounting. At consummation, Carolina Financial had assets of $5.00 billion, loans and leases, net of unearned income of $3.29 billion and deposits of $3.87 billion.
 
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The results of operations of Carolina Financial are included in the consolidated results of operations from its date of acquisition. As a result of the Carolina Financial acquisition, the third quarter and first nine months of 2020 were impacted by increased levels of average balances, income, and expense as compared to the third quarter and first nine months of 2019. In addition, the third quarter and first nine months of 2020 included $5.67 million and $53.68 million, respectively, of merger-related expenses from the Carolina Financial acquisition.
TRANSITION FROM THE LONDON INTERBANK OFFERED RATE (LIBOR)
In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit the rates used to calculate LIBOR after 2021. Currently, it is unclear whether these banks, as a group or individually, will continue to submit the rates used to calculate LIBOR after 2021. It is also unclear whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes may be on the markets for LIBOR-indexed financial instruments.
Working groups comprised of various regulators and other industry groups have been formed in the United States and other countries in order to provide guidance on this topic. In particular, the Alternative Reference Rates Committee (“ARRC”) has been formed in the United States by the Federal Reserve Board and the Federal Reserve Bank of New York. The ARRC has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative reference rate for U.S. Dollar LIBOR. The ARRC has also published recommended fall-back language for LIBOR-linked financial instruments, among numerous other areas of guidance. At this time, however, it is unclear whether these recommendations will be broadly accepted by industry participants, whether they will continue to evolve, and what impact they will ultimately have on the broader markets that utilize LIBOR as a reference rate.
United has loans, derivative contracts, borrowings, and other financial instruments that are directly or indirectly dependent on LIBOR. The transition from LIBOR will cause changes to payment calculations for existing contracts that use LIBOR as the reference rate. These changes will create various risks surrounding the financial, operational, compliance and legal aspects associated with changing certain elements of existing contracts. United will also be subject to risks surrounding changes to models and systems that currently use LIBOR reference rates, as well as market and strategic risks that could arise from the use of alternative reference rates. Additionally, United could face reputational risks if this transition is not managed appropriately with its customers. While the full impact of the transition is not yet known, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.
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, 2020, but prior to the date these financial statements were issued, for potential recognition or disclosure required in these financial statements.
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.
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.
 
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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.
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 differ from these estimates. These policies, along with the disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and the calculation of the income tax provision to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the expected credit losses on financial assets measured at amortized cost to present the net amount expected to be collected as of the balance sheet date. Such allowance is based on the credit losses expected to arise over the life of the asset (contractual term). Determining the allowance for loan losses requires management to make estimates of expected credit losses that are highly uncertain and require a high degree of judgment.
 
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At September 30, 2020, the allowance for loan losses was $225.81 million and is subject to periodic adjustment based on management’s assessment of expected credit losses in the loan portfolio. Such adjustment from period to period can have a significant impact on United’s consolidated financial statements. To illustrate the potential effect on the financial statements of our estimates of the allowance for loan losses, a 10% increase in the allowance for loan losses would have required $22.58 million in additional allowance (funded by additional provision for loan losses), which would have negatively impacted the first nine months of 2020 net income by approximately $17.84 million,
after-tax
or $0.15 diluted per common share. Management’s evaluation of the adequacy of the allowance for loan losses and the appropriate provision for loan losses is based upon a quarterly evaluation of the loan portfolio. This evaluation is inherently subjective and requires significant estimates, including estimates related to the amounts and timing of future cash flows, value of collateral, losses on pools of homogeneous loans and leases based on historical loss experience, and consideration of qualitative factors such as current economic trends, all of which are susceptible to constant and significant change. The allowance allocated to specific credits and loan pools grouped by similar risk characteristics is reviewed on a quarterly basis and adjusted as necessary based upon subsequent changes in circumstances. In determining the components of the allowance for loan losses, management considers the risk arising in part from, but not limited to, qualitative factors which include
charge-off
and delinquency trends, current business conditions and reasonable and supportable economic forecasts, lending policies and procedures, the size and risk characteristics of the loan portfolio, concentrations of credit, and other various factors. The methodology used to determine the allowance for loan losses is described in Note 6, Notes to Consolidated Financial Statements. A discussion of the factors leading to changes in the amount of the allowance for loan losses is included in the Provision for Credit Losses section of this MD&A.
Income Taxes
United’s calculation of income tax provision is inherently complex due to the various different tax laws and jurisdictions in which we operate and requires management’s use of estimates and judgments in its determination. The current income tax liability also includes income tax expense related to our uncertain tax positions as required in ASC Topic 740, “Income Taxes.” Changes to the estimated accrued taxes can occur due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities and recently enacted statutory, judicial and regulatory guidance. These changes can be material to the Company’s operating results for any particular reporting period. The analysis of the income tax provision requires the assessments of the relative risks and merits of the appropriate tax treatment of transactions, filing positions, filing methods and taxable income calculations after considering statutes, regulations, judicial precedent and other information. United strives to keep abreast of changes in the tax laws and the issuance of regulations which may impact tax reporting and provisions for income tax expense. United is also subject to audit by federal and state authorities. Because the application of tax laws is subject to varying interpretations, results of these audits may produce indicated liabilities which differ from United’s estimates and provisions. United continually evaluates its exposure to possible tax assessments arising from audits and records its estimate of probable exposure based on current facts and circumstances. The potential impact to United’s operating results for any of the changes cannot be reasonably estimated. See Note 17, Notes to Consolidated Financial Statements for information regarding United’s ASC Topic 740 disclosures.
Use of Fair Value Measurements
United determines the fair value of its financial instruments based on the fair value hierarchy established in ASC Topic 820, whereby the 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. ASC Topic 820 establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs in the methodology for determining fair value are observable or unobservable.
 
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Observable inputs reflect market-based information obtained from independent sources (Level 1 or Level 2), while unobservable inputs reflect management’s estimate of market data (Level 3). For assets and liabilities that are actively traded and have quoted prices or observable market data, a minimal amount of subjectivity concerning fair value is needed. Prices and values obtained from third party vendors that do not reflect forced liquidation or distressed sales are not adjusted by management. When quoted prices or observable market data are not available, management’s judgment is necessary to estimate fair value.
At September 30, 2020, approximately 14.47% of total assets, or $3.75 billion, consisted of financial instruments recorded at fair value. Of this total, approximately 78.73% or $2.95 billion of these financial instruments used valuation methodologies involving observable market data, collectively Level 1 and Level 2 measurements, to determine fair value. Approximately 21.27% or $797.77 million of these financial instruments were valued using unobservable market information or Level 3 measurements. Most of these financial instruments valued using unobservable market information were loans held for sale at our mortgage banking segment. At September 30, 2020, only $11.37 million or less than 1% of total liabilities were recorded at fair value. This entire amount was valued using methodologies involving observable market data. United does not believe that any changes in the unobservable inputs used to value the financial instruments mentioned above would have a material impact on United’s results of operations, liquidity, or capital resources. See Note 14 for additional information regarding ASC Topic 820 and its impact on United’s financial statements.
Any material effect on the financial statements related to these critical accounting areas is further discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FINANCIAL CONDITION
United’s total assets as of September 30, 2020 were $25.93 billion, which was an increase of $6.27 billion or 31.88% from December 31, 2019, primarily the result of the acquisition of Carolina Financial on May 1, 2020 and PPP loans. Portfolio loans and leases increased $4.22 billion or 30.76%, cash and cash equivalents increased $819.04 million or 97.80%, investment securities increased $337.47 million or 12.64%, loans held for sale increased $424.57 million or 109.56%, goodwill increased $316.87 million or 21.44%, other assets increased $175.40 million or 39.69%, bank premises and equipment increased $83.81 million or 86.72% and interest receivable increased $7.06 million or 12.15% due primarily to the Carolina Financial merger. Total liabilities increased $5.37 billion or 32.92% from
year-end
2019. This increase in total liabilities was due mainly to increases of $6.40 billion or 46.19% and $76.42 million or 44.87% in deposits and accrued and other liabilities, respectively, mainly due to the Carolina Financial acquisition. Partially offsetting these increases was a decrease of $1.14 billion or 51.51% in borrowings. Shareholders’ equity increased $903.61 million or 26.86% from
year-end
2019 due primarily to the acquisition of Carolina Financial.
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, 2020 increased $819.04 million or 97.80% from
year-end
2019. In particular, interest-bearing deposits with other banks increased $727.04 million or 111.61% as United increased its liquidity due to the
COVID-19
pandemic by placing excess cash in an interest-bearing account with the Federal Reserve. In addition, cash and due from banks increased $91.99 million or 49.66% due to increases of $45.64 million in cash and $18.69 million in process with the Federal Reserve. Federal funds sold were flat, increasing $3 thousand or less than 1%. During the first nine months of 2020, net cash of $889.01 million was provided by financing activities while net cash of $45.34 million and $24.64 million were used in operating and investing activities, respectively. 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 2020 and 2019.
 
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Securities
Total investment securities at September 30, 2020 increased $337.47 million or 12.64% from
year-end
2019. Carolina Financial added $580.79 million in investment securities, including purchase accounting amounts, upon consummation of the acquisition. Securities available for sale increased $340.51 million or 13.97%. This change in securities available for sale reflects $559.29 million acquired from Carolina Financial, $560.40 million in sales, maturities and calls of securities, $278.08 million in purchases, and an increase of $69.88 million in market value. Securities held to maturity declined $232 thousand or 16.04% from
year-end
2019 due to maturities and calls of securities. Equity securities were $10.26 million at September 30, 2020, an increase of $1.36 million or 15.30% due mainly to net purchases and a change in value. Other investment securities decreased $4.17 million or 1.88% from
year-end
2019 due to a decrease in Federal Home Loan Bank (FHLB) stock. Partially offsetting this decrease in FHLB stock were purchases of Federal Reserve Bank (FRB) stock and investment tax credits.
The following table summarizes the changes in the available for sale securities since
year-end
2019:
 
(Dollars in thousands)
  
September 30
2020
 
  
December 31
2019
 
  
$ Change
 
 
% Change
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  
$
66,510
 
  
$
58,676
 
  
$
7,834
 
 
 
13.35
State and political subdivisions
  
 
536,155
 
  
 
272,362
 
  
 
263,793
 
 
 
96.85
Mortgage-backed securities
  
 
1,497,658
 
  
 
1,455,340
 
  
 
42,318
 
 
 
2.91
Asset-backed securities
  
 
283,589
 
  
 
276,139
 
  
 
7,450
 
 
 
2.70
Trust preferred collateralized debt obligations
  
 
0
 
  
 
