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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
 
10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended
December 31, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
            
to
            
Commission File Number:
002-86947
United Bankshares, Inc.
(Exact name of registrant as specified in its charter)
     
    
West Virginia
  
55-0641179
    
(State or other jurisdiction of
  incorporation or organization)
 
(I.R.S. Employer    
Identification No.)  
     
300 United Center
500 Virginia Street, East
Charleston
, West Virginia
  
25301
    
(Address of principal executive offices)
 
(Zip Code)    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Registrant’s telephone number, including area code:
(
304
)
424-8716
Securities registered pursuant to section 12(b) of the Act:
         
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock
, par value $2.50 per share
 
UBSI
 
NASDAQ
 Global Select Market
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities registered pursuant to 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    
Yes
☒
No
☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    
Yes
☐
No
☒
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
☐
Table of Contents
UNITED BANKSHARES, INC.
FORM
10-K
(Continued)
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
☒
The aggregate market value of United Bankshares, Inc. common stock, representing all of its voting stock that was held by
non-affiliates
on June 30, 2019, was approximately
$
3,582,635,223
.
As of January 31, 2020, United Bankshares, Inc. had
101,568,065
shares of common stock outstanding with a par value of
$2.50
.
Documents Incorporated By Reference
Certain specifically designated portions of the Definitive Proxy Statement for the United Bankshares, Inc. 2020 Annual Shareholders’ Meeting to be held on May 12, 2020 are incorporated by reference in Part III of this Form
10-K.
 
2
 
Table of Contents
UNITED BANKSHARES, INC.
FORM
10-K
(Continued)
As of the date of filing this Annual report, neither the annual shareholders’ report for the year ended December 31, 2019, nor the proxy statement for the annual United shareholders’ meeting has been mailed to shareholders.
CROSS-REFERENCE INDEX
             
 
 
Page
 
Part I
 
 
 
 
             
Item 1.
     
4
  
Item 1A.
     
16
  
Item 1B.
     
26
  
Item 2.
     
26
  
Item 3.
     
26
  
Item 4.
     
26
  
             
Part II
 
 
 
 
             
Item 5.
     
27
  
Item 6.
     
30
  
Item 7.
     
31
  
Item 7A.
     
57
  
Item 8.
     
62
  
Item 9.
     
132
  
Item 9A.
     
132
  
Item 9B.
     
133
  
             
Part III
 
 
 
 
             
Item 10.
     
134
  
Item 11.
     
134
  
Item 12.
     
134
  
Item 13.
     
134
  
Item 14.
     
135
  
             
Part VI
 
 
 
 
             
Item 15.
     
136
  
 
3
Table of Contents
UNITED BANKSHARES, INC.
FORM
10-K,
PART I
Item 1.
BUSINESS
Organizational History and Subsidiaries
United Bankshares, Inc. (United) is a West Virginia corporation registered as a financial holding company pursuant to the Bank Holding Company Act of 1956, as amended. United was incorporated on March 26, 1982, organized on September 9, 1982, and began conducting business on May 1, 1984 with the acquisition of three wholly-owned subsidiaries. Since its formation in 1982, United has acquired
thirty-one
banking institutions. United has one banking subsidiary “doing business” under the name of United Bank, operating under the laws of Virginia. United Bank offers a full range of commercial and retail banking services and products. United also owns nonbank subsidiaries which engage in other community banking services such as asset management, real property title insurance, financial planning, mortgage banking, and brokerage services.
Employees
As of December 31, 2019, United and its subsidiaries had approximately 2,204 full-time equivalent employees and officers. None of these employees are represented by a collective bargaining unit and management considers employee relations to be excellent.
Web Site Address
United’s web site address is
“www.ubsi-inc.com”.
United makes available free of charge on its web site the annual report on Form
10-K,
quarterly reports on Form
10-Q,
current reports on Form
8-K,
and amendments thereto, as soon as reasonably practicable after United files such reports with the Securities and Exchange Commission (SEC). The reference to United’s web site does not constitute incorporation by reference of the information contained in the web site and should not be considered part of this document. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
Business of United
As a financial holding company, United’s present businesses are community banking and mortgage banking. As of December 31, 2019, United’s consolidated assets approximated $19.7 billion and total shareholders’ equity approximated $3.4 billion.
United is permitted to acquire other banks and bank holding companies, as well as thrift institutions. United is also permitted to engage in certain
non-banking
activities which are closely related to banking under the provisions of the Bank Holding Company Act and the Federal Reserve Board’s Regulation Y. Management continues to consider such opportunities as they arise, and in this regard, management from time to time makes inquiries, proposals, or expressions of interest as to potential opportunities, although no agreements or understandings to acquire other banks or bank holding companies or
non-banking
subsidiaries or to engage in other nonbanking activities, other than those identified herein, presently exist. See Note B—Notes to Consolidated Financial Statements for a discussion of United’s announced merger with Carolina Financial Corporation.
Business of Subsidiaries
United, through its subsidiaries, engages primarily in community banking and mortgage banking offering most types of business permitted by law and regulation. Included among the banking services offered are the acceptance of deposits in checking, savings, time and money market accounts; the making and servicing of personal, commercial, and floor plan loans; and the making of construction and real estate loans. Also offered are individual retirement accounts, safe deposit boxes, wire transfers and other standard banking products and services. As part of its lending function, United Bank offers credit card services.
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Table of Contents
United Bank maintains a trust department which acts as trustee under wills, trusts and pension and profit sharing plans, as executor and administrator of estates, and as guardian for estates of minors and incompetents, and in addition performs a variety of investment and security services. Trust services are available to customers of affiliate banks. United Bank provides services to its correspondent banks such as check clearing, safekeeping and the buying and selling of federal funds.
George Mason Mortgage, LLC (George Mason), a wholly-owned subsidiary of United Bank, is engaged in the operation of a general mortgage and agency business, including the origination and acquisition of residential real estate loans for resale and generally the activities commonly conducted by a mortgage banking company. These loans are for single-family, owner-occupied residences with either adjustable or fixed rate terms, with a variety of maturities tailored to effectively serve its markets.
United Brokerage Services, Inc., a wholly-owned subsidiary of United Bank, is a fully-disclosed broker/dealer and a Registered Investment Advisor with the National Association of Securities Dealers, Inc., the Securities and Exchange Commission, and a member of the Securities Investor Protection Corporation. United Brokerage Services, Inc. offers a wide range of investment products as well as comprehensive financial planning and asset management services to the general public.
United Bank is a member of a network of automated teller machines known as the New York Currency Exchange (NYCE) ATM network. The NYCE is an interbank network connecting the ATMs of various financial institutions in the United States and Canada.
United through United Bank offers an Internet banking service, Smart Touch Online Banking, which allows customers to perform various transactions using a computer or tablet from any location or from a mobile device such as a smart phone or other cellular device as long as they have access to the Internet, applicable software and a secure browser. Specifically, customers can check personal account balances, receive information about transactions within their accounts, make transfers between accounts, stop payment on a check, and reorder checks. Customers may also pay bills online and can make payments to virtually any business or individual. Customers can set up recurring fixed payments,
one-time
future payments or a
one-time
immediate payment. Customers can also set up their own merchants, view and modify that merchant list, view pending transactions and view their bill payment history with approximately three (3) months of history.
United also offers an automated telephone banking system, Telebanc, which allows customers to access their personal account(s) or business account(s) information from a touch-tone telephone.
Lending Activities
United’s loan portfolio, net of unearned income, increased $289.9 million or 2.16% in 2019 due mainly to growth in consumer and residential real estate loans. The loan portfolio is comprised of commercial, real estate and consumer loans including credit card and home equity loans. Consumer loans increased $201.7 million or 20.91%. Residential real estate loans increased $185.0 million or 5.28%. Commercial, financial and agricultural loans decreased $100.4 million or 1.33% as commercial real estate loans decreased $427.8 million or 7.65% and commercial loans (not secured by real estate) increased $327.4 million or 16.72%. Construction and land development loans were flat, decreasing $2.3 million or less than 1%.
Commercial Loans
The commercial loan portfolio consists of loans to corporate borrowers primarily in small to
mid-size
industrial and commercial companies, as well as automobile dealers, service, retail and wholesale merchants. Collateral securing these loans includes equipment, machinery, inventory, receivables, vehicles and commercial real estate. Commercial loans are considered to contain a higher level of risk than other loan types although care is taken to minimize these risks. Numerous risk factors impact this portfolio including industry specific risks such as economy, new technology, labor rates and cyclicality, as well as customer specific factors, such as cash flow, financial structure, operating controls and asset quality. United diversifies risk within this portfolio by closely monitoring industry concentrations and portfolios to ensure that it does not exceed established lending guidelines.
5
Table of Contents
Diversification is intended to limit the risk of loss from any single unexpected economic event or trend. Underwriting standards require a comprehensive credit analysis and independent evaluation of virtually all larger balance commercial loans by the loan committee prior to approval.
Real Estate Loans
Commercial real estate loans consist of commercial mortgages, which generally are secured by nonresidential and multi-family residential properties. Also included in this portfolio are loans that are secured by owner-occupied real estate, but made for purposes other than the construction or purchase of real estate. Commercial real estate loans are to many of the same customers and carry similar industry risks as the commercial loan portfolio. Real estate mortgage loans to consumers are secured primarily by a first lien deed of trust. These loans are traditional
one-to-four
family residential mortgages. The loans generally do not exceed an 80% loan to value ratio at the loan origination date and most are at a variable rate of interest. These loans are considered to be of normal risk. Also included in the category of real estate mortgage loans are home equity loans.
As of December 31, 2019, approximately $372.0 million or 2.71% of United’s loan portfolio were real estate loans that met the regulatory definition of a high
loan-to-value
loan. A high
loan-to-value
real estate loan is defined as any loan, line of credit, or combination of credits secured by liens on or interests in real estate that equals or exceeds a certain percentage established by United’s primary regulator of the real estate’s appraised value, unless the loan has other appropriate credit support. The certain percentage varies depending on the loan type and collateral. Appropriate credit support may include mortgage insurance, readily marketable collateral, or other acceptable collateral that reduces the
loan-to-value
ratio below the certain percentage.
Consumer Loans
Consumer loans are secured by automobiles, boats, recreational vehicles, and other personal property. Personal loans, student loans and unsecured credit card receivables are also included as consumer loans. United monitors the risk associated with these types of loans by monitoring such factors as portfolio growth, lending policies and economic conditions. Underwriting standards are continually evaluated and modified based upon these factors.
Underwriting Standards
United’s loan underwriting guidelines and standards are updated periodically and are presented for approval by the Board of Directors of United Bank. The purpose of the standards and guidelines is to grant loans on a sound and collectible basis; to invest available funds in a safe, profitable manner; to serve the legitimate credit needs of the communities of United’s primary market area; and to ensure that all loan applicants receive fair and equal treatment in the lending process. It is the intent of the underwriting guidelines and standards to: minimize loan losses by carefully investigating the credit history of each applicant, verify the source of repayment and the ability of the applicant to repay, collateralize those loans in which collateral is deemed to be required, exercise care in the documentation of the application, review, approval, and origination process, and administer a comprehensive loan collection program.
United’s underwriting standards and practices are designed to originate both fixed and variable rate loan products in a manner which is consistent with the prudent banking practices applicable to these exposures. Typically, both fixed and variable rate loan underwriting practices incorporate conservative methodology, including the use of stress testing for commercial loans, and other product appropriate measures designed to provide an adequate margin of safety for the full collection of both principal and interest within contractual terms. Consumer real estate secured loans are underwritten to the initial rate, and to a higher assumed rate commensurate with normal market conditions. Therefore, it is the intent of United’s underwriting standards to insure that adequate primary repayment capacity exists to address both future increases in interest rates, and fluctuations in the underlying cash flows available for repayment. Historically, and at December 31, 2019, United has not offered “teaser rate” loans, and had no loan portfolio products which were specifically designed for
“sub-prime”
borrowers. Management defines
“sub-prime”
borrowers as consumer borrowers with a credit score of less than 660.
6
Table of Contents
The above guidelines are adhered to and subject to the experience, background and personal judgment of the loan officer assigned to the loan application. A loan officer may grant, with justification, a loan with variances from the underwriting guidelines and standards. However, the loan officer may not exceed his or her respective lending authority without obtaining the prior, proper approval as outlined in United’s loan policy from a superior, a regional supervisor or market president (dual approval per policy) or the Loan Committee, whichever is deemed appropriate for the nature of the variance.
Loan Concentrations
United has commercial loans, including real estate and owner-occupied, income-producing real estate and land development loans, of approximately $8.8 billion as of December 31, 2019. These loans are primarily secured by real estate located in West Virginia, southeastern Ohio, southwestern Pennsylvania, Virginia, Maryland and the District of Columbia. United categorizes these commercial loans by industry according to the North American Industry Classification System (NAICS) to monitor the portfolio for possible concentrations in one or more industries. As of the most recent fiscal
year-end,
United has one such industry classification that exceeded 10% of total loans. As of December 31, 2019, approximately $6.0 billion or 43.4% of United’s total loan portfolio were for real estate and construction. The loans were originated by United’s subsidiary banks using underwriting standards as set forth by management. United’s loan administration policies are focused on the risk characteristics of the loan portfolio, including commercial real estate loans, in terms of loan approval and credit quality. It is the opinion of management that these loans do not pose any unusual risks and that adequate consideration has been given to the above loans in establishing the allowance for loan losses.
United does not have a loan classification concentration in the mining, quarrying and oil and gas extraction industry. As of December 31, 2019, approximately $112.3 million or less than 1% of United’s total loan portfolio were for the purpose of extracting, manufacturing and distributing oil, coal and natural gas.
Secondary Markets
United generally originates loans within the primary market area of United Bank. United may from time to time make loans to borrowers and/or on properties outside of its primary market area as an accommodation to its existing customers. In addition to offices in the primary market area of United Bank, George Mason also has offices in North Carolina and South Carolina. United does not service mortgage loans for others.
United Bank and George Mason both originate and acquire residential real estate loans for resale in the secondary market. Mortgage loan originations are generally intended to be sold in the secondary market on a best efforts or mandatory basis.
During 2019, United originated $2.6 billion of real estate loans for sale in the secondary market and sold $2.4 billion of loans designated as held for sale in the secondary market. Net gains on the sales of these loans during 2019 were $77.0 million.
The principal sources of revenue from United’s mortgage banking business are: (i) loan origination fees; (ii) gains or losses from the sale of loans; and (iii) interest earned on mortgage loans during the period that they are held by United pending sale, if any.
Investment Activities
United’s investment policy stresses the management of the investment securities portfolio, which includes both securities held to maturity and securities available for sale, to maximize return over the long-term in a manner that is consistent with good banking practices and relative safety of principal. United currently does not engage in trading account activity. The Asset/Liability Management Committee of United is responsible for the coordination and evaluation of the investment portfolio.
Sources of funds for investment activities include “core deposits”. Core deposits include certain demand deposits, 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, securities sold under agreements to repurchase and FHLB borrowings. Repurchase agreements represent funds that are generally obtained as the result of a competitive bidding process.
7
Table of Contents
United’s investment portfolio is comprised of a significant amount of mortgage-backed securities, asset-backed securities and corporate securities. Obligations of States and Political Subdivisions are comprised of primarily “investment grade” rated municipal securities. Interest and dividends on securities for the years of 2019, 2018, and 2017 were $74.3 million, $61.7 million, and $42.2 million, respectively. For the year of 2019, United realized net gains on sales of securities of $373 thousand. For the years of 2018 and 2017, United realized net losses on sales of securities of $862 thousand and net gains on sales of securities of $5.6 million, respectively. In the year 2019, United recognized other-than-temporary impairment (OTTI) charges of $198 thousand. In the year 2018, United recognized OTTI charges of $1.76 million and in the year 2017, United recognized OTTI charges of $60 thousand.
Competition
United faces a high degree of competition in all of the markets it serves. United considers all of West Virginia to be included in its market area. This area includes the five largest West Virginia Metropolitan Statistical Areas (MSA): the Parkersburg MSA, the Charleston MSA, the Huntington MSA, the Morgantown MSA and the Wheeling MSA. United serves the Ohio counties of Lawrence, Belmont, Jefferson and Washington and Fayette county in Pennsylvania primarily because of their close proximity to the Ohio and Pennsylvania borders and United banking offices located in those counties or in nearby West Virginia. United’s Virginia markets include the Maryland, northern Virginia and Washington, D.C. MSA, the Winchester MSA, the Harrisonburg MSA, and the Charlottesville MSA. United considers all of the above locations to be the primary market area for the business of its banking subsidiary.
With prior regulatory approval, Virginia banks are permitted unlimited branch banking throughout each state. In addition, interstate acquisitions of and by Virginia banks and bank holding companies are permissible on a reciprocal basis, as well as reciprocal interstate acquisitions by thrift institutions. These conditions serve to intensify competition within United’s market.
As of December 31, 2019, there were 61 bank holding companies operating in the State of West Virginia registered with the Federal Reserve System and the West Virginia Board of Banking and Financial Institutions and 95 bank holding companies operating in the Commonwealth of Virginia registered with the Federal Reserve System and the Virginia State Corporation Commission. These holding companies are headquartered in various states and control banks throughout West Virginia and Virginia, which compete for business as well as for the acquisition of additional banks.
Economic Characteristics of Primary Market Areas
As of December 2019, West Virginia’s seasonally adjusted unemployment rate was 5.0%, down from 5.1% for December of 2018, according to information from West Virginia’s Bureau of Employment Programs. The number of unemployed state residents was down 200 over the year. Since December 2018, total nonfarm payroll employment has decreased 2,900. Employment gains included 2,200 in trade, transportation, and utilities, 1,100 in leisure and hospitality, 1,000 in education and health services, and 800 in government. Employment declines included 3,400 in construction, 1,600 in mining and logging, 1,300 in professional and business services, 1,000 in other services, 400 in information, and 300 in manufacturing. Employment in financial activities was unchanged over the year. The national unemployment rate was 3.5%. The state unemployment rate of 5.0% for December 2019 was an increase from a rate of 4.9% for the month of November 2019.
United’s Virginia banking offices are located in markets that historically have reflected low unemployment rate levels. According to information available from the Virginia Employment Commission, Virginia’s seasonally adjusted unemployment rate was 2.6% as of December of 2019. The December 2019 seasonally adjusted unemployment rate for Virginia was down
two-tenths
of a percentage point from a year ago. According to household survey data in December, the labor force expanded for the eighteenth consecutive month. Virginia’s seasonally adjusted unemployment rate continues to be below the national rate of 3.5%.
Over-the-year
8
Table of Contents
employment growth in Virginia has been positive for 69 consecutive months and has accelerated slightly in recent months. In December, the private sector recorded an
over-the-year
gain of 50,600 jobs, while employment in the public sector decreased by 5,400 jobs. Compared to a year ago, on a seasonally adjusted basis, seven of the eleven major industry divisions experienced employment gains, while four experienced employment losses. The largest
over-the-year
job gain occurred in leisure and hospitality, up 17,400 jobs (+4.2%). The next largest
over-the-year
job gain occurred in private education and health services, up 16,700 jobs (+3.1%). The largest job loss occurred in government, down 5,400 jobs
(-0.7%).
Over the year, seasonally adjusted total nonfarm employment increased in nine of the ten Virginia metropolitan areas. The Northern Virginia metropolitan area experienced the largest absolute job gain, up 20,200 jobs (+1.3%). Richmond ranked second, with a gain of 12,300 jobs (+1.8%). Virginia Beach-Norfolk-Newport News ranked third, with a gain of 8,400 jobs (+1.1%). The other
over-the-year
job gains occurred in Roanoke (+3,400 jobs); Charlottesville (+1,700 jobs); Winchester (+1,400 jobs); Blacksburg-Christiansburg-Radford and Harrisonburg (+1,000 jobs each) and Staunton (+700 jobs). The sole job loss occurred in Lynchburg
(-100
jobs).
Regulation and Supervision
United, as a financial holding company, is subject to the restrictions of the Bank Holding Company Act of 1956, as amended, and is registered pursuant to its provisions. As such, United is subject to the reporting requirements of and examination by the Board of Governors of the Federal Reserve System (“Board of Governors”).
The Bank Holding Company Act prohibits the acquisition by a bank holding company of direct or indirect ownership of more than five percent of the voting shares of any bank within the United States without prior approval of the Board of Governors. With certain exceptions, a bank holding company also is prohibited from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank, and from engaging directly or indirectly in business unrelated to the business of banking, or managing or controlling banks.
The Board of Governors, in its Regulation Y, permits financial holding companies to engage in preapproved
non-banking
activities closely related to banking or managing or controlling banks. Approval of the Board of Governors is necessary to engage in certain other
non-banking
activities which are not preapproved or to make acquisitions of corporations engaging in these activities. In addition, on a
case-by-case
basis, the Board of Governors may approve other
non-banking
activities. A financial holding company may also engage in financial activities, including securities underwriting and dealing, insurance agency and underwriting activities, and merchant banking activities.
As a financial holding company doing business in West Virginia, United is also subject to regulation and examination by the West Virginia Board of Banking and Financial Institutions (the West Virginia Banking Board) and must submit annual reports to the West Virginia Banking Board. Further, any acquisition application that United must submit to the Board of Governors must also be submitted to the West Virginia Banking Board for approval.
The Board of Governors has broad authority to prohibit activities of financial holding companies and their
non-banking
subsidiaries that represent unsafe and unsound banking practices or which constitute violations of laws or regulations. The Board of Governors also can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1 million for each day the activity continues.
United Bank, as a Virginia state member bank, is subject to supervision, examination and regulation by the Federal Reserve System, and as such, are subject to applicable provisions of the Federal Reserve Act and regulations issued thereunder. United Bank is subject to the Virginia banking statutes and regulations, and is primarily regulated by the Virginia Bureau of Financial Institutions. As a member of the Federal Deposit Insurance Corporation (“FDIC”), United Bank’s deposits are insured as required by federal law. Bank regulatory authorities regularly examine revenues, loans, investments, management practices, and other aspects of United Bank. These examinations are conducted primarily to protect depositors and not shareholders. In addition to these regular examinations, United Bank must furnish to regulatory authorities quarterly reports containing full and accurate statements of its affairs.
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Table of Contents
United is also under the jurisdiction of the SEC and certain state securities commissions in regard to the offering and sale of its securities. Generally, United must file under the Securities Exchange Act of 1933, as amended, to issue additional shares of its common stock. United is also registered under and is subject to the regulatory and disclosure requirements of the Securities Exchange Act of 1934, as amended, as administered by the SEC. United is listed on the NASDAQ Global Select Market under the quotation symbol “UBSI,” and is subject to the rules of the NASDAQ for listed companies.
SEC regulations require us to disclose certain types of business and financial data on a regular basis to the SEC and to our shareholders. We are required to file annual, quarterly and current reports with the SEC. We prepare and file an annual report on Form
10-K
with the SEC that contains detailed financial and operating information, as well as a management response to specific questions about United’s operations. SEC regulations require that our annual reports to shareholders contain certified financial statements and other specific items such as management’s discussion and analysis of our financial condition and results of operations. We must also file quarterly reports with the SEC on Form
10-Q
that contain detailed financial and operating information for the prior quarter and we must file current reports on Form
8-K
to provide the pubic with information on recent material events.
In addition to periodic reporting to the SEC, we are subject to proxy rules and tender offer rules issued by the SEC. Our officers, directors and principal shareholders (holding 10% or more of our stock) must also submit reports to the SEC regarding their holdings of our stock and any changes to such holdings, and they are subject to short-swing profit liability.
Dividends and Stock Repurchases
The principal source of United’s liquidity is dividends from United Bank. The prior approval of the Federal Reserve Board is required if the total of all dividends declared by a state-chartered member bank in any calendar year would exceed the sum of the bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus or to fund the retirement of preferred stock. Federal law also prohibits a state-chartered, member bank from paying dividends that would be greater than the bank’s undivided profits. United Bank is also subject to limitations under Virginia state law regarding the level of dividends that may be paid.
In addition, United and United Bank are subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have stated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. In addition, in the current financial and economic environment, the Federal Reserve Board has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.
In July 2019, the federal bank regulators adopted final rules (the “Capital Simplifications Rules”) that, among other things, eliminated the standalone prior approval requirement in the Basel III Capital Rules for any repurchase of common stock. In certain circumstances, United’s repurchases of its common stock may be subject to a prior approval or notice requirement under other regulations, policies or supervisory expectations of the Federal Reserve Board. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve Board.
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Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), into law. The Dodd-Frank Act significantly changes regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes, among other things, provisions creating a Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation; centralizing the responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, which is responsible for implementing, examining and enforcing compliance with federal consumer financial laws; permanently raising the current standard maximum deposit insurance amount to $250,000; establishing strengthened capital standards for banks, and disallowing trust preferred securities as qualifying for Tier 1 capital (subject to certain grandfather provisions for existing trust preferred securities); establishing new minimum mortgage underwriting standards; granting the Federal Reserve Board the power to regulate debit card interchange fees; and implementing corporate governance changes.
On December 10, 2013, the banking agencies issued a final rule implementing Section 619 of the Dodd-Frank Act, commonly referred to as the “Volcker Rule”. The Federal Reserve issued an order on December 18, 2014 extending the period which banking entities have to divest disallowed securities under the Volcker Rule to July 21, 2016. The Federal Reserve also announced its intention to grant an additional one year extension of the conformance period until July 21, 2017. On January 14, 2014, the banking agencies approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (Trup Cdos) from the prohibitions under the Volcker Rule. During the third quarter of 2014 United sold four Trup Cdos for a net gain of $1.3 million in response to the Volcker Rule. Under the Volcker Rule, these four securities were identified by United as covered funds and were required to be divested of before July 21, 2017. United believes the remaining Trup Cdo portfolio is excluded from the scope of the Volcker Rule.
On May 24, 2018, President Trump signed into law the “Economic Growth, Regulatory Relief, and Consumer Protection Act (the EGRRCPA Act)” which provides certain limited amendments to the Dodd-Frank Act, as well as certain targeted modifications to other post-financial crisis regulatory requirements. In addition, the legislation establishes new consumer protections and amends various securities- and investment company-related requirements. The EGRRCPA Act primarily amends several other laws, including the Truth in Lending Act (TILA), Federal Credit Union Act, Federal Deposit Insurance Act, Fair Credit Reporting Act (FCRA) and Securities Act of 1933. The Act is divided into six titles, which aim to: improve consumer access to mortgage credit (Title I); provide regulatory relief and protect consumer access to credit (Title II); protect the credit information of consumers, including veterans and servicemembers (Title III); tailor regulations for certain bank holding companies, including raising the threshold levels for exemption from certain prudential standards and stress testing (Title IV); encourage capital formation by reforming certain Securities and Exchange Commission (SEC) regulations (Title V); and protect student borrowers (Title VI).
Deposit Insurance
The deposits of United Bank are insured by the FDIC to the extent provided by law. Accordingly, United Bank is also subject to regulation by the FDIC. United Bank is subject to deposit insurance assessments to maintain the Deposit Insurance Fund (DIF) of the FDIC. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating (CAMELS rating) and certain financial measures to assess an institution’s ability to withstand asset-related stress and funding-related stress. The risk matrix utilizes four risk categories which are distinguished by capital levels and supervisory ratings.
In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. Under the new restoration plan, the FDIC will update its loss and income projections at least semi-annually for the fund and, if needed, will increase or decrease assessment rates, following
notice-and-comment
rulemaking if required.
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In April 2011, the FDIC implemented rulemaking under the Dodd-Frank Act to reform the deposit insurance assessment system. The final rule redefined the assessment base used for calculating deposit insurance assessments. Specifically, the rule bases assessments on an institution’s total assets less tangible capital, as opposed to total deposits. Since the new base is larger than the prior base, the FDIC also proposed lowering assessment rates so that the rules would not significantly alter the total amount of revenue collected from the industry. The new assessment scale ranges from 2.5 basis points for the least risky institutions to 45 basis points for the riskiest.
As part of the its changes in April 2011, the FDIC established a new methodology for determining assessment rates for large and highly complex institutions, as defined in the rules. In October 2012, the FDIC announced revised changes to some of the definitions used to determine assessment rates for these large and highly complex insured depository institutions. The rule generally applies to FDIC-regulated banks with assets greater than $10 billion and took effect April 1, 2013. In the second quarter of 2018, United Bank was reclassified as a large institution for deposit insurance assessment purposes. Generally, this new classification will result in higher FDIC insurance premiums.
On September 30, 2018, the Deposit Insurance Fund Reserve Ratio reached 1.36%, exceeding the statutorily required minimum reserve ratio of 1.35% ahead of the September 30, 2020, deadline required under the Dodd-Frank Act. FDIC regulations provide for two changes to deposit insurance assessments upon reaching the minimum: (1) surcharges on insured depository institutions with total consolidated assets of $10 billion or more (large banks) ceased on December 28, 2018; and (2) small banks will receive assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from between 1.15% and 1.35%, to be applied when the reserve ratio is at or above 1.38%. United benefited from both these changes.
United’s FDIC insurance expense totaled $8.1 million, $11.5 million, and $7.1 million in 2019, 2018 and 2017, respectively.
Capital Requirements
United and United Bank are each required to comply with applicable capital adequacy standards established by the Federal Reserve Board. In July 2013, the federal bank regulators approved final rules (the “Basel III Capital Rules”) implementing the Basel III framework set forth by the Basel Committee on Banking Supervision (the “Basel Committee”) as well as certain provisions of the Dodd-Frank Act.
Since fully phased in on January 1, 2019, the Basel III Capital Rules require United and United Bank to maintain the following:
  • A minimum ratio of Common Equity Tier 1 (“CET1”) to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of CET1 to risk-weighted assets of 7.0%);
  • A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%);
  • A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.5%); and
  • A minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).
Banking institutions that fail to meet the effective minimum ratios once the capital conservation buffer is taken into account, as detailed above, will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (that is, four quarter trailing net income, net of distributions and tax effects not reflected in net income).
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The Basel III Capital Rules and the Capital Simplification Rules also provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax assets and significant investments in
non-consolidated
financial entities be deducted from CET1 to the extent that any one such category exceeds 25% of CET1. Prior to the adoption of the Capital Simplification Rules in July 2019, amounts were deducted from CET1 to the extent that any one such category exceeded 10% of CET1 or all such items, in the aggregate, exceeded 15% of CET1. The Capital Simplification Rules took effect for United and United Bank as of January 1, 2020. These limitations did not impact our regulatory capital during any of the reported periods.
In addition, under the general risk-based capital rules, the effects of accumulated other comprehensive income items included in capital were excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income items are not excluded; however,
non-advanced
approaches banking organizations, including United and United Bank, were able to make a
one-time
permanent election to continue to exclude these items. Both United and United Bank made this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of their
available-for-sale
securities portfolio. Under the Basel III Capital Rules, trust preferred securities no longer included in our Tier 1 capital may nonetheless be included as a component of Tier 2 capital on a permanent basis without
phase-out.
The Basel III Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures (and higher percentages for certain other types of interests), and resulting in higher risk weights for a variety of asset categories. In November 2019, the federal banking agencies adopted a rule revising the scope of commercial real estate mortgages subject to a 150% risk weight.
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to United or United Bank. The impact of Basel IV on us will depend on the manner in which it is implemented by the federal bank regulators.
Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could subject United to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits and other restrictions on its business. As described below, significant additional restrictions can be imposed on United if it would fail to meet applicable capital requirements.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) establishes a new regulatory scheme, which ties the level of supervisory intervention by bank regulatory authorities primarily to a depository institution’s capital category. Among other things, FDICIA authorizes regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements.
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FDICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
Effective January 1, 2015, under the Basel III Capital Rules, the current prompt corrective action requirements for an institution to be “well-capitalized” is a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8% or greater, a CET1 ratio of 6.5% or greater and a Tier 1 leverage ratio of 5 percent or greater.
United Bank was considered a “well capitalized” institution as of December 31, 2019. Well-capitalized institutions are permitted to engage in a wider range of banking activities, including among other things, the accepting of “brokered deposits,” and the offering of interest rates on deposits higher than the prevailing rate in their respective markets.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to
low-
and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. Banking regulators take into account CRA ratings when considering approval of a proposed transaction. United Bank received a rating of “outstanding” in its most recent CRA examination.
In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) jointly proposed rules that would significantly change existing CRA regulations. The proposed rules are intended to increase bank activity in
low-
and moderate-income communities where there is significant need for credit, more responsible lending, greater access to banking services, and improvements to critical infrastructure. The proposals change four key areas: (i) clarifying what activities qualify for CRA credit; (ii) updating where activities count for CRA credit; (iii) providing a more transparent and objective method for measuring CRA performance; and (iv) revising
CRA-related
data collection, record keeping, and reporting. However, the Federal Reserve Board has not joined the proposed rulemaking. As such, we will continue to evaluate the impact of any changes to the regulations implementing the CRA and their impact to our financial condition, results of operations, and/or liquidity.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If United fails to observe the regulatory guidance, United could be subject to various regulatory sanctions, including financial penalties.
In the ordinary course of business, United relies on electronic communications and information systems to conduct its operations and to store sensitive data. United employs an
in-depth,
layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. United employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of its defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, United and United Bank have not experienced a
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significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, United’s systems and those of its customers and third-party service providers are under constant threat and it is possible that United could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by United and its customers. See Item 1A. Risk Factors for a further discussion of risk related to cybersecurity.
Deposit Acquisition Limitation
Under West Virginia banking law, an acquisition or merger is not permitted if the resulting depository institution or its holding company, including its affiliated depository institutions, would assume additional deposits to cause it to control deposits in the State of West Virginia in excess of twenty five percent (25%) of such total amount of all deposits held by insured depository institutions in West Virginia. This limitation may be waived by the Commissioner of Banking by showing good cause.
Consumer Laws and Regulations
In addition to the banking laws and regulations discussed above, bank subsidiaries are also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. Among the more prominent of such laws and regulations are the Truth in Lending Act, the Home Mortgage Disclosure Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Act, the Right to Financial Privacy Act and the Fair Housing Act. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. United’s bank subsidiary must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.
As discussed above, the Dodd-Frank Act centralized responsibility for consumer financial protection by creating the CFPB, and giving it responsibility for implementing, examining and enforcing compliance with federal consumer protection laws. The CFPB has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans, and credit cards. The CFPB’s functions include investigating consumer complaints, rulemaking, supervising and examining banks’ consumer transactions, and enforcing rules related to consumer financial products and services. Banks with more than $10 billion in assets, such as United Bank, are subject to these federal consumer financial laws.
Incentive Compensation
The Federal Reserve Board reviews, as part of its regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as United, that are not “large, complex banking organizations.” These reviews are tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of this supervisory initiative will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
In June 2010, the Federal Reserve Board, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking
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organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
In April and May of 2016, the Federal Reserve Board, other federal banking agencies and the SEC (the “Agencies”) jointly published proposed rulemaking designed to implement provisions of the Dodd-Frank Act prohibiting incentive compensation arrangements that would encourage inappropriate risk taking at a covered institution, which includes a bank or bank holding company with $1 billion or more of assets, such as United. The proposed rule expanded beyond the June 2010 principals based guidance and broadened the scope to include community banks. The proposed rules (i) prohibit incentive-based compensation arrangements that encourage executive officers, employees, directors or principal shareholders to expose the institution to inappropriate risks by providing excessive compensation (based on the standards for excessive compensation adopted pursuant to the FDIA) and (ii) prohibit incentive-based compensation arrangements for executive officers, employees, directors or principal shareholders that could lead to a material financial loss for the institution. The proposed rule requires covered institutions to establish policies and procedures for monitoring and evaluating their compensation practices. As of February 2020, final rules have not been adopted. If these or other regulations are adopted in a form similar to that initially proposed, they will impose limitations on the manner in which we may structure compensation for our executives.
The scope and content of the U.S. banking regulators’ policies on incentive compensation are continuing to develop. It cannot be determined at this time whether or when a final rule will be adopted and whether compliance with such a final rule will adversely affect the ability of United and United Bank to hire, retain and motivate their key employees.
Item 1A.
RISK FACTORS
United is subject to risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair United’s business operations. This report is qualified in its entirety by these risk factors.
RISKS RELATING TO UNITED’S BUSINESS
Changes in economic and political conditions could adversely affect our earnings, as our borrowers’ ability to repay loans and the value of the collateral securing our loans decline
.
United’s success depends, to a certain extent, upon local and national economic and political conditions, as well as governmental monetary policies. Conditions such as an economic recession, rising unemployment, changes in interest rates, money supply and other factors beyond its control may adversely affect United’s and United Bank’s asset quality, deposit levels and loan demand and, therefore, its earnings. Because United has a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which could have an adverse impact on our earnings. Consequently, declines in the economy in our market area could have a material adverse effect on our financial condition and results of operations.
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The value of certain investment securities is volatile and future declines or other-than-temporary impairments could have a materially adverse effect on future earnings and regulatory capital.
Continued volatility in the fair value for certain investment securities, whether caused by changes in market conditions, interest rates, credit risk of the issuer, the expected yield of the security, or actual defaults in the portfolio could result in significant fluctuations in the value of the securities as well as any regulatory rulemaking such as the Volcker Rule which could exclude or limit the holdings of certain investment securities. This could have a material adverse impact on United’s accumulated other comprehensive income and shareholders’ equity depending on the direction of the fluctuations. Furthermore, future downgrades, defaults or prepayments, including the liquidation of the underlying collateral in certain securities, could result in future classifications as other-than-temporarily impaired. This could have a material impact on United’s future earnings, although the impact on shareholders’ equity will be offset by any amount already included in other comprehensive income for securities that were temporarily impaired.
There are no assurances as to adequacy of the allowance for loan losses.
United believes that its allowance for loan losses is maintained at a level appropriate to absorb any probable losses in its loan portfolio given the current information known to management.
Management establishes the allowance based upon many factors, including, but not limited to:
  • historical loan loss experience;
  • industry diversification of the commercial loan portfolio;
  • the effect of changes in the local real estate market on collateral values;
  • the amount of nonperforming loans and related collateral security;
  • current economic conditions that may affect the borrower’s ability to pay and value of collateral;
  • volume, growth and composition of the loan portfolio; and
  • other factors management believes are relevant.
These determinations are based upon estimates that are inherently subjective, and their accuracy depends on the outcome of future events, so ultimate losses may differ from current estimates. Changes in economic, operating and other conditions, including changes in interest rates, that are generally beyond United’s control, can affect United’s loan losses. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of United’s control, may require an increase in the allowance for credit losses. United can provide no assurance that its allowance is sufficient to cover actual loan losses should such losses differ substantially from our current estimates.
In addition, federal and state regulators, as an integral part of their respective supervisory functions, periodically review United’s allowance for loan losses, and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. Furthermore, if charge-offs in future periods exceed the allowance for loan losses, United will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on United’s business, financial condition and results of operations.
See the section captioned “Provision for Loan Losses” in in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this Form
10-K
for further discussion related to our process for determining the appropriate level of the allowance for loan losses.
In addition, the adoption of 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 will impact our methodology for estimating the allowance for loan losses. See Note A – Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form
10-K.
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Changes in interest rates may adversely affect United’s business.
United’s earnings, like most financial institutions, are significantly dependent on its net interest income. Net interest income is the difference between the interest income United earns on loans and other assets which earn interest and the interest expense incurred to fund those assets, such as on savings deposits and borrowed money. Therefore, changes in general market interest rates, such as a change in the monetary policy of the Board of Governors of the Federal Reserve System or otherwise beyond those which are contemplated by United’s interest rate risk model and policy, could have an effect on net interest income. For more information concerning United’s interest rate risk model and policy, see the discussion in Quantitative and Qualitative Disclosures About Market Risk included in Part II, under Item 7A of this Form
10-K.
Interest rates on United’s outstanding financial instruments might be subject to change based on regulatory developments.
The London Interbank Offered Rate (LIBOR) and certain other “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences, which cannot be predicted. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. Since then, regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fall-back language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. If LIBOR ceases to exist or if the methods of calculating LIBOR change from current methods for any reason, interest rates on our floating rate obligations, loans, deposits, derivatives, and other financial instruments tied to LIBOR rates, as well as the revenue and expenses associated with those financial instruments, may be adversely affected. Further, any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our floating rate obligations, loans, deposits, derivatives, and other financial instruments tied to LIBOR rates.
United is subject to credit risk.
There are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. United seeks to mitigate the risk inherent in its loan portfolio by adhering to prudent loan approval practices. Although United believes that its loan approval criteria are appropriate for the various kinds of loans the Company makes, United may incur losses on loans that meet our loan approval criteria. A significant decline in general economic conditions caused by inflation or deflation, recession, unemployment, changes in government fiscal and monetary policies, acts of terrorism, or other factors beyond our control could cause our borrowers to default on their loan payments, and the collateral values securing such loans to decline and be insufficient to repay any outstanding indebtedness. In such events, we could experience significant loan losses, which could have a material adverse effect on our financial condition and results of operations.
United’s information systems may experience an interruption or breach in security.
United relies heavily on communications and information systems to conduct its business. In addition, as part of its business, United collects, processes and retains sensitive and confidential client and customer information. United’s facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan and other systems. While United has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Company’s information systems could damage United’s
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reputation, result in a loss of customer business, subject United to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on United’s financial condition and results of operations.
Unauthorized disclosure of sensitive or confidential client or customer information, whether through a cyber-attack, other breach of our computer systems or otherwise, could severely harm our business.
In the normal course of our business, we collect, process and retain sensitive and confidential client and customer information on our behalf and on behalf of other third parties. Despite the security measures we have in place, our facilities and systems may be vulnerable to cyber-attacks, security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and / or human errors, or other similar events.
Information security risks for financial institutions like us have increased recently in part because of new technologies, the use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers have engaged in attacks against large financial institutions, particularly denial of service attacks, designed to disrupt key business services such as customer-facing web sites. We are not able to anticipate or implement effective preventive measures against all security breaches of these types. Although we employ detection and response mechanisms designed to contain and mitigate security incidents, early detection may be thwarted by persistent sophisticated attacks and malware designed to avoid detection.
We also face risks related to cyber-attacks and other security breaches in connection with card transactions that typically involve the transmission of sensitive information regarding our customers through various third parties. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them. We also rely on numerous other third-party service providers to conduct other aspects of our business operations and face similar risks relating to them. While we conduct security assessments on our higher risk third parties, we cannot be sure that their information security protocols are sufficient to withstand a cyber-attack or other security breach.
Any cyber-attack or other security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information could severely damage our reputation, erode confidence in the security of our systems, products and services, expose us to the risk of litigation and liability, disrupt our operations and have a material adverse effect on our business.
United’s business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, its business and a negative impact on results of operations.
United relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems, whether due to severe weather, natural disasters, cyber-attack, acts of war or terrorism, criminal activity or other factors, could result in failures or disruptions in general ledger, deposit, loan, customer relationship management and other systems. While United has disaster recovery and other policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of United’s information systems could damage its reputation, result in a loss of customer business, subject it to additional regulatory scrutiny or expose it to civil litigation and possible financial liability, any of which could have a material adverse effect on results of operations.
The negative economic effects caused by terrorist attacks, including cyber-attacks, potential attacks and other destabilizing events would likely contribute to the deterioration of the quality of United’s loan portfolio and could reduce its customer base, level of deposits, and demand for its financial products such as loans.
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High inflation, natural disasters, acts of terrorism, including cyber-attacks, an escalation of hostilities or other international or domestic occurrences, and other factors could have a negative impact on the economy of the
Mid-Atlantic
regions in which United operates. An additional economic downturn in its markets would likely contribute to the deterioration of the quality of United’s loan portfolio by impacting the ability of its customers to repay loans, the value of the collateral securing loans, and may reduce the level of deposits in its bank and the stability of its deposit funding sources. An additional economic downturn could also have a significant impact on the demand for United’s products and services. The cumulative effect of these matters on United’s results of operations and financial condition would likely be adverse and material.
Loss of United’s Chief Executive Officer or other executive officers could adversely affect its business.
United’s success is dependent upon the continued service and skills of its executive officers and senior management. If United loses the services of these key personnel, it could have a negative impact on United’s business because of their skills, years of industry experience and the difficulty of promptly finding qualified replacement personnel. The services of Richard M. Adams, United’s Chief Executive Officer, would be particularly difficult to replace. United and Mr. Adams are parties to an Employment Agreement providing for his continued employment by United through March 31, 2023.
United operates in a highly competitive market.
United faces a high degree of competition in all of the markets it serves. United considers all of West Virginia to be included in its market area. This area includes the five largest West Virginia Metropolitan Statistical Areas (MSA): the Parkersburg MSA, the Charleston MSA, the Huntington MSA, the Morgantown MSA and the Wheeling MSA. United serves the Ohio counties of Lawrence, Belmont, Jefferson and Washington and Fayette county in Pennsylvania primarily because of their close proximity to the Ohio and Pennsylvania borders and United banking offices located in those counties or in nearby West Virginia. United’s Virginia markets include the Maryland, northern Virginia and Washington, D.C. MSA, the Winchester MSA, the Harrisonburg MSA, and the Charlottesville MSA. United considers all of the above locations to be the primary market area for the business of its banking subsidiaries.
There is a risk that aggressive competition could result in United controlling a smaller share of these markets. A decline in market share could lead to a decline in net income which would have a negative impact on stockholder value.
United may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. United has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, or other institutional clients. Recent defaults by financial services institutions, and even rumors or questions about a financial institution or the financial services industry in general, have led to marketwide liquidity problems and could lead to losses or defaults by United or other institutions. Any such losses could adversely affect United’s financial condition or results of operations.
United is subject to extensive government regulation and supervision.
United is subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect United’s lending practices, capital structure, investment practices, dividend policy, operations and growth, among other things. These regulations also impose obligations to maintain appropriate policies, procedures and controls, among other things, to detect, prevent and report money laundering and terrorist financing and to verify the identities of United’s customers. Congress and
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federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes. Other changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect United in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products United may offer and/or increase the ability of nonbanks to offer competing financial services and products, among other things. United expends substantial effort and incurs costs to improve its systems, audit capabilities, staffing and training in order to satisfy regulatory requirements, but the regulatory authorities may determine that such efforts are insufficient. Failure to comply with relevant laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on United’s business, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.
In the normal course of business, United and its subsidiaries are routinely subject to examinations and challenges from federal and state tax authorities regarding the amount of taxes due in connection with investments that the Company has made and the businesses in which United has engaged. Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base, apportionment and tax credit planning. The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. If any such challenges are made and are not resolved in the Company’s favor, they could have a material adverse effect on United’s financial condition and results of operations.
The Consumer Financial Protection Bureau (CFPB) may reshape the consumer financial laws through rulemaking and enforcement of the prohibitions against unfair, deceptive and abusive business practices. Compliance with any such change may impact the business operations of depository institutions offering consumer financial products or services, including United Bank
.
The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers. The CFPB has also been directed to write rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The concept of what may be considered to be an “abusive” practice is relatively new under the law. Moreover, United Bank is supervised and examined by the CFPB for compliance with the CFPB’s regulations and policies. The costs and limitations related to this additional regulatory reporting regimen have yet to be fully determined, although they may be material and the limitations and restrictions that will be placed upon United Bank with respect to its consumer product offering and services may produce significant, material effects on United Bank (and United’s) profitability.
United may elect or be compelled to seek additional capital in the future, but capital may not be available when it is needed.
United is required by federal and state regulatory authorities to maintain adequate levels of capital to support the Company’s operations. In addition, United may elect to raise additional capital to support the Company’s business or to finance acquisitions, if any, or United may otherwise elect to raise additional capital. In that regard, a number of financial institutions have recently raised considerable amounts of capital as a result of deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors, which may diminish United’s ability to raise additional capital.
United’s ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside the Company’s control, and on United’s financial performance. Accordingly, United cannot be assured of its ability to raise additional capital if needed or on terms acceptable to the Company. If United cannot raise additional capital when needed, it may have a material adverse effect on the Company’s financial condition, results of operations and prospects.
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United is subject to higher regulatory capital requirements and failure to comply with these standards may impact dividend payments, equity repurchases and executive compensation.
United and United Bank are each required to comply with applicable capital adequacy standards established by the Federal Reserve Board. In July 2013, the federal bank regulators approved final rules (the “Basel III Capital Rules”) implementing the Basel III framework set forth by the Basel Committee on Banking Supervision (the “Basel Committee”) as well as certain provisions of the Dodd-Frank Act.
Since fully phased in on January 1, 2019, the Basel III Capital Rules require United and United Bank to maintain the following:
  • A minimum ratio of Common Equity Tier 1 (“CET1”) to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (resulting in a minimum ratio of CET1 to risk-weighted assets of 7.0%);
  • A minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%);
  • A minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.5%); and
  • A minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).
Banking institutions that fail to meet the effective minimum ratios once the capital conservation buffer is taken into account, as detailed above, will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (that is, four quarter trailing net income, net of distributions and tax effects not reflected in net income).
The Basel III Capital Rules and the Capital Simplification Rules also provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that certain deferred tax assets and significant investments in
non-consolidated
financial entities be deducted from CET1 to the extent that any one such category exceeds 25% of CET1. Prior to the adoption of the Capital Simplification Rules in July 2019, amounts were deducted from CET1 to the extent that any one such category exceeded 10% of CET1 or all such items, in the aggregate, exceeded 15% of CET1. The Capital Simplification Rules took effect for United and United Bank as of January 1, 2020. These limitations did not impact our regulatory capital during any of the reported periods.
In addition, under the general risk-based capital rules, the effects of accumulated other comprehensive income items included in capital were excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income items are not excluded; however,
non-advanced
approaches banking organizations, including United and United Bank, were able to make a
one-time
permanent election to continue to exclude these items. Both United and United Bank made this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of their
available-for-sale
securities portfolio. Under the Basel III Capital Rules, trust preferred securities no longer included in our Tier 1 capital may nonetheless be included as a component of Tier 2 capital on a permanent basis without
phase-out.
The Basel III Capital Rules prescribe a standardized approach for risk weightings that expanded the risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency
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securities, to 600% for certain equity exposures (and higher percentages for certain other types of interests), and resulting in higher risk weights for a variety of asset categories. In November 2019, the federal banking agencies adopted a rule revising the scope of commercial real estate mortgages subject to a 150% risk weight.
The Basel III changes have resulted in generally higher minimum capital ratios that require United and its subsidiaries to maintain capital buffers above minimum requirements to avoid restrictions on capital distributions and executive bonus payments. In addition, the application of more stringent capital requirements for United could, among other things, result in lower returns on invested capital, require the raising of additional capital and result in additional regulatory actions if United were to be unable to comply with such requirements. Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit United’s ability to make distributions, including paying dividends.
Failure to maintain effective internal controls over financial reporting in the future could impair United’s ability to accurately and timely report its financial results or prevent fraud, resulting in loss of investor confidence and adversely affecting United’s business and stock price.
Effective internal controls over financial reporting are necessary to provide reliable financial reports and prevent fraud. Management believes that United’s internal controls over financial reporting are currently effective. Management will continually review and analyze the Company’s internal controls over financial reporting for Sarbanes-Oxley Section 404 compliance. Any failure to maintain, in the future, an effective internal control environment could impact United’s ability to report its financial results on an accurate and timely basis, which could result in regulatory actions, loss of investor confidence, and adversely impact United’s business and stock price.
United could face unanticipated environmental liabilities or costs related to real property owned or acquired through foreclosure. Compliance with federal, state and local environmental laws and regulations, including those related to investigation and
clean-up
of contaminated sites, could have a negative effect on expenses and results of operations.
A significant portion of United’s loan portfolio is secured by real property. During the ordinary course of business, United may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, United may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require United to incur substantial expenses and may materially reduce the affected property’s value or limit United’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase exposure to environmental liability. Although United has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on results of operations.
United’s earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies.
The policies of the Federal Reserve impact United significantly. The Federal Reserve regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold. Those policies determine to a significant extent our cost of funds for lending and investing. Changes in those policies are beyond our control and are difficult to predict. Federal Reserve policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve could reduce the demand for a borrower’s products and services. This could adversely affect the borrower’s earnings and ability to repay its loan, which could have a material adverse effect on our financial condition and results of operations.
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New accounting or tax pronouncements or interpretations may be issued by the accounting profession, regulators or other government bodies which could change existing accounting methods. Changes in accounting methods could negatively impact United’s results of operations and financial condition.
Current accounting and tax rules, standards, policies and interpretations influence the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. Events that may not have a direct impact on United, such as the bankruptcy of major U.S. companies, have resulted in legislators, regulators and authoritative bodies, such as the Financial Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board, and various taxing authorities, responding by adopting and/or proposing substantive revision to laws, regulations, rules, standards, policies, and interpretations. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. A change in accounting standards may adversely affect reported financial condition and results of operations.
United’s vendors could fail to fulfill their contractual obligations, resulting in a material interruption in, or disruption to, its business and a negative impact on results of operations.
United is dependent upon third parties for certain information system, data management and processing services and to provide key components of its business infrastructure. United has entered into subcontracts for the supply of current and future services, such as data processing, mortgage loan processing and servicing, and certain property management functions. These services must be available on a continuous and timely basis and be in compliance with any regulatory requirements. Failure to do so could substantially harm United’s business.
United often purchases services from vendors under agreements that typically can be terminated on a periodic basis. There can be no assurance, however, that vendors will be able to meet their obligations under these agreements or that United will be able to compel them to do so. Risks of relying on vendors include the following:
  • If an existing agreement expires or a certain service is discontinued by a vendor, then United may not be able to continue to offer its customers the same breadth of products and its operating results would likely suffer unless it is able to find an alternate supply of a similar service.
 