4,703
 
  
 
(4,703
 
 
(100.00
%) 
Single issue trust preferred securities
  
 
16,748
 
  
 
16,774
 
  
 
(26
 
 
(0.16
%) 
Other corporate securities
  
 
377,142
 
  
 
353,302
 
  
 
23,840
 
 
 
6.75
  
 
 
    
 
 
    
 
 
   
 
 
 
Total available for sale securities, at fair value
  
$
2,777,802
 
  
$
2,437,296
 
  
$
340,506
 
 
 
13.97
  
 
 
    
 
 
    
 
 
   
 
 
 
The following table summarizes the changes in the held to maturity securities since
year-end
2019:
 
(Dollars in thousands)
  
September 30
2020
 
 
December 31
2019
 
  
$ Change
 
 
%
Change
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  
$
0
 
 
$
0
 
  
$
0
 
 
 
0.00
State and political subdivisions
  
 
1,194
(1) 
 
 
1,426
 
  
 
(232
 
 
(16.27
%) 
Mortgage-backed securities
  
 
0
 
 
 
0
 
  
 
0
 
 
 
0.00
Single issue trust preferred securities
  
 
0
 
 
 
0
 
  
 
0
 
 
 
0.00
Other corporate securities
  
 
20
 
 
 
20
 
  
 
0
 
 
 
0.00
  
 
 
   
 
 
    
 
 
   
 
 
 
Total held to maturity securities, at amortized cost
  
$
1,214
(1) 
 
$
1,446
 
  
$
(232
 
 
(16.04
%) 
  
 
 
   
 
 
    
 
 
   
 
 
 
Note
: (1) net of allowance for credit losses of $21 thousand.
At September 30, 2020, gross unrealized losses on available for sale securities were $10.64 million. Securities with the most significant gross unrealized losses at September 30, 2020 consisted primarily of asset-backed securities and single issue trust preferred securities. The asset-backed securities relate mainly to securities that 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 single issue trust preferred securities relate to securities of financial institutions.
As of September 30, 2020, United’s available for sale mortgage-backed securities had an amortized cost of $1.44 billion, with an estimated fair value of $1.50 billion. The portfolio consisted primarily of $777.16 million in agency residential mortgage-backed securities with a fair value of $804.33 million, $41.95 million in
non-agency
residential mortgage-backed securities with an estimated fair value of $42.34 million, and $618.90 million in commercial agency mortgage-backed securities with an estimated fair value of $650.99 million.
 
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As of September 30, 2020, United’s available for sale corporate securities had an amortized cost of $680.33 million, with an estimated fair value of $677.48 million. The portfolio consisted of $18.22 million in single issue trust preferred securities with an estimated fair value of $16.75 million. In addition to the single issue trust preferred securities, the Company held positions in various other corporate securities, including asset-backed securities with an amortized cost of $291.69 million and a fair value of $283.59 million and other corporate securities, with an amortized cost of $370.40 million and a fair value of $377.14 million.
United’s available for sale single-issue trust preferred securities had a fair value of $16.75 million as of September 30, 2020. Of the $16.75 million, $10.99 million or 65.62% were investment grade; $0.89 million or 5.28% were split rated; and $4.87 million or 29.10% were unrated. The two largest exposures accounted for 70.63% of the $16.75 million. These included Truist Bank at $6.96 million and Emigrant Bank at $4.87 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, 2020:
 
Security
  
Moodys
 
  
S&P
 
  
Fitch
 
  
Amortized
Cost
 
  
Fair
Value
 
  
Unrealized
Loss/
(Gain)
 
 
  
 
 
  
 
 
  
 
 
  
(Dollars in thousands)
 
Emigrant Bank
  
 
NR
 
  
 
NR
 
  
 
WD
 
  
$
5,744
 
  
$
4,874
 
  
$
870
 
Truist Bank
  
 
Baa1
 
  
 
NR
 
  
 
BBB
 
  
 
4,964
 
  
 
4,620
 
  
 
344
 
M&T Bank
  
 
NR
 
  
 
BBB-
 
  
 
BBB-
 
  
 
3,053
 
  
 
3,223
 
  
 
(170
Truist Bank
  
 
NR
 
  
 
BBB-
 
  
 
BBB
 
  
 
2,482
 
  
 
2,336
 
  
 
146
 
HSBC
  
 
Baa2
 
  
 
BBB
 
  
 
NR
 
  
 
1,000
 
  
 
811
 
  
 
189
 
Royal Bank of Scotland
  
 
Baa3
 
  
 
BB+
 
  
 
BBB
 
  
 
978
 
  
 
884
 
  
 
94
 
           
 
 
    
 
 
    
 
 
 
  
  
  
  
$
18,221
 
  
$
16,748
 
  
$
1,473
 
           
 
 
    
 
 
    
 
 
 
During the third quarter of 2020, United did not recognize any impairment on its available for sale investment securities. Management does not believe that any individual security with an unrealized loss as of September 30, 2020 is impaired. United believes the decline in value resulted from changes in market interest rates, credit spreads and liquidity, not a deterioration of credit. Based on a review of each of the securities in the available for sale investment portfolio, management concluded that it was more likely than not that it would be able 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. As of September 30, 2020, there was no allowance for credit losses related to the Company’s available for sale securities. However, United acknowledges that any securities in an unrealized loss position 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 impairment analysis, is presented in Note 3 to the unaudited Notes to Consolidated Financial Statements.
Loans held for sale
Loans held for sale increased $424.57 million or 109.56% from
year-end
2019 due mainly to the acquisition of Carolina Financial and its mortgage banking subsidiary, Crescent Mortgage, and increased production. Carolina Financial added $65.76 million in loans held for sale. In addition, loan originations exceeded loan sales in the secondary market during the first nine months of 2020. Loan originations for the first nine months of 2020 were $4.52 billion while loans sales were $4.16 billion. Loans held for sale were $812.08 million at September 30, 2020 as compared to $387.51 million at
year-end
2019.
 
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Portfolio Loans & Leases
Loans and leases, net of unearned income, increased $4.22 billion or 30.76% from
year-end
2019 mainly as a result of the Carolina Financial acquisition which added $3.29 billion, including purchase accounting amounts, in portfolio loans and leases and the issuance of PPP loans. Since
year-end
2019, commercial, financial and agricultural loans and leases increased $3.41 billion or 45.69% as commercial loans and leases (not secured by real estate) increased $1.93 billion or 84.31%, including $1.29 billion in PPP loans, while commercial real estate loans increased $1.48 billion or 28.61%. Consumer loans increased $48.68 million or 4.17% due to an increase in indirect automobile financing in addition to the loans acquired from Carolina Financial. In addition, construction and land development loans increased $416.10 million or 29.55% while residential real estate loans increased $384.11 million or 10.42%. These increases were due primarily to the Carolina Financial acquisition. Otherwise, portfolio loans and leases, net of unearned income, increased $957.03 million from
year-end
2019. Unearned income on loans and leases increased $35.87 million from
year-end
2019 due mainly to the deferred loan fees on the PPP loans.
The following table summarizes the changes in the major loan classes since
year-end
2019:
 
(Dollars in thousands)
  
September 30
2020
 
  
December 31
2019
 
  
$ Change
 
  
% Change
 
Loans held for sale
  
$
812,084
 
  
$
387,514
 
  
$
424,570
 
  
 
109.56
  
 
 
    
 
 
    
 
 
    
 
 
 
Commercial, financial, and agricultural:
  
  
  
  
Owner-occupied commercial real estate
  
$
1,616,380
 
  
$
1,201,652
 
  
$
414,728
 
  
 
34.51
Nonowner-occupied commercial real estate
  
 
5,029,867
 
  
 
3,965,960
 
  
 
1,063,907
 
  
 
26.83
Other commercial loans and leases
  
 
4,211,490
 
  
 
2,285,037
 
  
 
1,926,453
 
  
 
84.31
  
 
 
    
 
 
    
 
 
    
 
 
 
Total commercial, financial, and agricultural
  
$
10,857,737
 
  
$
7,452,649
 
  
$
3,405,088
 
  
 
45.69
Residential real estate
  
 
4,070,507
 
  
 
3,686,401
 
  
 
384,106
 
  
 
10.42
Construction & land development
  
 
1,824,303
 
  
 
1,408,205
 
  
 
416,098
 
  
 
29.55
Consumer:
  
  
  
  
Bankcard
  
 
8,373
 
  
 
10,074
 
  
 
(1,701
  
 
(16.89
%) 
Other consumer
  
 
1,206,600
 
  
 
1,156,219
 
  
 
50,381
 
  
 
4.36
  
 
 
    
 
 
    
 
 
    
 
 
 
Total gross loans and leases
  
$
17,967,520
 
  
$
13,713,548
 
  
$
4,253,972
 
  
 
31.02
Less: Unearned income
  
 
(37,289
  
 
(1,419
  
 
(35,870
  
 
2,527.84
  
 
 
    
 
 
    
 
 
    
 
 
 
Total loans and leases, net of unearned income
  
$
17,930,231
 
  
$
13,712,129
 
  
$
4,218,102
 
  
 
30.76
  
 
 
    
 
 
    
 
 
    
 
 
 
For a further discussion of loans and leases see Note 4 to the unaudited Notes to Consolidated Financial Statements.
Other Assets
Other assets increased $175.40 million or 39.69% from
year-end
2019. The Carolina Financial acquisition added $155.10 million in other assets plus an additional $3.04 million in core deposit intangibles and $196 thousand for the Crescent Mortgage trade name intangible. The cash surrender value of bank-owned life insurance policies increased $74.07 million, of which $71.88 million was acquired from Carolina Financial while the remaining increase was due to an increase in the cash surrender value. Deferred tax assets increased $7.63 million due mainly to the deferred taxes recorded on the purchase accounting adjustments in the Carolina Financial acquisition while income tax receivable increased $25.52 million. The remainder of the increase in other assets is the result of an increase of $46.60 million in derivative assets from Carolina Financial and an increase of $10.18 million in OREO.
 