 
 
 
  • Agreements United may negotiate in the future may commit it to certain minimum spending obligations. It is possible United will not be able to create the market demand to meet such obligations.
 
 
 
 
  • If market demand for United’s products increases suddenly, its current vendors might not be able to fulfill United’s commercial needs, which would require it to seek new arrangements or new sources of supply, and may result in substantial delays in meeting market demand.
 
 
 
 
  • United may not be able to control or adequately monitor the quality of services it receives from its vendors. Poor quality services could damage United’s reputation with its customers.
 
 
 
 
In addition, these third party service providers are sources of operational and informational security risk to United, including risks associated with operational errors, information system interruptions or breaches, and unauthorized disclosures of sensitive or confidential client or customer information. If third party service providers encounter any of these issues, or if United has difficulty communicating with them, United could be exposed to disruption of operations, loss of service or connectivity to customers, reputational damage, and litigation risk that could have a material adverse effect on our results of operations or our business.
Potential problems with vendors such as those discussed above could have a significant adverse effect on United’s business, lead to higher costs and damage its reputation with its customers and, in turn, have a material adverse effect on its financial condition and results of operations.
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Severe weather, natural disasters, public health issues, acts of war or terrorism, and other external events could significantly impact United’s ability to conduct business.
Severe weather, natural disasters, public health issues, acts of war or terrorism, and other external events could affect the stability of United’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, adversely impact United’s employee base, cause significant property damage, result in loss of revenue, and / or cause the Company to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on United’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.
RISKS ASSOCIATED WITH UNITED’S COMMON STOCK
United’s stock price can be volatile
.
Stock price volatility may make it more difficult for United shareholders to resell their common stock when they want and at prices they find attractive. United’s stock price can fluctuate significantly in response to a variety of factors, including, among other things:
  • Actual or anticipated negative variations in quarterly results of operations;
 
 
 
 
  • Negative recommendations by securities analysts;
 
 
 
 
  • Poor operating and stock price performance of other companies that investors deem comparable to United;
 
 
 
 
  • News reports relating to negative trends, concerns and other issues in the financial services industry or the economy in general;
 
 
 
 
  • Negative perceptions in the marketplace regarding United and/or its competitors;
 
 
 
 
  • New technology used, or services offered, by competitors;
 
 
 
 
  • Adverse changes in interest rates or a lending environment with prolonged low interest rates;
 
 
 
 
  • Adverse changes in the real estate market;
 
 
 
 
  • Negative economic news;
 
 
 
 
  • Failure to integrate acquisitions or realize anticipated benefits from acquisitions;
 
 
 
 
  • Adverse changes in government regulations; and
 
 
 
 
  • Geopolitical conditions such as acts or threats of terrorism or military conflicts.
 
 
 
 
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause United’s stock price to decrease regardless of operating results.
Dividend payments by United’s subsidiaries to United and by United to its shareholders can be restricted.
The declaration and payment of future cash dividends will depend on, among other things, United’s earnings, the general economic and regulatory climate, United’s liquidity and capital requirements, and other factors deemed relevant by United’s board of directors. Federal Reserve Board policy limits the payment of cash dividends by bank holding companies, without regulatory approval, and requires that a holding company serve as a source of strength to its banking subsidiaries.
United’s principal source of funds to pay dividends on its common stock is cash dividends from its subsidiaries. The payment of these dividends by its subsidiaries is also restricted by federal and state banking laws and regulations. As of December 31, 2019, approximately $121.5 million was available for dividend payments from United Bank to United without regulatory approval.
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An investment in United common stock is not an insured deposit.
United common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Corporation, any other deposit insurance fund or by any other public or private entity. Investment in United common stock is inherently risky for the reasons described in this section and elsewhere in this prospectus and joint proxy statement and is subject to the same market forces that affect the price of common stock in any company. As a result, someone who acquires United common stock, could lose some or all of their investment.
Certain banking laws may have an anti-takeover effect.
Provisions of federal banking laws, including regulatory approval requirements, could make it more difficult to be acquired by a third party, even if perceived to be beneficial to United’s shareholders. These provisions effectively inhibit a
non-negotiated
merger or other business combination, which could adversely affect the market price of United’s common stock.
Item 1B. UNRESOLVED STAFF COMMENTS
None
Item 2. PROPERTIES
Offices
United is headquartered in the United Center at 500 Virginia Street, East, Charleston, West Virginia. United’s executive offices are located in Parkersburg, West Virginia at Fifth and Avery Streets. United operates one hundred and thirty-eight (138) full service offices—fifty-one (51) offices located throughout West Virginia,
eighty-two
(82) offices in the Shenandoah Valley region of Virginia and the Northern Virginia, Maryland and Washington, D.C. metropolitan area, four (4) in southwestern Pennsylvania and one (1) in southeastern Ohio. United owns all of its West Virginia facilities except for two in the Charleston and Wheeling areas and one each in areas of Beckley, Huntington, Parkersburg, and Clarksburg, all of which are leased under operating leases. United owns most of its facilities in the Shenandoah Valley region of Virginia except for nine offices, two in Winchester, one each in Charlottesville, Front Royal, Harrisonburg, Stanardsville, Waynesboro, Weyers Cave and Woodstock, all of which are leased under operating leases. United leases all of its facilities under operating lease agreements in the Northern Virginia, Maryland and Washington, D.C. areas except for five offices, two in Arlington, one each in Alexandria, Chantilly and Vienna, Virginia, which are owned facilities. United owns all of its Pennsylvania facilities. In Ohio, United owns its one facility in Bellaire. United leases operations centers in the Charleston, West Virginia; Washington, D.C; and Chantilly, Virginia areas and owns one operations center in the Morgantown, West Virginia area.
Item 3. 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 4. MINE SAFETY DISCLOSURES
Not applicable.
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UNITED BANKSHARES, INC.
FORM
10-K,
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 
 
 
Stock
As of January 31, 2020, 200,000,000 shares of common stock, par value $2.50 per share, were authorized for United, of which 105,508,684 were issued, including 3,940,619 shares held as treasury shares. The outstanding shares are held by approximately 6,246 shareholders of record, as well as 61,894 shareholders in street name as of January 31, 2020. The unissued portion of United’ s authorized common stock (subject to registration approval by the SEC) and the treasury shares are available for issuance as the Board of Directors determines advisable. United offers its shareholders the opportunity to invest dividends in shares of United stock through its dividend reinvestment plan. United has also established stock option plans and a stock bonus plan as incentive for certain eligible officers. In addition to the above incentive plans, United is occasionally involved in certain mergers in which additional shares could be issued and recognizes that additional shares could be issued for other appropriate purposes.
In November of 2018, United’s Board of Directors approved a stock repurchase plan, whereby United could buy up to 3,352,000 shares of the Company’s common stock on the open market at prevailing prices through November 7, 2019. The Board of Directors approved a new plan in October of 2019 to repurchase up to 4,000,000 shares of the Company’s common stock on the open market at prevailing prices. As of December 31, 2019, United still has 4,000,000 shares available for repurchase under the plan. During 2019, 1,009,150 shares were repurchased under stock repurchase plans.
The Board of Directors believes that the availability of authorized but unissued common stock of United is of considerable value if opportunities should arise for the acquisition of other businesses through the issuance of United’s stock. Shareholders do not have preemptive rights, which allow United to issue additional authorized shares without first offering them to current shareholders.
Currently, United has only one voting class of stock issued and outstanding and all voting rights are vested in the holders of United’s common stock. On all matters subject to a vote of shareholders, the shareholders of United will be entitled to one vote for each share of common stock owned. Shareholders of United have cumulative voting rights with regard to election of directors.
United’s common stock is traded over the counter on the National Association of Securities Dealers Automated Quotations System, Global Select Market (NASDAQ) under the trading symbol UBSI. The closing sale price reported for United’s common stock on February 24, 2020, the last practicable date, was $32.51.
On December 23, 2008, the shareholders of United authorized the issuance of preferred stock up to 50,000,000 shares with a par value of $1.00 per share. The authorized preferred stock may be issued by the Company’s Board of Directors in one or more series, from time to time, with each such series to consist of such number of shares and to have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions providing for the issuance of such series adopted by the Board of Directors. Currently, no shares of preferred stock have been issued.
The authorization of preferred stock will not have an immediate effect on the holders of the Company’s common stock. The actual effect of the issuance of any shares of preferred stock upon the rights of the holders of common stock cannot be stated until the Board of Directors determines the specific rights of any shares of preferred stock. However, the effects might include, among other things, restricting dividends on common stock, diluting the voting power of common stock, reducing the market price of common stock or impairing the liquidation rights of the common stock without further action by the shareholders. Holders of the common stock will not have preemptive rights with respect to the preferred stock.
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There are no preemptive or conversion rights or, redemption or sinking fund provisions with respect to United’s stock. All of the issued and outstanding shares of United’s stock are fully paid and
non-assessable.
Stock Performance Graph
The following Stock Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that United specifically incorporates it by reference into such filing.
The following graph compares United’s cumulative total shareholder return (assuming reinvestment of dividends) on its common stock for the five-year period ending December 31, 2019, with the cumulative total return (assuming reinvestment of dividends) of the Standard and Poor’s Midcap 400 Index and with the NASDAQ Bank Index. The cumulative total shareholder return assumes a $100 investment on December 31, 2014 in the common stock of United and each index and the cumulative return is measured as of each subsequent fiscal
year-end.
There is no assurance that United’s common stock performance will continue in the future with the same or similar trends as depicted in the graph.
 
                                                 
 
Period Ending
 
 
12/31/14
   
12/31/15
   
12/31/16
   
12/31/17
   
12/31/18
   
12/31/19
 
United Bankshares, Inc.
   
100.00
     
102.19
     
132.05
     
102.83
     
95.58
     
123.13
 
NASDAQ Bank Index
   
100.00
     
108.84
     
150.17
     
158.36
     
132.75
     
165.11
 
S&P
Mid-Cap
Index
    
100.00
     
97.82
     
118.10
     
137.26
     
122.03
     
153.96
 
 
 
 
 
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Issuer Repurchases
The table below includes certain information regarding United’s purchase of its common shares during the three months ended December 31, 2019:
                                 
Period
 
Total
Number of
Shares
Purchased
(1) (2)
   
Average Price
Paid per
Share
   
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans (3)
   
Maximum
Number of
Shares that May
Yet be Purchased
Under the Plans (3)
 
10/01 – 10/31/2019
   
32,150
    $
36.49
     
32,150
     
1,472,850
 
11/01 – 11/30/2019
   
9,229
    $
40.33
     
0
     
4,000,000
 
12/01 – 12/31/2019
   
0
    $
0.00
     
0
     
4,000,000
 
                       
Total
   
41,379
    $
37.35
     
     
 
                       
 
 
 
 
  (1) Includes shares exchanged in connection with the exercise of stock options under United’s stock option plans. Shares are purchased pursuant to the terms of the applicable stock option plan and not pursuant to a publicly announced stock repurchase plan. For the quarter ended December 31, 2019, 9,225 shares were exchanged by participants in United’s stock option plans at an average price of $40.33.
 
 
 
 
  (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 December 31, 2019, the following shares were purchased for the deferred compensation plan: November 2019 –4 shares at an average price of $39.38.
 
 
 
 
  (3) In November of 2018, United’s Board of Directors approved a repurchase plan to repurchase up to 3,352,000 shares of United’s common stock on the open market (the 2018 Plan). The timing, price and quantity of purchases under the plans are at the discretion of management and the plan may be discontinued, suspended or restarted at any time depending on the facts and circumstances. The 2018 Plan had an expiration date of November 7, 2019. In October of 2019, United’s Board of Directors approved a new repurchase plan to repurchase up to 4,000,000 shares of United’s common stock on the open market (the 2019 Plan) once the 2018 Plan expired.
 