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Deposits
Deposits represent United’s primary source of funding. Total deposits at September 30, 2020 increased $6.40 billion or 46.19% as the result of the Carolina Financial acquisition. Carolina Financial added $3.88 billion in deposits, including purchase accounting amounts. In terms of composition, noninterest-bearing deposits increased $2.68 billion or 58.06% ($893.07 million added from Carolina Financial acquisition) while interest-bearing deposits increased $3.72 billion or 40.25% ($2.99 billion added from Carolina Financial acquisition) from December 31, 2019. Organically, deposits grew $2.52 billion from
year-end
2019.
Noninterest-bearing deposits consist of demand deposit and noninterest bearing money market (“MMDA”) account balances. The $2.68 billion increase in noninterest-bearing deposits was due mainly to increases in commercial noninterest-bearing deposits of $1.51 billion or 62.79% and personal noninterest-bearing deposits of $260.23 million or 35.00% as the result of the Carolina Financial acquisition. In addition, sweep activity to noninterest bearing MMDAs increased $869.12 million or 70.12%.
Interest-bearing deposits consist of interest-bearing checking (“NOW”), regular savings, interest-bearing MMDA, and time deposit account balances. All major categories of interest-bearing deposits increased from
year-end
2019 as the result of the Carolina Financial acquisition. In particular, interest-bearing MMDAs increased $2.12 billion or 37.59% since
year-end
2019 as commercial MMDAs increased $1.02 billion, personal MMDAs increased $731.95 million, and public funds MMDAs increased $391.01 million. Brokered MMDAs decreased $18.14 million. NOW accounts increased $385.39 million or 103.55% since
year-end
2019. Excluding sweep activity from NOW accounts to interest-bearing MMDAs to reduce United’s reserve requirement at its Federal Reserve Bank, NOW accounts increased $1.22 billion or 66.78% due to a $634.40 million increase in personal NOW accounts, a $322.79 million increase in public NOW accounts, and a $258.34 million increase in commercial NOW accounts.
Regular savings increased $363.09 million or 41.13% from
year-end
2019 due to a $324.00 million increase in personal savings accounts and a $39.00 million increase in commercial savings accounts as the result of the Carolina Financial acquisition.
Time deposits under $100,000 increased $322.36 million or 44.53% from
year-end
2019 due mainly to an increase in fixed rate certificates of deposits (CDs) of $243.91 million due to the Carolina Financial acquisition. Time deposits over $100,000 increased $520.52 million or 32.54% as brokered deposits increased $102.65 million, fixed rate CDs over $100,000 increased $499.74 million, and public funds CDs over $100,000 increased $18.24 million, all as a result of the Carolina Financial acquisition. Partially offsetting these increases in time deposits over $100,000 was a $102.40 million decrease in Certificate of Deposit Account Registry Service (“CDARS”) balances.
The table below summarizes the changes by deposit category since
year-end
2019:
 
(Dollars in thousands)
  
September 30
2020
 
  
December 31
2019
 
  
$ Change
 
  
% Change
 
Demand deposits
  
$
5,196,127
 
  
$
3,381,866
 
  
$
1,814,261
 
  
 
53.65
Interest-bearing checking
  
 
757,563
 
  
 
372,175
 
  
 
385,388
 
  
 
103.55
Regular savings
  
 
1,245,983
 
  
 
882,889
 
  
 
363,094
 
  
 
41.13
Money market accounts
  
 
9,885,198
 
  
 
6,891,696
 
  
 
2,993,502
 
  
 
43.44
Time deposits under $100,000
  
 
1,046,299
 
  
 
723,941
 
  
 
322,358
 
  
 
44.53
Time deposits over $100,000
(1)
  
 
2,120,369
 
  
 
1,599,854
 
  
 
520,515
 
  
 
32.54
  
 
 
    
 
 
    
 
 
    
 
 
 
Total deposits
  
$
20,251,539
 
  
$
13,852,421
 
  
$
6,399,118
 
  
 
46.19
  
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
Includes time deposits of $250,000 or more of $969,917 and $803,414 at September 30, 2020 and December 31, 2019, respectively.
 
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Borrowings
Total borrowings at September 30, 2020 decreased $1.14 billion or 51.51% since
year-end
2019. Carolina Financial added $374.74 million, including purchase accounting amounts, upon consummation of the acquisition. During the first nine months of 2020, short-term borrowings decreased $226.30 million or 60.40% due to a $250.00 million decrease in short term FHLB advances while securities sold under agreements to repurchase increased $23.70 million. Carolina Financial added $332.00 million in short-term borrowings, most of which was repaid prior to June 30, 2020. Long-term borrowings decreased $913.36 million or 49.69% from
year-end
2019 as long-term FHLB advances decreased $956.62 million as a result of early payoff of long-term FHLB advances while issuances of trust preferred capital securities increased $33.40 million. Including purchase accounting amounts, Carolina Financial added $42.74 million in long-term borrowings, which included subordinated debt of $9.87 million.
The table below summarizes the change in the borrowing categories since
year-end
2019:
 
(Dollars in thousands)
  
September 30
2020
 
  
December 31
2019
 
  
$ Change
 
 
% Change
 
Federal funds purchased
  
$
0
 
  
$
0
 
  
$
0
 
 
 
0.00
Short-term securities sold under agreements to repurchase
  
 
148,357
 
  
 
124,654
 
  
 
23,703
 
 
 
19.02
Short-term FHLB advances
  
 
0
 
  
 
250,000
 
  
 
(250,000
 
 
(100.00
%) 
Long-term FHLB advances
  
 
645,249
 
  
 
1,601,865
 
  
 
(956,616
 
 
(59.72
%) 
Subordinated debt
  
 
9,865
 
  
 
0
 
  
 
9,865
 
 
 
100.00
Issuances of trust preferred capital securities
  
 
269,560
 
  
 
236,164
 
  
 
33,396
 
 
 
14.14
  
 
 
    
 
 
    
 
 
   
 
 
 
Total borrowings
  
$
1,073,031
 
  
$
2,212,683
 
  
$
(1,139,652
 
 
(51.51
%) 
  
 
 
    
 
 
    
 
 
   
 
 
 
For a further discussion of borrowings see Notes 10 and 11 to the unaudited Notes to Consolidated Financial Statements.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at September 30, 2020 increased $76.42 million or 44.87% from
year-end
2019. Carolina Financial added $33.15 million. In particular, accounts payable associated with George Mason increased $35.86 million due to timing differences and derivative liabilities increased $8.49 million. In addition, accrued mortgage escrow liabilities increased $13.53 million and accrued employee expenses increased $17.26 million. Partially offsetting these increases was a decrease of $14.22 million in the pension liability due to a $20 million contribution in the third quarter of 2020.
Shareholders’ Equity
Shareholders’ equity at September 30, 2020 was $4.27 billion, which was an increase of $903.61 million or 26.86% from
year-end
2019 mainly as the result of the Carolina Financial acquisition. The Carolina Financial transaction added approximately $817.83 million in shareholders’ equity as 28,031,501 shares were issued from United’s authorized but unissued shares for the merger at a cost of approximately $816.00 million.
Retained earnings decreased $25.89 million or 2.29% from
year-end
2019. Earnings net of dividends for the first nine months of 2020 were $70.22 million. Amount recognized for the adoption of ASU
No. 2016-13
was a reduction of $44.33 million in retained earnings.
Accumulated other comprehensive income increased $56.22 million or 161.23% from
year-end
2019 due mainly to an increase of $52.89 million in United’s available for sale investment portfolio, net of deferred income taxes. The
after-tax
accretion of pension costs was $3.21 million for the first nine months of 2020. During the first nine months of 2020, United recognized a downward fair value adjustment of $594 thousand on a new cash flow hedge.
 
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RESULTS OF OPERATIONS
Overview
Net income for the third quarter of 2020 was $103.78 million or $0.80 per diluted share, as compared to $65.97 million or $0.65 per diluted share for the prior year third quarter. Net income for the first nine months of 2020 was $196.65 million or $1.68 per diluted share compared to $196.81 million or $1.93 per share for the first nine months of 2019.
Higher net income in the third quarter of 2020 compared to the third quarter of 2019 was primarily due to higher income from mortgage banking activities, driven by an elevated volume of mortgage loan originations and sales in the secondary market, as well as the impact from the Carolina Financial acquisition. Partially offsetting the increase in net income were merger-related expenses from the Carolina Financial acquisition, $10.39 million in prepayment penalties on the early payoff of three long-term FHLB advances and higher provision for credit losses resulting from an adverse future macroeconomic forecast as a result of the
COVID-19
pandemic under the CECL accounting standard.
The slightly lower amount of net income for the first nine months of 2020 compared to the first nine months of 2019 was driven primarily by significant merger-related expenses from the Carolina Financial acquisition, a higher provision for loan losses resulting from an adverse future macroeconomic forecast as a result of the
COVID-19
pandemic under the new CECL accounting standard and the prepayment penalties on the early payoff of the FHLB advances mentioned above. Mostly offsetting the decreases to net income was higher income from mortgage banking activities as well as the impact from the Carolina Financial acquisition.
As previously mentioned, United completed its acquisition of Carolina Financial on May 1, 2020. The financial results of Carolina Financial are included in United’s results from the acquisition date. As a result of the acquisition, the third quarter and first nine months of 2020 were impacted by increased levels of average balances, income, and expense, including merger-related expense of $5.67 million and $53.68 million for the third quarter and first nine months of 2020, respectively, as compared to the third quarter and first nine months and of 2019. In addition, the second quarter of 2020 would not have been fully impacted by the acquisition.
For the third quarter of 2020, United’s annualized return on average assets was 1.56% and return on average shareholders’ equity was 9.68% as compared to 1.33% and 7.79% for the third quarter of 2019. United’s annualized return on average assets for the first nine months of 2020 was 1.12% and return on average shareholders’ equity was 6.85% as compared to 1.35% and 7.93% for the first nine months of 2019. For the third quarter and first nine months of 2020, United’s annualized return on average tangible equity was 16.94% and 12.19%, respectively, as compared to 14.16% and 14.56% for the third quarter and first nine months of 2019, respectively.
 
 
  
Three Months Ended
 
 
Nine Months Ended
 
(Dollars in thousands)
  
September 30,
2020
 
 
September 30,
2019
 
 
September 30,
2020
 
 
September 30,
2019
 
Return on Average Tangible Equity:
  
 
 
 
(a) Net Income (GAAP)
  
$
103,784
 
 
$
65,965
 
 
$
196,653
 
 
$
196,814
 
(b) Number of days
  
 
92
 
 
 
92
 
 
 
274
 
 
 
273
 
Average Total Shareholders’ Equity (GAAP)
  
$
4,263,111
 
 
$
3,359,437
 
 
$
3,835,617
 
 
$
3,319,420
 
Less: Average Total Intangibles
  
 
(1,826,057
 
 
(1,510,653
 
 
(1,681,202
 
 
(1,512,394
  
 
 
   
 
 
   
 
 
   
 
 
 
(c) Average Tangible Equity
(non-GAAP)
  
$
2,437,054
 
 
$
1,848,784
 
 
$
2,154,415
 
 
$
1,807,026
 
Return on Tangible Equity
(non-GAAP)

[(a) / (b)] x 366 or 365/ (c)
  
 
16.94
 
 
14.16
 
 
12.19
 
 
14.56
Net interest income for the third quarter of 2020 was $185.66 million which was an increase of $43.75 million or 30.82% from the third quarter of 2019. The increase in net interest income occurred because total interest income increased $19.92 million while total interest expense decreased $23.83 million from the third quarter of 2019. Net interest income for the first nine months of 2020 was $497.78 million, an increase of $61.15 million or 14.00% from the first nine months of 2019. The increase in net interest income occurred because total interest income increased $10.78 million while total interest expense decreased $50.37 million from the first nine months of 2019.
 
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The provision for credit losses was $16.78 million and $89.81 million for the third quarter and first nine months of 2020, respectively, as compared to $5.03 million and $15.45 million for the third quarter and first nine months of 2019, respectively. The higher amount of provision expense for 2020 compared to 2019 was due mainly to the reasonable and supportable forecasts for future macroeconomic scenarios used in the estimation of expected credit losses adversely impacted by the
COVID-19
pandemic under the new CECL accounting standard adopted by United on January 1, 2020 . In addition, for the first nine months of 2020, a provision for loan losses of $28.95 million was recorded on purchased
non-PCD
loans and leases from Carolina Financial. For the third quarter of 2020, noninterest income was $135.47 million, which was an increase of $93.24 million or 220.83% from the third quarter of 2019. Noninterest income for the first nine months of 2020 was $260.66 million which was an increase of $147.42 million or 130.18% from the first nine months of 2019. For the third quarter of 2020, noninterest expense increased $75.46 million or 78.49% from the third quarter of 2019. For the first nine months of 2020, noninterest expense increased $136.35 million or 47.71% from the first nine months of 2019.
Income taxes for the third quarter of 2020 were $28.97 million as compared to $17.01 million for the third quarter of 2019. For the first nine months of 2020 and 2019, income tax expense was $49.88 million and $51.87 million, respectively. For the quarters ended September 30, 2020 and 2019, United’s effective tax rate was 21.82% and 20.50%, respectively. The effective tax rate for the first nine months of 2020 and 2019 was 20.23% and 20.86%, respectively.
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 2020 was $51.29 million compared to net income of $63.57 million for the third quarter of 2019. Net income attributable to the community banking segment for the first nine months of 2020 was $123.12 million compared to net income of $194.45 million for the first nine months of 2019. As previously mentioned, the lower amount of net income in 2020 was driven primarily by merger-related expenses from the Carolina Financial acquisition, prepayment penalties on the early payoff of three long-term FHLB advances and a higher provision for loan losses resulting from an adverse future macroeconomic forecast as a result of the
COVID-19
pandemic under the new CECL accounting standard adopted by United on January 1, 2020. In addition, for the first nine months of 2020, the community banking segment included the provision for loan losses of $28.95 million recorded on purchased
non-PCD
loans and leases from Carolina Financial.
Net interest income increased $38.57 million to $182.19 million for the third quarter of 2020, compared to $143.62 million for the same period of 2019. Net interest income increased $48.29 million to $490.31 million for the first nine months of 2020, compared to $442.02 million for the same period of 2019. Net interest income for the third quarter and first nine months of 2020 increased from the third quarter and first nine months of 2019 due mainly to an increase in average earning assets as a result of the Carolina Financial acquisition.
Provision for credit losses was $16.78 million for the three months ended September 30, 2020 compared to a provision of $5.03 million for the same period of 2019. Provision for credit losses was $89.81 million for the nine months ended September 30, 2020 compared to a provision of $15.45 million for the same period of 2019. The increases for the third quarter and first nine months of 2020 were due mainly to the impact from the reasonable and supportable forecasts for future macroeconomic scenarios used in the estimation of expected credit losses adversely impacted by the
COVID-19
pandemic. As previously mentioned, the first nine months of 2020 also included the provision for credit losses of $28.95 million recorded on purchased
non-PCD
loans and leases from Carolina Financial.
 
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Noninterest income increased $7.92 million for the third quarter of 2020 to $26.62 million as compared to $18.70 million for the third quarter of 2019. Noninterest income for the first nine months of 2020 increased $11.74 million to $66.48 million as compared to $54.75 million for the first nine months of 2019. The increases in 2020 were due mainly to increased fees from brokerage services, income from bank owned-owned life insurance due to death benefits, mortgage loan servicing income and a net gain of $2.23 million on the sale and subsequent leaseback of a bank premises.
Noninterest expense was $125.68 million for the third quarter of 2020, compared to $77.31 million for the same period of 2019. Noninterest expense was $312.62 million for the nine months ended September 30, 2020, compared to $235.61 million for the same period of 2019. The increases in noninterest expense in 2020 were primarily attributable to the additional employees and branch offices from the Carolina Financial acquisition as most major categories of noninterest expense showed increases as well as mortgage loan servicing expense and impairment and an increase in prepayment penalties on the early payoff of long-term FHLB advances.
Mortgage Banking
The mortgage banking segment reported net income of $55.40 million and $87.56 million for the third quarter and the first nine months of 2020, respectively, as compared to net income of $3.40 million and $8.28 million for the third quarter and first nine months of 2019. Noninterest income, which consists mainly of realized and unrealized gains associated with the fair value of commitments and loans held for sale, was $110.90 million and $203.10 million for the third quarter and first nine months of 2020 as compared to $24.33 million and $63.94 million for the third quarter and first nine months of 2019. The increases in 2020 were due mainly to increased sales of mortgage loans in the secondary market and the addition of mortgage banking operations from the Carolina Financial acquisition. Noninterest expense was $43.42 million and $99.44 million for the third quarter and first nine months of 2020 as compared $20.26 million and $53.87 million for the third quarter and first nine months of 2019. Noninterest expense consists mainly of salaries, commissions and benefits of mortgage segment employees. The increases in 2020 were due mainly to higher employee incentives and commissions related to the increased mortgage banking production as well as the additional expense associated with the employees added from the Carolina Financial acquisition.
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 2020 and 2019, are presented below.
Net interest income for the third quarter of 2020 was $185.66 million, which was an increase of $43.75 million or 30.82% from the third quarter of 2019. The $43.75 million increase in net interest income occurred because total interest income increased $19.92 million while total interest expense decreased $23.83 million from the third quarter of 2019. Net interest income for the first nine months of 2020 was $497.78 million, which was an increase of $61.15 million or 14.00% from the first nine months of 2019. The $61.15 million increase in net interest income occurred because total interest income increased $10.78 million while total interest expense decreased $50.37 million from the first nine months of 2019. On a linked-quarter basis, net interest income for the third quarter of 2020 increased $15.06 million or 8.83% from the second quarter of 2020. The $15.06 million increase in net interest income occurred because total interest income increased $11.55 million while total interest expense decreased $3.51 million from the second quarter of 2020.
 
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Generally, interest income for the third quarter and first nine months of 2020 increased from the third quarter and first nine months of 2019 due to an increase in earning assets, mainly as a result of the Carolina Financial acquisition and PPP loan activity, while interest expense decreased primarily due to a decline in market interest rates which resulted in lower funding costs. 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 for the third quarter of 2020 was $186.71 million, an increase of $43.88 million or 30.72% from the third quarter of 2019. Average earning assets for the third quarter of 2020 increased $6.07 billion or 34.97% from the third quarter of 2019 due to a $4.56 billion or 32.90% increase in average net loans, including loans held for sale, a $1.14 billion or 136.94% increase in average short-term investments and a $366.65 million or 13.84% increase in average investment securities. The net interest spread for the third quarter of 2020 increased 19 basis points from the third quarter of 2019 due to a 98 basis point decrease in the average cost of funds primarily due to the impact of declines in interest rates from the third quarter of 2019 partially offset by a 79 basis point decrease in the average yield on earning assets from the third quarter of 2019 due to the decline in market interest rates and the lower yield on PPP loans. In addition, loan accretion on acquired loans and leases was $11.74 million and $7.17 million for the third quarter of 2020 and 2019, respectively, an increase of $4.57 million, primarily driven by the accretion on loans and leases acquired from the Carolina Financial acquisition. The net interest margin of 3.18% for the third quarter of 2020 was a decrease of 9 basis points from the net interest margin of 3.27% for the third quarter of 2019.
Tax-equivalent
net interest income for the first nine months of 2020 was $500.63 million, an increase of $61.11 million or 13.90% from the first nine months of 2019. Average earning assets for the first nine months of 2020 increased $3.64 billion or 21.21% from the first nine months of 2019 due to a $2.75 billion or 19.96% increase in average net loans and leases, including loans held for sale, a $632.03 million or 80.99% increase in average short-term investments and a $259.08 million or 9.95% increase in average investment securities. The net interest spread for the first nine months of 2020 decreased 2 basis points from the first nine months of 2019 due to a 73 basis point decrease in the average yield on earning assets partially offset by a 71 basis point decrease in the average cost of funds. Loan accretion on acquired loans and leases was $30.84 million and $30.16 million for the first nine months of 2020 and 2019, respectively, an increase of $676 thousand. The net interest margin of 3.21% for the first nine months of 2020 was a decrease of 21 basis points from the net interest margin of 3.42% for the first nine months of 2019.
On a linked-quarter basis, United’s
tax-equivalent
net interest income for the third quarter of 2020 increased $15.09 million or 8.79% from the second quarter of 2020. Average earning assets increased $1.77 billion or 8.18% from the second quarter of 2020, due to the full quarter impact of assets acquired in the Carolina Financial acquisition and PPP loan activity. Average net loans and leases, including loans held for sale, increased $1.27 billion or 7.37% and average short-term investments increased $419.03 million or 27.06%. The net interest spread for the third quarter of 2020 increased 5 basis points from the second quarter of 2020 due to a 16 basis point decrease in the average cost of funds partially offset by a 11 basis point decrease in the average yield on earning assets. Loan accretion on acquired loans and leases increased $2.19 million from the second quarter of 2020 primarily driven by the accretion on loans and leases acquired from Carolina Financial. The net interest margin remained flat at 3.18% for the third quarter of 2020 from the second quarter of 2020.
United’s
tax-equivalent
net interest income also includes the impact of acquisition accounting fair value adjustments.
 