 
 
 
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Item 6.
SELECTED FINANCIAL DATA
 
 
 
 
The following consolidated selected financial data is derived from United’s audited financial statements as of and for the five years ended December 31, 2019. The selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes contained elsewhere in this report.
                                         
 
Five Year Summary
 
(Dollars in thousands, except per share data)
  
2019
 
  
2018
 
  
2017
 
  
2016
 
  
2015
 
Summary of Operations:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Total interest income
  $
762,562
    $
717,715
    $
623,806
    $
470,341
    $
423,630
 
Total interest expense
   
184,640
     
129,070
     
74,809
     
45,010
     
39,506
 
Net interest income
   
577,922
     
588,645
     
548,997
     
425,331
     
384,124
 
Provision for loan losses
   
21,313
     
22,013
     
28,406
     
24,509
     
22,574
 
Other income
   
150,484
     
128,712
     
131,645
     
70,032
     
73,626
 
Other expense
   
382,654
     
368,179
     
367,409
     
248,196
     
231,687
 
Income taxes
   
64,340
     
70,823
     
134,246
     
75,575
     
65,530
 
Net income
   
260,099
     
256,342
     
150,581
     
147,083
     
137,959
 
Cash dividends
   
139,508
     
141,610
     
131,755
     
98,696
     
89,667
 
                                         
Per common share:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Net income:
   
     
     
     
     
 
Basic
   
2.55
     
2.46
     
1.54
     
2.00
     
1.99
 
Diluted
   
2.55
     
2.45
     
1.54
     
1.99
     
1.98
 
Cash dividends
   
1.37
     
1.36
     
1.33
     
1.32
     
1.29
 
Book value per share
   
33.12
     
31.78
     
30.85
     
27.59
     
24.61
 
                                         
Selected Ratios:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Return on average shareholders’ equity
   
7.80
 %    
7.84
 %    
5.09
 %    
7.67
 %    
8.10
 %
Return on average assets
   
1.34
 %    
1.36
 %    
0.85
 %    
1.10
 %    
1.12
 %
Dividend payout ratio
   
53.64
 %    
55.24
 %    
87.50
 %    
67.10
 %    
65.00
 %
                                         
Selected Balance Sheet Data:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Average assets
  $
19,475,468
    $
18,848,027
    $
17,617,429
    $
13,376,803
    $
12,265,115
 
Investment securities
   
2,669,797
     
2,543,727
     
2,071,645
     
1,403,638
     
1,204,182
 
Loans held for sale
   
387,514
     
249,846
     
265,955
     
8,445
     
10,681
 
Total loans
   
13,712,129
     
13,422,222
     
13,011,421
     
10,341,137
     
9,384,080
 
Total assets
   
19,662,324
     
19,250,498
     
19,058,959
     
14,508,892
     
12,577,944
 
Total deposits
   
13,852,421
     
13,994,749
     
13,830,591
     
10,796,867
     
9,341,527
 
Long-term borrowings
   
1,838,029
     
1,499,103
     
1,363,977
     
1,172,026
     
1,015,249
 
Total liabilities
   
16,298,491
     
15,998,874
     
15,818,429
     
12,273,145
     
10,865,309
 
Shareholders’ equity
   
3,363,833
     
3,251,624
     
3,240,530
     
2,235,747
     
1,712,635
 
 
 
 
 
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Item 7.
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 haven for such disclosure; in other words, protection from unwarranted litigation if actual results are not the same as management expectations.
United desires to provide its shareholders with sound information about past performance and future trends. Consequently, any forward-looking statements contained in this report, in a report incorporated by reference to this report, or made by management of United in this report, in any other reports and filings, in press releases and in oral statements, involve numerous assumptions, risks and uncertainties. Actual results could differ materially from those contained in or implied by United’s statements for a variety of factors including, but not limited to: changes in economic conditions; business conditions in the banking industry; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature and extent of governmental actions and reforms; and rapidly changing technology and evolving banking industry standards.
The discussion in Item 1A, “Risk Factors,” lists some of the factors that could cause United’s actual results to vary materially from those expressed or implied by any forward-looking statements, and such discussion is incorporated into this discussion by reference.
PENDING ACQUISITION
On November 17, 2019, United entered into an Agreement and Plan of Merger (the Agreement) with Carolina Financial Corporation (Carolina Financial), a Delaware corporation headquartered in Charleston, South Carolina. In accordance with the Agreement, Carolina Financial shall merge with and into United (the Merger). Carolina Financial will cease to exist and United shall survive and continue to exist as a West Virginia corporation. At the effective time of the Merger, CresCom Bank, a wholly-owned subsidiary of Carolina Financial, will merge with and into United Bank, a wholly-owned subsidiary of United (the Bank Merger). United Bank will survive the Bank Merger and continue to exist as a Virginia banking corporation. As of December 31, 2019, Carolina Financial had $4.71 billion in assets with banking locations in North Carolina and South Carolina. CresCom Bank owns and operates 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.
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
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. Management is in the process of finalizing the impact of the adoption of this guidance on United’s financial condition, results of operations, liquidity, and regulatory capital ratios. Based on current economic conditions, management expects the allowance for credit losses to increase by 20% to 30%. For additional discussion of accounting pronouncements pending adoption, see Note A of the Notes to the Condensed Consolidated Financial Statements in Part II, Item 8 of this Form
10-K.
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TRANSITION FROM THE LONDON INTERBANK OFFERERED 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 more significant changes in financial condition as of December 31, 2019 and 2018 and the results of operations of United and its subsidiaries for each of the years then ended. This discussion and the consolidated financial statements and the notes to 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 December 31, 2019, but prior to the date these financial statements were issued, for potential recognition or disclosure required in these financial statements. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form
10-K
filed with the SEC on March 1, 2019 (the 2018 Form 10-K) for a discussion and analysis of the more significant factors that affected periods prior to 2018.
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.
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.
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Table of Contents
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, the valuation of investment securities and the related other-than-temporary impairment analysis, the accounting for acquired loans 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. The most significant accounting policies followed by United are presented in Note A, Notes to Consolidated Financial Statements.
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of the probable credit losses inherent in the lending portfolio. Determining the allowance for loan losses requires management to make estimates of losses that are highly uncertain and require a high degree of judgment. At December 31, 2019, the allowance for loan losses was $77.1 million and is subject to periodic adjustment based on management’s assessment of current probable 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 $7.7 million in additional allowance (funded by additional provision for credit losses), which would have negatively impacted the year of 2019 net income by approximately $6.1 million,
after-tax
or $0.06 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 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
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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 economic and business conditions, 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 A, 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 Loan Losses section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). For a discussion of concentrations of credit risk, see Item 1, under the caption of Loan Concentrations in this Form
10-K.
Investment Securities
Accounting estimates are used in the presentation of the investment portfolio and these estimates impact the presentation of United’s financial condition and results of operations. United classifies its investments in debt as either held to maturity or available for sale. Securities held to maturity are accounted for using historical costs, adjusted for amortization of premiums and accretion of discounts. Securities available for sale are accounted for at fair value, with the net unrealized gains and losses, net of income tax effects, presented as a separate component of shareholders’ equity. When available, fair values of securities are based on quoted prices or prices obtained from third party vendors. 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. Prices obtained from third party vendors that do not reflect forced liquidation or distressed sales are not adjusted by management. Where prices reflect forced liquidation or distressed sales, as is the case with United’s portfolio of trust preferred securities (Trup Cdos), management estimates fair value based on a discounted cash flow methodology using appropriately adjusted discount rates reflecting nonperformance and liquidity risks. Due to the subjective nature of this valuation process, it is possible that the actual fair values of these securities could differ from the estimated amounts, thereby affecting United’s financial position, results of operations and cash flows. The potential impact to United’s financial position, results of operations or cash flows for changes in the valuation process cannot be reasonably estimated.
If the estimated value of investments is less than the cost or amortized cost, the investment is considered impaired and management evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred, management must exercise judgment to determine the nature of the potential impairment (i.e., temporary or other-than-temporary) in order to apply the appropriate accounting treatment. If United intends to sell, or is more likely than not they will be required to sell an impaired debt security before recovery of its amortized cost basis less any current period credit loss, other-than-temporary impairment is recognized in earnings. The amount recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. If United does not intend to sell, and is not more likely than not they will be required to sell the impaired debt security prior to recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into the following: 1) the amount representing the credit loss, which is recognized in earnings, and 2) the amount related to all other factors, which is recognized in other comprehensive income. For additional information on management’s consideration of investment valuation and other-than-temporary impairment, see Note C and Note V, Notes to Consolidated Financial Statements.
Accounting for Acquired Loans
Loans acquired are initially recorded at their acquisition date fair values. The fair value of the acquired loans is based on the present value of the expected cash flows, including principal, interest and prepayments. Periodic principal and interest cash flows are adjusted for expected losses and prepayments, then discounted to determine the present value and summed to arrive at the estimated fair value. Fair value estimates involve assumptions and judgments as to credit risk, interest rate risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.
Acquired loans are divided into loans with evidence of credit quality deterioration, which are accounted for under Accounting Standards Codification (ASC) Topic
310-30
(acquired impaired) and loans that do not meet this criteria, which are accounted for under ASC Topic
310-20
(acquired performing). Acquired impaired loans have experienced a
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deterioration of credit quality from origination to acquisition for which it is probable that United will be unable to collect all contractually required payments receivable, including both principal and interest. In the assessment of credit quality, numerous assumptions, interpretations and judgments must be made, based on internal and third-party credit quality information and ultimately the determination as to the probability that all contractual cash flows will not be able to be collected. This is a point in time assessment and inherently subjective due to the nature of the available information and judgment involved.
Subsequent to the acquisition date, United continues to estimate the amount and timing of cash flows expected to be collected on acquired impaired loans. Increases in expected cash flows will generally result in a recovery of any previously recorded allowance for loan losses, to the extent applicable, and/or a reclassification from the nonaccretable difference to accretable yield, which will be recognized prospectively. The present value of any decreases in expected cash flows after the acquisition date will generally result in an impairment charge recorded as a provision for loan losses, resulting in an increase to the allowance for loan losses.
For acquired performing loans, the difference between the acquisition date fair value and the contractual amounts due at the acquisition date represents the fair value adjustment. Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to interest income over the loan’s remaining life using the level yield method. Subsequent to the acquisition date, the methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans.
See Note D, Notes to Consolidated Financial Statements for additional information regarding United’s acquired loans disclosures.
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 N, 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. 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.
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Table of Contents
At December 31, 2019, approximately 14.86% of total assets, or $2.92 billion, consisted of financial instruments recorded at fair value. Of this total, approximately 86.10% or $2.52 billion of these financial instruments used valuation methodologies involving observable market data, collectively Level 1 and Level 2 measurements, to determine fair value. Approximately 13.90% or $406.04 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 and Trup Cdos classified as
available-for-sale.
At December 31, 2019, only $3.07 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 V 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.
2019 COMPARED TO 2018
United’s total assets as of December 31, 2019 were $19.66 billion, which was an increase of $411.83 million or 2.14% from December 31, 2018. The increase was mainly due to an increase of $289.91 million or 2.16% in portfolio loans, an increase of $137.67 million or 55.10% in loans held for sale, and an increase of $126.07 million or 4.96% in investment securities. In addition, United adopted the new accounting standard for leases effective January 1, 2019, as previously mentioned, resulting in a $57.78 million operating lease
right-of-use
asset as of December 31, 2019. Partially offsetting these increases in total assets was a $182.90 million or 17.92% decrease in cash and cash equivalents and a $15.23 million or 3.33% decrease in other assets. Total liabilities increased $299.62 million or 1.87% from
year-end
2018. Borrowings increased $362.25 million or 19.58% while accrued expenses and other liabilities increased $18.01 million or 11.82%. Partially offsetting these increases to liabilities was a $142.33 million or 1.02% decrease in deposits. As a result of the adoption of the leases accounting standard, United also recorded a $61.34 million operating lease liability as of December 31, 2019. Shareholders’ equity increased $112.21 million or 3.45%.
The following discussion explains in more detail the changes in financial condition by major category.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 2019 decreased $182.90 million or 17.92% from
year-end
2018. In particular, interest-bearing deposits with other banks decreased $180.27 million or 21.67% as United placed less cash in an interest-bearing account with the Federal Reserve. In addition, cash and due from banks decreased $2.65 million or 1.41%. Federal funds sold increased $17 thousand or 2.12%. During the year of 2019, net cash of $147.69 million and $48.45 million were provided by operating and financing activities, respectively, while net cash of $379.05 million was used in investing activities. Further details related to changes in cash and cash equivalents are presented in the Consolidated Statements of Cash Flows.
Securities
Total investment securities at December 31, 2019 increased $126.07 million or 4.96% from
year-end
2018. Securities available for sale increased $100.26 million or 4.29%. This change in securities available for sale reflects $712.56 million in sales, maturities and calls of securities, $771.29 million in purchases, and an increase of $32.47 million in market value. The majority of the purchase activity was related to corporate securities which were almost exclusively issued by investment grade rated, single-name issuers, and have maturity dates of less than five years. Securities held to maturity declined $18.55 million or 92.77% from
year-end
2018 due mainly to the transfer of $11.54 million of investment securities to available for sale securities upon the adoption of ASU No.
 2017-12.
Equity securities were $8.89 million at December 31, 2019, a decrease of $840 thousand or 8.63% due mainly to net sales. Other investment securities increased $45.21 million or 25.55% from
year-end
2018 due mainly to purchases of an equity security without a readily determinable fair value, investment tax credits, and Federal Home Loan Bank (FHLB) stock.
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The following is a summary of available for sale securities at December 31:
                         
 
        2019        
 
  
        2018        
 
  
        2017        
 
 
(In thousands)
 
U.S. Treasury and obligations of U.S. Government corporations and agencies
  $
58,127
    $
86,285
    $
114,735
 
States and political subdivisions
   
272,014
     
212,670
     
303,101
 
Mortgage-backed securities
   
1,439,747
     
1,611,906
     
1,283,933
 
Asset-backed securities
   
284,390
     
272,459
     
109,829
 
Marketable equity securities
   
0
     
0
     
9,712
 
Trust preferred collateralized debt obligations
   
6,045
     
6,176
     
37,856
 
Single issue trust preferred securities
   
18,196
     
8,754
     
13,417
 
Corporate securities
   
348,405
     
162,634
     
28,101
 
                         
TOTAL AVAILABLE FOR SALE SECURITIES, at amortized cost
  $
   2,426,924
    $
   2,360,884
    $
   1,900,684
 
                         
TOTAL AVAILABLE FOR SALE SECURITIES, at fair value
  $
2,437,296
    $
2,337,039
    $
1,888,756
 
                         
The following is a summary of held to maturity securities at December 31:
                         
 
        2019        
 
  
        2018        
 
  
        2017        
 
 
(In thousands)
 
U.S. Treasury and obligations of U.S. Government corporations and agencies
  $
0
    $
5,074
    $
5,187
 
States and political subdivisions
   
1,426
     
5,473
     
5,797
 
Mortgage-backed securities
   
0
     
20
     
23
 
Single issue trust preferred securities
   
0
     
9,412
     
9,401
 
Other corporate securities
   
20
     
20
     
20
 
                         
TOTAL HELD TO MATURITY SECURITIES, at amortized cost
  $
          1,446
    $
        19,999
    $
        20,428
 
                         
TOTAL HELD TO MATURITY SECURITIES, at fair value
  $
1,447
    $
18,655
    $
20,018
 
                         
At December 31, 2019, gross unrealized losses on available for sale securities were $18.54 million. Securities with the most significant gross unrealized losses at December 31, 2019 consisted primarily of asset-backed securities, agency commercial mortgage-backed securities, and state and political subdivision securities. The asset-backed securities are backed by Federal Family Education Loan Program (FFELP) student loan collateral which includes a minimum of a 97% government repayment guaranty, as well as additional credit support and subordination in excess of the government guaranteed portion. The agency commercial mortgage-backed securities relate to commercial properties and provide a guaranty of full and timely payments of principal and interest by the issuing agency. The state and political subdivisions securities relate to securities issued by various municipalities.
As of December 31, 2019, United’s mortgage-backed securities had an amortized cost of $1.44 billion, with an estimated fair value of $1.46 billion. The portfolio consisted primarily of $826.86 million in agency residential mortgage-backed securities with a fair value of $836.53 million, $3.43 million in
non-agency
residential mortgage-backed securities with an estimated fair value of $3.83 million, and $609.46 million in commercial agency mortgage-backed securities with an estimated fair value of $614.97 million.
As of December 31, 2019, United’s corporate securities had an amortized cost of $657.06 million, with an estimated fair value of $650.94 million. The portfolio consisted of $6.05 million in Trup Cdos with a fair value of $4.70 million and $18.20 million in single issue trust preferred securities with an estimated fair value of $16.77 million. In addition to the trust preferred securities, the Company held positions in various other corporate securities, including asset-backed securities with an amortized cost of $284.39 million and a fair value of $276.14 million and other corporate securities, with an amortized cost of $348.43 million and a fair value of $353.32 million.
The Trup Cdos consisted of pools of trust preferred securities issued by trusts related to financial institutions. As of December 31, 2019, all of the Trup Cdos were rated below investment grade. United’s single issue trust preferred securities had a fair value of $16.77 million as of December 31, 2019. Of the $16.77 million, $11.11 million or 66.23% were investment grade; $860 thousand or 5.16% were split rated; and $4.80 million or 28.61% were unrated. The two largest exposures accounted for 71.06% of the $16.77 million. These included Truist Bank at $7.12 million and Emigrant Bank at $4.80 million. All single-issue trust preferred securities are currently receiving full scheduled principal and interest payments.
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Table of Contents
The following is a summary of available for sale single-issue trust preferred securities as of December 31, 2019:
                                                 
Security
 
Moodys
 
  
S&P
 
  
Fitch
 
  
Amortized
Cost
 
  
Fair
Value
 
  
Unrealized
Loss/(Gain)
 
 
 
  
 
  
 
  
(Dollars in thousands)
 
Emigrant Bank
   
NR
     
NR
     
WD
    $
5,735
    $
4,800
    $
935
 
Truist Bank
   
Baa1
     
NR
     
BBB
     
4,961
     
4,757
     
204
 
M&T Bank
   
NR
     
BBB-
     
BBB-
     
3,043
     
3,213
     
(170
 )
Truist Bank
   
NR
     
BBB-
     
BBB
     
2,480
     
2,362
     
118
 
HSBC
   
Baa2
     
BBB+
     
NR
     
1,000
     
778
     
222
 
Royal Bank of Scotland
   
Baa3
     
BB+
     
BBB
     
977
     
864
     
113
 
                                                 
   
     
     
    $
18,196
    $
16,774
    $
1,422
 
                                                 
During 2019, United recognized other-than-temporary impairment totaling $198 thousand on three investment securities. With the exception of these three securities, management does not believe that any other individual security with an unrealized loss as of December 31, 2019 is other-than-temporarily impaired. United believes the decline in value resulted from changes in market interest rates, credit spreads and liquidity, not an adverse change in the expected contractual cash flows. Based on a review of each of the securities in the investment portfolio, management concluded that it was not probable that it would be unable to realize the cost basis investment and appropriate interest payments on such securities. United has the intent and the ability to hold these securities until such time as the value recovers or the securities mature. However, United acknowledges that any impaired securities may be sold in future periods in response to significant, unanticipated changes in asset/liability management decisions, unanticipated future market movements or business plan changes.
Further information regarding the amortized cost and estimated fair value of investment securities, including remaining maturities as well as a more detailed discussion of management’s other-than-temporary impairment analysis, is presented in Note C, Notes to Consolidated Financial Statements.
Loans held for sale
Loans held for sale increased $137.67 million or 55.10% from
year-end
2018. Loan originations in the secondary market exceeded sales during the year of 2019. Loan originations were $2.57 billion while loans sales were $2.44 billion. Loans held for sale were $387.51 million at December 31, 2019 as compared to $249.85 million at
year-end
2018.
Portfolio Loans
Loans, net of unearned income, increased $289.91 million or 2.16%. Since
year-end
2018, commercial, financial and agricultural loans decreased $100.40 million or 1.33% as commercial real estate loans decreased $427.79 million or 7.65% which was mostly offset by a $327.40 million or 16.72% increase in commercial loans (not secured by real estate). Residential real estate loans increased $185.01 million or 5.28% due mainly to an increase in first lien mortgage loans, and consumer loans increased $201.67 million or 20.91% due to an increase in indirect automobile financing. Construction and land development loans remained flat from prior year, decreasing $2.26 million or less than 1%.
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Table of Contents
A summary of loans outstanding is as follows:
                                         
 
December 31
 
(In thousands)
 
2019
 
  
2018
 
  
2017
 
  
2016
 
  
2015
 
Commercial, financial & agricultural
  $
7,452,649
    $
7,553,044
    $
7,811,906
    $
6,088,775
    $
5,426,335
 
Residential real estate
   
3,686,401
     
3,501,393
     
2,996,171
     
2,403,437
     
2,268,685
 
Construction & land development
   
1,408,205
     
1,410,468
     
1,504,907
     
1,255,738
     
1,273,054
 
Consumer
   
1,166,293
     
964,627
     
714,353
     
608,769
     
430,878
 
Less: Unearned income
   
(1,419
 )    
(7,310
 )    
(15,916
 )    
(15,582
 )    
(14,872
 )
                                         
Total loans
   
13,712,129
     
13,422,222
     
13,011,421
     
10,341,137
     
9,384,080
 
Allowance for loan losses
   
(77,057
 )    
(76,703
 )    
(76,627
 )    
(72,771
 )    
(75,726
 )
                                         
TOTAL LOANS, NET
  $
13,635,072
    $
13,345,519
    $
12,934,794
    $
10,268,366
    $
9,308,354
 
                                         
                                         
Loans held for sale
  $
387,514
    $
249,846
    $
265,955
    $
8,445
    $
10,681
 
                                         
 
The following table summarizes the outstanding balances of portfolio loans originated and acquired, by type, as of December 31, 2019 and December 31, 2018:
                                         
 
December 31, 2019
 
(In thousands)
 
Commercial,
financial and
agricultural
 
  
Residential real
estate
 
  
Construction & land
development
 
  
Consumer
 
  
Total
 
Originated
  $
5,324,709
    $
3,029,967
    $
1,279,764
    $
1,162,360
    $
10,796,800
 
Acquired
   
2,127,940
     
656,434
     
128,441
     
3,933
     
2,916,748
 
                                         
Total gross loans
  $
7,452,649
    $
3,686,401
    $
1,408,205
    $
1,166,293
    $
13,713,548
 
                                         
 
                                         
 
December 31, 2018
 
(In thousands)
 
Commercial,
financial and
agricultural
 
  
Residential real
estate
 
  
Construction & land
development
 
  
Consumer
 
  
Total
 
Originated
  $
4,887,688
    $
2,686,817
    $
1,179,676
    $
959,392
    $
9,713,573
 
Acquired
   
2,665,356
     
814,576
     
230,792
     
5,235
     
3,715,959
 
                                         
Total gross loans
  $
7,553,044
    $
3,501,393
    $
1,410,468
    $
964,627
    $
13,429,532
 
                                         
 
The following table shows the maturity of commercial, financial, and agricultural loans and real estate construction and land development loans as of December 31, 2019:
                                 
(In thousands)
 
Less Than
One Year
 
  
One To
Five Years
 
  
Over
Five Years
 
  
Total
 
Commercial, financial & agricultural
  $
1,328,994
    $
2,659,218
    $
3,464,437
    $
7,452,649
 
Construction & land development
   
495,591
     
658,344
     
254,270
     
1,408,205
 
                                 
Total
  $
   1,824,585
    $
   3,317,562
    $
   3,718,707
    $
   8,860,854
 
                                 
 
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Table of Contents
At December 31, 2019, commercial, financial and agricultural loans and real estate construction and land development loans by maturity are as follows:
                                 
 
Less Than
 
  
One to
 
  
Over
 
  
 
(In thousands)
 
One Year
 
  
Five Years
 
  
Five Years
 
  
Total
 
Outstanding with fixed interest rates
  $
487,500
    $
2,039,690
    $
1,729,543
    $
4,256,733
 
Outstanding with adjustable rates
   
1,337,085
     
1,277,871
     
1,989,165
     
4,604,121
 
                                 
 
$  1,824,585
   
$  3,317,561
   
$  3,718,708
   
$  8,860,854
 
                                 
 
More information relating to loans is presented in Note D, Notes to Consolidated Financial Statements.
Other Assets
Other assets decreased $15.23 million or 3.33% from
year-end
2018, mainly due to deferred tax assets decreasing $18.32 million. In addition, core deposit intangibles decreased $7.02 million due to amortization. Partially offsetting these decreases were increases of $7.72 million in accounts receivables and $4.28 million in prepaid assets.
Deposits
Deposits represent United’s primary source of funding. Total deposits at December 31, 2019 decreased $142.33 million or 1.02%. In terms of composition, interest-bearing deposits decreased $346.88 million or 3.62% while noninterest-bearing deposits increased $204.55 million or 4.63% from December 31, 2018.
Noninterest-bearing deposits consist of demand deposit and noninterest bearing money market (MMDA) account balances. The $204.55 million increase in noninterest-bearing deposits was due mainly to increases in commercial noninterest-bearing deposits of $139.67 million or 6.19% and personal noninterest-bearing deposits of $23.38 million or 3.25%. In addition, in process items increased $9.44 million.
Interest-bearing deposits consist of interest-bearing checking (NOW), regular savings, interest-bearing MMDA, and time deposit account balances. Interest-bearing MMDAs decreased $300.89 million or 5.05% while NOW accounts decreased $2.32 million or less than 1% since
year-end
2018. In particular, interest-bearing MMDAs decreased $300.89 million as commercial MMDAs decreased $162.79 million, brokered MMDAs decreased $126.95 million, and public funds MMDAs decreased $61.10 million. Excluding sweep activity from NOW accounts to interest-bearing MMDAs to reduce United’s reserve requirement at its Federal Reserve Bank, NOW accounts decreased $159.34 million or 8.05% mainly due to a decrease of $137.70 million in personal NOW accounts and a $73.10 million decrease in public funds NOW accounts. Partially offsetting these decreases was an increase of $51.46 million in commercial NOW accounts.
Regular savings decreased $72.07 million or 7.55% from
year-end
2018 mainly due to a $68.18 million decrease in personal savings accounts, a $4.60 million decrease in commercial savings accounts, and a $3.25 million decrease in retirement savings accounts.
Time deposits under $100,000 increased $11.63 million or 1.63% from
year-end
2018. This increase in time deposits under $100,000 is the result of a $9.52 million increase in Certificate of Deposit Account Registry Service (CDARS) balances and a $4.59 million increase in fixed CDs under $100,000.
Since
year-end
2018, time deposits over $100,000 increased $16.78 million or 1.06% as fixed rate CDs increased $183.84 million and CDARS increased $124.14 million. These increases in time deposits over $100,000 were mostly offset by a $218.30 million decrease in brokered certificates of deposits and a $72.90 million decrease in public funds CDs over $100,000.
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Table of Contents
The table below summarizes the changes by deposit category since
year-end
2018:
                                 
(Dollars in thousands)
 
December 31
2019
 
  
December 31
2018
 
  
$
Change
 
  
%
Change
 
Demand deposits
  $
3,381,866
    $
3,212,878
    $
168,988
     
5.26
 %
Interest-bearing checking
   
372,175
     
374,495
     
(2,320
 )    
(0.62
 %)
Regular savings
   
882,889
     
954,961
     
(72,072
 )    
(7.55
 %)
Money market accounts
   
6,891,696
     
7,157,028
     
(265,332
 )    
(3.71
 %)
Time deposits under $100,000
   
723,941
     
712,313
     
11,628
     
1.63
 %
Time deposits over $100,000 
(1)
    
1,599,854
     
1,583,074
     
16,780
     
1.06
 %
                                 
                                 
Total deposits
  $
13,852,421
    $
13,994,749
    $
(142,328
 )    
(1.02
 %)
                                 
  (1) Includes time deposits of $250,000 or more of $803,414 and $979,707 at December 31, 2019 and 2018, respectively.
At December 31, 2019, the scheduled maturities of time deposits are as follows:
         
Year
 
Amount
 
(In thousands)
   
 
2020
  $
1,654,411
 
2021
   
401,197
 
2022
   
167,288
 
2023
   
60,118
 
2024 and thereafter
   
40,781
 
         
TOTAL
  $
   2,323,795
 
         
Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 2019 are summarized as follows:
         
 
Amount
 
(In thousands)
 
 
3 months or less
  $
418,978
 
Over 3 through 6 months
   
305,171
 
Over 6 through 12 months
   
462,114
 
Over 12 months
   
413,591
 
         
         
TOTAL
  $
      1,599,854
 
         
The average daily amount of deposits and rates paid on such deposits is summarized for the years ended December 31:
                                                                         
 
2019
   
2018
   
2017
 
 
 
  
Interest
 
  
 
  
 
  
Interest
 
  
 
  
 
  
Interest
 
  
 
 
Amount
 
  
Expense
 
  
Rate
 
  
Amount
 
  
Expense
 
  
Rate
 
  
Amount
 
  
Expense
 
  
Rate
 
 
(Dollars in thousands)
 
Demand deposits
  $
4,388,664
    $
0
     
0.00
 %   $
4,297,474
    $
0
     
0.00
 %   $
3,800,902
    $
0
     
0.00
 %
NOW and money market deposits
   
6,297,715
     
88,591
     
1.41
 %    
6,062,294
     
57,723
     
0.95
 %    
5,650,379
     
25,867
     
0.46
 %
Savings deposits
   
963,954
     
2,501
     
0.26
 %    
1,043,348
     
2,161
     
0.21
 %    
992,798
     
2,002
     
0.20
 %
Time deposits
   
2,342,969
     
44,557
     
1.90
 %    
2,337,368
     
31,623
     
1.35
 %    
2,505,711
     
21,857
     
0.87
 %
                                                                         
                                                                         
TOTAL
  $
   13,993,302
    $
   135,649
     
0.97
 %   $
   13,740,484
    $
   91,507
     
0.67
 %   $
   12,949,790
    $
   49,726
     
0.38
 %
                                                                         
More information relating to deposits is presented in Note J, Notes to Consolidated Financial Statements.
Borrowings
Total borrowings at December 31, 2019 increased $362.25 million or 19.58% since
year-end
2018. During 2019, short-term borrowings increased $23.33 million or 6.64% due to a $75.00 million increase in short term FHLB advances.
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Table of Contents
This increase in short-term borrowings was partially offset by a $28.27 million decrease in short-term securities sold under agreements to repurchase and a $23.40 million decrease in federal funds purchased. Long-term borrowings increased $338.93 million or 22.61% from
year-end
2018 due to a $337.67 million increase in long-term FHLB advances as new borrowings exceeded repayments.
The table below summarizes the change in the borrowing categories since
year-end
2018:
                                 
(Dollars in thousands)
 
December 31
2019
 
  
December 31
2018
 
  
$
Change
 
  
%
Change
 
Federal funds purchased
  $
0
    $
23,400
    $
(23,400
 )    
(100.00
 %)
Short-term securities sold under agreements to repurchase
   
124,654
     
152,927
     
(28,273
 )    
(18.49
 %)
Short-term FHLB advances
   
250,000
     
175,000
     
75,000
     
42.86
 %
Long-term FHLB advances
   
1,601,865
     
1,264,198
     
337,667
     
26.71
 %
Issuances of trust preferred capital securities
   
236,164
     
234,905
     
1,259
     
0.54
 %
                                 
Total borrowings
  $
2,212,683
    $
1,850,430
    $
362,253
     
19.58
 %
                                 
 
For a further discussion of borrowings see Notes K and L, Notes to Consolidated Financial Statements.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at December 31, 2019 increased $18.01 million or 11.82% from
year-end
2018. In particular, the pension liability increased $8.99 million, accounts payable associated with George Mason increased $4.64 million, and interest payable increased $2.02 million. Partially offsetting these increases was a decrease of $3.61 million in deferred compensation due to payments.
Shareholders’ Equity
Shareholders’ equity at December 31, 2019 was $3.36 billion, which was an increase of $112.21 million or 3.45% from
year-end
2018.
Retained earnings increased $119.54 million or 11.80% from
year-end
2018. Earnings net of dividends for the year of 2019 were $120.59 million. Amount recognized in retained earnings for the adoption of ASU No.
 2016-02
was $1.05 million.
Accumulated other comprehensive income increased $22.15 million or 38.85% from
year-end
2018 due mainly to an increase of $26.25 million in the
after-tax
fair value adjustment on AFS securities. The
after-tax
accretion of pension costs was $3.79 million for the year of 2019 while the
after-tax
pension accounting adjustment at
year-end
2019 resulted in a decline of $7.94 million.
During the second quarter of 2018, United began repurchasing its common stock on the open market under repurchase plans approved by United’s Board of Directors. United repurchased 1,009,150 shares in 2019 at a cost of $35.22 million or an average price per share of $34.90.
EARNINGS SUMMARY
Overview
Net income for the year 2019 was $260.10 million or $2.55 per diluted share, an increase of $3.76 million or 1.47% from $256.34 million or $2.45 per diluted share for the year of 2018. Income before income taxes for the year of 2019 was $324.44 million which was relatively flat from the year of 2018, decreasing $2.73 million or less than 1%.
United’s return on average assets for the year of 2019 was 1.34% and return on average shareholders’ equity was 7.80% as compared to 1.36% and 7.84% for the year of 2018. United’s Federal Reserve peer group’s (bank holding
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companies with total assets over $10 billion) most recently reported average return on assets and average return on equity were 1.21% and 9.90%, respectively, for the first nine months of 2019. For the year of 2019, United’s annualized return on average tangible equity was 14.26%, as compared to 14.65% the year of 2018.
                 
 
Year Ended
 
(Dollars in thousands)
 
December 31,
2019
 
  
December 31,
2018
 
Return on Average Tangible Equity:
   
     
 
(a) Net Income (GAAP)
  $
260,099
    $
256,342
 
Average Total Shareholders’ Equity (GAAP)
   
3,336,075
     
3,268,944
 
Less: Average Total Intangibles
   
(1,511,501
 )    
(1,519,174
 )
                 
(b) Average Tangible Equity
(non-GAAP)
  $
1,824,574
    $
1,749,770
 
Return on Tangible Equity
(non-GAAP)
[(a) / (b)]
    
14.26
 %    
14.65
 %
Net interest income for the year of 2019 was $577.92 million, a decrease of $10.72 million or 1.82% from the prior year. The decrease in net interest income occurred because total interest income increased $44.85 million while total interest expense increased $55.57 million from the year of 2018.
The provision for credit losses was $21.31 million for the year 2019 as compared to $22.01 million for the year of 2018. Noninterest income was $150.48 million for the year of 2019 which was an increase of $21.77 million or 16.92% from the year of 2018. Noninterest expense was $382.65 million which was an increase of $14.48 million or 3.93% from the year of 2018.
Income taxes for the year of 2019 was $64.34 million as compared to $70.82 million for the year of 2018. United’s effective tax rate was approximately 19.8% and 21.7% for years ended December 31, 2019 and 2018, respectively, as compared to 47.1% for 2017. The year of 2017 included additional income tax expense of $37.73 million related to the estimated impact of the enactment of the Tax Act.
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 year of 2019 was $258.40 million compared to net income of $268.65 million for the year of 2018.
Net interest income decreased $9.56 million to $583.55 million for the year of 2019, compared to $593.11 million for the same period of 2018. Net interest income for year of 2019 decreased from the year of 2018 due mainly to an increase in the average cost of funds primarily as a result of higher market interest rates and a change in the mix of interest-bearing liabilities. Provision for loan losses was $21.31 million for the year ended December 31, 2019 compared to a provision of $22.01 million for the same period of 2018. Noninterest income for the year of 2019 increased $2.42 million to $74.96 million as compared to $72.54 million for the year of 2018. The increase was due mainly to increased fees from trust and brokerage services and higher income from bank-owned life insurance due to death benefits partially offset by a net gain on the sale of bank premises in 2018. Noninterest expense was $314.71 million for the year ended December 31, 2019, compared to $301.12 million for the same period of 2018. The increase of $13.59 million in noninterest expense was primarily attributable to penalties on the prepayment of FHLB advances, increases in employee compensation due mainly to higher employee incentives, OREO expense due to a decline in the fair values of OREO properties and other expense due to an increase in the amortization of income tax credits. Partially offsetting these increases were decreases in net occupancy expense due mainly to a decline in building rental expense, data processing fees due to lower fees under a new contract, FDIC insurance expense resulting from the small bank assessment credit, and employee benefits due mainly to a decline in pension expense.
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Table of Contents
Mortgage Banking
The mortgage banking segment reported net income of $10.16 million for the year of 2019 as compared to a net loss of $2.26 million for the year of 2018 due mainly to a decline in mortgage rates, more refinance transactions and a reduction in operating expenses. Noninterest income, which consists mainly of realized and unrealized gains associated with the fair value of commitments and loans held for sale, was $83.88 million for the year of 2019 as compared to $68.56 million for the year of 2018. Noninterest expense was $72.29 million for the year of 2019 as compared to $72.63 million the year of 2018. Noninterest expense consists mainly of salaries, commissions and benefits of mortgage segment employees.
The following discussion explains in more detail the consolidated results of operations by major category.
Net Interest Income
Net interest income represents the primary component of United’s earnings. It is the difference between interest income from earning assets and interest expense incurred to fund these assets. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in market interest rates. Such changes, and their impact on net interest income in 2019 and 2018, are presented below.
Net interest income for the year of 2019 was $577.92 million, which was a decrease of $10.72 million or 1.82% from the year of 2018. The $10.72 million decrease in net interest income occurred because total interest income increased $44.85 million while total interest expense increased $55.57 million from the year of 2018. Generally, interest income for the year of 2019 increased from the year of 2018 due to a higher level of earning assets. The higher amount of interest expense for the year of 2019 was due to higher market interest rates on interest-bearing liabilities. For the purpose of this remaining discussion, net interest income is presented on a
tax-equivalent
basis to provide a comparison among all types of interest earning assets. The
tax-equivalent
basis adjusts for the
tax-favored
status of income from certain loans and investments. Although this is a
non-GAAP
measure, United’s management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and
tax-exempt
sources. United uses this measure to monitor net interest income performance and to manage its balance sheet composition.
Tax-equivalent
net interest income for the year of 2019 was $581.66 million, a decrease of $11.32 million or 1.91% from the year of 2018 due mainly to an increase in the average cost of funds. Partially offsetting these decreases to
tax-equivalent
net interest income for the year of 2019 were increases in average earning assets and the average yield on those average earning assets. For the year of 2019, average earning assets increased $608.04 million or 3.67% from the year of 2018 due mainly to increases of $403.36 million or 3.01% in average net loans and $313.89 million or 13.58% in average investment securities. Average short-term investments decreased $109.21 million or 12.96%. The average yield on earning assets for the year of 2019 increased 11 basis points from the year of 2018 due to higher market rates. Loan accretion on acquired loans was $38.80 million and $43.20 million for the year of 2019 and 2018, respectively, decreasing $4.39 million or 10.17%. The net interest margin of 3.39% for the year of 2019 was a decrease of 19 basis points from the net interest margin of 3.58% for the year of 2018.
United’s
tax-equivalent
net interest income also includes the impact of acquisition accounting fair value adjustments. The following table provides the discount/premium and net accretion impact to
tax-equivalent
net interest income for the year ended December 31, 2019, 2018 and 2017.
                         
 
Year Ended
 
(Dollars in thousands)
 
December 31
2019
 
  
December 31
2018
 
  
December 31
2017
 
Loan Accretion
  $
38,803
    $
43,197
    $
41,202
 
Certificates of deposit
   
791
     
1,258
     
2,244
 
Long-term borrowings
   
1,074
     
1,074
     
617
 
                         
Total
  $
40,668
    $
45,529
    $
44,063
 
                         
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The following table reconciles the difference between net interest income and
tax-equivalent
net interest income for the year ended December 31, 2019, 2018 and 2017.
                         