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The following table provides the discount/premium and net accretion impact to
tax-equivalent
net interest income for the three months ended September 30, 2020, September 30, 2019 and June 30, 2020 and the nine months ended September 30, 2020 and September 30, 2019:
 
 
 
  
Three Months Ended
 
(Dollars in thousands)
  
September 30
2020
 
  
September 30
2019
 
  
June 30
2020
 
Loan accretion
  
$
11,743
 
  
$
7,167
 
  
$
9,549
 
Certificates of deposit
  
 
3,028
 
  
 
198
 
  
 
2,611
 
Long-term borrowings
  
 
217
 
  
 
269
 
  
 
488
 
  
 
 
    
 
 
    
 
 
 
Total
  
$
14,988
 
  
$
7,634
 
  
$
12,648
 
  
 
 
    
 
 
    
 
 
 
 
 
 
  
Nine Months Ended
 
(Dollars in thousands)
  
September 30
2020
 
  
September 30
2019
 
Loan accretion
  
$
30,838
 
  
$
30,162
 
Certificates of deposit
  
 
5,780
 
  
 
593
 
Long-term borrowings
  
 
973
 
  
 
806
 
  
 
 
    
 
 
 
Tax-equivalent
net interest income
  
$
37,591
 
  
$
31,561
 
  
 
 
    
 
 
 
The following tables reconcile the difference between net interest income and
tax-equivalent
net interest income for the three months ended September 30, 2020, September 30, 2019 and June 30, 2020 and the nine months ended September 30, 2020 and September 30, 2019.
 
 
 
  
Three Months Ended
 
(Dollars in thousands)
  
September 30
2020
 
  
September 30
2019
 
  
June 30
2020
 
Net interest income, GAAP basis
  
$
185,664
 
  
$
141,918
 
  
$
170,602
 
Tax-equivalent
adjustment (1)
  
 
1,046
 
  
 
914
 
  
 
1,018
 
  
 
 
    
 
 
    
 
 
 
Tax-equivalent
net interest income
  
$
186,710
 
  
$
142,832
 
  
$
171,620
 
  
 
 
    
 
 
    
 
 
 
 
 
 
  
Nine Months Ended
 
(Dollars in thousands)
  
September 30
2020
 
  
September 30
2019
 
Net interest income, GAAP basis
  
$
497,784
 
  
$
436,639
 
Tax-equivalent
adjustment (1)
  
 
2,846
 
  
 
2,884
 
  
 
 
    
 
 
 
Tax-equivalent
net interest income
  
$
500,630
 
  
$
439,523
 
  
 
 
    
 
 
 
 
(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, 2020 and 2019 and the three months ended June 30, 2020. All interest income on loans and leases 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, 2020 and 2019, 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, 2020 and 2019. Interest income on all loans and leases and investment securities was subject to state income taxes.
 
 
 
  
Three Months Ended

September 30, 2020
 
 
Three Months Ended

September 30, 2019
 
(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
  
$
1,967,791
 
 
$
2,060
 
  
 
0.42
 
$
830,502
 
 
$
6,236
 
  
 
2.98
Investment Securities:
  
 
  
 
 
  
Taxable
  
 
2,749,114
 
 
 
14,448
 
  
 
2.10
 
 
2,525,682
 
 
 
18,168
 
  
 
2.88
Tax-exempt
  
 
267,355
 
 
 
1,893
 
  
 
2.83
 
 
124,141
 
 
 
1,011
 
  
 
3.26
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
    
 
 
 
Total Securities
  
 
3,016,469
 
 
 
16,341
 
  
 
2.17
 
 
2,649,823
 
 
 
19,179
 
  
 
2.90
Loans and leases, net of unearned income (2)
  
 
18,655,500
 
 
 
192,914
 
  
 
4.12
 
 
13,952,287
 
 
 
165,850
 
  
 
4.72
Allowance for loan losses
  
 
(214,870
 
  
 
 
(76,408
 
  
  
 
 
        
 
 
      
Net loans
  
 
18,440,630
 
 
  
 
4.17
 
 
13,875,879
 
 
  
 
4.75
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
    
 
 
 
Total earning assets
  
 
23,424,890
 
 
$
211,315
 
  
 
3.59
 
 
17,356,204
 
 
$
191,265
 
  
 
4.38
    
 
 
    
 
 
     
 
 
    
 
 
 
Other assets
  
 
2,990,733
 
 
  
 
 
2,310,404
 
 
  
  
 
 
        
 
 
      
TOTAL ASSETS
  
$
26,415,623
 
 
  
 
$
19,666,608
 
 
  
  
 
 
        
 
 
      
LIABILITIES
  
 
  
 
 
  
Interest-Bearing Funds:
  
 
  
 
 
  
Interest-bearing deposits
  
$
12,951,290
 
 
$
17,726
 
  
 
0.54
 
$
9,692,296
 
 
$
36,368
 
  
 
1.49
Short-term borrowings
  
 
156,502
 
 
 
172
 
  
 
0.44
 
 
120,155
 
 
 
539
 
  
 
1.78
Long-term borrowings
  
 
1,616,647
 
 
 
6,707
 
  
 
1.65
 
 
1,870,944
 
 
 
11,526
 
  
 
2.44
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
    
 
 
 
Total Interest-Bearing Funds
  
 
14,724,439
 
 
 
24,605
 
  
 
0.66
 
 
11,683,395
 
 
 
48,433
 
  
 
1.64
    
 
 
    
 
 
     
 
 
    
 
 
 
Noninterest-bearing deposits
  
 
7,178,769
 
 
  
 
 
4,440,399
 
 
  
Accrued expenses and other liabilities
  
 
249,304
 
 
  
 
 
183,377
 
 
  
  
 
 
        
 
 
      
TOTAL LIABILITIES
  
 
22,152,512
 
 
  
 
 
16,307,171
 
 
  
SHAREHOLDERS’ EQUITY
  
 
4,263,111
 
 
  
 
 
3,359,437
 
 
  
  
 
 
        
 
 
      
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  
$
26,415,623
 
 
  
 
$
19,666,608
 
 
  
  
 
 
        
 
 
      
NET INTEREST INCOME
  
 
$
186,710
 
  
 
 
$
142,832
 
  
    
 
 
        
 
 
    
INTEREST SPREAD
  
 
  
 
2.93
 
 
  
 
2.74
NET INTEREST MARGIN
  
 
  
 
3.18
 
 
  
 
3.27
 
(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 and leases are included in the daily average loan amounts outstanding.
 
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Nine Months Ended

September 30, 2020
 
 
Nine Months Ended

September 30, 2019
 
(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
  
$
1,412,386
 
 
$
7,893
 
  
 
0.75
 
$
780,355
 
 
$
17,478
 
  
 
2.99
Investment Securities:
  
 
  
 
 
  
Taxable
  
 
2,663,754
 
 
 
47,658
 
  
 
2.39
 
 
2,455,085
 
 
 
53,279
 
  
 
2.89
Tax-exempt
  
 
200,371
 
 
 
4,413
 
  
 
2.94
 
 
149,956
 
 
 
3,527
 
  
 
3.14
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
    
 
 
 
Total Securities
  
 
2,864,125
 
 
 
52,071
 
  
 
2.42
 
 
2,605,041
 
 
 
56,806
 
  
 
2.91
Loans and leases, net of unearned income (2)
  
 
16,698,013
 
 
 
532,350
 
  
 
4.26
 
 
13,851,974
 
 
 
507,293
 
  
 
4.89
Allowance for loan losses
  
 
(173,452
 
  
 
 
(76,616
 
  
  
 
 
        
 
 
      
Net loans
  
 
16,524,561
 
 
  
 
4.30
 
 
13,775,358
 
 
  
 
4.92
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
    
 
 
 
Total earning assets
  
 
20,801,072
 
 
$
592,314
 
  
 
3.80
 
 
17,160,754
 
 
$
581,577
 
  
 
4.53
    
 
 
    
 
 
     
 
 
    
 
 
 
Other assets
  
 
2,671,235
 
 
  
 
 
2,318,170
 
 
  
  
 
 
        
 
 
      
TOTAL ASSETS
  
$
23,472,307
 
 
  
 
$
19,478,924
 
 
  
  
 
 
        
 
 
      
LIABILITIES
  
 
  
 
 
  
Interest-Bearing Funds:
  
 
  
 
 
  
Interest-bearing deposits
  
$
11,282,883
 
 
$
64,452
 
  
 
0.76
 
$
9,713,567
 
 
$
104,461
 
  
 
1.44
Short-term borrowings
  
 
146,302
 
 
 
826
 
  
 
0.75
 
 
143,132
 
 
 
1,838
 
  
 
1.72
Long-term borrowings
  
 
1,895,635
 
 
 
26,406
 
  
 
1.86
 
 
1,816,476
 
 
 
35,755
 
  
 
2.63
  
 
 
   
 
 
    
 
 
   
 
 
   
 
 
    
 
 
 
Total Interest-Bearing Funds
  
 
13,324,820
 
 
 
91,684
 
  
 
0.92
 
 
11,673,175
 
 
 
142,054
 
  
 
1.63
    
 
 
    
 
 
     
 
 
    
 
 
 
Non-interest
bearing deposits
  
 
6,076,683
 
 
  
 
 
4,301,300
 
 
  
Accrued expenses and other liabilities
  
 
235,187
 
 
  
 
 
185,029
 
 
  
  
 
 
        
 
 
      
TOTAL LIABILITIES
  
 
19,636,690
 
 
  
 
 
16,159,504
 
 
  
SHAREHOLDERS’ EQUITY
  
 
3,835,617
 
 
  
 
 
3,319,420
 
 
  
  
 
 
        
 
 
      
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  
$
23,472,307
 
 
  
 
$
19,478,924
 
 
  
  
 
 
        
 
 
      
NET INTEREST INCOME
  
 
$
500,630
 
  
 
 
$
439,523
 
  
    
 
 
        
 
 
    
INTEREST SPREAD
  
 
  
 
2.88
 
 
  
 
2.90
NET INTEREST MARGIN
  
 
  
 
3.21
 
 
  
 
3.42
 
(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 and leases are included in the daily average loan amounts outstanding.
Provision for Credit Losses
For the quarters ended September 30, 2020 and 2019, the provision for loan and lease losses was $16.34 million and $5.03 million, respectively. The provision for loan and lease losses for the first nine months of 2020 and 2019 was $89.36 million and $15.45 million, respectively. Net charge-offs were $5.65 million for the third quarter of 2020 as compared to net charge-offs of $4.34 million for the same quarter in 2019. Net charge-offs for the first nine months of 2020 were $16.68 million as compared to $15.05 million for the first nine months of 2019. The higher amount of provision expense for 2020 compared to 2019 was due mainly to a provision for loan losses of $28.95 million recorded on purchased non-PCD loans and leases from Carolina Financial and the reasonable and supportable forecasts for future macroeconomic scenarios used in the estimation of current expected credit losses adversely impacted by the COVID-19 pandemic and future economic uncertainty.
 