 
Year Ended
 
(Dollars in thousands)
 
December 31
2019
 
  
December 31
2018
 
  
December 31
2017
 
Net interest income (GAAP)
  $
577,922
    $
588,645
    $
548,997
 
Tax-equivalent
adjustment
(non-GAAP)
(1)
    
3,735
     
4,328
     
8,429
 
                         
Tax-equivalent
net interest income
(non-GAAP)
  $
581,657
    $
592,973
    $
557,426
 
                         
  (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 2019 and 2018 and 35% for 2017. All interest income on loans and investment securities was subject to state income taxes.
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Table of Contents
The following table shows the consolidated daily average balance of major categories of assets and liabilities for each of the three years ended December 31, 2019, 2018 and 2017 with the consolidated 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 years ended December 31, 2019 and 2018 and 35% for the year ended December 31, 2017. Interest income on all loans and investment securities was subject to state taxes.
                                                                         
 
Year Ended
December 31, 2019
   
Year Ended
December 31, 2018
   
Year Ended
December 31, 2017
 
(Dollars in thousands)
 
Average
Balance
 
  
Interest
(1)
 
  
Avg.
Rate
(1)
 
  
Average
Balance
 
  
Interest
(1)
 
  
Avg.
Rate
(1)
 
  
Average
Balance
 
  
Interest
(1)
 
  
Avg.
Rate
(1)
 
ASSETS
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Earning Assets:
   
     
     
     
     
     
     
     
     
 
Federal funds sold, securities repurchased under agreements to resell & other short-term investments
  $
733,865
    $
21,338
     
2.91
 %   $
843,079
    $
19,268
     
2.29
 %   $
1,304,830
    $
16,035
     
1.23
 %
Investment Securities:
   
     
     
     
     
     
     
     
     
 
Taxable
   
2,485,767
     
70,789
     
2.85
 %    
2,080,145
     
56,273
     
2.71
 %    
1,486,460
     
36,715
     
2.47
 %
Tax-exempt
   
139,277
     
4,412
     
3.17
 %    
231,009
     
6,904
     
2.99
 %    
234,450
     
8,491
     
3.62
 %
                                                                         
Total Securities
   
2,625,044
     
75,201
     
2.86
 %    
2,311,154
     
63,177
     
2.73
 %    
1,720,910
     
45,206
     
2.63
 %
Loans, net of unearned income (2)
   
13,879,662
     
669,758
     
4.83
 %    
13,476,416
     
639,598
     
4.75
 %    
12,598,295
     
570,994
     
4.53
 %
Allowance for loan losses
   
(76,731
 )    
     
     
(76,848
 )    
     
     
(73,434
 )    
     
 
                                                                         
Net loans
   
13,802,931
     
     
4.85
 %    
13,399,568
     
     
4.77
 %    
12,524,861
     
     
4.56
 %
                                                                         
Total earning assets
   
17,161,840
    $
766,297
     
4.47
 %    
16,553,801
    $
722,043
     
4.36
 %    
15,550,601
    $
632,235
     
4.07
 %
                                                                         
Other assets
   
2,313,628
     
     
     
2,294,226
     
     
     
2,066,828
     
     
 
                                                                         
TOTAL ASSETS
  $
19,475,468
     
     
    $
18,848,027
     
     
    $
17,617,429
     
     
 
                                                                         
LIABILITIES
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Interest-Bearing Funds:
   
     
     
     
     
     
     
     
     
 
Interest-bearing deposits
  $
9,604,638
    $
135,649
     
1.41
 %   $
9,443,010
    $
91,507
     
0.97
 %   $
9,148,888
    $
49,726
     
0.54
 %
Short-term borrowings
   
140,483
     
2,347
     
1.67
 %    
224,948
     
2,245
     
1.00
 %    
309,794
     
1,579
     
0.51
 %
Long- term borrowings
   
1,821,504
     
46,644
     
2.56
 %    
1,509,604
     
35,318
     
2.34
 %    
1,306,120
     
23,504
     
1.80
 %
                                                                         
Total Interest-Bearing Funds
   
11,566,625
     
184,640
     
1.60
 %    
11,177,562
     
129,070
     
1.15
 %    
10,764,802
     
74,809
     
0.69
 %
                                                                         
Noninterest-bearing deposits
   
4,388,664
     
     
     
4,297,474
     
     
     
3,800,902
     
     
 
Accrued expenses and other liabilities
   
184,104
     
     
     
104,047
     
     
     
92,432
     
     
 
                                                                         
TOTAL LIABILITIES
   
16,139,393
     
     
     
15,579,083
     
     
     
14,658,136
     
     
 
SHAREHOLDERS’ EQUITY
   
3,336,075
     
     
     
3,268,944
     
     
     
2,959,293
     
     
 
                                                                         
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
  $
19,475,468
     
     
    $
18,848,027
     
     
    $
17,617,429
     
     
 
                                                                         
NET INTEREST INCOME
   
    $
581,657
     
     
    $
592,973
     
     
    $
557,426
     
 
                                                                         
                                                                         
INTEREST SPREAD
   
     
     
2.87
 %    
     
     
3.21
 %    
     
     
3.38
 %
                                                                         
NET INTEREST MARGIN
   
     
     
3.39
 %    
     
     
3.58
 %    
     
     
3.58
 %
  (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 % for 2019 and 2018 and 35% for 2017.
  (2) Nonaccruing loans are included in the daily average loan amounts outstanding.
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Table of Contents
The following table sets forth a summary for the periods indicated of the changes in consolidated interest earned and interest paid detailing the amounts attributable to (i) changes in volume (change in the average volume times the prior year’s average rate), (ii) changes in rate (change in the average rate times the prior year’s average volume), and (iii) changes in rate/volume (change in the average volume times the change in average rate).
                                                                 
 
2019 Compared to 2018
   
2018 Compared to 2017
 
 
Increase (Decrease) Due to
   
Increase (Decrease) Due to
 
(In thousands)
 
Volume
 
  
Rate
 
  
Rate/
Volume
 
  
Total
 
  
Volume
 
  
Rate
 
  
Rate/
Volume
 
  
Total
 
Interest income:
   
     
     
     
     
     
     
     
 
Federal funds sold, securities purchased under agreements to resell and other short-term investments
  $
(2,501
 )   $
5,227
    $
(656
 )   $
2,070
    $
(5,680
 )   $
13,831
    $
(4,918
 )   $
3,233
 
Investment securities:
   
     
     
     
     
     
     
     
 
Taxable
   
10,992
     
2,912
     
612
     
14,516
     
14,664
     
3,568
     
1,326
     
19,558
 
Tax-exempt
(1)
    
(2,743
 )    
416
     
(165
 )    
(2,492
 )    
(125
 )    
(1,477
 )    
15
     
(1,587
 )
Loans (1),(2)
   
19,240
     
10,720
     
200
     
30,160
     
39,887
     
26,302
     
2,415
     
68,604
 
                                                                 
                                                                 
TOTAL INTEREST INCOME
   
24,988
     
19,275
     
(9
 )    
44,254
     
48,746
     
42,224
     
(1,162
 )    
89,808
 
                                                                 
Interest expense:
   
     
     
     
     
     
     
     
 
Interest-bearing deposits
  $
1,568
    $
41,549
    $
1,025
    $
44,142
    $
1,588
    $
39,340
    $
853
    $
41,781
 
Short-term borrowings
   
(845
 )    
1,507
     
(560
 )    
102
     
(433
 )    
1,518
     
(419
 )    
666
 
Long-term borrowings
   
7,298
     
3,321
     
707
     
11,326
     
3,663
     
7,053
     
1,098
     
11,814
 
                                                                 
                                                                 
TOTAL INTEREST EXPENSE
   
8,021
     
46,377
     
1,172
     
55,570
     
4,818
     
47,911
     
1,532
     
54,261
 
                                                                 
                                                                 
NET INTEREST INCOME
  $
16,967
    $
(27,102
 )   $
(1,181
 )   $
(11,316
 )   $
43,928
    $
(5,687
 )   $
(2,694
 )   $
35,547
 
                                                                 
  (1) Yields and interest income on federally
tax-exempt
loans and investment securities are computed on a fully
tax-equivalent
basis using the statutory federal income tax rate of 21% for 2019 and 2018 and 35% for 2017.
  (2) Nonaccruing loans are included in the daily average loan amounts outstanding.
Provision for Loan Losses
At December 31, 2019, nonperforming loans were $131.07 million or 0.96% of loans, net of unearned income compared to nonperforming loans of $142.82 million or 1.06% of loans, net of unearned income at December 31, 2018. The components of nonperforming loans include: 1) nonaccrual loans, 2) loans which are contractually past due 90 days or more as to interest or principal, but have not been put on a nonaccrual basis and 3) loans whose terms have been restructured for economic or legal reasons due to financial difficulties of the borrowers.
Loans past due 90 days or more were $9.49 million at December 31, 2019, a decrease of $5.36 million or 36.07% from $14.85 million at
year-end
2018. This decrease was primarily due to a decrease in delinquencies of loans that have matured as well as one significant relationship with delinquent payments at
year-end
2018. At December 31, 2019, nonaccrual loans were $63.21 million, a decrease of $5.34 million or 7.78% from $68.54 million at
year-end
2018. This decrease was primarily due to repayment of several large nonaccrual relationships through liquidation of collateral as well as foreclosure on collateral. Restructured loans were $58.37 million at December 31, 2019, a decrease of $1.06 million or 1.78% from $59.43 million at
year-end
2018. Eleven loans totaling $11.69 million were restructured during the year of 2019. Partially offsetting these new restructured loans were repayments on previously restructured loans as well as partial charge-offs of the outstanding balance on two restructured relationships. The losses inherent on these loans has been properly evaluated and allocated within the Company’s allowance for loan losses.
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Table of Contents
Nonperforming assets include nonperforming loans and real estate acquired in foreclosure or other settlement of loans (OREO). Total nonperforming assets of $146.59 million, including OREO of $15.52 million at December 31, 2019, represented 0.75% of total assets.
Management is not aware of any other significant loans or securities, groups of loans or securities, or segments of the loan or investment portfolio not included below or disclosed elsewhere herein where there are serious doubts as to the ability of the borrowers or issuers to comply with the present repayment terms of the debt. The following table summarizes nonperforming assets for the indicated periods.
                                         
 
December 31
 
 
2019
 
  
2018
 
  
2017
 
  
2016
 
  
2015
 
 
(In thousands)
 
Nonaccrual loans
   
     
     
     
     
 
Originated
  $
54,090
    $
57,258
    $
97,971
    $
77,111
    $
83,146
 
Acquired
   
9,119
     
11,286
     
10,832
     
6,414
     
8,043
 
Loans which are contractually past due 90 days or more as to interest or principal, and are still accruing interest
   
     
     
     
     
 
Originated
   
7,030
     
11,945
     
7,288
     
7,763
     
11,462
 
Acquired
   
2,464
     
2,906
     
2,515
     
823
     
166
 
Restructured loans (1)
   
     
     
     
     
 
Originated
   
54,912
     
58,101
     
48,709
     
21,115
     
23,890
 
Acquired
   
3,457
     
1,324
     
1,420
     
37
     
0
 
                                         
Total nonperforming loans
  $
131,072
    $
142,820
    $
168,735
    $
113,263
    $
126,707
 
Other real estate owned
   
15,515
     
16,865
     
24,348
     
31,510
     
32,228
 
                                         
TOTAL NONPERFORMING ASSETS
  $
146,587
    $
159,685
    $
193,083
    $
144,773
    $
158,935
 
                                         
(1) Restructured loans that were contractually past due 90 days or more as to interest or principal and are still accruing interest or on nonaccrual status for the indicated periods are included in “Restructured loans” and not “Loans which are contractually past due 90 days or more as to interest or principal and are still accruing interest” or “Nonaccrual loans” (see Note E to the Consolidated Financial Statements for further information).
Loans are designated as impaired when, in the opinion of management, the collection of principal and interest in accordance with the loan contract is doubtful. At December 31, 2019, impaired loans were $289.36 million, which was a decrease of $100.18 million or 25.72% from the $389.53 million in impaired loans at December 31, 2018. This decrease was due mainly to a reduction in the outstanding balance of acquired impaired loans. Acquired impaired loans are accounted for under ASC Subtopic
310-30.
The recorded investment balance and the contractual principal balance of the acquired impaired loans were $96.00 million and $124.78 million at December 31, 2019, respectively, as compared to $149.74 million and $195.71 million, respectively, at December 31, 2018. For the acquired impaired loans accounted for under ASC
310-30,
the difference between the contractually required payments due and the cash flows expected to be collected, considering the impact of prepayments, is referred to as the
non-accretable
difference (the credit mark). The credit mark is not recognized in income. The remaining credit mark was $27.64 million and $38.53 million at December 31, 2019 and December 31, 2018, respectively. For further details regarding impaired loans, see Note E to the Consolidated Financial Statements.
United maintains an allowance for loan losses and a reserve for lending-related commitments. The combined allowance for loan losses and reserve for lending-related commitments are referred to as the allowance for credit losses. At December 31, 2019, the allowance for credit losses was $78.79 million as compared to $78.09 million at December 31, 2018.
At December 31, 2019, the allowance for loan losses was $77.06 million as compared to $76.70 million at December 31, 2018. As a percentage of loans, net of unearned income, the allowance for loan losses was 0.56% at December 31, 2019 and 0.57% at December 31, 2018. The ratio of the allowance for loan losses to nonperforming loans or coverage ratio was 58.79% and 53.71% at December 31, 2019 and December 31, 2018, respectively. The Company’s detailed methodology and analysis indicated a minimal increase in the allowance for loan losses primarily because of the offsetting factors of changes within historical loss rates and reduced loss allocations on impaired loans.
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For the years ended December 31, 2019 and 2018, the provision for loan losses was $21.31 million and $22.01 million, respectively. Net charge-offs were $20.96 million for the year of 2019 as compared to net charge-offs of $21.94 million for the year of 2018. These lower amounts of provision expense and net charge-offs in 2019 compared to the same periods in 2018 were due to the recognition of losses on several large commercial relationships in 2018. Annualized net charge-offs as a percentage of average loans were 0.16% and 0.17% for the year of 2019 and 2018, respectively. The reserve for lending-related commitments at December 31, 2019 was $1.73 million, an increase of $344 thousand or 24.77% from December 31, 2018. Changes to the reserve for lending-related commitments are recorded in other expense in the Consolidated Statements of Income.
The following table summarizes United’s credit loss experience for each of the five years ended December 31:
                                         
 
2019
 
  
2018
 
  
2017
 
  
2016
 
  
2015
 
 
(Dollars in thousands)
 
Balance of allowance for loan losses at beginning of year
  $
76,703
    $
76,627
    $
72,771
    $
75,726
    $
75,529
 
                                         
Loans charged off:
   
     
     
     
     
 
Commercial, financial & agricultural
   
21,973
     
19,963
     
23,731
     
26,130
     
15,917
 
Residential real estate
   
2,967
     
3,162
     
2,973
     
4,597
     
6,411
 
Construction & land development
   
1,303
     
2,731
     
3,337
     
2,659
     
862
 
Consumer
   
2,867
     
2,750
     
2,822
     
2,794
     
2,309
 
                                         
TOTAL CHARGE-OFFS
   
29,110
     
28,606
     
32,863
     
36,180
     
25,499
 
Recoveries:
   
     
     
     
     
 
Commercial, financial & agricultural
   
6,412
     
4,696
     
6,238
     
7,198
     
1,617
 
Residential real estate
   
858
     
1,114
     
601
     
639
     
495
 
Construction & land development
   
175
     
197
     
726
     
433
     
511
 
Consumer
   
706
     
662
     
748
     
446
     
499
 
                                         
                                         
TOTAL RECOVERIES
   
8,151
     
6,669
     
8,313
     
8,716
     
3,122
 
                                         
                                         
NET LOANS CHARGED OFF
   
20,959
     
21,937
     
24,550
     
27,464
     
22,377
 
Provision for loan losses
   
21,313
     
22,013
     
28,406
     
24,509
     
22,574
 
                                         
                                         
BALANCE OF ALLOWANCE
FOR LOAN LOSSES AT END
OF YEAR
  $
77,057
    $
76,703
    $
76,627
    $
72,771
    $
75,726
 
Reserve for lending-related commitments
   
1,733
     
1,389
     
679
     
1,044
     
936
 
                                         
                                         
BALANCE OF ALLOWANCE
FOR CREDIT LOSSES AT END
OF YEAR
  $
78,790
    $
78,092
    $
77,306
    $
73,815
    $
76,662
 
                                         
Loans outstanding at the end of period (gross) (1)
  $
13,713,548
    $
13,429,532
    $
13,027,337
    $
10,356,719
    $
9,398,952
 
                                         
Average loans outstanding during period (net of unearned income) (1)
  $
13,570,789
    $
13,258,619
    $
12,399,901
    $
9,983,828
    $
9,117,844
 
                                         
Net charge-offs as a percentage of average loans outstanding
   
0.15
 %    
0.17
 %    
0.20
 %    
0.28
 %    
0.25
 %
                                         
Allowance for loan losses, as a percentage of nonperforming loans
   
58.79
 %    
53.71
 %    
45.41
 %    
64.25
 %    
59.76
 %
  (1) Excludes loans held for sale.
United evaluates the adequacy of the allowance for credit losses and its loan administration policies are focused upon the risk characteristics of the loan portfolio and lending-related commitments. United’s process for evaluating the allowance is a formal company-wide process that focuses on early identification of potential problem credits and procedural discipline in managing and accounting for those credits. This process determines the appropriate level of the allowance for credit losses, allocation among loan types and lending-related commitments, and the resulting provision for credit losses. The provision for credit losses includes the provision for loan losses and a provision for lending-related commitments included in other expenses.
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Allocations are made for specific commercial loans based upon management’s estimate of the borrowers’ ability to repay and other factors impacting collectibility. Other commercial loans not specifically reviewed on an individual basis are evaluated based on historical loss percentages applied to loan pools that have been segregated by risk. Allocations for loans other than commercial loans are made based upon historical loss experience adjusted for current environmental conditions. The allowance for credit losses includes estimated probable inherent but unidentified losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet fully manifested themselves in loss allocation factors. In addition, a portion of the allowance accounts for the inherent imprecision in the allowance for credit losses analysis.
The following table presents the allocation of United’s allowance for credit losses for each of the five years ended December 31:
                                         
 
2019
 
  
2018
 
  
2017
 
  
2016
 
  
2015
 
 
(In thousands)
 
Commercial, financial & agricultural
  $
61,403
    $
53,323
    $
56,959
    $
45,243
    $
40,274
 
Residential real estate
   
8,997
     
12,448
     
9,927
     
13,770
     
15,148
 
Construction & land development
   
3,354
     
7,992
     
7,187
     
10,606
     
18,205
 
Consumer
   
3,007
     
2,695
     
2,481
     
2,805
     
1,995
 
Allowance for estimated imprecision
   
296
     
245
     
73
     
347
     
104
 
                                         
Allowance for loan losses
  $
77,057
    $
76,703
    $
76,627
    $
72,771
    $
75,726
 
Reserve for lending-related commitments
   
1,733
     
1,389
     
679
     
1,044
     
936
 
                                         
Allowance for credit losses
  $
78,790
    $
78,092
    $
77,306
    $
73,815
    $
76,662
 
                                         
 
The following is a summary of loans outstanding as a percent of total loans at December 31:
                                         
 
2019
 
  
2018
 
  
2017
 
  
2016
 
  
2015
 
Commercial, financial & agricultural
   
54.35
 %    
56.27
 %    
60.04
 %    
58.88
 %    
57.82
 %
Residential real estate
   
26.88
 %    
26.09
 %    
23.03
 %    
23.24
 %    
24.18
 %
Construction & land development
   
10.27
 %    
10.51
 %    
11.56
 %    
12.14
 %    
13.57
 %
Consumer
   
8.50
 %    
7.13
 %    
5.37
 %    
5.74
 %    
4.43
 %
                                         
Total
   
100.00
 %    
100.00
 %    
100.00
 %    
100.00
 %    
100.00
 %
                                         
 
United’s company-wide review of the allowance for loan losses at December 31, 2019 produced increased allocations in two of the four loan categories. The commercial, financial & agricultural loan pool allocation increased $8.08 million due to an increase in historical loss rates as well as an increase in outstanding loan balances. The consumer loan pool experienced a minimal increase of $312 thousand due to an increase in outstanding loan balances. Offsetting these increases was a decrease in the real estate construction and development loan pool allocation of $4.64 million due to a decrease in historical loss rates and decrease in allocations recognized for impaired loans. The residential real estate allocation decreased $3.45 million primarily due to a decrease in allocations recognized for impaired loans. In summary, the overall level of the allowance for loan losses was relatively stable in comparison to
year-end
2018 as a result of offsetting factors within the portfolio as described above.
An allowance is established for probable credit losses on impaired loans via specific allocations. Nonperforming commercial loans and leases are regularly reviewed to identify impairment. A loan or lease is impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts contractually due. Measuring impairment of a loan requires judgment and estimates, and the eventual outcomes may differ from those estimates. Impairment is measured based upon the present value of expected future cash flows from the loan discounted at the loan’s effective rate, the loan’s observable market price or the fair value of collateral if the loan is collateral dependent. When the selected measure is less than the recorded investment in the loan, an impairment has occurred. The allowance for impaired loans was $16.50 million at December 31, 2019 and $28.36 million at December 31, 2018. In comparison to the prior
year-end,
this element of the allowance decreased by $11.86 million primarily due to decreased specific allocations for commercial, financial & agricultural loans as well as residential real estate loans.
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Management believes that the allowance for credit losses of $78.79 million at December 31, 2019 is adequate to provide for probable losses on existing loans and lending-related commitments based on information currently available. United’s loan administration policies are focused on the risk characteristics of the loan portfolio in terms of loan approval and credit quality. The commercial loan portfolio is monitored for possible concentrations of credit in one or more industries. Management has lending limits as a percentage of capital per type of credit concentration in an effort to ensure adequate diversification within the portfolio. Most of United’s commercial loans are secured by real estate located in West Virginia, southeastern Ohio, Pennsylvania, Virginia, Maryland and the District of Columbia. It is the opinion of management that these commercial loans do not pose any unusual risks and that adequate consideration has been given to these loans in establishing the allowance for credit losses.
Management is not aware of any potential problem loans, trends or uncertainties, which it reasonably expects, will materially impact future operating results, liquidity, or capital resources which have not been disclosed. Additionally, management has disclosed all known material credits, which cause management to have serious doubts as to the ability of such borrowers to comply with the loan repayment schedules.
Other Income
Other income consists of all revenues, which are not included in interest and fee income related to earning assets. Noninterest income has been and will continue to be an important factor for improving United’s profitability. Recognizing the importance, management continues to evaluate areas where noninterest income can be enhanced.
Noninterest income for the year of 2019 was $150.48 million, which was an increase of $21.77 million or 16.92% from the year of 2018. The increase was due mainly to an increase in income from mortgage banking activities.
Income from mortgage banking activities totaled $76.95 million for the year of 2019 compared to $58.11 million for the year of 2018. The increase of $18.84 million or 32.43% for the year of 2019 was mainly due to increased loan originations and a higher realized gain on sale margin by George Mason. Mortgage loan sales were $2.44 billion in the year of 2019 as compared to $1.98 billion in the year of 2018. Mortgage loans originated for sale were $2.57 billion for the year of 2019 as compared to $1.99 billion for the year of 2018.
United recognized a net gain of $175 thousand on investment securities’ activity in 2019 as compared to a net loss of $2.62 million on investment securities’ activity in 2018. In particular, United recognized a net gain of $373 thousand on the sales, calls and redemption of investment securities for the year of 2019 as compared to a net loss of $862 thousand on the sales, calls and redemption of investment securities for the year of 2018. In addition, United recognized other-than-temporary (OTTI) of $198 thousand for the year of 2019 as compared to OTTI of $1.76 million for the year of 2018.
Income from bank-owned life insurance for the year of 2019 increased $2.29 million or 45.47% from the year of 2018 due to the recognition of $2.28 million in death benefits.
Fees from trust services for the year of 2019 were $13.87 million, an increase of $943 thousand or 7.29% from the year of 2018. The increase was due to an increase in the value of managed assets.
Fees from brokerage services for the year of 2019 were $10.14 million, an increase of $789 thousand or 8.44% from the year of 2018 due to increased volume.
Bankcard fees for the year of 2019 decreased $494 thousand or 9.56% from the year of 2018 due to a decline in interchange income from decreased volume.
United recognized a net gain of $2.76 million in the year of 2018 on the sale of bank premises.
Other Expense
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 expense includes all items of expense other than interest expense, the provision for credit losses and income tax expense. Noninterest expense for the year of 2019 was $382.65 million, which was an increase of $14.48 million or 3.93% from the year of 2018.
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Table of Contents
Employee compensation for the year of 2019 increased $9.49 million or 5.77% from the year of 2018. This increase was due mainly to increased salaries and commissions expense primarily related to the increase in production and sales of mortgage loans at George Mason.
During the second quarter of 2019, United recognized $5.11 million in penalties to prepay FHLB advances.
Other real estate owned (OREO) expense increased $1.89 million or 54.94% for the year of 2019 due to a decline in the fair value of OREO properties.
Other expense for the year of 2019 increased $4.72 million or 6.16% from the year of 2018 due mainly to an increase of $2.77 million in the amortization of income tax credits and an increase of $1.11 million in donations. The amortization of tax credits had a corresponding positive impact on lowering the effective tax rate. In addition, United incurred merger expenses of $589 thousand in the year of 2019 related to the announced acquisition of Carolina Financial Corporation.
Federal Deposit Insurance Corporation (FDIC) insurance expense for the year of 2019 decreased $3.39 million from the year of 2018 resulting from a Small Bank Assessment credit and lower assessment fees.
Data processing expense decreased $1.57 million or 6.59% for the year of 2019 as compared to the prior year due to lower fees from a new contract.
Net occupancy expense decreased $1.61 million or 4.42% for the year of 2019 as compared to the prior year. The decrease was due mainly to a decline in building rental expense due to fewer offices. Building depreciation expense also declined.
Employee benefits expense for the year of 2019 decreased $427 thousand or 1.18% as compared to the year of 2018. Pension expense decreased $1.33 million. Partially offsetting this decrease was an increase of $636 thousand in health care insurance costs. United uses certain valuation methodologies to measure the fair value of the assets within United’s pension plan which are presented in Note O, Notes to Consolidated Financial Statements. The funded status of United’s pension plan is based upon the fair value of the plan assets compared to the projected benefit obligation. The determination of the projected benefit obligation and the associated periodic benefit expense involves significant judgment and estimation of future employee compensation levels, the discount rate and the expected long-term rate of return on plan assets. If United assumes a 1% increase or decrease in the estimation of future employee compensation levels while keeping all other assumptions constant, the benefit cost associated with the pension plan would increase by approximately $668 thousand and decrease by approximately $631 thousand, respectively. If United assumes a 1% increase or decrease in the discount rate while keeping all other assumptions constant, the benefit cost associated with the pension plan would decrease by approximately $2.02 million and increase by approximately $2.29 million, respectively. If United assumes a 1% increase or decrease in the expected long-term rate of return on plan assets while keeping all other assumptions constant, the benefit cost associated with the pension plan would decrease by approximately $1.35 million and increase by approximately $1.35 million, respectively.
Income Taxes
For the year ended December 31, 2019, income taxes were $64.34 million, compared to $70.82 million for 2018 due to a decline in the effective tax rate due in large part to the previously mentioned income tax credits. United’s effective tax rate was approximately 19.8% and 21.7% for years ended December 31, 2019 and 2018, respectively, as compared to 47.1% for 2017. For further details related to income taxes, see Note N, Notes to Consolidated Financial Statements.
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Table of Contents
Quarterly Results
Net income for the first three months of 2019 was $63.64 million or $0.62 per diluted share compared to $61.71 million or $0.59 per share for the first three months of 2018. United’s annualized return on average assets for the first three months of 2019 was 1.34% and return on average shareholders’ equity was 7.88% as compared to 1.35% and 7.65% for the first three months of 2018. Net interest income for the first three months of 2019 was $144.17 million, which was relatively flat from net interest income of $144.04 million for the first three months of 2018. The slight increase of $125 thousand in net interest income occurred because total interest income increased $21.91 million while total interest expense increased $21.79 million from the first quarter of 2018. The provision for credit losses was $5.00 million for the first three months of 2019 as compared to $5.18 million for the first three months of 2018. Noninterest income was $31.22 million for the first three months of 2019, which was relatively flat from the first three months of 2018, increasing $31 thousand or less than 1%. Noninterest expense for the first three months of 2019 decreased $1.03 million or 1.14% from the first three months of 2018. Income taxes decreased $571 thousand or 3.19% for the first three months of 2019 as compared to the first three months of 2018. The effective tax rate was 21.40% and 22.48% for the first quarter of 2019 and 2018, respectively.
Net income for the second quarter of 2019 was $67.21 million or $0.66 per diluted share, as compared to $66.27 million or $0.63 per diluted share for the prior year second quarter. Net interest income for the second quarter of 2019 was $150.55 million which was relatively flat from the second quarter of 2018, increasing $1.43 million or less than 1%. The slight increase in net interest income occurred because total interest income increased $21.25 million while total interest expense only increased $19.81 million from the second quarter of 2018. The provision for credit losses was $5.42 million for the second quarter of 2019 as compared to $6.20 million for the second quarter of 2018. For the second quarter of 2019, noninterest income was $39.80 million, which was an increase of $3.79 million or 10.52% from the second quarter of 2018. This increase from 2018 was mainly due to additional income from mortgage banking activities. For the second quarter of 2019, noninterest expense increased $6.79 million or 7.26% from the second quarter of 2018 due mainly to penalties incurred during the second quarter of 2019 on the prepayment of FHLB advances. Income taxes for the second quarter of 2019 were $17.53 million as compared to $19.24 million for the second quarter of 2018. For the quarters ended June 30, 2019 and 2018, United’s effective tax rate was 20.69% and 22.50%, respectively.
Net income for the third quarter of 2019 was $65.97 million or $0.65 per diluted share, as compared to $64.41 million or $0.62 per diluted share for the prior year third quarter. Net interest income for the third quarter of 2019 was $141.92 million which was a decrease of $6.86 million or 4.61% from the third quarter of 2018. The decrease in net interest income occurred because total interest income increased $5.32 million while total interest expense increased $12.18 million from the third quarter of 2018. The provision for credit losses was $5.03 million for the third quarter of 2019 as compared to $4.81 million for the third quarter of 2018. For the third quarter of 2019, noninterest income was $42.22 million, which was an increase of $10.54 million or 33.26% from the third quarter of 2018 due to additional income from mortgage banking activities. For the third quarter of 2019, noninterest expense increased $2.82 million or 3.02% from the third quarter of 2018 due mainly to an increase in employee compensation resulting from higher commissions expense from increased production and sales from mortgage banking activities. Income taxes for the third quarter of 2019 were $17.01 million as compared to $17.93 million for the third quarter of 2018. For the quarters ended September 30, 2019 and 2018, United’s effective tax rate was 20.50% and 21.77%, respectively.
Net income for the fourth quarter of 2019 was $63.29 million or $0.62 per diluted share as compared to earnings of $63.95 million or $0.62 per diluted share for the fourth quarter of 2018. Net interest income for the fourth quarter of 2019 was $141.28 million, which was a decrease of $5.42 million or 3.70% from the fourth quarter of 2018. The $5.42 million decrease in net interest income occurred because total interest income decreased $3.63 million while total interest expense increased $1.79 million from the fourth quarter of 2018.
Tax-equivalent
net interest income, which adjusts for the
tax-favored
status of income from certain loans and investments, for the fourth quarter of 2019 was $142.13 million, a decrease of $5.63 million or 3.81% from the fourth quarter of 2018 due mainly to a decrease of 18 basis points in the average yield on earning assets and an increase of 7 basis points in the average cost of funds as compared to the fourth quarter of 2018. For the quarters ended December 31, 2019 and 2018, the provision for loan losses was $5.87 million and $5.82 million. Noninterest income for the fourth quarter of 2019 was $37.24 million, which was an increase of $7.42 million or 24.86% from the fourth quarter of 2018. The higher amount of noninterest income was due mainly to a rise of $5.98 million in income from mortgage banking activities due to increased production and sales of mortgage loans in the secondary market by George Mason. Noninterest expense for the fourth quarter of 2019 was $96.90 million, an increase of $5.90 million or 6.48% from the fourth quarter of 2018. In particular, employee compensation increased $5.20 million due mainly to an increase in commissions and incentives expense related to the increase in production and sales of mortgage loans at George Mason. In addition, other expense increased $2.40 million due to an increase of $1.16 million in donations and merger expenses of $589 thousand related to the announced acquisition of Carolina Financial Corporation. Partially offsetting these increases was a decline of $2.24 million in FDIC assessment fees.
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Additional quarterly financial data for 2019 and 2018 may be found in Note Y, Notes to Consolidated Financial Statements.
The Effect of Inflation
United’s income statements generally reflect the effects of inflation. Since interest rates, loan demand and deposit levels are impacted by inflation, the resulting changes in the interest-sensitive assets and liabilities are included in net interest income. Similarly, operating expenses such as salaries, rents and maintenance include changing prices resulting from inflation. One item that would not reflect inflationary changes is depreciation expense. Subsequent to the acquisition of depreciable assets, inflation causes price levels to rise; therefore, historically presented dollar values do not reflect this inflationary condition. With inflation levels at relatively low levels and monetary and fiscal policies being implemented to keep the inflation rate increases within an acceptable range, management expects the impact of inflation would continue to be minimal in the near future.
The Effect of Regulatory Policies and Economic Conditions
United’s business and earnings are affected by the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities. The Federal Reserve Board regulates the supply of money in order to influence general economic conditions. Among the instruments of monetary policy available to the Federal Reserve Board are (i) conducting open market operations in United States government obligations, (ii) changing the discount rate on financial institution borrowings, (iii) imposing or changing reserve requirements against financial institution deposits, and (iv) restricting certain borrowings and imposing or changing reserve requirements against certain borrowings by financial institutions and their affiliates. These methods are used in varying degrees and combinations to affect directly the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits.
United’s business and earnings are also affected by general and local economic conditions. Certain credit markets can experience difficult conditions and volatility. Downturns in the credit market can cause a decline in the value of certain loans and securities, a reduction in liquidity and a tightening of credit. A downturn in the credit market often signals a weakening economy that can cause job losses and thus distress on borrowers and their ability to repay loans. Uncertainties in credit markets and the economy present significant challenges for the financial services industry.
Regulatory policies and economic conditions have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future; however, United cannot accurately predict the nature, timing or extent of any effect such policies or economic conditions may have on its future business and earnings.
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. The table below presents, by payment date, significant known contractual obligations to third parties as of December 31, 2019:
                                         
 
 
  
Total Payments Due by Period
 
(In thousands)
 
  
Total
 
  
One
Year 
or Less
 
  
One to
Three Years
 
  
Three to
Five Years
 
  
Over Five
Years
 
Deposits without a stated maturity (1)
  $
11,528,626
    $
11,528,626
    $
0
    $
0
    $
0
 
Time deposits (2) (3)
   
2,368,211
     
1,682,519
     
582,709
     
102,945
     
38
 
Short-term borrowings (2)
   
374,686
     
374,686
     
0
     
0
     
0
 
Long-term borrowings (2) (3)
   