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On a linked-quarter basis, the provision for loan losses decreased $29.57 million due primarily to the provision expense of $28.95 million recorded on the
non-PCD
loans and leases acquired from Carolina Financial in the second quarter of 2020 while net charge-offs increased $1.30 million from the second quarter of 2020. Annualized net charge-offs as a percentage of average loans and leases was 0.13% and 0.14% for the third quarter and first nine months of 2020, respectively.
As of September 30, 2020, nonperforming loans and leases were $152.28 million or 0.85% of loans and leases, net of unearned income as compared to nonperforming loans of $131.07 million or 0.96% of loans, net of unearned income at December 31, 2019. Nonperforming loans and leases at September 30, 2020 included $46.64 million of nonperforming loans and leases from the Carolina Financial acquisition. The components of nonperforming loans and leases include: 1) nonaccrual loans and leases, 2) loans and leases 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 and leases whose terms have been restructured for economic or legal reasons due to financial difficulties of the borrowers.
Loans and leases past due 90 days or more were $12.58 million at September 30, 2020, an increase of $3.09 million or 32.53% from $9.49 million at
year-end
2019. This increase was primarily due to loans and leases that had matured at
quarter-end
and were in the process of renewal. At September 30, 2020, nonaccrual loans and leases were $71.31 million, which was an increase of $8.10 million or 12.82% from $63.21 million at
year-end
2019. This increase was primarily due to nonaccrual loans and leases added from the Carolina Financial acquisition. Restructured loans were $68.38 million at September 30, 2020, an increase of $10.01 million or 17.15% from $58.37 million at
year-end
2019. This increase was primarily due to restructured loans added from the Carolina Financial acquisition and loans being classified as restructured due to payment deferrals partially offset by repayments and charge-offs of previously recognized impairments and repayment of several restructured loans. 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 leases and real estate acquired in foreclosure or other settlement of loans (“OREO”). Total nonperforming assets of $177.97 million, including OREO of $25.70 million at September 30, 2020, represented 0.69% of total assets.
United maintains an allowance for loan and lease losses and a reserve for lending-related commitments. The combined allowance for loan and lease losses and reserve for lending-related commitments is considered the allowance for credit losses. At September 30, 2020, the allowance for credit losses was $241.77 million as compared to $78.79 million at December 31, 2019.
At September 30, 2020, the allowance for loan and lease losses was $225.81 million as compared to $77.06 million at December 31, 2019. The increase in the allowance for loan and lease losses was due to the adoption of CECL, the impact of
COVID-19
and the loans and leases acquired from Carolina Financial. As a percentage of loans and leases, net of unearned income, the allowance for loan losses was 1.26% at September 30, 2020 and 0.56% at December 31, 2019. The ratio of the allowance for loan losses to nonperforming loans and leases or coverage ratio was 148.29% and 58.79% at September 30, 2020 and December 31, 2019, respectively. The increase in these ratios was due mainly to the adoption of CECL which caused a change in the Company’s methodology for determining the allowance for loan losses as well as the adverse impact of the
COVID-19
pandemic on the reasonable and supportable forecasts for future macroeconomic scenarios used in the estimation of current expected credit losses and the allowance for loan losses recorded on loans and leases acquired from Carolina Financial.
United continues to evaluate risks which may impact its loan and lease portfolios. As a result of the COVID-19 pandemic and resulting economic uncertainty given the rapidly changing economic impact, the Company reviewed its loan portfolio segments, assessing the likely impact of COVID-19 on each segment and established relevant qualitative adjustment factors.
 
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Reserves are initially determined based on losses identified from the PD/LGD and Cohort models which utilize the Company’s historical information. Then any qualitative adjustments are applied to account for the Company’s view of the future. If current conditions underlying any qualitative adjustment factor were deemed to be materially different than historical conditions, then an adjustment was made for that factor.
The first nine months of 2020 qualitative adjustments include analyses of the following:
 
 
 
Past events
– This includes portfolio trends related to business conditions; past due, nonaccrual, and graded loans and leases; and concentrations.
 
 
 
Current conditions
– United considered the impact of
COVID-19
on the economy as well as loan deferrals and modifications made in light of the pandemic when making determinations related to factor adjustments, such as collateral values and past due loans and leases, and the reasonable and supportable forecast. This is in contrast with the CECL adoption date (January 1, 2020) estimate as neither of these items were relevant for United’s footprint at the beginning of the year. Additional considerations were made for the Carolina Financial acquisition, such as the experience of lending management and staff and the nature and volume of the portfolio.
 
 
 
Reasonable and supportable forecasts
– The forecast is determined on a
portfolio-by-portfolio
basis by relating the correlation of real GDP and the unemployment rate to loss rates to forecasts of those variables. The reasonable and supportable forecast selection is subjective in nature and requires more judgment compared to the other components of the allowance. Assumptions for the economic variables were the following:
 
 
 
The ranges for the economic variables of GDP and the unemployment rate have narrowed in the third quarter as compared to the second.
 
 
 
The forecast is less severe than second quarter; however, projections show a more gradual recovery pace over a longer period compared to the second quarter.
 
 
 
Reversion to historical loss data occurs via a straight-line method during the year following the
one-year
reasonable and supportable forecast period.
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 and leases 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 and leases other than commercial loans and leases are made based upon historical loss experience adjusted for current environmental conditions. The allowance for credit losses includes estimated lifetime 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.
United’s review of the allowance for loan and lease losses at September 30, 2020 produced increased allocations in each of the four loan categories, primarily due to implementation of CECL and the adverse impact of the
COVID-19
pandemic on reasonable and supportable forecasts for future macroeconomic scenarios used in the estimation of expected credit losses. The allocation related to the commercial, financial & agricultural loan pool increased $76.07 million. The residential real estate allocation increased $27.74 million. The real estate construction and development loan pool allocation increased $31.69 million. The consumer loan pool experienced an increase of $13.56 million.
An allowance is established for estimated lifetime losses for loans that are individually assessed. Nonperforming commercial loans and leases are regularly reviewed to identify probable credit losses. A loan is individually assessed for expected credit losses when, based on current information and events, it is probable that the Company will not be able to collect all amounts contractually due. Measuring expected credit losses of a loan requires judgment and estimates, and the eventual outcomes may differ from those estimates. Expected credit losses are 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 expected credit loss has occurred.
 
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The allowance for loans and leases that were individually assessed was $11.87 million at September 30, 2020 and $16.50 million at December 31, 2019. In comparison to the prior
year-end,
this element of the allowance decreased by $4.63 million primarily due to
charge-off
of previously recognized allocations for probable credit losses on individually assessed loans.
Management believes that the allowance for credit losses of $241.77 million at September 30, 2020 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, North Carolina, South Carolina 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.
The provision for credit losses related to held to maturity and available for sale investment securities for the third quarter and first nine months of 2020 was immaterial. There was no provision for credit losses related to held to maturity and available for sale investment securities for the first nine months of 2019. Due to loan interest payment deferrals granted by United under the CARES Act, United assessed the collectability of the accrued interest receivables on these deferring loans during the third quarter of 2020. As a result of this assessment, United recorded a provision for credit losses and an allowance for credit losses of $435 thousand for accrued interest receivables not expected to be collected as of September 30, 2020.
Management is not aware of any potential problem loans or leases, 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 2020 was $135.47 million, an increase of $93.24 million or 220.83% from the third quarter of 2019. Noninterest income for the first nine months of 2020 was $260.66 million, which was an increase of $147.42 million or 130.18% from the first nine months of 2019.
Income from mortgage banking activities totaled $109.46 million for the third quarter of 2020 compared to $24.02 million for the same period of 2019. For the first nine months of 2020 and 2019, income from mortgage banking activities was $195.30 million and $59.40 million, respectively. The increases for 2020 were the result of increased production and sales of mortgage loans in the secondary market and the acquisition of Carolina Financial and, in particular, the acquisition of its mortgage banking subsidiary, Crescent Mortgage. In addition, the fair value on interest rate lock commitments for the third quarter and first nine months of 2020 increased $28.65 million and $41.75 million, respectively, from the third quarter and first nine months of 2019 due to a higher locked pipeline. For the three months ended September 30, 2020 and 2019, mortgage loan sales were $1.95 billion and $821.03 million, respectively. For the nine months ended September 30, 2020 and 2019, mortgage loan sales were $4.16 billion and $1.76 billion, respectively.
Mortgage loan servicing income of $2.35 million and $3.88 million was added in the third quarter and first nine months of 2020, respectively, due to the acquisition of Carolina Financial and Crescent Mortgage.
 
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Net investment securities’ gains were $860 thousand and $2.57 million for the third quarter and first nine months of 2020, respectively, as compared to a net gains of $116 thousand and $66 thousand for the third quarter and first nine months of 2019, respectively.
Fees from brokerage services for the third quarter and first nine months of 2020 increased $688 thousand and $965 thousand, respectively, from the same time periods in 2019. The increases were primarily due to increased volume.
Fees from deposit services for the third quarter of 2020 increased $618 thousand from the third quarter of 2019. The increase was due primarily to higher debit card fee income partially offset by lower income from overdraft fees and automated teller machine (ATM) fees due to the waiving of fees as a result of the
COVID-19
pandemic.
Income from bank-owned life insurance (BOLI) for the third quarter and first nine months of 2020 increased $779 thousand and $1.31 million, respectively, from the third quarter and first nine months of 2019 due to an increase in death benefits. For the third quarter and first nine months of 2020, United recognized death benefits from BOLI of $529 thousand and $1.72 million as compared to death benefits of $600 thousand for the first nine months of 2019. No death benefits were recognized in the third quarter of 2019.
On a linked-quarter basis, noninterest income for the third quarter of 2020 increased $47.08 million or 53.26% from the second quarter of 2020 primarily due to an increase of $41.24 million in income from mortgage banking activities, a $2.23 million gain on the sale and subsequent leaseback of bank premises, and an increase in fees from deposit services of $1.27 million.
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 credit losses, and income taxes. Noninterest expense increased $75.46 million or 78.49% for the third quarter of 2020 compared to the same period in 2019. For the first nine months of 2020, noninterest expense increased $136.35 million or 47.71% from the first nine months of 2019. Generally, these increases in 2020 from 2019 were the result of additional general operating expenses and increased merger-related charges from the Carolina Financial acquisition and an increase in prepayment penalties on long-term FHLB advances which were recognized during the third quarter of 2020 and the second quarter of 2019.
Employee compensation for the third quarter and first nine months of 2020 increased $38.14 million or 82.36% and $68.10 million or 52.56% from the third quarter and first nine months of 2019. Base salaries for the third quarter and first nine months of 2020 increased $18.83 million or 61.62% and $32.53 million or 36.05%, respectively, from the same time periods in 2019 due mainly to additional employees from the Carolina Financial acquisition. The remainder of the increase in employee compensation for the third quarter and first nine months of 2020 was due mainly to higher employee incentives and commissions expense primarily related to the increased mortgage banking production.
Employee benefits expense for the third quarter of 2020 increased $4.59 million or 53.24% from the third quarter of 2019. Employee benefits expense for the first nine months of 2020 increased $10.14 million or 38.10% as compared to the first nine months of 2019. The increases for third quarter and first nine months of 2020 were due in large part to additional health insurance expense of $1.74 million and $3.84 million, respectively, from the same time periods last year due to higher premiums and additional employees from the Carolina Financial acquisition. In addition, Federal Insurance Contributions Act (FICA) expense for third quarter and first nine months of 2020 increased $1.58 million and $3.18 million, respectively, from the third quarter and first nine months of 2019 due mainly to the additional employees from the Carolina Financial acquisition as well as the higher commissions expense.
 