2,025,375
     
774,128
     
878,829
     
19,985
     
352,433
 
Operating leases
   
66,495
     
17,725
     
26,702
     
13,878
     
8,190
 
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  (1) Excludes interest.
  (2) Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based upon interest rates in effect at December 31, 2019. The interest to be paid on variable rate obligations is affected by changes in market interest rates, which materially affect the contractual obligation amounts to be paid.
  (3) Excludes carrying value adjustments such as unamortized premiums or discounts.
As of December 31, 2019, United recorded a liability for uncertain tax positions, including interest and penalties, of $2.01 million. This liability represents an estimate of tax positions that United has taken in its tax returns which may ultimately not be sustained upon examination by tax authorities. Since the ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty, this estimated liability is excluded from the contractual obligations table.
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 December 31, 2019 do not represent the amounts that may ultimately be paid under these contracts, they are excluded from the preceding table. Further discussion of derivative instruments is included in Note R, 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 amounts do not necessarily represent future cash requirements.
The following table details the amounts of significant commitments and letters of credit as of December 31, 2019:
         
(In thousands)
 
Amount
 
Commitments to extend credit:
   
 
Revolving
open-end
secured by
1-4
residential
   $
579,798
 
Credit card and personal revolving lines
   
143,449
 
Commercial
   
2,887,530
 
         
Total unused commitments
  $
3,610,777
 
         
Financial standby letters of credit
  $
62,784
 
Performance standby letters of credit
   
82,321
 
Commercial letters of credit
   
5,092
 
         
Total letters of credit
  $
150,197
 
         
Commitments generally have fixed expiration dates or other termination clauses, generally within one year, and may require the payment of a fee. Further discussion of commitments is included in Note Q, 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 that 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 that 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 borrowings, 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. See Notes K and L, Notes to Consolidated Financial Statements.
Cash flows provided by operations in 2019 were $147.69 million due mainly to net income of $260.10 million for the year of 2019. In 2018, cash flows provided by operations were $292.53 million due mainly to net income of $256.34 million for the year of 2018. In 2019, net cash of $379.05 million was used in investing activities which was primarily due to net purchases of $95.82 million in investment securities and net growth of $285.25 million in loans. In 2018, net cash of $871.51 million was used in investing activities which was primarily due net purchases of $493.57 million in investment securities and net growth of $391.38 million in loans. During the year of 2019, net cash of $48.45 million was provided by financing activities due primarily to net increases of $340.00 million and $23.33 million in long-term and short-term borrowings, respectively. Partially offsetting this source of cash from financing activities was the payment of cash dividends in the amount of $138.94 million, a net withdrawal of $141.54 million in deposits and the acquisition of treasury stock for $35.67 million. During the year of 2018, net cash of $66.79 million was used in financing activities due primarily to the payment of cash dividends in the amount of $142.35 million and the acquisition of treasury stock for $100.72 million. Partially offsetting these uses of cash for financing activities were net increases of $195.00 million and $165.42 million in long-term borrowings and deposits, respectively. The net effect of the cash flow activities was a decrease in cash and cash equivalents of $182.90 million for the year of 2019 as compared to a decrease in cash and cash equivalents of $645.77 million for the year of 2018. See the Consolidated Statement of Cash Flows in the Consolidated Financial Statements.
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 K and L, Notes to Consolidated Financial Statements for more detail regarding the amounts available to United under its 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 and 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 considered to be well-capitalized based upon regulatory guidelines. United’s risk-based capital ratio is 14.70% at December 31, 2019 while its Common Equity Tier 1 capital, Tier 1 capital and leverage ratios are 12.53%, 12.53% and 10.48%, respectively. The regulatory requirements for a well-capitalized financial institution are a risk-based capital ratio of 10.0%, a Common Equity Tier 1 capital ratio of 6.5%, a Tier 1 capital ratio of 8.0% and a leverage ratio of 5.0%. See Note U, Notes to Consolidated Financial Statements.
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Total shareholders’ equity was $3.36 billion at December 31, 2019, which was an increase of $112.21 million or 3.45% from December 31, 2018. This increase was primarily due to the retention of earnings.
United’s equity to assets ratio was 17.11% at December 31, 2019 as compared to 16.89% at December 31, 2018. The primary capital ratio, capital and reserves to total assets and reserves, was 17.44% at December 31, 2019 as compared to 17.23% at December 31, 2018. United’s average equity to average asset ratio was 17.13% and 17.34% for the years ended December 31, 2019 and 2018, respectively. All these financial measurements reflect a financially sound position.
During the fourth quarter of 2019, United’s Board of Directors declared a cash dividend of $0.35 per share. Dividends per share of $1.37 for the year of 2019 represented an increase over the $1.36 per share paid for 2018. Total cash dividends declared to common shareholders were $139.51 million for the year of 2019 as compared to $141.61 million for the year of 2018. The year 2019 was the forty-sixth consecutive year of dividend increases to United shareholders.
The following table shows selected consolidated operating and capital ratios for each of the last three years ended December 31:
                         
 
2019
 
  
2018
 
  
2017
 
Return on average assets
   
1.34
 %    
1.36
 %    
0.85
 %
Return on average equity
   
7.80
 %    
7.84
 %    
5.09
 %
Dividend payout ratio
   
53.64
 %    
55.24
 %    
87.50
 %
Average equity to average assets ratio
   
17.13
 %    
17.34
 %    
16.80
 %
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The objective of United’s Asset/Liability Management function is to maintain consistent growth in net interest income within United’s policy guidelines. This objective is accomplished through the management of balance sheet liquidity and interest rate risk exposures due to changes in economic conditions, interest rate levels and customer preferences.
Interest Rate Risk
Management considers interest rate risk to be United’s most significant market risk. Interest rate risk is the exposure to adverse changes in United’s net interest income as a result of changes in interest rates. United’s earnings are largely dependent on the effective management of interest rate risk.
Management of interest rate risk focuses on maintaining consistent growth in net interest income within Board-approved policy limits. United’s Asset/Liability Management Committee (ALCO), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. Policy established for interest rate risk is stated in terms of the change in net interest income over a
one-year
and
two-year
horizon given an immediate and sustained increase or decrease in interest rates. The current limits approved by the Board of Directors are structured on a staged basis with each stage requiring specific actions.
United employs a variety of measurement techniques to identify and manage its exposure to changing interest rates. One such technique utilizes an earnings simulation model to analyze the sensitivity of net interest income to movements in interest rates. The model is based on actual cash flows and repricing characteristics for on and
off-balance
sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. The model also includes executive management projections for activity levels in product lines offered by United. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. Rate scenarios could involve parallel or nonparallel shifts in the yield curve, depending on historical, current, and expected conditions, as well as the need to capture any material effects of explicit or embedded options. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management’s strategies.
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Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or are repriced within a designated time frame. The principal function of managing interest rate risk is to maintain an appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. The difference between rate sensitive assets and rate sensitive liabilities for specified periods of time is known as the “GAP.” Earnings-simulation analysis captures not only the potential of these interest sensitive assets and liabilities to mature or reprice, but also the probability that they will do so. Moreover, earnings-simulation analysis considers the relative sensitivities of these balance sheet items and projects their behavior over an extended period of time. United closely monitors the sensitivity of its assets and liabilities on an
on-going
basis and projects the effect of various interest rate changes on its net interest margin.
The following table shows United’s estimated earnings sensitivity profile as of December 31, 2019 and December 31, 2018:
         
    Change in
Interest Rates
 
Percentage Change in Net Interest Income
(basis points)
 
December 31, 2019
 
December 31, 2018
        +200
 
(2.37%)
 
(2.71%)
        +100
 
(1.09%)
 
(1.29%)
        -100
 
0.86%
 
0.97%
        -200
 
(1.34%)
 
(0.97%)
At December 31, 2019, given an immediate, sustained 100 basis point upward shock to the yield curve used in the simulation model, net interest income for United is estimated to decrease by 1.09% over one year as compared to a decrease of 1.29% at December 31, 2018. A 200 basis point immediate, sustained upward shock in the yield curve would decrease net interest income by an estimated 2.37% over one year as of December 31, 2019, as compared to a decrease of 2.71% as of December 31, 2018. A 100 basis point immediate, sustained downward shock in the yield curve would increase net interest income by an estimated 0.86% over one year as of December 31, 2019 as compared to an increase of 0.97%, over one year as of December 31, 2018. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 1.34% over one year as of December 31, 2019 as compared to a decrease of 0.97% over one year as of December 31, 2018.
In addition to the one year earnings sensitivity analysis, a
two-year
analysis is also performed. Compared to the one year analysis, United is projected to show improved performance in year two within the upward rate shock scenarios. Given an immediate, sustained 100 basis point upward shock to the yield curve used in the simulation model, net interest income for United is estimated to increase by 1.45% in year two as of December 31, 2019. A 200 basis point immediate, sustained upward shock in the yield curve would increase net interest income by an estimated 2.16% in year two as of December 31, 2019. A 100 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 2.43% in year two as of December 31, 2019. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 7.28% in year two as of December 31, 2019.
This analysis does not include the potential increased refinancing activities, which should lessen the negative impact on net income from falling rates. While it is unlikely market rates would immediately move 100 or 200 basis points upward or downward on a sustained basis, this is another tool used by management and the Board of Directors to gauge interest rate risk. All of these estimated changes in net interest income are and were within the policy guidelines established by the Board of Directors.
To further aid in interest rate management, United’s subsidiary bank is a member of the Federal Home Loan Bank (FHLB). The use of FHLB advances provides United with a low risk means of matching maturities of earning assets and interest-bearing funds to achieve a desired interest rate spread over the life of the earning assets. In addition, United uses credit with large regional banks and trust preferred securities to provide funding.
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.”
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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 December 31, 2019, United’s mortgage related securities portfolio had an amortized cost of $1.4 billion, of which approximately $1.1 billion or 77% were fixed rate collateralized mortgage obligations (CMOs). These fixed rate CMOs consisted primarily of planned amortization class (PACs),
sequential-pay
and accretion directed (VADMs) bonds having an average life of approximately 3.8 years and a weighted average yield of 2.66%, under current projected prepayment assumptions. These securities are expected to have very little extension risk in a rising rate environment. Current models show that an immediate, sustained upward shock of 300 basis points, the average life of these securities would only extend to 4.6 years. The projected price decline of the fixed rate CMO portfolio in rates up 300 basis points would be 10.8%, or less than the price decline of a
4-
year treasury note. By comparison, the price decline of a
30-year
current coupon mortgage backed security (MBS) given an immediate, sustained upward shock of 300 basis points would be approximately 15.1%.
United had approximately $149 million in balloon and other securities with a projected yield of 2.55% and a projected average life of 4.1 years on December 31, 2019. This portfolio consisted primarily of Fannie Mae Delegated Underwriting and Servicing (DUS) mortgage backed securities (MBS) with a weighted average loan age (WALA) of 5.1 years and a weighted average maturity (WAM) of 4.5 years.
United had approximately $19 million in
15-year
mortgage backed securities with a projected yield of 3.04% and a projected average life of 3.3 years as of December 31, 2019. This portfolio consisted of seasoned
15-year
mortgage paper with a weighted average loan age (WALA) of 7.2 years and a weighted average maturity (WAM) of 10.3 years.
United had approximately $42 million in
20-year
mortgage backed securities with a projected yield of 2.61% and a projected average life of 4.7 years on December 31, 2019. This portfolio consisted of seasoned
20-year
mortgage paper with a weighted average loan age (WALA) of 4.3 years and a weighted average maturity (WAM) of 15.3 years.
United had approximately $44 million in
30-year
mortgage backed securities with a projected yield of 2.86% and a projected average life of 5.1 years on December 31, 2019. This portfolio consisted of seasoned
30-year
mortgage paper and Home Equity Conversion Mortgages with a weighted average loan age (WALA) of 2.8 years and a weighted average maturity (WAM) of 26.9 years.
The remaining 6% of the mortgage related securities portfolio at December 31, 2019, included adjustable rate securities (ARMs),
10-year
mortgage backed pass-through securities and other fixed rate mortgage backed securities.
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of United Bankshares, Inc. (the Company) is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules
13a-15(f)
under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013 framework). Based on our assessment, we believe that, as of December 31, 2019, the Company’s internal control over financial reporting is effective based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm who audited the Company’s consolidated financial statements has also issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. Ernst & Young’s report on the effectiveness of the Company’s internal control over financial reporting appears on the following page.
         
/s/ Richard M. Adams
 
 
/s/ W. Mark Tatterson
Richard M. Adams, Chairman of the Board and Chief Executive Officer
 
 
W. Mark Tatterson, Executive Vice President and Chief Financial Officer
 
March 2, 2020
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of United Bankshares, Inc.
Opinion on Internal Control over Financial Reporting
We have audited United Bankshares, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, United Bankshares, Inc
.
and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of
the Company as of December 31, 2019 and 2018,
and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and our report dated March 2, 2020 expressed an unqualified opinion thereon. 
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Charleston, West Virginia
March 2, 2020
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Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of United Bankshares, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of United Bankshares, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 2, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses
     
Description of the Matter
  
The Company’s commercial loan portfolio totaled $9.4 billion as of December 31, 2019, and the associated allowance for loan losses (ALL) for the commercial loan portfolio was $61.4 million. As discussed in Notes E and F to the consolidated financial statements, management segments the commercial loan portfolio by loan type to recognize differing risk profiles among loan categories and further segregates by credit grade for
non-homogenous
loan pools. For impaired loans,
 
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management calculates specific reserve allocations based on the present value of expected future cash flows using the loan’s effective interest rate, or as a practical expedient, the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent. For commercial loans not specifically reviewed on an individual basis, the outstanding principal balance within each pool is multiplied by historical loss data, the loss emergence period and certain qualitative factors to derive the general loss allocation per pool. Qualitative factors include, among others, current economic conditions, concentration risk, underwriting changes and other risk factors that have not been fully addressed in risk ratings or historical loss data.
 
Auditing management’s estimate of the qualitative factors used in determining the ALL for the commercial loan portfolio involved a high degree of subjectivity in evaluating management’s assumptions used to derive certain qualitative factors.
     
How We Addressed the Matter in Our Audit
 
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s ALL process for the commercial loan portfolio. Controls tested included, among others, those over the risk rating process, the identification of indicators of impairment, management’s evaluation and review of the qualitative factors and overall ALL, and management’s review and approval of the calculations used to determine the ALL, including the underlying data and data inputs and outputs of those calculations.
     
 
To test the Company’s qualitative factors for the commercial loan portfolio, we evaluated management’s basis for the adjustments considering historical loss experience, the adjustments applied, and the completeness of the inputs and assumptions used by management in determining such adjustments. Our procedures included evaluating management’s qualitative factor inputs and assumptions by comparing the inputs and assumptions to internal and external data including, among others, the Company’s historical loan performance data and third-party economic outlook reports. In addition, we evaluated the overall ALL amount, inclusive of the adjustments for qualitative factors, and whether the amount appropriately reflects losses incurred in the loan portfolios as of the consolidated balance sheet date. For example, we evaluated the Company’s analysis of their historical loss experience and peer losses to the Company’s recorded ALL to test the ALL in totality. We also reviewed subsequent events and transactions and considered whether they corroborate or contradict the Company’s conclusion.
 
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1986.
Charleston, West Virginia
March 2, 2020
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CONSOLIDATED BALANCE SHEETS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except par value)
                 
 
December 31
2019
 
  
December 31
2018
 
Assets
 
 
 
  
 
 
Cash and due from banks
 
    $
185,238
 
 
    $
187,886
    
 
Interest-bearing deposits with other banks
 
 
651,435
 
 
 
831,707
    
 
Federal funds sold
 
 
820
 
 
 
803
    
 
                 
Total cash and cash equivalents
 
 
837,493
 
 
 
1,020,396
    
 
Securities available for sale at estimated fair value (amortized cost-$2,426,924
at December 31, 2019 and $2,360,884
at December 31, 2018)
 
 
2,437,296
 
 
 
2,337,039
    
 
Securities held to maturity (estimated fair value-$1,447
at December 31, 2019 and $18,655
at December 31, 2018)
 
 
1,446
 
 
 
19,999
    
 
Equity securities at estimated fair value
 
 
8,894
 
 
 
9,734
    
 
Other investment securities
 
 
222,161
 
 
 
176,955
    
 
Loans held for sale (at fair value-$384,375
at December 31, 2019 and $247,104
at December 31, 2018)
 
 
387,514
 
 
 
249,846
    
 
Loans
 
 
13,713,548
 
 
 
13,429,532
    
 
Less: Unearned income
 
 
(1,419)
 
 
 
(7,310)
    
 
                 
Loans net of unearned income
 
 
13,712,129
 
 
 
13,422,222
    
 
Less: Allowance for loan losses
 
 
(77,057)
 
 
 
(76,703)
    
 
                 
Net loans
 
 
13,635,072
 
 
 
13,345,519
    
 
Bank premises and equipment
 
 
96,644
 
 
 
95,245
    
 
Operating lease right of-use asset
 
 
57,783
 
 
 
0
 
Goodwill
 
 
1,478,014
 
 
 
1,478,014
    
 
Accrued interest receivable
 
 
58,085
 
 
 
60,597
    
 
Other assets
 
 
441,922
 
 
 
457,154
    
 
                 
TOTAL ASSETS
      $
19,662,324
        $
19,250,498    
  
                 
                 
Liabilities
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
Noninterest-bearing
 
    $
4,621,362
    
 
 
   $
4,416,815
    
 
Interest-bearing
 
 
9,231,059
    
 
 
 
9,577,934
    
 
                 
Total deposits
 
 
13,852,421
    
 
 
 
13,994,749
    
 
Borrowings:
 
 
 
 
 
 
Federal funds purchased
 
 
0
    
 
 
 
23,400
    
 
Securities sold under agreements to repurchase
 
 
124,654
    
 
 
 
152,927
    
 
Federal Home Loan Bank borrowings
 
 
1,851,865
    
 
 
 
1,439,198
    
 
Other long-term borrowings
 
 
236,164
    
 
 
 
234,905
    
 
Reserve for lending-related commitments
 
 
1,733
    
 
 
 
1,389
    
 
Operating lease liability
 
 
61,342
 
 
 
0
 
Accrued expenses and other liabilities
 
 
170,312
    
 
 
 
152,306
    
 
                 
TOTAL LIABILITIES
 
 
16,298,491
    
 
 
 
15,998,874
    
 
                 
Shareholders’ Equity
 
 
 
 
 
 
Preferred stock, $1.00 par value;
Authorized-50,000,000
shares,
none
issued
 
 
0
    
 
 
 
0
    
 
Common stock, $2.50 par value;
Authorized-200,000,000
shares;
issued
-
105,494,290
and 105,239,121 at December 31, 2019 and December 31, 2018, respectively, including 3,940,619 and 2,915,633 shares in treasury at December 31, 2019 and December 31, 2018, respectively
 
 
263,736
    
 
 
 
263,098
    
 
Surplus
 
 
2,140,175
    
 
 
 
2,134,462
    
 
Retained earnings
 
 
1,132,579
    
 
 
 
1,013,037
    
 
Accumulated other comprehensive loss
 
 
(34,869)
    
 
 
 
(57,019)
    
 
Treasury stock, at cost
 
 
(137,788)
    
 
 
 
(101,954)
    
 
                 
TOTAL SHAREHOLDERS’ EQUITY
 
 
3,363,833
    
 
 
 
3,251,624
    
 
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
    $
 
 
 
19,662,324
    
 
 
    $
 
19,250,498
    
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See notes to consolidated financial statements
 
6
4
 
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
                         
 
Year Ended December 31
 
 
2019
 
  
2018
 
  
2017
 
Interest income
 
 
 
  
 
 
  
 
 
Interest and fees on loans
      $
 
 
666,950    
         $
 
 
636,720    
         $
 
 
565,537    
  
Interest on federal funds sold and other short-term investments
   
21,338    
      
19,268    
      
16,035    
  
Interest and dividends on securities:
   
     
     
 
Taxable
   
70,789    
      
56,273    
      
36,715    
  
Tax-exempt
   
3,485    
      
5,454    
      
5,519    
  
                         
Total interest income
   
762,562    
      
717,715    
      
623,806    
  
Interest expense
 
 
 
  
 
   
 
 
Interest on deposits
   
135,649    
      
91,507    
      
49,726    
  
Interest on short-term borrowings
   
2,347    
      
2,245    
      
1,579    
  
Interest on long-term borrowings
   
46,644    
      
35,318    
      
23,504    
  
                         
Total interest expense
   
184,640    
      
129,070    
      
74,809    
  
                         
Net interest income
   
577,922    
      
588,645    
      
548,997    
  
Provision for loan losses
   
21,313    
      
22,013    
  
 
 
 
    
28,406    
  
                         
Net interest income after provision for loan losses
   
556,609    
  
 
    
566,632    
      
520,591    
  
Other income
 
 
 
  
 
   
 
 
Fees from trust services
   
13,873    
      
12,930    
      
11,801    
  
Fees from brokerage services
   
10,136    
      
9,347    
      
7,730    
  
Fees from deposit services
   
33,768    
      
33,973    
      
33,622    
  
Bankcard fees and merchant discounts
   
4,674    
      
5,168    
      
4,795    
  
Other service charges, commissions, and fees
   
2,241    
      
2,228    
      
2,057    
  
Income from bank-owned life insurance
   
7,339    
      
5,045    
      
5,110    
  
Income from mortgage banking activities
   
76,951    
      
58,109    
      
58,907    
  
Net gain on the sale of bank premises
   
0    
      
2,763    
      
0    
  
Net investment securities gains (losses)
   
175    
      
(2,618)    
      
5,584    
  
Other income
   
1,327    
      
1,767    
      
2,039    
  
                         
Total other income
   
150,484    
      
128,712    
      
131,645    
  
Other expense
 
 
 
  
 
   
 
 
Employee compensation
   
173,962    
      
164,468    
      
166,393    
  
Employee benefits
   
35,745    
      
36,172    
      
34,997    
  
Net occupancy expense
   
34,850    
      
36,462    
      
39,067    
  
Other real estate owned (OREO) expense
   
5,336    
      
3,444    
      
6,003    
  
Equipment expense
   
14,210    
      
13,846    
      
10,528    
  
Data processing expense
   
22,232    
      
23,800    
      
21,019    
  
Bankcard processing expense
   
1,877    
      
1,971    
      
1,809    
  
FDIC insurance expense
   
8,070    
      
11,464    
      
7,051    
  
FHLB prepayment penalties
   
5,105    
      
0    
      
0    
  
Other expense
   
81,267    
      
76,552    
      
80,542    
  
                         
Total other expense
   
382,654    
      
368,179    
      
367,409    
  
                         
Income before income taxes
   
324,439    
      
327,165    
      
284,827    
  
Income taxes
   
64,340
      
70,823
      
134,246
  
                         
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
      $
 
 
260,099    
         $
 
 
256,342    
         $
 
 
150,581    
  
                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6
5
 
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
                         
 
Year Ended December 31
 
 
2019
 
  
2018
 
  
2017
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
Basic
 
    $
2.55
    
 
 
    $
2.46
    
 
 
    $
1.54
    
 
                         
Diluted
 
    $
2.55
    
 
 
    $
2.45
    
 
 
    $
1.54
    
 
                         
Dividends per common share
 
    $
1.37
    
 
 
    $
1.36
    
 
 
    $
1.33
    
 
                         
Average outstanding shares:
 
 
 
 
 
 
 
 
 
Basic
 
 
101,585,599
    
 
 
 
104,015,976
    
 
 
 
97,502,633
    
 
Diluted
 
 
101,852,577
    
 
 
 
104,298,825
    
 
 
 
97,890,078
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See notes to consolidated financial statements
 
6
6
 
Table of Contents
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
                         
 
Year Ended December 31
 
 
2019
 
  
2018
   
2017
 
Net income
      $
260,099    
         $
256,342    
         $
150,581    
  
                         
Change in net unrealized gain (loss) on available-for-sale
(AFS) securities, net of tax
   
26,245    
      
(9,015)    
      
4,093    
  
Accretion of the net unrealized loss on the transfer of AFS securities to
held-to-maturity
(HTM) securities, net of tax
    
0    
      
6    
      
5    
  
Change in defined benefit pension plan, net of tax
   
(4,145)    
      
504    
      
(1,406)    
  
                         
Comprehensive income, net of tax
      $
 
    
282,199    
         $ 
 
   
247,837    
         $    
 
153,273    
  
                         
 
 
 
 
 
 
 
6
7
 
Table of Contents
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
  
Common Stock
   
 
  
 
  
Other
 
  
 
  
Total
 
  
 
  
Par
 
  
 
  
Retained
 
  
Comprehensive
 
  
Treasury
 
  
Shareholders’
 
  
Shares
 
  
Value
 
  
Surplus
 
  
Earnings
 
  
Income (Loss)
 
  
Stock
 
  
Equity
 
Balance at January 1
, 2017
 
 
81,068,252
 
 
$
202,671
 
 
$
1,205,778
 
 
$
872,990
 
 
$
(44,717
)
 
$
(975
)
 
$
2,235,747
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
0
 
 
 
0
 
 
 
0
 
 
 
150,581
 
 
 
0
 
 
 
0
 
 
 
150,581
 
Other comprehensive income, net of tax
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
2,692
 
 
 
0
 
 
 
2,692
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
153,273
 
Stock based compensation expense
 
 
0
 
 
 
0
 
 
 
3,555
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
3,555
 
Acquisition of Cardinal Financial Corporation
 
(23,690,589

shares)
 
 
23,690,589
 
 
 
59,226
 
 
 
916,028
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
975,254
 
Purchase of treasury stock (86
shares)
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
(1
)
 
 
(1
)
Distribution of treasury stock for deferred compensation plan (31
shares)
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
1
 
 
 
1
 
Cash dividends ($1.33
per share)
 
 
0
 
 
 
0
 
 
 
0
 
 
 
(131,755
)
 
 
0
 
 
 
0
 
 
 
(131,755
)
Grant of restricted stock (90,075
shares)
 
 
90,075
 
 
 
225
 
 
 
(225
)
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
Forfeiture of restricted stock (840
shares)
 
 
0
 
 
 
0
 
 
 
38
 
 
 
0
 
 
 
0
 
 
 
(38
)
 
 
0
 
Common stock options exercised (220,905
shares)
 
 
220,905
 
 
 
553
 
 
 
3,903
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
4,456
 
       
Balance at December 31
, 2017
 
 
105,069,821
 
 
 
262,675
 
 
 
2,129,077
 
 
 
891,816
 
 
 
(42,025
)
 
 
(1,013
)
 
 
3,240,530
 
Cumulative effect of adopting Accounting Standard Update 2016
-01
 
 
 
 
 
 
 
 
 
 
 
136
 
 
 
(136
)
 
 
 
 
 
0
 
Reclass due to adopting Accounting Standard Update 2018
-02
 
 
 
 
 
 
 
 
 
 
 
6,353
 
 
 
(6,353
)
 
 
 
 
 
0
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
0
 
 
 
0
 
 
 
0
 
 
 
256,342
 
 
 
0
 
 
 
0
 
 
 
256,342
 
Other comprehensive income, net of tax
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
(8,505
)
 
 
0
 
 
 
(8,505
)
Total comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
247,837
 
Stock based compensation expense
 
 
0
 
 
 
0
 
 
 
4,073
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
4,073
 
Purchase of treasury stock (2,880,855
shares)
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
(100,724
)
 
 
(100,724
)
Distribution of treasury stock for deferred compensation plan (31
shares)
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
1
 
 
 
1
 
Cash dividends ($1.36
per share)
 
 
0
 
 
 
0
 
 
 
0
 
 
 
(141,610
)
 
 
0
 
 
 
0
 
 
 
(141,610
)
Grant of restricted stock (97,004
shares)
 
 
97,004
 
 
 
243
 
 
 
(243
)
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
Forfeiture of restricted stock (5,636

shares)
 
 
0
 
 
 
0
 
 
 
218
 
 
 
0
 
 
 
0
 
 
 
(218
)
 
 
0
 
Common stock options exercised (72,296
shares)
 
 
72,296
 
 
 
180
 
 
 
1,337
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
1,517
 
       
Balance at December 31
, 2018
 
 
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
 
 
 
260,099
 
 
 
0
 
 
 
0
 
 
 
260,099
 
Other comprehensive income, net of tax
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
22,100
 
 
 
0
 
 
 
22,100
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
282,199
 
Stock based compensation expense
 
 
0
 
 
 
0
 
 
 
4,914
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
4,914
 
Purchase of treasury stock (1,020,864
shares)
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
(35,673
)
 
 
(35,673
)
Distribution of treasury stock for deferred compensation plan (27
shares)
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
1
 
 
 
1
 
Cash dividends ($1.37
per share)
 
 
0
 
 
 
0
 
 
 
0
 
 
 
(139,508
)
 
 
0
 
 
 
0
 
 
 
(139,508)
 
Grant of restricted stock (126,427
shares)
 
 
126,427
 
 
 
316
 
 
 
(316
)
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
Forfeiture of restricted stock (4,149

shares)
 
 
0
 
 
 
0
 
 
 
162
 
 
 
0
 
 
 
0
 
 
 
(162
)
 
 
0
 
Common stock options exercised (128,742
shares)
 
 
128,742
 
 
 
322
 
 
 
953
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
1,275
 
       
Balance at December 31
, 2019
 
 
105,494,290
 
 
$
263,736
 
 
$
2,140,175
 
 
$
1,132,579
 
 
$
(34,869
)
 
$
(137,788
)
 
$
3,363,833
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See notes to consolidated financial statements
 
6
8
 
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
                         
(In thousands)
 
Year Ended December 31
 
 
2019
 
  
2018
 
  
2017
 
OPERATING ACTIVITIES
   
     
     
 
Net income
  $
260,099
    $
256,342
    $
150,581
 
Adjustments to reconcile net income to net cash provided by operating activities:
   
     
     
 
Provision for loan losses
   
21,313
     
22,013
     
28,406
 
Depreciation, amortization and accretion
   
(20,531
 )    
(21,061
 )    
(21,567
 )
Loss (Gain) on sales of bank premises, OREO, leases and equipment
   
3,912
      
(772
 )    
4,813
 
(Gain) Loss on securities
    
(175
)    
2,618
     
(5,584
 )
Loans originated for sale
   
(2,574,434
 )    
(1,994,707
 )    
(2,373,622
 )
Proceeds from sales of loans
   
2,513,717
     
2,041,508
     
2,455,213
 
Gain on sales of loans
   
(76,951
 )    
(58,109
 )    
(58,907
 )
Stock-based compensation
   
4,914
     
4,073
     
3,555
 
Excess tax benefits from stock-based compensation arrangements
   
223
     
158
     
2,201
 
Deferred income tax expense
   
14,205
     
9,353
     
60,827
 
Increase in cash surrender value of bank-owned life insurance policies
   
(1,458
 )    
(5,045
 )    
(5,110
 )
Contribution to pension plan
   
0
      
(7,000
 )    
(10,000
 )
Amortization of net periodic pension costs
   
3,635
     
2,566
     
3,310
 
Changes in:
   
     
     
 
Loans held for sale
   
0
     
27,417
     
(8,893
 )
Interest receivable
   
2,512
      
(7,782
 )    
(2,024
 )
Other assets
   
(23,449
)    
11,824
     
32,924
 
Accrued expenses and other liabilities
   
20,162
     
9,137
     
(2,195
 )
                         
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
147,694
     
292,533
     
253,928
 
                         
INVESTING ACTIVITIES
   
     
     
 
Proceeds from maturities and calls of held to maturity securities
   
7,000
     
328
     
14,214
 
Purchases of held to maturity securities
   
0
     
0
     
(1,403
 )
Proceeds from sales of securities available for sale
   
374,764
     
171,202
     
247,131
 
Proceeds from maturities and calls of securities available for sale
   
337,793
     
270,754
     
439,181
 
Purchases of securities available for sale
   
(771,290
 )    
(917,907
 )    
(932,474
 )
Proceeds from sales of equity securities
   
2,011
     
2,005
     
0
 
Purchases of equity securities
   
(895
 )    
(657
 )    
0
 
Proceeds from sales and redemptions of other investment securities
   
84,541
     
37,860
     
40,837
 
Purchases of other investment securities
   
(129,747
 )    
(57,154
 )    
(74,090
 )
Redemption of bank-owned life insurance policies
   
2,829
     
0
     
0
 
Purchases of bank premises and equipment
   
(11,083
 )    
(5,776
 )    
(14,357
 )
Proceeds from sales of bank premises and equipment
   
251
     
8,397
     
17
 
Acquisition of subsidiaries, net of cash paid
   
0
     
0
     
44,531
 
Proceeds from sales of OREO properties
   
10,026
     
10,816
     
7,066
 
Net change in loans
   
(285,248
 )    
(391,381
 )    
496,025
 
                         
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
   
(379,048
 )    
(871,513
 )    
266,678
 
                         
FINANCING ACTIVITIES
   
     
     
 
Cash dividends paid
   
(138,939
 )    
(142,350
 )    
(121,354
 )
Acquisition of treasury stock
   
(35,673
 )    
(100,724
 )    
(1
 )
Proceeds from exercise of stock options
   
1,272
     
1,500
     
4,619
 
Distribution of treasury stock for deferred compensation plan
   
1
     
1
     
1
 
Repayment of long-term Federal Home Loan Bank borrowings
   
(1,135,000
 )    
(755,000
 )    
(845,208
 )
Proceeds from issuance of long-term Federal Home Loan Bank borrowings
   
1,475,000
     
950,000
     
815,000
 
Repayment of trust preferred issuance
   
0
      
(9,374
 )    
0
 
Changes in:
   
     
     
 
Time deposits
   
28,408
      
(293,184
 )    
614,821
 
Other deposits
   
(169,945
)    
458,600
     
(928,665
 )
Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings
   
23,327
      
(176,260
 )    
171,821
 
                         
                         
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
   
48,451
      
(66,791
 )    
(288,966
 )
                         
                         
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
   
(182,903
 )    
(645,771
 )    
231,640
 
                         
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
   
1,020,396
     
1,666,167
     
1,434,527
 
                         
                         
CASH AND CASH EQUIVALENTS AT END OF YEAR
  $
837,493
    $
1,020,396
    $
1,666,167
 
                         
 
 
 
 
 
 
 
 
 
 
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CONSOLIDATED STATEMENTS OF CASH FLOWS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
                         
(In thousands)
 
Year Ended December 31
 
 
2019
 
  
2018
 
  
2017
 
Supplemental information
   
     
     
 
Cash paid for interest
  $
 
182,549
    $
 
124,679
    $
 
72,715
 
Cash paid for income taxes
   
56,459
     
55,336
     
73,096
 
Noncash investing activities:
   
     
     
 
Transfers of loans to OREO
   
13,185
     
1,840
     
17,615
 
Transfers of held to maturity debt securities to available for sale debt securities
 
 
11,544
 
 
 
0
 
 
 
0
 
 
 
 
 
 
 
 
 
See notes to consolidated financial statements
 
 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
December 31, 2019
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations:
United Bankshares, Inc. (United, the Company) is a financial holding company headquartered in Charleston, West Virginia. United considers all of West Virginia to be included in its market area. This area includes the five largest West Virginia Metropolitan Statistical Areas (MSA): the Parkersburg MSA, the Charleston MSA, the Huntington MSA, the Morgantown MSA and the Wheeling MSA. United serves the Ohio counties of Lawrence, Belmont, Jefferson and Washington and Fayette county in Pennsylvania primarily because of their close proximity to the Ohio and Pennsylvania borders and United banking offices located in those counties or in nearby West Virginia. United’s Virginia markets include the Maryland, northern Virginia and Washington, D.C. MSA, the Winchester MSA, the Harrisonburg MSA, and the Charlottesville MSA. United considers all of the above locations to be the primary market area for the business of its banking subsidiaries.
Operating Segments:
United operates in two business segments: community banking and mortgage banking. Through its community banking segment, United offers a full range of banking products and services through various delivery channels. Included among the banking products and services offered are the acceptance of deposits in checking, savings, time and money market accounts; the making and servicing of personal, credit card commercial, and floor plan loans; and the making of construction and real estate loans. Also offered are trust and brokerage services, safe deposit boxes, and wire transfers. The mortgage banking segment engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market though George Mason Mortgage, LLC (George Mason), an indirectly owned subsidiary of United.
 