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Net occupancy expense increased $2.25 million or 25.82% and $4.21 million or 16.11% for the third quarter and first nine months of 2020, respectively, as compared to the same periods in the prior year. The increases were due mainly to increases in building rental expense and depreciation due mainly to the offices added in the Carolina Financial acquisition.
Equipment expense increased $1.92 million or 51.87% and $3.78 million or 35.34% for the third quarter and first nine months of 2020, respectively, as compared to the same periods in 2019. The increases were due mainly to increases in equipment maintenance and depreciation due mainly to the Carolina Financial acquisition.
Data processing expense increased $932 thousand or 16.14% and $11.64 million or 70.49% for the third quarter and first nine months of 2020, respectively, as compared to the third quarter and first nine months of 2019 due to additional processing as a result of the Carolina Financial acquisition. In addition, the increase for the first nine months of 2020 was due to a $9.66 million penalty to terminate the contract with Carolina Financial’s data processor.
Federal Deposit Insurance Corporation (“FDIC”) insurance expense for the third quarter and first nine months of 2020 increased $2.24 million and $817 thousand, respectively, from the same periods in 2019 due to a Small Bank Assessment Credit in the third quarter of 2019 partially offset by the exclusion of a surcharge in 2020.
Mortgage loan servicing expense and impairment for the third quarter and first nine months of 2020 increased $3.19 million and $5.65 million, respectively, from the same time periods in 2019. The increases were due to the acquisition of Carolina Financial and Crescent Mortgage. In addition, United recorded a $400 thousand and $1.11 million temporary impairment charge on its mortgage servicing rights during the third quarter and first nine months of 2020, respectively.
During the third quarter and first nine months of 2020, United incurred penalties of $10.39 million to prepay three long-term FHLB advances. United incurred similar penalties of $5.11 million to prepay certain long-term FHLB advances during the first nine months of 2019.
Other expense for the third quarter and first nine months of 2020 increased $12.52 million or 62.11% and $28.03 million or 47.92% from the third quarter and first nine months of 2019, respectively. Included in other expense for the third quarter and first nine months of 2020 were merger-related expenses of $5.67 million and $53.68 million, respectively, for the Carolina Financial acquisition. No merger-related expenses were incurred in the third quarter and first nine months of 2019. The expense for the reserve for unfunded commitments for the third quarter and first nine months of 2020 increased $3.99 million and $7.64 million, respectively, from the same time periods in 2019. The increase for the first nine months of 2020 included $1.82 million of expense related to the reserve for acquired unfunded commitments from Carolina Financial. In addition, the amortization of income tax credits, which reduces the effective tax rate, for the third quarter and first nine months of 2020 increased $1.39 million and $3.79 million, respectively, from the third quarter and first nine months of 2020.
On a linked-quarter basis, noninterest expense for the third quarter of 2020 increased $22.22 million or 14.87% from the second quarter of 2020 due primarily to added employee and branch office related expenses of $16.84 million from the Carolina Financial acquisition as well as higher employee incentives and commissions expense mainly related to higher mortgage banking production. Noninterest expense for the third quarter also included the previously mentioned $10.39 million in prepayment penalties on the early payoff of three long-term FHLB advances. Partially offsetting the increases to noninterest expense were decreases of $9.22 million in data processing expense due to the $9.66 million contract termination penalty recorded in the second quarter of 2020.
 
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Income Taxes
For the third quarter and first nine months of 2020, income tax expense was $28.97 million and $49.88 million as compared to $17.01 million and $51.87 million, respectively, for the third quarter and first nine months of 2019. The increase in the third quarter of 2020 from the third quarter of 2019 was due to overall higher earnings and a higher effective tax rate while the decrease for the first nine months of 2020 from the first nine months of 2019 was due mainly to slightly lower earnings. On a linked-quarter basis, income tax expense increased $17.95 million also due to higher earnings. United’s effective tax rate was 21.82% for the third quarter of 2020, 20.50% for the third quarter of 2019 and 17.30% for the second quarter of 2020. For the first nine months of 2020 and 2019, United’s effective tax rate was 20.23% and 20.86%, respectively, reflecting higher amortization of income tax credits in 2020. For further details related to income taxes, see Note 17 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, 2019 for disclosures with respect to United’s fixed and determinable contractual obligations. As previously mentioned, United completed its acquisition of Carolina Financial during the second quarter of 2020. As such, United assumed the financial obligations of Carolina Financial, including contractual obligations and commitments, which also may require future payments. For a discussion of the Carolina Financial’s contractual obligations and commitments, please refer to the Carolina Financial 2019 Annual Report on Form
10-K.
Otherwise, there have been no material changes outside the ordinary course of business since
year-end
2019 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, 2020 do not present the amounts that may ultimately be paid under these contracts, they are excluded from the contractual obligations table in the 2019 Form
10-K
report. Further discussion of derivative instruments is presented in Note 13 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 12 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. 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.
 
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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, 2020, cash of $45.38 million was used in operating activities due mainly to net originations of $358.81 million in mortgage loans held for sale partially offset by net income of $196.65 million. In addition, an increase of $42.53 million in accrued expenses and $89.81 million in the provision for credit losses added cash to the net income amount. Net cash of $24.64 million was used in investing activities which was primarily due to loan growth of $957.03 million, mainly from the PPP loans which was partially offset by net cash of $629.11 million provided in the acquisition of Carolina Financial and $302.62 million of proceeds from sales of investment securities over purchases. During the first nine months of 2020, net cash of $889.01 million was provided by financing activities due primarily to net growth of $2.52 billion in deposits. These funding activities were partially offset by net repayment of $250.00 million in overnight FHLB advances, net repayment of $1.29 billion in long-term FHLB advances and cash dividends paid of $117.29 million for the first nine months of 2020. The net effect of the cash flow activities was an increase in cash and cash equivalents of $819.04 million for the first nine months of 2020.
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 10 and 11 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 15.14% at September 30, 2020 while its Common Equity Tier 1 capital, Tier 1 capital and leverage ratios are 12.89%, 12.89% and 10.08%, respectively. The September 30, 2020 ratios reflects United’s election of a five-year transition provision, allowed by the Federal Reserve Board and other federal banking agencies in response to the
COVID-19
pandemic, to delay for two years the full impact of CECL on regulatory capital, followed by a three-year transition period. 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 $4.27 billion at September 30, 2020, increasing $903.61 million or 26.86% as a result of the Carolina Financial acquisition. In addition, a cumulative effective adjustment of $44.33 million was recognized in retained earnings for the adoption of ASU
2016-13
by United on January 1, 2020 partially offset by the retention of $70.22 million in net earnings. Accumulated other comprehensive income increased $56.22 million due mainly to an
after-tax
increase in the fair value of available for sale securities.
United’s equity to assets ratio was 16.46% at September 30, 2020 as compared to 17.11% at December 31, 2019. The primary capital ratio, capital and reserves to total assets and reserves, was 17.23% at September 30, 2020 as compared to 17.44% at December 31, 2019. United’s average equity to average asset ratio was 16.14% for the third quarter of 2020 as compared to 17.08% the third quarter of 2019. United’s average equity to average asset ratio was 16.34% for the first nine months of 2020 as compared to 17.04% for the first nine months of 2019. All of these financial measurements reflect a financially sound position.
During the third quarter of 2020, United’s Board of Directors declared a cash dividend of $0.35 per share. Cash dividends were $1.05 per common share for the first nine months of 2020. Total cash dividends declared were $45.41 million for the third quarter of 2020 and $126.43 million for the first nine months of 2020 as compared to $34.52 million for the third quarter of 2019 and $103.97 million for the first nine months of 2019.
 
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.
 
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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.
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, 2020 and December 31, 2019:
 
Change in Interest Rates (basis points)
  
Percentage Change in Net Interest Income
 
  
September 30, 2020
 
 
December 31, 2019
 
+200
  
 
(2.90
%) 
 
 
(2.37
%) 
+100
  
 
(1.80
%) 
 
 
(1.09
%) 
-100
  
 
0.50
 
 
0.86
-200
  
 
0.40
 
 
(1.34
%) 
At September 30, 2020, 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 1.80% over one year as compared to a decrease of 1.09% at December 31, 2019. A 200 basis point immediate, sustained upward shock in the yield curve would decrease net interest income by an estimated 2.90% over one year as of September 30, 2020, as compared to a decrease of 2.37% as of December 31, 2019. A 100 basis point immediate, sustained downward shock in the yield curve would increase net interest income by an estimated 0.50% over one year as of September 30, 2020 as compared to an increase of 0.86%, over one year as of December 31, 2019. A 200 basis point immediate, sustained downward shock in the yield curve would increase net interest income by an estimated 0.40% over one year as of September 30, 2020 as compared to a decrease of 1.34% over one year as of December 31, 2019.
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 1.20% in year two as of September 30, 2020. A 200 basis point immediate, sustained upward shock in the yield curve would increase net interest income by an estimated 2.40% in year two as of September 30, 2020. A 100 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 1.10% in year two as of September 30, 2020. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 1.40% in year two as of September 30, 2020.
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.
 
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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.
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, 2020, United’s mortgage related securities portfolio had an amortized cost of $1.4 billion, of which approximately $584.5 million or 41% 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 2 years and a weighted average yield of 2.47%, under current projected prepayment assumptions. These securities are expected to have very little extension risk in a rising rate environment. Current models show that that an immediate, sustained upward shock of 300 basis points, the average life of these securities would only extend to 3.4 years. The projected price decline of the fixed rate CMO portfolio in rates up 300 basis points would be 5.5%, or less than the price decline of a
2-
year treasury note. By comparison, the price decline of a
30-year
current coupon mortgage backed security (MBS) in rates higher by 300 basis points would be approximately 16.3%.
United had approximately $563.4 million in fixed rate balloon and Commercial Mortgage Backed Securities with a projected yield of 2.34% and a projected average life of 4.6 years on September 30, 2020. This portfolio consisted primarily of Freddie Mac Multifamily K securities and Fannie Mae Delegated Underwriting and Servicing (DUS) securities with a weighted average maturity (WAM) of 7.8 years.
United had approximately $24.9 million in
15-year
mortgage backed securities with a projected yield of 2.00% and a projected average life of 2.5 years as of September 30, 2020. This portfolio consisted of seasoned
15-year
mortgage paper with a weighted average loan age (WALA) of 7.5 years and a weighted average maturity (WAM) of 8.4 years.
United had approximately $65.0 million in
20-year
mortgage backed securities with a projected yield of 1.87% and a projected average life of 3.1 years on September 30, 2020. This portfolio consisted of seasoned
20-year
mortgage paper with a weighted average loan age (WALA) of 3.8 years and a weighted average maturity (WAM) of 15.9 years.
United had approximately $130.1 million in
30-year
mortgage backed securities with a projected yield of 2.38% and a projected average life of 3.6 years on September 30, 2020. This portfolio consisted of seasoned
30-year
mortgage paper with a weighted average loan age (WALA) of 5 years and a weighted average maturity (WAM) of 22 years.
The remaining 5% of the mortgage related securities portfolio on September 30, 2020, included
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, 2020, 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, 2020 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 (as defined in Rules
13a-15(e)
and
15d-15(f)
under the Exchange Act) that occurred during the quarter ended September 30, 2020, 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, 2019 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.
The following risk factor supplements the “Risk Factors” section in Item 1A of United’s Annual Report on Form
10-K
for the year ended December 31, 2019:
United’s business, financial condition, liquidity and results of operations have been, and will likely continue to be, adversely affected by the
COVID-19
pandemic
.
The
COVID-19
pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, United’s business, financial condition, liquidity and results of operations. The extent to which the
COVID-19
pandemic will continue to negatively affect United’s business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the continued effectiveness of United’s business continuity plan, the direct and indirect impact of the pandemic on United’s employees, customers, clients, counterparties and service providers, as well as other market participants, and actions taken by governmental authorities and other third parties in response to the pandemic.
The
COVID-19
pandemic has contributed to:
 
 
 
Increased unemployment and decreased consumer confidence and business generally, leading to an increased risk of delinquencies, defaults and foreclosures.
 
 
 
Ratings downgrades, credit deterioration and defaults in many industries, including natural resources, hospitality, transportation and commercial real estate.
 
 
 
A sudden and significant reduction in the valuation of the equity, fixed-income and commodity markets and the significant increase in the volatility of those markets.
 
 
 
A decrease in the rates and yields on U.S. Treasury securities, which may lead to decreased net interest income.
 
 
 
Increased demands on capital and liquidity.
 
 
 
A reduction in the value of the assets that the Company manages or otherwise administers or services for others, affecting related fee income and demand for the Company’s services.
 
 
 
Heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements.
 
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Governmental authorities have taken unprecedented measures to provide economic assistance to individual households and businesses, stabilize the markets and support economic growth. The success of these measures is unknown and they may not be sufficient to fully mitigate the negative impact of the
COVID-19
pandemic. Additionally, some measures, such as a suspension of mortgage and other loan payments and foreclosures, may have a negative impact on United’s business, financial condition, liquidity and results of operations. United also faces an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of
COVID-19
on market and economic conditions and actions governmental authorities take in response to those conditions.
The length of the pandemic and the efficacy of the extraordinary measures being put in place to address it are unknown. Until the pandemic subsides, the Company expects continued draws on lines of credit, reduced revenues in our trust operations and other businesses and increased customer and client defaults, including defaults in unsecured loans.
Even after the pandemic subsides, the U.S. economy may experience a recession, and United anticipates the Company’s businesses would be materially and adversely affected by a prolonged recession. To the extent the pandemic adversely affects United’s business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in United’s Annual Report on Form
10-K
for the year ended December 31, 2019 and any subsequent Quarterly Reports on Form
10-Q.
United may be terminated as a servicer of mortgage loans, be required to repurchase a mortgage loan or reimburse investors for credit losses on a mortgage loan, or incur costs, liabilities, fines and other sanctions if we fail to satisfy our servicing obligations, including our obligations with respect to mortgage loan foreclosure actions
.
United, through its mortgage banking subsidiary, Crescent Mortgage, acts as servicer for approximately $3.6 billion of mortgage loans owned by third parties as of September 30, 2020. As a servicer for those loans, United has certain contractual obligations, including foreclosing on defaulted mortgage loans or, to the extent applicable, considering alternatives to foreclosure such as loan modifications or short sales. If United commits a material breach of its obligations as servicer, United may be subject to termination as servicer if the breach is not cured within a specified period of time following notice, causing United to lose servicing income.
In some cases, United may be contractually obligated to repurchase a mortgage loan or reimburse the investor for credit losses incurred on the loan as a remedy for servicing errors with respect to the loan. If United has increased repurchase obligations because of claims that United did not satisfy our obligations as a servicer, or increased loss severity on such repurchases, United may have a significant reduction to net servicing income within its mortgage banking noninterest income. United may incur costs if United is required to, or if United elects to,
re-execute
or
re-file
documents or take other action in its capacity as a servicer in connection with pending or completed foreclosures. United may incur litigation costs if the validity of a foreclosure action is challenged by a borrower. If a court were to overturn a foreclosure because of errors or deficiencies in the foreclosure process, United may have liability to the borrower and/or to any title insurer of the property sold in foreclosure if the required process was not followed. These costs and liabilities may not be legally or otherwise reimbursable to United. In addition, if certain documents required for a foreclosure action are missing or defective, United could be obligated to cure the defect or repurchase the loan. United may incur liability to securitization investors relating to delays or deficiencies in its processing of mortgage assignments or other documents necessary to comply with state law governing foreclosures. The fair value of United’s mortgage servicing rights may be negatively affected to the extent our servicing costs increase because of higher foreclosure costs. United may be subject to fines and other sanctions imposed by federal or state regulators as a result of actual or perceived deficiencies in our foreclosure practices or in the foreclosure practices of other mortgage loan servicers. Any of these actions may harm United’s reputation or negatively affect its home lending or servicing business.
 
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United may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances, which could harm liquidity, results of operations and financial condition
.
When mortgage loans are sold, whether as whole loans or pursuant to a securitization, United is required to make customary representations and warranties to purchasers, guarantors and insurers, including the government sponsored enterprises, about the mortgage loans and the manner in which they were originated. Whole loan sale agreements require repurchase or substitute mortgage loans, or indemnification of buyers against losses, in the event United breaches these representations or warranties. In addition, United may be required to repurchase mortgage loans as a result of early payment default of the borrower on a mortgage loan. With respect to loans that are originated through United’s broker or correspondent channels, the remedies available against the originating broker or correspondent, if any, may not be as broad as the remedies available to purchasers, guarantors and insurers of mortgage loans against United. United faces further risk that the originating broker or correspondent, if any, may not have financial capacity to perform remedies that otherwise may be available. Therefore, if a purchaser, guarantor or insurer enforces its remedies against United, it may not be able to recover losses from the originating broker or correspondent. If repurchase and indemnity demands increase and such demands are valid claims and are in excess of United’s provision for potential losses, its liquidity, results of operations and financial condition may be adversely affected.
As a participating lender in the PPP, United and United Bank are subject to additional risks of litigation from United Bank’s customers or other parties regarding United Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. United Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there was some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes United and United Bank to risks relating to noncompliance with the PPP. In addition, United Bank’s participation in the PPP as a lender may adversely affect the Company’s revenue and results of operations depending on the timing and amount of forgiveness, if any, to which borrowers are entitled.
Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. United and United Bank may be exposed to the risk of similar litigation, from both customers and
non-customers
that approached United Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP, or litigation from agents with respect to agent fees. If any such litigation is filed against United or United Bank and is not resolved in a manner favorable to United or United Bank, it may result in significant financial liability or adversely affect their reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.
United Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by United Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by United Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from United Bank. Additionally, if a borrower under the PPP loan fails to qualify for loan forgiveness, United Bank is at the heightened risk of holding the loan at an unfavorable interest rate as compared to loans to customers that United Bank would have otherwise extended credit. Rules providing for forgiveness have been constantly evolving, including an automatic forgiveness if the amount of the PPP loan was not larger than a specified floor.
 
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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, 2020 that were not registered. The table below includes certain information regarding United’s purchase of its common shares during the quarter ended September 30, 2020:
 
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 – 7/31/2020
  
 
0
 
  
$
00.00
 
  
 
0
 
  
 
4,000,000
 
8/01 – 8/31/2020
  
 
6
 
  
$
26.08
 
  
 
0
 
  
 
4,000,000
 
9/01 – 9/30/2020
  
 
0
 
  
$
00.00
 
  
 
0
 
  
 
4,000,000
 
  
 
 
    
 
 
    
 
 
    
Total
  
 
6
 
  
$
26.08
 
  
 
0
 
  
  
 
 
    
 
 
    
 
 
    
 
(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. No shares were exchanged by participants in United’s long-term incentive plans for the quarter ended September 30, 2020.
(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, 2020, the following shares were purchased for the deferred compensation plan: August 2020 – 6 shares at an average price of $26.08.
(3)
In October 2019, United’s Board of Directors approved a repurchase plan to repurchase up to 4,000,000 shares of United’s common stock on the open market (the 2019 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.
 
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.
 
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Item 6.
EXHIBITS
Index to exhibits required by Item 601 of Regulation
S-K
 
Exhibit
No.
  
Description
  2.1
  
  3.1
  
  3.2
  
  4.1
  
31.1
  
31.2
  
32.1
  
32.2
  
101
  
Interactive data file (iXBRL) (filed herewith)
104
  
Cover Page (imbedded in iXBRL)
 
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
UNITED BANKSHARES, INC.
 
 
 
(Registrant)
Date:
 
November 9, 2020
 
 
/s/ Richard M. Adams
 
 
 
Richard M. Adams, Chairman of the Board and Chief
Executive Officer
Date:
 
November 9, 2020
 
 
/s/ W. Mark Tatterson
 
 
 
W. Mark Tatterson, Executive Vice President and Chief
Financial Officer
 
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