Basis of Presentation:
The consolidated financial statements and the notes to consolidated financial statements include the accounts of United and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
United determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (VIE) under U.S. generally accepted accounting principles. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. United consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, VIEs are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE 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. United’s wholly owned and indirect wholly owned statutory trust subsidiaries are VIEs for which United is not the primary beneficiary. Accordingly, its accounts are not included in United’s consolidated financial statements.
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 and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. To conform to the 2019 presentation, certain reclassifications have been made to prior period amounts, which had no impact on net income, comprehensive income or shareholders’ equity. In the opinion of management, all adjustments necessary for a fair presentation of financial position and results of operations have been made. Such adjustments are of a normal and recurring nature.
The Company has evaluated events and transactions subsequent to December 31, 2019 through the date these financial statements were issued. Based on definitions and requirements of generally accepted accounting principles for “Subsequent Events,” the Company has not identified any events that would require adjustments to, or disclosure in the financial statements.
 
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Cash and Cash Equivalents:
United considers cash and due from banks, interest-bearing deposits with other banks and federal funds sold as cash and cash equivalents.
Securities:
Management determines the appropriate classification of securities at the time of purchase. Debt securities that United has the positive intent and the ability to hold to maturity are carried at amortized cost. Securities to be held for indefinite periods of time are classified as available for sale and carried at estimated fair value. Unrealized gains and losses on securities classified as available for sale are carried as a separate component of Accumulated Other Comprehensive Income (Loss), net of deferred income taxes. Equity investments with readily determinable fair values are measured at fair value with changes in fair value recognized within noninterest income of the Consolidated Statements of Income.
Gains or losses on sales of securities are recognized by the specific identification method and are reported in securities gains and losses within noninterest income of the Consolidated Statements of Income. United reviews
available-for-sale
and
held-to-maturity
securities on a quarterly basis for possible impairment. United determines whether a decline in fair value below the amortized cost basis of a security is other-than-temporary. This determination requires significant judgment. In making this judgment, United’s review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer, recent changes in external credit ratings, and the assessment of collection of the security’s contractual amounts from the issuer or issuers. If United intends to sell, or it is more likely than not that United will be required to sell an impaired debt security before recovery of its amortized cost basis less any current period credit loss, other-than-temporary impairment is recognized in earnings. The credit loss is defined as the difference between the present value of cash flows expected to be collected (discounted at the contractual rate) and the amortized cost basis. The amount recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. If United does not intend to sell, and it is not more likely than not that United will be required to sell the impaired debt security prior to recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into the following: 1) the amount representing the credit loss, which is recognized within noninterest income of the Consolidated Statements of Income, and 2) the amount related to all other factors, which is recognized in other comprehensive income within shareholders’ equity of the Consolidated Balance Sheets.
Certain security investments such as Federal Reserve Bank stock and Federal Home Loan Bank stock that do not have readily determinable fair values and for which United does not exercise significant influence are carried at cost and are classified as other investment securities on the balance sheet. These cost-method investments are reviewed for impairment at least annually or sooner if events or changes in circumstances indicate the carrying value may not be recoverable.
Securities Purchased Under Resale Agreements and Securities Sold Under Agreements to Repurchase:
Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized financing transactions. They are recorded at the amounts at which the securities were acquired or sold plus accrued interest. Securities, generally U.S. government and federal agency securities, pledged as collateral under these financing arrangements cannot be repledged or sold, unless replaced, by the secured party. The fair value of the collateral either received from or provided to a third party is continually monitored and additional collateral is obtained or is requested to be returned to United as deemed appropriate.
Loans:
Loans are reported at the principal amount outstanding, net of unearned income. Interest on loans is accrued and credited to operations using methods that produce a level yield on individual principal amounts outstanding. Loan origination and commitment fees and related direct loan origination costs are deferred and amortized as an adjustment of loan yield over the estimated life of the related loan. Loan fees net of costs accreted and included in interest income were $39,026,000, $44,547,000, and $44,475,000, for the years of 2019, 2018 and 2017, respectively. 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. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and accrued interest, and the loan is in the process of collection.
 
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Loans are designated as impaired when, in the opinion of management, based on current information and events, the collection of principal and interest in accordance with the loan contract is doubtful. Consistent with United’s existing method of income recognition for loans, interest on impaired loans, except those classified as nonaccrual, is recognized as income using the accrual method. United’s method of income recognition for impaired loans that are classified as nonaccrual is to recognize interest income on the cash basis or apply the cash receipt to principal when the ultimate collectibility of principal is in doubt.
A loan is categorized as a trouble debt restructuring (TDR) if a concession is granted to provide for a reduction of either interest or principal due to a deterioration in the financial condition of the borrower. A loan classified as a TDR will generally retain such classification until the loan is paid in full. However, a
one-to-four-family
residential mortgage TDR loan that yields a market rate and demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally one year, is removed from the TDR classification. Interest income on TDRs is accrued at the reduced rate and the loan is returned to performing status once the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally six months. The portfolio of TDR loans is monitored monthly.
Loans Acquired Through Transfer:
Loans acquired through the completion of a transfer, including loans acquired in a business combination, that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that United will be unable to collect all contractually required payment receivable are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received).
Loans Held for Sale:
Loans held for sale consist of
one-to-four
family conforming residential real estate loans originated for sale in the secondary market.
Loans held for sale within the mortgage banking segment are recorded under the fair value option at a fair value measured using valuations from investors for loans with similar characteristics adjusted for the Company’s actual sales experience versus the investor’s indicated pricing.
Loans held for sale within the community banking segment 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.
Gains and losses on sale of loans are recorded within income from mortgage banking activities.
Allowance for Credit Losses:
United maintains an allowance for loan losses and a reserve for lending-related commitments such as unfunded loan commitments and letters of credit. The combined allowance for loan losses and reserve for lending-related commitments are referred to as the allowance for credit losses.
The allowance for loan losses is management’s estimate of the probable credit losses inherent in the loan portfolio. Management’s evaluation of the adequacy of the allowance for loan losses and the appropriate provision for credit losses is based upon a quarterly evaluation of the portfolio. This evaluation is inherently subjective and requires significant estimates, including the amounts and timing of estimated future cash flows, estimated losses on pools of loans 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 amounts allocated to specific credits and loan pools grouped by similar risk characteristics are reviewed on a quarterly basis and adjusted as necessary based upon subsequent changes in circumstances. In determining the components of the allowance for credit losses, management considers the risk arising in part
from, but not limited to, qualitative factors such as
charge-off
and delinquency trends, current economic and business conditions, lending policies and procedures, the size and risk characteristics of the loan portfolio, concentrations of credit, and other various quantitative and qualitative factors. Loans deemed to be uncollectible are charged against the allowance for loan losses, while recoveries of previously
charged-off
amounts are credited to the allowance for loan losses.
 
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In determining the adequacy of the allowance for loan losses, management makes allocations to specific commercial loans classified by management as to risk. Management determines the loan’s risk by considering the borrowers’ ability to repay, the collateral securing the credit and other borrower-specific factors that may impact collectibility. For impaired loans, specific allocations are based on the present value of expected future cash flows using the loan’s effective interest rate, or as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent. Other commercial loans not specifically reviewed on an individual basis are evaluated based on loan pools, which are grouped by similar risk characteristics using management’s internal risk ratings. Allocations for these commercial loan pools are determined based upon historical loss experience adjusted for current environmental conditions and risk factors and the estimate period it takes for losses to result in a
charge-off,
or loss-emergence period.
Allocations for loans, other than commercial loans, are developed by applying historical loss experience adjusted for current environmental conditions and risk factors to loan pools grouped by similar risk characteristics. The environmental factors considered for each of the loan portfolios includes estimated probable inherent but undetected 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. While allocations are made to specific loans and pools of loans, the allowance is available for all loan losses. Management believes that the allowance for credit losses is adequate to provide for probable losses on existing loans and loan-related commitments based on information currently available.
Bank Premises and Equipment:
Bank premises and equipment are stated at cost, less allowances for depreciation and amortization. The provision for depreciation is computed principally by the straight-line method over the estimated useful lives of the respective assets. Useful lives range primarily from three to 15 years for furniture, fixtures and equipment and five to 40 years for buildings and improvements. Leasehold improvements are generally amortized over the lesser of the term of the respective leases or the estimated useful lives of the improvements.
Other Real Estate Owned
: At December 31, 2019 and 2018, other real estate owned (OREO) included in other assets in the Consolidated Balance Sheets was $15,515,000 and $16,865,000, 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 December 31, 2019 and 2018, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process was $890,000 and $520,000, respectively.
Revenue Recognition
: Interest and dividend income, loans fees, fees from trust and brokerage services, deposit services and bankcard fees are recognized and accrued as earned.
Descriptions of our revenue-generating activities that are within the scope of ASC Topic 606, which are presented in our Consolidated Statements of Income as components of Other Income are discussed below. There are no significant judgements relating to the amount and timing of revenue recognition for those revenue streams under the scope of ASC Topic 606.
Fees from Trust Services
Revenue from trust services primarily is comprised of fees earned from the management and administration of trusts and other customer assets. Trust services include custody of assets, investment management, escrow services, and similar fiduciary activities. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the
month-end
market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts.
 
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Fees from Brokerage Services
Revenue from brokerage services are recorded as the income is earned at the time the related service is performed. In return for such services, the Company charges a commission for the sales of various securities products primarily consisting of investment company shares, annuity products, and corporate debt and equity securities, for its selling and administrative efforts. For account supervision, advisory and administrative services, revenue is recognized over a period of time as earned based on customer account balances and activity.
Fees from Deposit Services
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, ATM activity fees, debit card fees, and other deposit account related fees. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (ATM or debit card activity).
Bankcard Fees and Merchant Discounts
Bankcard fees and merchant discounts are primarily comprised of credit card income and merchant services income. Credit card income is primarily comprised of interchange fees earned whenever the Company’s credit cards are processed through card payment networks such as Visa. Merchant services income mainly represents fees charged to merchants to process their credit card transactions. The Company’s performance obligation for bankcard fees and
i
n
ter
change are largely satisfied, and related revenue recognized at the time services are rendered. Payment is typically received immediately or in the following month.
Advertising Costs:
Advertising costs are generally expensed as incurred and included in Other Expense on the Consolidated Statements of Income. Advertising expense was $5,082,000, $4,643,000, and $4,519,000, for the years of 2019, 2018, and 2017, respectively.
Income Taxes:
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to business combinations or components of other comprehensive income). Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. Interest and/or penalties related to income taxes are reported as a component of income tax expense.
For uncertain income tax positions, United records a liability 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.
United files a consolidated income tax return with its subsidiaries. Federal income tax expense or benefit has been allocated to subsidiaries on a separate return basis.
Intangible Assets:
Intangible assets relating to the estimated fair value of the deposit base of the acquired institutions are being amortized on an accelerated basis over a one to seven-year period. Management reviews 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. United incurred amortization expense of $7,016,000, $8,039,000, and $7,772,000 in 2019, 2018, and 2017, respectively, related to all intangible assets.
Goodwill and intangible assets with indefinite lives (such as a trade name intangible) are not amortized, but are tested for impairment at least annually or sooner if indicators of impairment exist. Intangible assets with definite useful lives (such as core deposit intangibles) are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment at least annually or as indicators of impairment are identified. Based on the most recent goodwill impairment test, no impairment was noted. As of December 31, 2019, and 2018, total goodwill approximated $1,478,014,000.
Derivative Financial Instruments:
United accounts for its derivative financial instruments in accordance with the Derivatives and Hedging topic of the FASB Accounting Standards Codification (ASC Topic 815). ASC Topic 815 requires all derivative instruments to be carried at fair value on the balance sheet. United has designated certain derivative instruments 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.
 
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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 other comprehensive income within shareholders’ equity, net of tax. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a cash flow hedge are offset to other comprehensive income, net of tax. The portion of a hedge that is ineffective is recognized immediately in earnings.
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.
United through George Mason enters into interest rate lock commitments to finance residential mortgage loans with its customers. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by United. Interest rate risk arises on these commitments and subsequently closed loans if interest rates change between the time of the interest rate lock and the delivery of the loan to the investor. Market risk on interest rate lock commitments and mortgage loans held for sale is managed using corresponding forward mortgage loan sales contracts. United is a party to these forward mortgage loan sales contracts to sell loans servicing released and short sales of mortgage-backed securities. When the interest rate is locked with the borrower, the rate lock commitment, forward sale agreement, and mortgage-backed security position are undesignated derivatives and marked to fair value through earnings. The fair value of the rate lock derivative includes the servicing premium and the interest spread for the difference between retail and wholesale mortgage rates. Income from mortgage banking activities includes the gain recognized for the period presented and associated elements of fair value.
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 for mandatory delivery loans 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 the 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 a best efforts delivery basis, 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.
For derivatives that are not designated in a hedge relationship, changes in the fair value of the derivatives are recognized in earnings in the same period as the change in the fair value.
Stock-Based Compensation
: Compensation expense related to stock options and restricted stock awards issued to participants is based upon the fair value of the award at the date of grant. The fair value of stock options is estimated at the date of grant using a binomial lattice option pricing model, while the fair value of restricted stock awards is based upon the stock price at the date of grant. Compensation expense is recognized on a straight-line basis over the vesting period for options and the respective period for stock awards.
 
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6
Table of Contents
Stock-based compensation expense was $
4,914
,000 in 2019, $
4,073
,000 in 2018, and $
3,555
,000 in 2017.
Treasury Stock
: United records common stock purchased for treasury at cost. At the date of subsequent reissuance, the treasury stock account is reduced by the cost of such stock using the weighted-average cost method.
 
Trust Assets and Income:
Assets held in a fiduciary or agency capacity for customers are not included in the balance sheets since such items are not assets of the company. Trust income is reported on an accrual basis.
Earnings Per Common Share:
United calculates earnings per common share in accordance with ASC Topic 260, “Earnings Per Share,” which provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the
two-class
method. United has determined that its outstanding
non-vested
restricted stock awards are participating securities.
Under the
two-class
method, basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.
The reconciliation of the numerator and denominator of basic earnings per share with that of diluted earnings per share is presented as follows:
 
                         
 
Year Ended December 31
 
(Dollars in thousands, except per share)
 
2019
 
  
2018
 
  
2017
 
Distributed earnings allocated to common stock
          $
    139,167
        $
     141,336
        $
     131,527
 
Undistributed earnings allocated to common stock
   
120,337
     
114,542
     
18,816
 
                         
Net earnings allocated to common shareholders
      $
     259,504
        $
     255,878
        $
     150,343
 
                         
Average common shares outstanding
   
101,585,599
     
104,015,976
     
97,502,633
 
Dilutive effect of stock compensation
   
266,978
     
282,849
     
387,445
 
                         
Average diluted shares outstanding
   
101,852,577
     
104,298,825
     
97,890,078
 
                         
Earnings per basic common share
          $
     2.55
            $
     2.46
            $
     1.54
 
Earnings per diluted common share
      $
     2.55
        $
     2.45
    $
     1.54
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements
: United determines the fair values of its financial instruments based on the fair value hierarchy established in 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.
ASC Topic 820 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 model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
 
 
 
 
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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.
Recent Accounting Pronouncements
:
In April 2019, the Financial Accounting Standards Board (FASB) issued ASU No.
 2019-04
“Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” The amendments clarify the scope of the credit losses standard and address
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 Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.
 2018-14
“Compensation – Retirement Benefits—Defined Benefits – General (Topic
715-20):
Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans.” This update amends ASC Topic 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other post retirement plans. The ASU’s changes related to disclosures are part of the FASB’s disclosure framework project, which the FASB launched in 2014 to improve effectiveness of disclosures in notes to financial statements. ASU No.
 2018-14
is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2020; early adoption is permitted. ASU No.
 2018-14
is not expected to have a material impact on the Company’s financial condition or results of operations.
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. The adoption did not have a material impact on the Company’s financial condition or results of operations.
In June 2018, the FASB issued Accounting Standards Update (ASU) No.
 2018-07
“Compensation-Stock Compensation (Topic 718):
 
Improvements to Nonemployee Share-Based Payment Accounting.” This update has been issued as part of a simplification initiative which will expand the scope of ASC Topic 718 to include share-based payment transactions for acquiring goods and services from
non-employees
and expands the scope through the amendments to address and improve aspects of the accounting for
non-employee
share-based payment transactions. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU No.
 2018-07
is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2018; early adoption is permitted. ASU No.
 2018-07
was adopted by United on January 1, 2019. The adoption did not have a material impact on the Company’s financial condition or results of operations.
In February 2018, the FASB issued ASU No.
 2018-03,
“Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic
825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU
2018-03
clarifies that entities that use the measurement alternative for equity securities without readily determinable fair values can change its measurement approach to fair value. This election is irrevocable and will apply to all future purchases of identical or similar investments of the same issuer. The amended guidance also clarifies that adjustments made under the measurement alternative should reflect the fair value of the security as of the date that an observable transaction took place rather than the current reporting date. Entities will use the prospective transition approach only for securities they elect to measure using the measurement alternative. ASU No.
 2018-03
is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No.
 2018-03
did not have a material impact on the Company’s financial condition or results of operations.
 
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In February 2018, the FASB issued ASU No.
 2018-02,
“Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” to help organizations address certain stranded income tax effects in accumulated other comprehensive income (AOCI) resulting from the Tax Cuts and Jobs Act (the “Tax Act”). This ASU provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act (or portion thereof) is recorded. The amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. United adopted ASU No.
 2018-02
in the first quarter of 2018 and reclassified $6,353,000 of stranded income tax effected amounts in AOCI to retained earnings.
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 $11,544,000, which resulted in a decrease of $1,098,000 to AOCI.
In July 2017, the FASB issued ASU No.
 2017-11,
“Part I, Accounting for Certain Financial Instruments with Down Round Features and Part II, Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling interests with a Scope Exception.” Part I of this ASU simplifies the accounting for financial instruments that include down round features while the amendments in Part II, which do not have an accounting effect, address the difficulty of navigating the guidance in ASC 480, “Distinguishing Liabilities from Equity”, due to the existence of extensive pending content in the Codification. ASU No.
 2017-11
is effective for interim and annual reporting periods beginning after December 15, 2018. ASU No.
 2017-11
was adopted by United on January 1, 2019. The adoption did not have a material impact on the Company’s financial condition or results of operations.
In May 2017, the FASB issued ASU No.
 2017-09,
“Stock Compensation,
Scope of Modification Accounting.” This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain
non-substantive
changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No.
 2017-09
is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No.
 2017-09
did not have a material impact on the Company’s financial condition or results of operations.
In March 2017, the FASB issued ASU No.
 2017-07,
“Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU No.
 2017-07
amends ASC Topic 715, “Compensation—Retirement Benefits” and will change how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Employers will present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. Employers will present the other components of the net periodic benefit cost separately from the line item that includes the service cost and outside of any subtotal of operating income, if one is presented. These components will not be eligible for capitalization in assets. ASU
 
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No.
 2017-07
was effective for United on January 1, 2018. The adoption of ASU No.
 2017-07
had a slight change in presentation but did not materially impact the Company’s financial condition or results of operations. United elected to use
the practical expedient and used amounts previously disclosed in its Employee Benefits Plan footnote (Note O) to retrospectively adjust prior period amounts of employee compensation and employee benefits within United’s Consolidated Statements of Income.
In January 2017, the FASB issued ASU No.
 2017-04,
“Intangibles – Goodwill and Other (Topic 350).” ASU No.
 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 No.
 2017-04
was effective for United on January 1, 2020, with early adoption permitted. The adoption of ASU No.
 2017-04
did not have a material impact on the Company’s financial condition or results of operations.
In January 2017, the FASB issued ASU No.
 2017-01,
“Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU No.
 2017-01
changes the definition of a business to assist entities with evaluation when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC Topic 606. ASU No.
 2017-01
was effective for United on January 1, 2018 and did not have a material impact on the Company’s financial condition or results of operations.
In August 2016, the FASB issued ASU No.
 2016-15,
“Classification of Certain Cash Receipts and Cash Payments.” ASU No.
 2016-15
amends ASC Topic 230 to add and clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows as a result of diversity in practice and in certain circumstances, financial statement restatements. Entities should apply ASU No.
 2016-15
using a retrospective transition method to each period presented. ASU No.
 2016-15
was effective for United on January 1, 2018 and 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 (Topic 326): Measurement of Credit Losses on Financial Instruments” which changes the impairment model for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaces the prior “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. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In May 2019, the FASB issued Accounting Standards Update (ASU) No.
 2019-05
“Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief” which amends ASU
2016-13
to allow companies to irrevocably elect, upon adoption of ASU
2016-13,
the fair value option on financial instruments that were previously recorded at amortized cost and are within the scope of ASC
326-20
if the instruments are eligible for the fair value option under ASC
825-10.
The fair value option election does not apply to
held-to-maturity
debt securities. Entities are required to make this election on an
instrument-by-instrument
basis. ASU No.
 2019-05
is effective on the same date as ASU No.
 2016-13,
which was January 1, 2020 for United, with early adoption permitted. To this point, United engaged a third-party service provider to assist with the implementation of the new accounting standard. In addition, United selected loss estimation methodologies for its allowance for credit losses, evaluated and addressed data gaps within the model, performed testing on the chosen methodologies and determined a qualitative adjustment methodology that aligns with the requirements of the new standard. United continues its implementation efforts and is in process of determining the exact impact on the Company’s financial condition, results of operations, liquidity and regulatory capital ratios. The extent of the increase will depend on the composition of the loan portfolio, as well as the economic conditions and forecast as of the adoption date. Furthermore, ASU
2016-13
will necessitate that United establish an allowance for expected credit losses for certain debt securities and other financial assets. Progress continues regarding
 model validation,
the documentation of the new standard and internal controls as well as changes to financial statement disclosures.
In March 2016, the FASB issued ASU No.
 2016-09,
“Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU No.
 2016-09
changed certain aspects of accounting for share-based payments to employees. The new guidance, amongst other things, requires all income tax effects of awards to be recognized
 
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in the income statement when the awards vest or are settled. The requirement to report those income tax effects in earnings
 
was applied to settlements occurring on or after January 1, 2017 and the impact of applying that guidance reduced reporting income tax expense by $
1,048,000
for the year of 2017. ASU No.
 2016-09
also allows an employer to repurchase more of an employee’s shares than it could previously for tax withholding purposes without triggering liability accounting and make a policy election to account for forfeitures as they occur. The Company will continue to estimate the number of awards expected to be forfeited and adjust the estimate when it is no longer probable that the employee will fulfill the service condition, as was previously required. ASU No.
 2016-09
also requires that all income
tax-related
cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows. Previously, income tax benefits at settlement of an award were reported as a reduction to operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the award’s vesting period. The adoption of ASU No.
 2016-09
did not have a material impact on the Company’s financial condition or results of operations.
In February 2016, the FASB issued ASU No.
 2016-02,
“Leases (Topic 842)”. ASU No.
 2016-02
includes a lessee accounting model that recognizes two types of leases, finance leases and operating leases, while lessor accounting will remain largely unchanged from the current GAAP. ASU No.
 2016-02
requires, amongst other things, that a lessee recognize on the balance sheet a
right-of-use
asset and a lease liability for leases with terms of more than twelve months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. In July 2018, the FASB issued ASU No.
 2018-11
“Leases (Topic 842), Targeted Improvements.” This update creates an additional transition method, and a lessor practical expedient to not separate lease and
non-lease
components if specified criteria are met. The new transition method allows companies to use the effective date of the new leases standard as the date of initial application transition. Companies that elect this transition option will not adjust their comparative period financial information for the effect of ASC Topic 842, nor will they make the new required lease disclosure for periods before the effective date. In addition, these companies will carry forward their ASC Topic 840 disclosures for comparative periods. The practical expedient permits lessors to make an accounting policy election by class of underlying asset to not separate lease and
non-lease
components if specified criteria are met. In July 2018, the FASB issued ASU No.
 2018-10
“Codification Improvements to ASC Topic 842, Leases.” This update includes narrow amendments to clarify how to apply certain aspects of the new leases standard. The amendments address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments. ASU
2018-10
does not make any substantive changes to the core provisions or principals of the new leases standard. United adopted the standard using the modified retrospective transition method on January 1, 2019. The Company has evaluated and has elected the 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. Adoption of the standard resulted in the recognition of additional net lease assets and lease liabilities of $67,040,000 and $70,692,000, respectively, as of January 1, 2019. Of the difference between these two amounts, $1,049,000 was recorded as an adjustment to retained earnings.
In January 2016, the FASB issued ASU No.
 2016-01,
“Financial Instruments Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU
2016-01
makes changes to the classification and measurement of investments in equity securities, the presentation of certain fair value changes for financial liabilities measured at fair value under the fair value option and disclosure of fair value of instruments. In addition, ASU No.
 2016-01
clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on
available-for-sale
debt securities. ASU No.
 2016-01
was adopted by United on January 1, 2018 and did not have a significant impact on the Company’s financial condition or results of operations.
In May 2014, the FASB issued ASU No.
 2014-09,
“Revenue from Contracts with Customers (Topic 606).” ASU No.
 2014-09
supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition”, and most industry-specific guidance throughout the ASC. The amendments require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new revenue recognition standard sets forth a five-step principle-based approach for determining revenue recognition. For United, revenue is comprised of net interest income and noninterest income. As the standard does not apply to revenue associated with financial instruments, net interest income, gains and losses from securities, income from bank-owned life insurance (BOLI) and income from mortgage banking activities are not impacted by the standard. Based on a review and evaluation of a number of revenue contracts, United’s management determined that ASU No.
 2014-09
impacts certain recurring revenue streams related to noninterest income such as fees from trust and brokerage services. However, based on an assessment of these revenue streams under the standard, management concluded
 
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that ASU No.
 2014-09
does not have a material impact on the Company’s financial condition or results of operations. In
 
addition, in the Company’s evaluation of the nature of its contracts with customers, United has determined that further disaggregation of revenue from contracts with customers into more granular categories beyond those presented in the Consolidated Statements of Income was not necessary. ASU No.
 2014-09
was adopted by United on January 1, 2018 using the modified-retrospective transition method. No cumulative effect adjustment was made to the opening balance of retained earnings because the amount was considered immaterial. The impact of ASU No.
 2014-09
for the year of 2018 was also immaterial to United’s consolidated financial position, results of operations, shareholders’ equity, cash flows and disclosures.
NOTE B—MERGERS AND ACQUISITIONS
On November 17, 2019, United entered into an Agreement and Plan of Merger (the Agreement) with Carolina Financial Corporation (Carolina Financial), a Delaware corporation headquartered in Charleston, South Carolina. In accordance with the Agreement, Carolina Financial will cease to exist and United shall survive and continue to exist as a West Virginia corporation. United may at any time prior to the effective time of the Merger change the method of effecting the combination with Carolina Financial subject to certain conditions contained in the Agreement.
The merger with Carolina Financial represents a significant step towards continuing to grow United’s presence in North and South Carolina. The combined organization will have the potential of creating a contiguous
Mid-Atlantic
and Southeast banking franchise with additional scale and access to a broader base of middle market and small business prospects. The merger will result in a combined company with more than 200 locations in some of the best banking markets in the United States.
The Agreement provides that consummation of the Merger, each outstanding share of common stock of Carolina Financial will be converted into the right to receive 1.13 shares of United common stock, par value $2.50 per share.
Pursuant to the 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 Agreement, shall, at such option holder’s election, (i) vest and convert into an option to acquire United common stock adjusted based on the 1.13
exchange ratio, or (ii) be entitled to receive cash consideration equal to the difference between (a) the option’s exercise price and (b) 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 is outstanding immediately prior to the effective time of the Merger, shall fully vest in accordance with the terms of the Carolina Financial stock plan and at the election of the holder (i) convert into the right to receive shares of United common stock based on the
 1.13 exchange ratio or (ii) convert 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.
At the effective time of the Merger, Crescom Bank, a wholly-owned subsidiary of Carolina Financial, will merge with and into United Bank, a wholly-owned subsidiary of United (the Bank Merger). United Bank will survive the Bank Merger and continue to exist as a Virginia banking corporation.
The acquisition of Carolina Financial will afford United the opportunity to expand its existing footprint in North Carolina and South Carolina. As of December 31, 2019, Carolina Financial
had $4,708,873,000
in total assets, $
3,227,937,000
in gross loans and
 $
3,408,361,000
 
in deposits. Carolina Financial has banking locations in North Carolina and South Carolina. CresCom Bank owns and operates Crescent Mortgage Company, which is based in Atlanta, Georgia.
United recently filed an amended Form S-4 with the Securities and Exchange Commission regarding the proposed merger with Carolina Financial. United expects the merger to close during the second quarter of 2020.
 
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NOTE C—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.
 
 
December 31, 2019
 
(In thousands)
 
Amortized
Cost
 
  
Gross
Unrealized
Gains
 
  
Gross
Unrealized
Losses
 
  
Estimated
Fair Value
 
  
Cumulative
OTTI in
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  
  
                                         
  
December 31, 2018
 
(In thousands)
 
Amortized
Cost
 
  
Gross
Unrealized
Gains
 
  
Gross
Unrealized
Losses
 
  
Estimated
Fair Value
 
  
Cumulative
OTTI in
AOCI
(1)
 
                                         
U.S. Treasury securities and obligations of U.S.
 
Government corporations and agencies
  $
86,285
    $
35
    $
430
    $
85,890
    $
0  
  
State and political subdivisions
   
212,670
     
439
     
4,121
     
208,988
     
0  
  
Residential mortgage-backed securities
   
     
     
     
     
 
Agency
   
1,047,345
     
3,235
     
14,930
     
1,035,650
     
0  
  
Non-agency
   
3,927
     
332
     
0
     
4,259
     
86  
  
Commercial mortgage-backed securities
   
     
     
     
     
 
Agency
   
560,634
     
996
     
7,030
     
554,600
     
0  
  
Asset-backed securities
   
272,459
     
450
     
939
     
271,970
     
0  
  
Trust preferred collateralized debt obligations
   
6,176
     
91
     
350
     
5,917
     
2,586  
  
Single issue trust preferred securities
   
8,754
     
169
     
561
     
8,362
     
0  
  
Other corporate securities
   
162,634
     
118
     
1,349
     
161,403
     
0  
  
                                         
Total
  $
     
2,360,884
    $
5,865
    $
     29,710
    $
   2,337,039
    $
     2,672  
  
                                         
(1) Other-than-temporary impairment in accumulated other comprehensive income. Amounts are
before-tax.
 
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The following is a summary of securities available for sale which were in an unrealized loss position at December 31, 2019 and 2018.
 
Less than 12 months
   
12 months or longer
 
(In thousands)
 
Fair
    Value    
 
  
  Unrealized   
Losses
 
  
Fair
    Value    
 
  
  Unrealized   
Losses
 
December 31, 2019
  
 
 
  
 
 
  
 
 
  
 
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  $
1,415
     $
6
     $
0
     $
0
  
State and political subdivisions
   
144,307
      
3,291
      
885
      
5
  
Residential mortgage-backed securities
   
     
     
     
 
Agency
   
108,072
      
502
      
71,736
      
744
  
Non-agency
   
0
      
0
      
0
      
0
  
Commercial mortgage-backed securities
   
     
     
     
 
Agency
   
173,039
      
2,676
      
45,251
      
131
  
Asset-backed securities
   
135,174
      
3,252
      
140,965
      
4,999
  
Trust preferred collateralized debt obligations
   
2,703
      
842
      
2,000
      
500
  
Single issue trust preferred securities
   
0
      
0
      
13,562
      
1,592
  
Other corporate securities
   
0
      
0
      
0
      
0
  
                                 
Total
  $
     564,710
     $
 10,569
     $
 274,399
     $
 7,971
  
                                 
  
Less than 12 months
   
12 months or longer
 
(In thousands)
 
Fair
    Value    
 
  
  Unrealized    
Losses
 
  
Fair
    Value    
 
  
  Unrealized    
Losses
 
December 31, 2018
  
 
 
  
 
 
  
 
 
  
 
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
  $
66,072
    $
250
     $
7,374
     $
180
  
State and political subdivisions
   
53,421
     
544
      
94,337
      
3,577
  
Residential mortgage-backed securities
   
     
     
     
 
Agency
   
195,009
     
1,597
      
508,041
      
13,333
  
Non-agency
   
0
     
0
      
0
      
0
  
Commercial mortgage-backed securities
   
     
     
     
 
Agency
   
107,443
     
1,124
      
294,129
      
5,906
  
Asset-backed securities
   
151,427
     
939
      
0
      
0
  
Trust preferred collateralized debt obligations
   
0
     
0
      
2,150
      
350
  
Single issue trust preferred securities
   
0
     
0
      
5,163
      
561
  
Other corporate securities
   
129,709
     
1,233
      
6,879
      
116
  
                                 
Total
  $
     703,081
    $
 5,687
     $
918,073
     $
24,023
  
                                 
The following table shows the proceeds from maturities, sales and calls of available for sale securities and the gross realized gains and losses on sales and calls of those securities that have been included in earnings as a result of any sales and calls. Gains or losses on sales and calls of available for sale securities were recognized by the specific identification method. The realized losses relate to sales of securities within a rabbi trust for the payment of benefits under a deferred compensation plan for certain key officers and its subsidiaries.
 
Year Ended
 
(In thousands)
 
    2019    
 
  
    2018    
 
  
    2017    
 
Proceeds from maturities, sales and calls
  $
  712,557
     $
  441,956
     $
  686,312
  
Gross realized gains
   
1,542
      
1,594
      
3,274
  
Gross realized losses
   
1,445
      
2,364
      
1,400
  
 
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4
 
Table of Contents
At December 31, 2019, gross unrealized losses on available for sale securities were $18,540,000 on 166 securities of a total portfolio of 641
available for sale securities. Securities with the most significant gross unrealized losses at December 31, 2019 consisted primarily of asset-backed securities, agency commercial mortgage-backed securities, and state and political subdivision securities. The asset-backed securities are backed by Federal Family Education Loan Program (FFELP) student loan collateral which includes a minimum of
a 97% government
repayment guaranty, as well as additional credit support and subordination in excess of the government guaranteed portion. The agency commercial mortgage-backed securities relate to commercial properties and provide a guaranty of full and timely payments of principal and interest by the issuing agency. The state and political subdivisions securities relate to securities issued by various municipalities.
In determining whether or not a security is other-than-temporarily impaired (OTTI), management considered the severity and the duration of the loss in conjunction with United’s positive intent and the more likely than not ability to hold these securities to recovery of their cost basis or maturity.
State and political subdivisions
United’s state and political subdivisions portfolio relates to securities issued by various municipalities located throughout the United States. The total amortized cost of available for sale state and political subdivision securities was $272,014,000
 
at December 31, 2019. As of December 31, 2019, approximately 66% of
the portfolio was supported by the general obligation of the issuing municipality, which allows for the securities to be repaid by any means available to the municipality. The majority of the portfolio was rated AA or higher, and no securities within the portfolio were rated below investment grade as of December 31, 2019. In addition to monitoring the credit ratings of these securities, management also evaluates the financial performance of the underlying issuers on an ongoing basis. Based upon management’s analysis and judgment, it was determined that none of the state and political subdivision securities were other-than-temporarily impaired at December 31, 2019.
Agency mortgage-backed securities
United’s agency mortgage-backed securities portfolio relates to securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae. The total amortized cost of available for sale agency mortgage-backed securities was $1,436,318,000 at December 31, 2019. Of the $1,436,318,000 amount, $609,461,000 was related to agency commercial mortgage-backed securities and $826,857,000 was related to agency residential mortgage-backed securities. Each of the agency mortgage-backed securities provides a guarantee of full and timely payments of principal and interest by the issuing agency. Based upon management’s analysis and judgment, it was determined that none of the agency mortgage-backed securities were other-than-temporarily impaired at December 31, 2019.
Non-agency
residential mortgage-backed securities
United’s
non-agency
residential mortgage-backed securities portfolio relates to securities of various private label issuers. The total amortized cost of available for sale
non-agency
residential mortgage-backed securities was $3,429,000 at December
 
31, 2019.
All of the securities were rated below investment grade at December 31, 2019. The entire portfolio of the
non-agency
residential mortgage-backed securities is either the senior or super-senior tranches of their respective structure. Based upon management’s analysis and judgment, it was determined that two of the
non-agency
mortgage-backed securities were other-than-temporarily impaired at December 31, 2019. The total amount of OTTI recognized in earnings on these securities during the fourth quarter
and year
of 2019 was $21,000
 
and $42,000, respectively
.
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 December 31, 2019 consisted of $11,484,000 in investment grade bonds, $977,000 in split rated bonds, and $5,735,000 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 fourth quarter of 2019, it was determined that none of the single issue trust preferred securities were other-than-temporarily impaired.
 
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5
 
Table of Contents
Trust preferred collateralized debt obligations (Trup Cdos)
The total amortized cost balance of United’s Trup Cdo portfolio was $6,045,000 as of December 31, 2019. For any securities in an unrealized loss position, the Company first assesses its intentions regarding any sale of securities as well as the likelihood that it would be required to sell prior to recovery of the amortized cost. As of December 31, 2019, the Company has determined that it does not intend to sell any Trup Cdo and that it is not more likely than not that the Company will be required to sell such securities before recovery of their amortized cost.
To determine a net realizable value and assess whether other-than-temporary impairment existed, management performed detailed cash flow analysis to determine whether, in management’s judgment, it was more likely that United would not recover the entire amortized cost basis of the security. Based on this review, management determined that one of the Trup Cdo securities was other-than-temporarily impaired as of December 31, 2019. The total amount of OTTI recognized in earnings on this security during the fourth quarter
and year
of 2019 was $93,000
 
and $156,000, respectively
.
Corporate securities
As of December 31, 2019, United’s Corporate securities portfolio had a total amortized cost balance of $348,405,000. The majority of the portfolio consisted of debt issuances of corporations representing a variety of industries, including financial institutions. Of the $348,405,000, 92% was investment grade rated and 8% was unrated. For corporate securities, management has evaluated the near-term prospects of the investment in relation to the severity and duration of any impairment. Based upon management’s analysis and judgment, it was determined that none of the other corporate securities were other-than-temporarily impaired at December 31, 2019.
Below is a progression of the credit losses on securities which United has recorded other-than-temporary charges. These charges were recorded through earnings and other comprehensive income.
(In thousands)
 
Year Ended
December 31
 
  
2019
 
  
2018
 
  
2017
 
Balance of cumulative credit losses at beginning of period
  $
     3,138
    $
     18,060
    $
     22,162
 
Additional credit losses on securities for which OTTI was previously recognized
   
156
     
0
     
0
 
Reductions for securities sold or paid off during the period
   
(0
)    
(14,922
)    
(4,102
)
                         
Balance of cumulative credit losses at end of period
  $
3,294
    $
3,138
    $
18,060
 
                         
The amortized cost and estimated fair value of securities available for sale at December 31, 2019 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations without penalties.
Maturities of mortgage-backed securities with an amortized cost of $1,439,747,000 and an estimated fair value of $1,455,340,000 at December 31, 2019 are included below based upon contractual maturity.
 
 
  
    Estimated    
 
(In thousands)
 
    Amortized    
 
  
Fair
 
  
Cost
 
  
Value
 
Due in one year or less
  $
     92,422    
     $
92,473    
  
Due after one year through five years
   
583,715    
      
592,850    
  
Due after five years through ten years
   
564,922    
      
568,241    
  
Due after ten years
   
1,185,865    
      
1,183,732    
  
                 
Total
  $
     2,426,924    
     $
   2,437,296    
  
                 
 
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6
 
Table of Contents
Securities Held to Maturity
The amortized cost and estimated fair values of securities held to maturity are summarized as follows:.
 
December 31, 2019
 
(In thousands)
 
Amortized
Cost
 
  
Gross
Unrealized
Gains
 
  
Gross
Unrealized
Losses
 
  
Estimated    
Fair    
Value    
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
      $
   0
        $
   0
        $
0
        $
0    
  
State and political subdivisions
   
1,426
     
1
     
0
     
1,427    
  
Residential mortgage-backed securities
   
     
     
     
 
Agency
   
0
     
0
     
0
     
0    
  
Single issue trust preferred securities
   
0
     
0
     
0
     
0    
  
Other corporate securities
   
20
     
0
     
0
     
20    
  
       
Total
      $
 
   1,446
        $
 
 
   1
        $
 
 
 
 
 
 
 
   0
        $
 
 
 1,447    
  
       
 
December 31, 2018
 
(In thousands)
 
Amortized
Cost
 
  
Gross
Unrealized
Gains
 
  
Gross
Unrealized
Losses
 
  
Estimated    
Fair    
Value    
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
      $
   5,074
        $
   90
        $
   0
        $
   5,164    
  
State and political subdivisions
   
5,473
     
7
     
1
     
5,479    
  
Residential mortgage-backed securities
   
     
     
     
 
Agency
   
20
     
2
     
0
     
22    
  
Single issue trust preferred securities
   
9,412
     
0
     
1,442
     
7,970    
  
Other corporate securities
   
20
     
0
     
0
     
20    
  
                                 
Total
      $
   19,999
        $
   99
        $
   1,443
        $
   18,655    
  
                                 
No gross realized gains and losses on calls and sales of held to maturity securities have been included in earnings for the years ended December 31, 2019, 2018 and 2017.
The amortized cost and estimated fair value of debt securities held to maturity at December 31, 2019 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
  
 
  
    Estimated    
 
(In thousands)
 
    Amortized    
 
  
Fair
 
  
Cost
 
  
Value
 
Due in one year or less
  $
 
210    
     $
 
210    
  
Due after one year through five years
   
216    
      
217    
  
Due after five years through ten years
   
0    
      
0    
  
Due after ten years
   
1,020    
      
1,020    
  
                 
Total
  $
   1,446    
     $
   1,447    
  
                 
Equity securities at fair value
Equity securities consist mainly of equity securities of financial institutions and mutual funds within a rabbi trust for the payment of benefits under a deferred compensation plan for certain key officers of United and its subsidiaries. The fair value of United’s equity securities was $8,894,000 at December 31, 2019 and $9,734,000 at December 31, 2018.
(In thousands)
 
Year Ended
    December 31, 2019    
 
Net gains recognized during the period
  $
 276
  
Net gains recognized during the period on equity securities sold
   
133
  
Unrealized gains recognized during the period on equity securities still held at period end
   
177
 
Unrealized losses recognized during the period on equity securities still held at period end
   
(34
 )
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7
 
Table of Contents
Other
investment securities
During the fourth quarter of 2019, United evaluated all of its cost method investments to determine if certain events or changes in circumstances during the fourth quarter of 2019 had a significant adverse effect on the fair value of any of its cost method securities. United determined that there was no individual security that experienced an adverse event during the
fourth
quarter. There were no other events or changes in circumstances during the
fourth
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 $1,540,717,000 and $1,887,176,000 at December 31, 2019 and December 31, 2018 respectively.
The fair value of
mortgage-backed
securities is affected by changes in interest rates and prepayment speeds. When interest rates decline, prepayment speeds generally accelerate due to homeowners refinancing their mortgages at lower interest rates. This may result in the proceeds being reinvested at lower interest rates. Rising interest rates may decrease the assumed prepayment speed. Slower prepayment speeds may extend the maturity of the security beyond its estimated maturity. Therefore, investors may not be able to invest at current higher market rates due to the extended expected maturity of the security. United had a net unrealized gain of
$15,593,000 
at December 31, 2019 and a net unrealized loss of
$17,395,000 
at December 31, 2018 on all
mortgage-backed
securities.
The following table sets forth the maturities of all securities (based on amortized cost) at December 31, 2019, and the weighted-average yields of such securities (calculated on the basis of the cost and the effective yields weighted for the scheduled maturity of each security).
 
   
After 1 But
   
After 5 But
   
 
(Dollars in thousands)
 
Within 1 Year
   
Within 5 Years
   
Within 10 Years
   
After 10 Years
 
  
Amount
 
  
Yield
 
  
Amount
 
  
Yield
 
  
Amount
 
  
Yield
 
  
Amount
 
  
Yield
 
U.S. Treasury and other U.S. Government agencies and corporations
  $
 0
     
0.00
 %   $
 51,511
     
2.41
 %   $
 6,616
     
2.74
 %   $
 0
     
0.00
 %
States and political subdivisions (1)
   
5,364
     
2.78
 %    
4,964
     
3.36
 %    
38,732
     
2.80
 %    
224,380
     
2.92
 %
Residential mortgage-backed securities
   
     
     
     
     
     
     
     
 
Agency
   
0
     
0.00
 %    
0
     
0.00
 %    
230,686
     
2.60
 %    
596,171
     
2.71
 %
Non-agency
   
69
     
5.00
 %    
0
     
0.00
 %    
0
     
0.00
 %    
3,360
     
5.84
 %
Commercial mortgage-backed
   
     
     
     
     
     
     
     
 
Agency
   
28,178
     
2.32
 %    
281,903
     
2.65
 %    
241,159
     
2.40
 %    
58,221
     
2.73
 %
Asset-backed securities
   
0
     
0.00
 %    
0
     
0.00
 %    
0
     
0.00
 %    
284,390
     
2.56
 %
Trust preferred collateralized debt obligations
   
0
     
0.00
 %    
0
     
0.00
 %    
0
     
0.00
 %    
6,045
     
3.61
 %
Single issue trust preferred securities
   
0
     
0.00
 %    
0
     
0.00
 %    
10,483
     
4.80
 %    
7,713
     
3.68
 %
Other corporate securities
   
59,020
     
2.63
 %    
245,553
     
2.98
 %    
37,246
     
4.58
 %    
6,606
     
1.28
 %
Marketable equity securities
   
0
     
0.00
 %    
0
     
0.00
 %    
0
     
0.00
 %    
8,894
     
1.49
 %
Other investment securities
   
0
     
0.00
 %    
100
     
2.55
 %    
750
     
2.08
 %    
221,311
     
3.32
 %
  (1)
Tax-equivalent
adjustments (using a
21
% federal rate) have been made in calculating yields on obligations of states and political subdivisions.
There are no securities with a single issuer, other than the U.S. government and its agencies and corporations, the book value of which in the aggregate exceeds 10% of United’s total shareholders’ equity.
 
8
8
 
Table of Contents
NOTE D—LOANS
Major classes of loans are as follows:
  
December 31
 
(In thousands)
 
2019
 
  
2018
 
Commercial, financial, and agricultural
   
     
 
Owner-occupied
  $
1,201,652
    $
1,291,790
 
Nonowner-occupied
   
3,965,960
     
4,303,613
 
Other commercial
   
2,285,037
     
1,957,641
 
                 
Total commercial, financial & agricultural
   
7,452,649
     
7,553,044
 
Residential real estate
   
3,686,401
     
3,501,393
 
Construction & land development
   
1,408,205
     
1,410,468
 
Consumer:
   
     
 
Bankcard
   
10,074
     
10,203
 
Other Consumer
   
1,156,219
     
954,424
 
Less: Unearned income
   
(1,419
)    
(7,310
)
                 
Total Loans, net of unearned income
  $
13,712,129
    $
13,422,222
 
                 
The table above does not include loans held for sale of $387,514,000 and $249,846,000 at December 31, 2019 and December 31, 2018, respectively. Loans held for sale consist of single-family residential real estate loans originated for sale in the secondary market.
The outstanding loan balances in the table above include previously acquired impaired loans with a recorded investment of $96,004,000 or
 less than
1% of total gross loans at December 31, 2019 and $149,737,000 or 1.12% of total gross loans at December 31, 2018. The contractual principal in these acquired impaired loans was $124,779,000 and $195,706,000 at December 31, 2019 and December 31, 2018, respectively. The balances above do not include future accretable net interest (i.e. the difference between the undiscounted expected cash flows and the recorded investment in the loan) on the acquired impaired loans. The outstanding loan balances in the table above also include
accretable discounts
of $71,542,000 and $93,372,000 at December 31, 2019 and December 31, 2018, respectively.
Activity for the accretable yield for the year of 2019 follows
:
(In thousands)
 
 
Accretable yield at the beginning of the period
  $
 26,289
 
Accretion (including cash recoveries)
   
(10,688
 )
Additions
   
0
 
Net reclassifications to accretable from
non-accretable
   
10,627
 
Disposals (including maturities, foreclosures, and charge-offs)
   
(5,140
 )
         
Accretable yield at the ending of the period
  $
 21,088
 
         
At December 31, 2019 and 2018,
loans-in-process
of $49,456,000 and $53,997,000 and overdrafts from deposit accounts of $22,219,000 and $13,833,000, respectively, are included within the appropriate loan classifications above.
United’s subsidiary bank has made loans, in the normal course of business, to the directors and officers of United and its subsidiaries, and to their associates. The aggregate dollar amount of these loans was $38,558,000 and $93,282,000 at December 31, 2019 and 2018, respectively. During 2019, $9,358,000 of new loans were made and repayments totaled $64,082,000.
NOTE E—CREDIT QUALITY
Management monitors the credit quality of its loans on an ongoing basis. Measurement of delinquency and past due status are based on the contractual terms of each loan.
 
 
89
 
Table of Contents
For all loan classes, past due loans are reviewed on a monthly basis to identify loans for nonaccrual status. Generally, when collection in full of the principal and interest is jeopardized, the loan is placed on nonaccrual status. The accrual of interest income on commercial and most consumer loans generally is discontinued when a loan becomes 90 to 120 days past due as to principal or interest. However, regardless of delinquency status, if a loan is fully secured and in the process of collection and resolution of collection is expected in the near term (generally less than 90 days), then the loan will not be placed on nonaccrual status. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and unpaid interest accrued in prior years is charged to the allowance for loan losses. United’s method of income recognition for loans that are classified as nonaccrual is to recognize interest income on a cash basis or apply the cash receipt to principal when the ultimate collectibility of principal is in doubt. Nonaccrual loans will not normally be returned to accrual status unless all past due principal and interest has been paid and the borrower has evidenced their ability to meet the contractual provisions of the note.
A loan is categorized as a troubled debt restructuring (TDR) if a concession is granted and there is deterioration in the financial condition of the borrower. TDRs can take the form of a reduction of the stated interest rate, splitting a loan into separate loans with market terms on one loan and concessionary terms on the other loan, receipts of assets from a debtor in partial or full satisfaction of a loan, the extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk, the reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, the reduction of accrued interest or any other concessionary type of renegotiated debt. As of December 31, 2019, United had TDRs of $58,369,000. Of the $
58,369,000
aggregate balance of TDRs at December 31, 2019, $
48,387,000
 
was on nonaccrual and $
902,000
 
w
as
30
-
89
 days past due. As of December 31, 2018, United had TDRs of $
59,425,000
. Of the $59,425,000 aggregate balance of TDRs at December 31, 2018, $
48,899,000
 
was on nonaccrual and $
690,000
 
were 90 days or more past due. All these amounts are included in the appropriate categories in the “Age Analysis of Past Due Loans” table on a subsequent page. As of December 31, 2019, there were commitments to lend
additional funds of $1,159,000 to two
debtors owing receivables whose terms have been modified in TDRs.
During the year of 2019, $39,000 was advanced to one of these debtors under a loan that had been previously modified.
At December 31, 2019, United had restructured loans in the amount of $1,685,000 that were modified by a reduction in the interest rate, $1,733,000 that were modified by a combination of a reduction in the interest rate and the principal and $54,951,000 that were modified by a change in terms.
A loan acquired and accounted for under ASC Topic
310-30
“Loans and Debt Securities Acquired with Deteriorated Credit Quality” is reported as an accruing loan and a performing asset unless it does not perform in accordance with its restructured contractual provisions.
The following table sets forth United’s troubled debt restructurings that have been restructured during the year ended December 31, 2019 and 2018, segregated by class of loans:
 
Troubled Debt Restructurings
 
  
For the Year Ended
 
  
December 31, 2019
   
December 31, 2018
 
(Dollars in thousands)
 
Number of
Contracts
 
  
Pre-
Modification
Outstanding
Recorded
Investment
 
  
Post-
Modification
Outstanding
Recorded
Investment
 
  
Number of
Contracts
 
  
Pre-
Modification
Outstanding
Recorded
Investment
 
  
Post-
Modification
Outstanding
Recorded
Investment
 
Commercial real estate:
   
     
     
     
     
     
 
Owner-occupied
   
2
        $
1,179
        $
1,144
     
0
        $
0
        $
0
 
Nonowner-occupied
   
0
     
0
     
0
     
1
     
61
     
61
 
Other commercial
   
3
     
5,962
     
5,722
     
9
     
16,991
     
16,560
 
Residential real estate
   
3
     
2,258
     
1,970
     
3
     
7,225
     
6,077
 
Construction & land
development
   
3
     
2,287
     
2,104
     
0
     
0
     
0
 
Consumer:
   
     
     
     
     
     
 
Bankcard
   
0
     
0
     
0
     
0
     
0
     
0
 
Other consumer
   
0
     
0
     
0
     
0
     
0
     
0
 
                                                 
Total
   
            11
        $
 11,686
        $
 10,940
     
13
        $
 24,277
        $
 22,698
 
                                                 
During 2019, $241,000 of restructured loans were modified by an interest rate reduction and $10,699,000 of restructured loans were modified by a change in terms. During 2018, $22,698,000 of restructured loans were modified by a change in loan terms. In some instances, the post-modification balance on a restructured loan is larger than the pre-modification balance due to the advancement of monies for items such as delinquent taxes on real estate property. The loans were evaluated individually for allocation within United’s allowance for loan losses. The modifications had an immaterial impact on the financial condition and results of operations for
United
.
 
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The following table presents troubled debt restructurings, by class of loan, that had charge-offs during the year ended December 31, 2019 and 2018. These loans were restructured during the twelve months ended December 31, 2019 and 2018 and subsequently defaulted, resulting in principal charge-offs during the year of 2019 and 2018.
 
Year Ended
December 31, 2019
   
Year Ended
December 31, 2018
 
(In thousands)
 
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
     
1,477
     
1
     
0
 
Residential real estate
   
0
     
0
     
1
     
2,173
 
Construction & land development
   
0
     
0
     
0
     
0
 
Consumer:
   
     
     
     
 
Bankcard
   
0
     
0
     
0
     
0
 
Other consumer
   
0
     
0
     
0
     
0
 
                                 
Total
   
            2
    $
       1,477
     
            2
    $
       2,173
 
                                 
The following table sets forth United’s age analysis of its past due loans, segregated by class of loans:
Age Analysis of Past Due Loans
As of December 31, 2019
 
(In thousands)
 
30-89

  Days Past  
Due
 
  
90 Days or
more
Past Due
 
  
  Total Past  
Due
 
  
Current &
Other (1)
 
  
Total
Financing
 Receivables 
 
  
Recorded
Investment
 >90 Days & 
Accruing
 
Commercial real estate:
   
     
     
     
     
     
 
Owner-occupied
  $
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”.
Age Analysis of Past Due Loans
As of December 31, 2018
 
(In thousands)
 
30-89

  Days Past  
Due
 
  
90 Days or
more
Past Due
 
  
  Total Past  
Due
 
  
Current &
Other (1)
 
  
Total
Financing
 Receivables 
 
  
Recorded
Investment
 >90 Days & 
Accruing
 
Commercial real estate:
   
     
     
     
     
     
 
Owner-occupied
  $
9,224
    $
17,742
    $
26,966
    $
1,264,824
    $
 
 
 
 
 
1,291,790
    $
629
 
Nonowner-occupied
   
16,108
     
18,092
     
34,200
     
4,269,413
     
4,303,613
     
1,171
 
Other commercial
   
13,556
     
46,040
     
59,596
     
1,898,045
     
1,957,641
     
2,850
 
Residential real estate
   
37,111
     
30,278
     
67,389
     
3,434,004
     
3,501,393
     
9,141
 
Construction & land development
   
8,462
     
19,412
     
27,874
     
1,382,594
     
1,410,468
     
680
 
Consumer:
   
     
     
     
     
     
 
Bankcard
   
657
     
177
     
834
     
9,369
     
10,203
     
177
 
Other consumer
   
8,909
     
1,243
     
10,152
     
944,272
     
954,424
     
893
 
                                                 
Total
  $
    94,027
    $
       132,984
    $
       227,011
    $
       13,202,521
    $
 
 
 
 
 
 
13,429,532
    $
       15,541
 
                                                 
  (1) Other includes loans with a recorded investment of $149,737 acquired and accounted for under ASC Topic
310-30
“Loans and Debt Securities Acquired with Deteriorated Credit Quality”.
 
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Table of Contents
The following table sets forth United’s nonaccrual loans, segregated by class of loans:
Loans on Nonaccrual Status
 
(In thousands)
 
December 31,
2019
 
  
December 31,
2018
 
Commercial real estate:
   
     
 
Owner-occupied
  $
10,665
     $
17,113
  
Nonowner-occupied
   
15,658
      
16,921
  
Other commercial
   
50,873
      
43,190
  
Residential real estate
   
18,087
      
21,137
  
Construction & land development
   
16,043
      
18,732
  
Consumer:
   
     
 
Bankcard
   
0
      
0
  
Other consumer
   
270
      
350
  
                 
Total
  $
 111,596
     $
 117,443
  
                 
United assigns credit quality indicators of pass, special mention, substandard and doubtful to its loans. For United’s loans with a corporate credit exposure, United internally assigns a grade based on the creditworthiness of the borrower. For loans with a consumer credit exposure, United internally assigns a grade based upon an individual loan’s delinquency status. United reviews and updates, as necessary, these grades on a quarterly basis.
Special mention loans, with a corporate credit exposure, have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or in the Company’s credit position at some future date. Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a special mention rating. Nonfinancial reasons for rating a credit exposure special mention include management problems, pending litigation, an ineffective loan agreement or other material structural weakness, and any other significant deviation from prudent lending practices. For loans with a consumer credit exposure, loans that are past due
30-89
days are generally considered special mention.
A substandard loan with a corporate credit exposure is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt by the borrower. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. They require more intensive supervision by management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt
 
service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk
mitigants
. For some substandard loans, the likelihood of full collection of interest and principal may be in doubt and thus, placed on
nonaccrual
. For loans with a consumer credit exposure, loans that are
90 days
or more past due or that have been placed on
nonaccrual
are considered substandard.
A loan with corporate credit exposure is classified as doubtful if it has all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. A doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the loan, its classification as loss is deferred.
 
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Table of Contents
Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral, and refinancing. Generally, there are not any loans with a consumer credit exposure that are classified as doubtful. Usually, they are
charged-off
prior to such a classification. Loans classified as doubtful are also considered impaired.
The following tables set forth United’s credit quality indicators information, by class of loans:
                                 
Credit Quality Indicators
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                 
 
Corporate Credit Exposure
 
As of December 31, 2019
 
 
Commercial Real Estate
   
 
  
 
(In thousands)
 
Owner-
    occupied    
    
Nonowner-
    occupied    
    
Other
    Commercial    
    
Construction &
Land
    Development    
  
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
  
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                 
Credit Quality Indicators
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                 
 
Corporate Credit Exposure
 
As of December 31, 2018
 
 
Commercial Real Estate
   
 
  
 
(In thousands)
 
Owner-
    occupied    
    
Nonowner-
    occupied    
    
Other
    Commercial    
    
Construction &
Land
    Development    
  
Grade:
   
     
     
     
 
Pass
  $
  1,201,387
    $
  4,161,149
    $
  1,858,821
    $
  1,330,899
 
Special mention
   
34,487
     
46,442
     
14,424
     
28,629
 
Substandard
   
55,916
     
96,022
     
81,946
     
50,940
 
Doubtful
   
0
     
0
     
2,450
     
0
 
                                 
Total
  $
1,291,790
    $
4,303,613
    $
1,957,641
 
 
   $
1,410,468
 
                                 
 
 
 
 
 
                         
Credit Quality Indicators
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                         
 
Consumer Credit Exposure
 
As of December 31, 2019
 
(In thousands)
 
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
 
                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                         
As of December 31, 2018
 
(In thousands)
 
Residential
Real Estate
 
 
Bankcard
 
 
Other
Consumer
 
Grade:
 
 
 
 
 
 
 
 
 
Pass
 
$
   3,436,584
 
 
$
9,369
 
 
$
 
   944,241
 
Special mention
 
 
19,051
 
 
 
657
 
 
 
8,914
 
Substandard
 
 
45,758
 
 
 
177
 
 
 
1.269
 
Doubtful
 
 
0
 
 
 
0
 
 
 
0
 
                         
Total
 
$
 
 
 
 
 
3,501,393
 
 
$
 
 
 
 
 
 
 
 
 
10,203
 
 
$
 
 
 
 
 
 
954,424
 
                         
 
 
 
 
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Table of Contents
Loans are designated as impaired when, in the opinion of management, based on current information and events, the collection of principal and interest in accordance with the loan contract is doubtful. Typically, United does not consider loans for impairment unless a sustained period of delinquency (i.e.
90-plus
days) is noted or there are subsequent events that impact repayment probability (i.e. negative financial trends, bankruptcy filings, eminent foreclosure proceedings, etc.). Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. Consistent with United’s existing method of income recognition for loans, interest on impaired loans, except those classified as nonaccrual, is recognized as income using the accrual method. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The following table set forth United’s impaired loans information, by class of loans:
                                                 
 
Impaired Loans
 
 
December 31, 2019
 
 
December 31, 2018
 
(In thousands)
 
Recorded
Investment
 
 
Unpaid
Principal
Balance
 
 
Related
Allowance
 
 
Recorded
Investment
 
 
Unpaid
Principal
Balance
 
 
Related
Allowance
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied
 
$
  58,709
 
 
$
  58,709
 
 
$
0
 
 
$
63,633
 
 
$
63,798
 
 
$
0
 
Nonowner-occupied
 
 
38,011
 
 
 
38,070
 
 
 
0
 
 
 
98,845
 
 
 
98,904
 
 
 
0
 
Other commercial
 
 
56,717
 
 
 
62,796
 
 
 
0
 
 
 
40,291
 
 
 
50,459
 
 
 
0
 
Residential real estate
 
 
28,096
 
 
 
29,022
 
 
 
0
 
 
 
28,207
 
 
 
29,279
 
 
 
0
 
Construction & land development
 
 
39,599
 
 
 
47,594
 
 
 
0
 
 
 
37,174
 
 
 
40,459
 
 
 
0
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bankcard
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
Other consumer
 
 
11
 
 
 
11
 
 
 
0
 
 
 
27
 
 
 
27
 
 
 
0
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied
 
$
  3,904
 
 
$
  5,223
 
 
$
974
 
 
$
10,004
 
 
$
10,004
 
 
$
2,542
 
Nonowner-occupied
 
 
15,947
 
 
 
15,947
 
 
 
2,979
 
 
 
15,720
 
 
 
15,720
 
 
 
2,715
 
Other commercial
 
 
40,300
 
 
 
42,684
 
 
 
11,931
 
 
 
61,266
 
 
 
62,812
 
 
 
17,581
 
Residential real estate
 
 
6,793
 
 
 
6,793
 
 
 
354
 
 
 
19,623
 
 
 
22,064
 
 
 
3,265
 
Construction & land development
 
 
1,269
 
 
 
1,269
 
 
 
262
 
 
 
14,742
 
 
 
19,446
 
 
 
2,254
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bankcard
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
   
 
 
 
0
 
 
 
0
 
Other consumer
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
   
 
 
 
0
 
 
 
0
 
Total:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied
 
$
  62,613
 
 
$
  63,932
 
 
$
  974
 
 
$
73,637
 
 
$
73,802
 
 
$
2,542
 
Nonowner-occupied
 
 
53,958
 
 
 
54,017
 
 
 
2,979
 
 
 
114,565
 
 
 
114,624
 
 
 
2,715
 
Other commercial
 
 
97,017
 
 
 
105,480
 
 
 
11,931
 
 
 
101,557
 
 
 
113,271
 
 
 
17,581
 
Residential real estate
 
 
34,889
 
 
 
35,815
 
 
 
354
 
 
 
47,830
 
 
 
51,343
 
 
 
3,265
 
Construction & land development
 
 
40,868
 
 
 
48,863
 
 
 
262
 
 
 
51,916
 
 
 
59,905
 
 
 
2,254
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bankcard
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
 
 
0
 
Other consumer
 
 
11
 
 
 
11
 
 
 
0
 
 
 
27
 
 
 
27
 
 
 
0
 
 
 
 
 
94
Table of Contents
                                 
 
Impaired Loans
 
 
For the Year Ended
 
 
December 31, 2019
   
December 31, 2018
 
(In thousands)
 
Average
Recorded
Investment
 
  
Interest
Income
Recognized
 
  
Average
Recorded
Investment
 
  
Interest
Income
Recognized
 
With no related allowance recorded:
 
 
 
  
 
 
  
 
 
  
 
 
Commercial real estate:
   
     
     
     
 
Owner-occupied
  $
  66,838
     $
  1,568
     $
67,665
     $
  1,548
  
Nonowner-occupied
   
54,948
      
1,064
      
103,611
      
1,516
  
Other commercial
   
55,473
      
1,008
      
51,416
      
718
  
Residential real estate
   
31,166
      
630
      
27,459
      
657
  
Construction & land development
   
35,702
      
799
      
41,892
      
914
  
Consumer:
   
     
     
     
 
Bankcard
   
0
      
0
      
0
      
0
  
Other consumer
   
25
      
0
      
28
      
0
  
With an allowance recorded:
 
 
 
  
 
 
  
 
 
  
 
 
Commercial real estate:
   
     
     
     
 
Owner-occupied
  $
3,848
     $
0
     $
7,658
     $
25
  
Nonowner-occupied
   
13,471
      
404
      
12,298
      
387
  
Other commercial
   
41,112
      
182
      
51,118
      
1,072
  
Residential real estate
   
10,444
      
267
      
15,365
      
460
  
Construction & land development
   
11,243
      
79
      
8,893
      
79
  
Consumer:
   
     
     
     
 
Bankcard
   
0
      
0
      
0
      
0
  
Other consumer
   
0
      
0
      
0
      
0
  
Total:
   
     
     
     
 
Commercial real estate:
   
     
     
     
 
Owner-occupied
  $
  70,686
     $
  1,568
     $
75,323
     $
  1,573
  
Nonowner-occupied
   
68,419
      
1,468
      
115,909
      
1,903
  
Other commercial
   
96,585
      
1,190
      
102,534
      
1,790
  
Residential real estate
   
41,610
      
897
      
42,824
      
1,117
  
Construction & land development
   
46,945
      
878
      
50,785
      
993
  
Consumer:
   
     
     
     
 
Bankcard
   
0
      
0
      
0
      
0
  
Other consumer
   
25
      
0
      
28
      
0
  
 
NOTE F—ALLOWANCE FOR CREDIT
LOSSES
The allowance for loan losses is management’s estimate of the probable credit losses inherent in the loan portfolio. For purposes of determining the general allowance, the loan portfolio is segregated by product type to recognize differing risk profiles among categories. It is further segregated by credit grade for
non-homogenous
loan pools and delinquency for homogeneous loan pools. The outstanding principal balance within each pool is multiplied by historical loss data, the loss emergence period (which is the period of time between the event that triggers a loss and the confirmation and/or charge off of that loss) and certain qualitative factors including, among others, current economic conditions, concentration risk, underwriting changes and other risk factors that have not been fully addressed in risk ratings or historical loss data to derive the general loss allocation per pool. Specific loss allocations are calculated for commercial loans in excess
of $500,000 in accordance with ASC Topic 310. Risk characteristics of owner-occupied commercial real estate loans and other commercial loans are similar in that they are normally dependent upon the borrower’s internal cash flow from operations to service debt. Nonowner-occupied commercial real estate loans differ in that cash flow to service debt is normally dependent on external income from third parties for use of the real estate such as rents, leases and room rates. Residential real estate loans are dependent upon individual borrowers who are affected by changes in general economic conditions, demand for housing and resulting residential real estate valuation. Construction and land development loans are impacted mainly by demand whether for new residential housing or for retail, industrial, office and other types of commercial construction within a given area. Consumer loan pool risk characteristics are influenced by general, regional and local economic conditions.
Loans deemed to be uncollectible are charged against the allowance for loan losses, while recoveries of previously
charged-off
amounts are credited to the allowance for loan losses. For commercial loans, when a loan or a portion of a loan is identified to contain a loss, a
charge-off
recommendation is directed to management to
charge-off
all or a portion of that
 
95
Table of Contents
loan. Generally, any unsecured commercial loan more than six months delinquent in payment of interest must be
charged-off
in full. If secured, the
charge-off
is generally made to reduce the loan balance to a level equal to the liquidation value of the collateral when payment of principal and interest is six months delinquent. Any commercial loan, secured or unsecured, on which a principal or interest payment has not been made within 90 days, is reviewed monthly for appropriate action.
For consumer loans,
closed-end
retail loans that are past due 120 cumulative days delinquent from the contractual due date and
open-end
loans 180 cumulative days delinquent from the contractual due date are
charged-off.
Any consumer loan on which a principal or interest payment has not been made within 90 days is reviewed monthly for appropriate action. For a
one-to-four
family
open-end
or
closed-end
residential real estate loan, home equity loan, or
high-loan-to-value
loan that has reached 180 or more days past due, management evaluates the collateral position and
charges-off
any amount that exceeds the value of the collateral. On retail credits for which the borrower is in bankruptcy, all amounts deemed unrecoverable are charged off within 60 days of the receipt of the notification. On retail credits effected by fraud, a loan is
charged-off
within 90 days of the discovery of the fraud. In the event of the borrower’s death and if repayment within the required timeframe is uncertain, the loan is generally
charged-off
as soon as the amount of the loss is determined.
For loans acquired through the completion of a transfer, including loans acquired in a business combination, that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that United will be unable to collect all contractually required payment receivable are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). The amount of provision for loan losses related to loans acquired that have evidence of deterioration of credit quality resulted in provision for loan losses
expense
 
of
$
1,984,000
and
 $
4,218,000
for the years of 2019 and 2018, respectively, and a reversal of provision for loan losses expense
of $
1,106,000
for the year of
2017
.
 
A progression of the allowance for loan losses, by portfolio segment, for the year ended December 31, 2019 and 2018 is summarized as follows:
                                                                 
Allowance for Loan Losses and Carrying Amount of Loans
For the Year Ended December 31, 2019
 
(In thousands)
 
Commercial Real
Estate
   
Other
Commercial
 
  
Residential
Real
Estate
 
  
Construction 
& Land
Development
 
  
Consumer
 
  
Allowance
for
Estimated
Imprecision
 
  
Total
 
Owner-
occupied
 
  
Nonowner-
occupied
 
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
  
 
 
 
 
 
 
 
 
 
 
96
Table of Contents
                                                                 
Allowance for Loan Losses and Carrying Amount of Loans
For the Year Ended December 31, 2019
 
(In thousands)
 
Commercial Real
Estate
 
 
Other
Commercial
 
 
Residential
Real
Estate
 
 
Construction 
& Land
Development
 
 
Consumer
 
 
Allowance
for
Estimated
Imprecision
 
 
Total
 
Owner-
occupied
 
 
Nonowner-
occupied
 
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
 
 
 
                                                                 
Allowance for Loan Losses and Carrying Amount of Loans
For the Year Ended December 31, 2018
 
(In thousands)
 
Commercial Real
Estate
   
Other
Commercial
 
  
Residential
Real
Estate
 
  
Construction
& Land
Development
 
  
Consumer
 
  
Allowance
for
Estimated
Imprecision
 
  
Total
 
Owner-
occupied
 
  
Nonowner-
occupied
 
Allowance for Loan 
Losses:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Beginning balance
  $
5,401  
     $
6,369  
     $
45,189  
     $
9,927  
     $
7,187  
     $
2,481  
     $
73  
     $
76,627  
  
Charge-offs
   
(3,225)  
      
(314)  
      
(16,424)  
      
(3,162)  
      
(2,731)  
      
(2,750)  
      
0  
      
(28,606)  
  
Recoveries
   
1,189  
      
563  
      
2,944  
      
1,114  
      
197  
      
662  
      
0  
      
6,669  
  
Provision
   
1,698  
      
301  
      
9,632  
      
4,569  
      
3,339  
      
2,302  
      
172  
      
22,013  
  
                                                                 
Ending balance
  $
5,063  
     $
6,919  
     $
41,341  
     $
12,448  
     $
7,992  
     $
2,695  
     $
245  
     $
76,703  
  
                                                                 
Ending Balance:
individually
evaluated
 
for
impairment
  $
2,543
    $
2,715
    $
17,581
    $
3,265
    $
2,254
    $
0
    $
0
    $
28,358
 
Ending Balance:
collectively
evaluated
 
for
impairment
  $
2,520
    $
4,204
    $
23,760
    $
9,183
    $
5,738
    $
2,695
    $
245
    $
48,345
 
Ending Balance: loans
acquired with
deteriorated credit
quality
  $
0
     $
0
     $
0
     $
0
     $
0
     $
0
     $
0
     $
0
  
Financing receivables:
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Ending balance
  $
1,291,790
     $
4,303,613
     $
1,957,641
     $
3,501,393
     $
1,410,468
     $
964,627
     $
0
     $
13,429,532
 
Ending Balance:
individually
evaluated
 
for
impairment
  $
27,599
     $
25,231
     $
72,300
     $
21,998
     $
14,807
     $
0
     $
0
     $
161,935
 
Ending Balance:
collectively
evaluated
 
for
impairment
  $
1,234,919
     $
4,215,060
     $
1,860,085
     $
3,468,356
     $
1,374,840
     $
964,600
     $
0
     $
13,117,860
 
Ending Balance: loans
acquired with
deteriorated credit
quality
  $
29,272
     $
63,322
     $
25,256
     $
11,039
     $
20,821
     $
27
     $
0
     $
149,737
 
 
United maintains an allowance for loan losses and a reserve for lending-related commitments such as unfunded loan commitments and letters of credit. The reserve for lending-related commitments of $1,733,000 and $1,389,000 at December 31, 2019 and December 31, 2018, respectively, is separately classified on the balance sheet and is included in other liabilities. The combined allowance for loan losses and reserve for lending-related commitments are referred to as the allowance for credit
losses
.
 
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Table of Contents
A progression of the allowance for credit losses, which includes the allowance for loan losses and the reserve for lending-related commitments, for the periods presented is summarized as follows:
                         
 
Year Ended December 31
 
(In thousands)
  
2019
 
  
2018
 
  
2017
 
Balance of allowance for loan losses at beginning of period
  $
 
 
76,703
     $
76,627
    $
72,771
 
Provision for loan losses
   
21,313
      
22,013
     
28,406
 
                         
   
98,016
      
98,640
     
101,177
 
                         
Loans charged off
   
(29,110)
      
(28,606)
      
(32,863)
  
R
ecoveries
   
8,151
      
6,669
      
8,313
  
                         
Net charge-offs
   
(20,959)
      
(21,937)
      
(24,550)
  
                         
Balance of allowance for loan losses at end of period
  $
77,057
     $
76,703
     $
76,627
  
Reserve for lending-related commitments
   
1,733
      
1,389
     
679
 
                         
Balance of allowance for credit losses at end of period
  $
78,790
     $
78,092
    $
77,306
 
                         
 
 
 
 
NOTE G—BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
 
December 31
 
(In thousands)
  
2019
 
  
2018
 
 
 
 
 
 
 
 
 
 
Land
  $
32,085
    $
31,679
 
Buildings and improvements
   
105,759
     
103,014
 
Leasehold improvements
   
40,789
     
41,001
 
Furniture, fixtures and equipment
   
71,377
     
72,045
 
                 
    
250,010
     
247,739
 
Less allowance for depreciation and amortization
   
(153,366
)     
(152,494
) 
                 
Net bank premises and equipment
  $
96,644
    $
95,245
 
                 
Depreciation expense was $
9,329,000
, $
10,254,000
, and $
8,914,000
for years ending December 31, 2019, 2018 and 2017, respectively, while amortization expense was $
141,000
, $
102,000
and $
122,000
for the years ended December 31, 2019, 2018 and 2017, respectively.
NOTE H—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 13 years, some of which include options to extend leases generally for periods of 5 years. United rents or subleases certain real estate to third parties. Our sublease portfolio consists of operating leases to other organizations for former branch offices.
ROU assets represent United’s right to use an underlying asset for the lease term and lease liabilities represent United’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of United’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend the lease when it is reasonably certain that United will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
 
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Table of Contents
The components of lease expense were as follows:
 
 
Year Ended
 
(In thousands)
 
Classification
 
December 31,
2019
 
Operating lease cost
 
Net occupancy expense
 
$
19,508
 
Sublease income
 
Net occupancy expense
 
 
(825)
 
 
 
 
 
 
 
 
Net lease cost
 
 
$
18,683
 
 
 
 
 
 
 
 
Supplemental balance sheet information related to leases was as follows:
(In thousands)
 
Classification
 
December 31, 2019
 
Operating lease
right-of-use
assets
 
Operating lease
right-of-use
assets
 
$
57,783
 
Operating lease liabilities
 
Operating lease liabilities
 
$
61,342
 
Other information related to leases was as follows:
 
December 31, 2019
 
Weighted-average remaining lease term:
 
 
 
Operating leases
 
 
4.91 years
 
Weighted-average discount rate:
 
 
 
Operating leases
 
 
3.20
%
 
Supplemental cash flow information related to leases was as follows:
 
Year Ended
 
(In thousands)
 
December 31, 2019
 
Cash paid for amounts in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
 
$
19,601
 
ROU assets obtained in the exchange for lease liabilities
 
 
7,630
 
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:
Year
 
Amount
 
(In thousands)
 
 
 
2020
  $
17,725
  
2021
   
15,180
  
2022
   
11,522
  
2023
   
8,751
  
2024
   
5,127
  
Thereafter
   
8,190
  
Total lease payments
 
 
66,495
 
Less: imputed interest
 
 
(5,153
)
         
Total
  $
61,342
  
         
 
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Table of Contents
NOTE
I
—GOODWILL AND OTHER INTANGIBLES
The following is a summary of intangible assets subject to amortization and those not subject to amortization:
 
December 31, 2019
 
  
Community Banking
   
Mortgage Banking
   
Total
 
(In thousands)
  
    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
     
 
                                                 
 
  
December 31, 2018
 
  
Community Banking
   
Mortgage Banking
   
Total
 
(In thousands)
  
    Gross Carrying    
Amount
 
  
    Accumulated    
Amortization
 
  
    Gross Carrying    
Amount
 
  
    Accumulated    
Amortization
 
  
Gross Carrying
Amount
 
  
Accumulated
Amortization
 
Amortized intangible assets:
   
     
     
     
     
     
 
Core deposit intangible assets
  $
98,359
    $
(62,492
 )   $
0
    $
0
    $
98,359
    $
(62,492
 )
                                                 
Non-amortized
intangible
assets:
    
     
     
     
     
     
 
George Mason trade name
  $
0
     
    $
1,080
     
    $
1,080
     
 
                                                 
Goodwill not subject to amortization
  $
1,472,699
     
    $
5,315
     
    $
1,478,014
     
 
                                                 
There was no change to goodwill for the year ended December 31, 2019. 
 
The following table sets forth the anticipated amortization expense for intangible assets for the years subsequent to 2019:
Year
 
Amount
 
(In thousands)
  
 
 
2020
  $
6,309
 
2021
   
5,369
 
2022
   
4,582
 
2023
   
4,322
 
2024 and thereafter
   
8,269
 
 
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Table of Contents
NOTE
J
—DEPOSITS
The book value of deposits consisted of the following:
(In thousands)
  
December 31
 
  
    2019    
 
  
    2018    
 
Demand deposits
  $
3,381,866
    $
3,212,878
 
Interest-bearing checking
   
372,175
     
374,495
 
Regular savings
   
882,889
     
954,961
 
Money market accounts
   
6,891,696
     
7,157,028
 
Time deposits under $100,000
   
723,941
     
712,313
 
Time deposits over $100,000
   
1,599,854
     
1,583,074
 
                 
                 
Total deposits
  $
13,852,421
    $
13,994,749
 
                 
Included in time deposits over $
100
,000 at December 31, 2019 and 2018 were time deposits of $
250
,000 or more of $803,414,000 and $979,707,000, respectively. Interest paid on deposits approximated $136,360,000, $87,219,000, and $48,887,000 in 2019, 2018 and 2017, respectively.
 
 
United’s subsidiary banks have received deposits, in the normal course of business, from the directors and officers of United and its subsidiaries, and their associates. Such related party deposits were accepted on substantially the same terms, including interest rates and maturities, as those prevailing at the time for comparable transactions with unrelated persons. The aggregate dollar amount of these deposits
was $15,350,000 and $24,102,000
at December 31, 2019 and 2018, respectively.
NOTE
K—SHORT-TERM BORROWINGS
At December 31, 2019 and 2018, short-term borrowings and the related weighted-average interest rates were as follows:
 
2019
   
2018
 
  
 
  
Weighted-
 
  
 
  
Weighted-
 
(Dollars in thousands)
  
 
  
Average
 
  
 
  
Average
 
  
  Amount  
 
  
Rate
 
  
  Amount  
 
  
Rate
 
Federal funds purchased
  $
0
     
0.00
 %   $
23,400
     
2.40
 %
Securities sold under agreements to repurchase
   
124,654
     
1.09 
 %    
152,927
(1)
 		    
0.96
 %
(1)
                                 
Total
    $
124,654
     
      $
176,627
     
 
                                 
 
(1)
Excludes a wholesale security sold under an agreement to repurchase of $50,000 assumed in the Virginia Commerce merger that matured in May of 2018.
Federal funds purchased and securities sold under agreements to repurchase have been 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 $230,000,000. 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.
The following table shows the distribution of United’s federal funds purchased and securities sold under agreements to repurchase and the weighted-average interest rates thereon at the end of each of the last three years. Also provided are the maximum amount of borrowings and the average amounts of borrowings as well as weighted-average interest rates for the last three years. The table does not include the long-term wholesale security sold under an agreement to repurchase mentioned above assumed in the Virginia Commerce merger.
(Dollars in thousands)
 
Federal
Funds
    Purchased    
 
 
Securities Sold
Under Agreements
    To Repurchase    
 
At December 31:
 
 
 
 
 
 
2019
 
    $
0
 
 
    $
124,654
 
2018
 
 
23,400
 
 
 
152,927
 
2017
 
 
16,235
 
 
 
261,352
 
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(Dollars in thousands)
  
Federal
Funds
    Purchased    
 
  
  Securities Sold  
Under
Agreements
  To Repurchase  
 
Weighted-average interest rate at
year-end:
   
     
 
2019
   
0.00
 %    
1.09
 %
2018
   
2.40
 %    
0.96
 %
2017
   
1.40
 %    
0.36
 %
Maximum amount outstanding at any month’s end:
   
     
 
2019
  $
0
    $
161,175
 
2018
      
25,790
        
328,484
 
2017
   
25,800
     
377,687
 
Average amount outstanding during the year:
   
     
 
2019
  $
 
 
 
  1,899
    $
 
 
 
  131,187
 
2018
      
16,773
        
   194,956
 
2017
   
18,433
     
287,663
 
Weighted-average interest rate during the year:
   
     
 
2019
   
2.52
 %    
1.33
 %
2018
   
1.86
 %    
0.61
 %
2017
   
0.88
 %    
0.33
 %
 
At December 31, 2019, all the repurchase agreements were in overnight accounts. The rates offered on these funds vary according to movements in the federal funds and
short-term
investment market rates.
United has a $20,000,000 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 is renewable on a 360 day basis and carries an indexed, floating-rate of interest. The line requires compliance with various financial and nonfinancial covenants. At December 31, 2019, United had
no
outstanding balance under this credit.
Interest paid on short-term borrowings approximated $2,359,000, $2,238,000, and
 $
1,574,000 in 2019, 2018 and 2017, respectively.
NOTE L—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 December 31, 2019, the total carrying value of loans pledged as collateral for FHLB advances approximated $4,317,748,000. United had an unused borrowing amount as of December 31, 2019 of approximately $3,666,479,000 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 December 31, 2019 and 2018, FHLB advances and the related weighted-average interest rates were as follows:
                                                 
 
2019
   
2018
 
 
 
  
Weighted-
 
  
Weighted-
 
  
 
  
Weighted-
 
  
Weighted-
 
(Dollars in thousands)
 
 
  
Average
 
  
Average
 
  
 
  
Average
 
  
Average
 
 
 
  
Contractual
 
  
Effective
 
  
 
  
Contractual
 
  
Effective
 
 
    Amount    
 
  
Rate
 
  
Rate
 
  
    Amount    
 
  
Rate
 
  
Rate
 
FHLB advances
  $
   1,851,865
     
2.03
 %    
2.03
 %   $
1,439,198
     
2.42
 %    
2.42
 %
 
 
 
 
Overnight funds of $250,000,000 were included in the $1,851,865,000 above at December 31, 2019. Overnight funds of $175,000,000 were included in the $1,439,198,000 above at December 31, 2018. The weighted-average effective rate
 
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Table of Contents
considers the effect of any interest rate swaps designated as fair value hedges outstanding at
year-end
2019 and 2018 to manage interest rate risk on its long-term debt. Additional information is provided in Note
R
, Notes to Consolidated Financial Statements.
At December 31, 2019, United had a total of
fourteen
statutory business trusts that were formed for the purpose of issuing or participating in pools of trust preferred capital securities (Capital Securities) with the proceeds invested in junior subordinated debt securities (Debentures) of United. The Debentures, which are subordinate and junior in right of payment to all present and future senior indebtedness and certain other financial obligations of United, are the sole assets of the trusts and United’s payment under the Debentures is the sole source of revenue for the trusts. At December 31, 2019 and 2018, the outstanding balance of the Debentures was $236,164,000 and $234,905,000, respectively, and was included in the category of long-term debt on the Consolidated Balance Sheets entitled “Other long-term borrowings.” The Capital Securities are not included as a component of shareholders’ equity in the Consolidated Balance Sheets. United fully and unconditionally guarantees each individual trust’s obligations under the Capital Securities.
Under the provisions of the subordinated debt, United has the right to defer payment of interest on the subordinated debt at any time, or from time to time, for periods not exceeding
five years
. If interest payments on the subordinated debt are deferred, the dividends on the Capital Securities are also deferred. Interest on the subordinated debt is cumulative.
For reporting periods prior to June 30, 2017, the Trust Preferred Securities qualified as Tier 1 regulatory capital under the “Basel III Capital Rules” as published by United’s primary federal regulator, the Federal Reserve, in July of 2013. The “Basel III Capital Rules” established a new comprehensive capital framework for U.S. banking organizations. Because United was less than $15 billion in total consolidated assets, the Basel III Capital Rules grandfathered United’s Trust Preferred Securities as Tier 1 capital under the limitations for restricted capital elements in the general risk-based capital rules. As a result, beginning in 2015 (the adoption date), United’s Trust Preferred Securities was subject to a limit of 25 percent of Tier 1 capital elements excluding any
non-qualifying
capital instruments and after all regulatory capital deductions and adjustments applied to Tier 1 capital, which is substantially similar to the limit in the general risk-based capital rules. Trust preferred securities no longer included in United’s Tier 1 capital could be included as a component of Tier 2 capital on a permanent basis without
phase-out.
Information related to United’s statutory trusts is presented in the table below:
                                 
(Dollars in thousands)
 
Description
 
  
Issuance Date
 
  
Amount of
Capital
Securities
Issued
 
  
Interest Rate
 
  
Maturity Date
 
United Statutory Trust III
   
December 17, 2003
      
$20,000
     
3-month LIBOR + 2.85%
      
December 17, 2033
 
United Statutory Trust IV
   
December 19, 2003
      
$25,000
     
3-month LIBOR + 2.85%
      
January 23, 2034
 
United Statutory Trust V
   
July 12, 2007
      
$50,000
     
3-month LIBOR + 1.55%
      
October 1, 2037
 
United Statutory Trust VI
   
September 20, 2007
      
$30,000
     
3-month LIBOR + 1.30%
      
December 15, 2037
 
Premier Statutory Trust II
   
September 25, 2003
     
$  6,000
     
3-month LIBOR + 3.10%
      
October 8, 2033
 
Premier Statutory Trust III
   
May 16, 2005
     
$  8,000
     
3-month LIBOR + 1.74%
      
June 15, 2035
 
Premier Statutory Trust IV
   
June 20, 2006
     
$14,000
     
3-month LIBOR + 1.55%
      
September 23, 2036
 
Premier Statutory Trust V
   
December 14, 2006
     
$10,000
     
3-month LIBOR + 1.61%
      
March 1, 2037
 
Centra Statutory Trust I
   
September 20, 2004
     
$10,000
     
3-month LIBOR + 2.29%
      
September 20, 2034
 
Centra Statutory Trust II
   
June 15, 2006
     
$10,000
     
3-month LIBOR + 1.65%
      
July 7, 2036
 
Virginia Commerce Trust II
   
December 19, 2002
     
$15,000
     
6-month LIBOR + 3.30%
      
December 19, 2032
 
Virginia Commerce Trust III
   
December 20, 2005
     
$25,000
     
3-month LIBOR + 1.42%
      
February 23, 2036
 
Cardinal Statutory Trust I
   
July 27, 2004
     
$20,000
     
3-month LIBOR + 2.40%
      
September 15, 2034
 
UFBC Capital Trust I
   
December 30, 2004
     
$  5,000
     
3-month LIBOR + 2.10%
      
March 15, 2035
 
 
 
 
 
 
 
 
 
 
 
10
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Table of Contents
At December 31, 2019 and 2018, the Debentures and their related weighted-average interest rates were as follows:
                                 
 
2019
   
2018
 
(Dollars in thousands)
  
Amount
 
  
Weighted-
Average
Rate
 
  
Amount
 
  
Weighted-
Average
Rate
 
United Statutory Trust III
      $
20,619
     
4.75
 %       $
20,619
     
5.64
 %
United Statutory Trust IV
   
25,774
     
4.79
 %    
25,774
     
5.37
 %
United Statutory Trust V
   
51,547
     
3.65
 %    
51,547
     
3.95
 %
United Statutory Trust VI
   
30,928
     
3.19
 %    
30,928
     
4.09
 %
Premier Statutory Trust II
   
6,186
     
5.09
 %    
6,186
     
5.54
 %
Premier Statutory Trust III
   
8,248
     
3.63
 %    
8,248
     
4.53
 %
Premier Statutory Trust IV
   
14,433
     
3.48
 %    
14,433
     
4.37
 %
Premier Statutory Trust V
   
10,310
     
3.52
 %    
10,310
     
4.35
 %
Centra Statutory Trust I
   
10,000
     
4.20
 %    
10,000
     
5.08
 %
Centra Statutory Trust II
   
10,000
     
3.64
 %    
10,000
     
4.09
 %
Virginia Commerce Trust II
   
12,475
     
5.22
 %    
12,245
     
5.80
 %
Virginia Commerce Trust III
   
17,268
     
3.33
 %    
16,742
     
4.07
 %
Cardinal Statutory Trust I
   
14,825
     
4.29
 %    
14,428
     
5.19
 %
UFBC Capital Trust I
   
3,551
     
3.99
 %    
3,445
     
4.89
 %
                                 
Total
  $
236,164
     
    $
234,905
     
 
                                 
 
 
 
At December 31, 2019, the scheduled maturities of long-term borrowings were as follows:
         
Year
 
Amount
 
(In thousands)
 
 
2020
      $
740,734
 
2021
   
826,527
 
2022
   
19,737
 
2023
   
0
 
2024
   
0
 
2025 and thereafter
   
251,031
 
         
Total
      $
   1,838,029
 
         
 
 
 
 
 
 
 
 
 
 
Interest paid on long-term borrowings approximated $43,830,000, $35,222,000, and $22,254,000 in 2019, 2018 and 2017, respectively.
NOTE M
 
—
 
OTHER EXPENSE
The following details certain items of other expense for the periods indicated:
                         
 
Year Ended December 31
 
(In thousands)
  
2019
 
  
2018
 
  
2017
 
Legal, consulting & other professional services
      $
 
 
 
12,360
        $
 
13,248
        $
 
 
 
11,844
 
Franchise & other taxes not on income
   
11,330
     
11,428
     
12,586
 
Automated Teller Machine (ATM) expenses
   
7,336
     
6,892
     
6,686
 
 
 
 
 
 
 
 
 
 
 
 
NOTE N—INCOME TAXES
The income tax provisions included in the consolidated statements of income are summarized as follows:
                         
 
Year Ended December 31
 
(In thousands)
  
2019
 
  
2018
 
  
2017
 
Current expense:
   
     
     
 
Federal
      $
   43,337
        $
   52,041
        $
   65,459
 
State
   
6,798
     
9,429
     
7,960
 
Deferred expense:
   
     
     
 
Federal
   
12,522
     
8,298
     
20,920
 
Tax Act remeasurement
   
0
      
(120
 )    
37,732
 
State
   
1,683
     
1,175
     
2,175
 
                         
Total income taxes
      $
64,340
        $
70,823
        $
 
134,246
 
                         
 
 
 
 
 
 
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Table of Contents
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act lowered the Federal corporate tax rate from 35% to 21% effective January 1, 2018 and made numerous other tax law changes. U.S. generally accepted accounting principles (GAAP) requires companies to recognize the effect of tax law changes in the period of enactment. As a result of the Tax Act, United was required to remeasure deferred tax assets and liabilities at the new tax rate and as a result, recorded provisional deferred income tax expense of $37,732,000 in the fourth quarter of 2017. Upon final analysis of available information and refinement of its calculations during 2018, United decreased the provisional amount by $120,000 which is
included as a component of deferred income tax expense in the table above. 
The following is a reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate to income before income taxes:
                                                 
 
Year Ended December 31
 
(Dollars in thousands)
  
2019
   
2018
   
2017
 
 
Amount
 
  
%
 
  
Amount
 
  
%
 
  
Amount
 
  
%
 
Tax on income before taxes at statutory federal rate
      $
  68,132
     
21.0
%
        $
  68,704
     
21.0
%
        $
 99,689
     
35.0
%
 
Plus: State income taxes net of federal tax benefits
   
6,690
     
2.1
     
8,362
     
2.6
     
6,207
     
2.2
 
                                                 
   
74,822
     
23.1
     
77,066
     
23.6
     
105,896
     
37.2
 
Increase (decrease) resulting from:
   
     
     
     
     
     
 
Tax-exempt
interest income
    
(2,813
 )    
(0.9
 )    
(3,298
 )    
(1.0
 )    
(5,362
 )    
(1.9
 )
Tax credits
 
 
(5,636
)
 
 
(1.7
)
 
 
(2,054
 ) 
 
 
(0.6
 ) 
 
 
(1,171
 ) 
 
 
(0.4
 )
Deferred taxes due to the Tax Act
   
(0
 )    
0.0
     
(120
 )    
0.0
     
37,732
     
13.2
 
Other
items-net
   
(2,033
 )    
(0.7
 )    
(771
 )    
(0.3
 )    
(2,849
 )    
(1.0
 )
                                                 
Income taxes
      $
64,340
     
19.8
%
        $
70,823
     
21.7
%
        $
134,246
     
47.1
%
 
                                                 
 
 
 
 
 
For years ended 2019, 2018 and 2017, United incurred federal income tax expense of
 
$54,000,
a federal tax benefit of
 
$
180,000
and federal income tax expense of
 $
2,088,000
, respectively
, applicable to the sales and calls of securities
. Income taxes paid approximated $56,459,000
, $
55,336,000
, and $
73,096,000
in 2019, 2018 and 2017, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 2019, United had
no
federal or state net operating loss
carryforwards
.
Taxes not on income, which consists mainly of business franchise taxes, were $11,330,000, $11,428,000, and $12,586,000, for the years ended December 31, 2019, 2018 and 2017, respectively. These amounts are recorded in other expense in the Consolidated Statements of Income.
Significant components of United’s deferred tax assets and liabilities (included in other assets in the Consolidated Balance Sheets) at December 31, 2019 and 2018 are as follows:
                 
(In thousands)
 
2019
 
  
2018
 
Deferred tax assets:
   
     
 
Allowance for credit losses
  $
18,358
    $
18,109
 
Accrued benefits payable
   
13.459
      
13,914
 
Other accrued liabilities
   
992
     
846
 
Pension plan accruals 
    
3,313
     
1,217
 
Unrealized loss on securities available for sale
   
0
     
5,572
 
Other real estate owned
   
2,482
     
2,482
 
Lease liabilities under operating leases
 
 
14,293
 
 
 
0
 
Deferred mortgage points
   
0
     
983
 
Purchase accounting intangibles
   
5,917
     
18,091
 
                 
Total deferred tax assets
   
58,814
     
61,214
 
                 
                 
Deferred tax liabilities:
   
     
 
Premises and equipment
   
2,963
     
1,414
 
Unrealized gain on securities available for sale
 
 
2,755
 
 
 
0
 
Right-of-use assets under operating leases
 
 
13,464
 
 
 
0
 
Deferred mortgage points
 
 
389
 
 
 
0
 
Other
   
2,300
     
2,899
 
                 
Total deferred tax liabilities
   
21,871
     
4,313
 
                 
Net deferred tax assets
  $
 
 
 
36,943
    $
 
 
 
56,901
 
                 
 
 
 
 
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Table of Contents
At December 31, 2019 and 2018, United believes that all of the deferred tax amounts shown above are more likely than not to be realized based on an assessment of all available positive and negative evidence and therefore
no
valuation allowance has been recorded.
In accordance with ASC Topic 740, “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.
 
Below is a reconciliation of the total amounts of unrecognized tax benefits:
 
December 31
 
(In thousands)
 
    2019    
 
  
    2018    
 
Unrecognized tax benefits at beginning of year
      $
   2,005
        $
   2,894
 
Increase in unrecognized tax benefits as a result of tax positions taken during the current period
   
152
     
156
 
Decreases in the unrecognized tax benefits as a result of a
lapse of the applicable statute of limitations
   
(589
)     
(1,045
) 
                 
Unrecognized tax benefits at end of year
    $
1,568
      
 
$
2,005
 
                 
The entire amount of unrecognized tax benefits, if recognized, would impact United’s effective tax rate. Over the next 12 months, the statute of limitations will close on certain income tax returns. However, at this time,
United cannot reasonably estimate the amount of tax benefits, if any, it may recognize over the next 12 months.
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.
As of December 31, 2019, and 2018, the total amount of accrued interest related to uncertain tax positions was $667,000 and $675,000, respectively. United accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes.
No
interest or penalties were recognized in the results of operations for the years of 2019, 2018 and 2017.
NOTE O—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 by United are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future.
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 have taken similar steps. The amendment provided that employees hired on or after October 1, 2007, will not be eligible to participate in the Plan. However, new employees will continue to 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.
As of December 31, 2016, United changed the method used to estimate the interest cost component of net periodic benefit cost for the Plan. Under the previous method, appropriate spot rates were used to discount the projected benefit obligation (PBO) cash flows based on date of measurement. Then, a single aggregated discount rate was calculated such that the
 
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present value of the PBO remained the same. This rate is technically a weighted-average of the spot rates. This single discount rate was applied to the interest and service costs as well. Under the full yield curve approach, separate discount rates are used to calculate the present value for each projected cash flow. That is, individual spot rates are applied to the cash flows in each time period. This does not have any impact on the present value of the PBO as the PBO was originally discounted with spot rates. The adoption of this method concerns the manner in which it affects interest and service costs. Interest costs typically decrease when using this method because of the different weightings applied to the cash flows; that is, interest costs closer to the current period will be discounted with a smaller rate than those further in the future based on a typical yield curve, and greater future Interest Costs values are discounted with greater longer-term spot rates. Similarly, service costs typically have longer durations and will thus be subject to longer-term spot rates, decreasing the present value of these costs. As a result, the full yield curve method is preferable as it provides a more granular, and thus a more accurate, determination of costs. This new method constitutes a change in an accounting estimate under the provisions of ASC Topic 250, “Accounting Changes and Error Corrections,” that is inseparable from a change in accounting principle and was accounted for prospectively, with the resulting change impacting the recognition of net periodic pension cost beginning January 1, 2017. The impact of this accounting change on United’s net periodic pension cost for the year of 2017 was a decline of $1,000,000 in expense from the amount that would have been recorded under the previous
method
.
 
Net consolidated periodic pension cost included the following components:
(Dollars in thousands)
  
Year Ended December 31,
 
  
2019
 
  
2018
 
  
2017
 
Service cost
      $
  2,173
        $
2,566
        $
2,146
 
Interest cost
   
5,931
     
5,341
     
5,149
 
Expected return on plan assets
   
(9,434)
     
(10,260)
     
(8,538)
 
Recognized net actuarial loss
   
4,965
     
4,919
     
4,553
 
                         
Net periodic pension cost
      $
3,635
        $
2,566
        $
3,310
 
                         
Weighted-Average Assumptions:
 
 
 
  
 
 
  
 
 
Discount rate
   
4.52%
     
3.83%
     
4.49%
 
Expected return on assets
   
7.00%
     
7.00%
     
7.00%
 
Rate of Compensation Increase (prior to age 45)
   
3.50%
     
3.50%
     
3.50%
 
Rate of Compensation Increase (otherwise)
   
3.00%
     
3.00%
     
3.00%
 
Amounts related to the Plan recognized as a component of other comprehensive income were as follows:
(In thousands)
  
Year Ended December 31,
 
  
2019
 
  
2018
 
  
2017
 
Net actuarial loss
      $
10,324
        $
4,232
        $
6,784
 
Amortization of:
   
     
     
 
Prior service cost
   
0
     
0
     
0
 
Actuarial loss
   
(4,965)
     
(4,919)
     
(4,553)
 
                         
Total recognized in other comprehensive income
      $
5,359
        $
(687)
        $
2,231
 
                         
Included in accumulated other comprehensive income at December 31, 2019 are unrecognized actuarial losses of $60,894,000 ($46,706,000 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 $5,802,000 ($4,450,000 net of tax).
 
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The reconciliation of the beginning and ending balances of the projected benefit obligation and the fair value of plan assets for the years ended December 31, 2019 and 2018 and the accumulated benefit obligation at December 31, 2019 and 2018 are as follows:
(Dollars in thousands)
  
December 31,
 
  
 
 
 
 
2019
 
 
 
 
 
  
 
 
 
 
2018
 
 
 
 
 
Change in Projected Benefit Obligation
 
 
 
  
 
 
Projected Benefit Obligation at the Beginning of the Year
      $
     142,632
        $
152,740
 
Service Cost
   
2,173
     
2,566
 
Interest Cost
   
5,931
     
5,341
 
Actuarial Loss (Gain)
    
28,364
      
(13,301
 )
Benefits Paid
   
(5,323
 )    
(4,714
 )
                 
Projected Benefit at the End of the Year
      $
173,777
        $
     142,632
 
Accumulated Benefit Obligation at the End of the Year
      $
157,154
        $
130,567
 
Change in Plan Assets
 
 
 
  
 
 
Fair Value of Plan Assets at the Beginning of the Year
      $
137,408
        $
142,395
 
Actual Return on Plan Assets
   
27,475
      
(7,273
 )
Benefits Paid
   
(5,323
 )    
(4,714
 )
Employer Contributions
   
0
     
7,000
 
                 
Fair value of plan assets at end of year
      $
159,560
        $
137,408
 
Net Amount Recognized
 
 
 
  
 
 
Funded Status
      $
   (14,217
 )       $
   (5,224
 )
Unrecognized Transition Asset
   
0
     
0
 
Unrecognized Prior Service Cost
   
0
     
0
 
Unrecognized Net Loss
   
60,894
     
55,535
 
                 
Net Amount Recognized
      $
46,677
        $
50,311
 
                 
 
 
 
 
 
 
 
Weighted-Average Assumptions at the End of the Year
 
 
 
  
 
 
Discount Rate
   
3.42
 %    
4.52
 %
Rate of Compensation Increase (prior to age 40)
 
 
 
5.00
%
 
 
 
n/a
 
Rate of Compensation Increase (ages 40-54)
 
 
 
4.00
%
 
 
 
n/a
 
Rate of Compensation Increase (prior to age 45)
   
n/a
 
    
3.50
 %
Rate of Compensation Increase (otherwise)
   
3.50
 %    
3.00
 %
 
Asset allocation for the defined benefit pension plan as of the measurement date, by asset category, is as follows:
Plan Assets
 
Target Allocation
2020
 
  
Allowable
Allocation Range
 
  
Percentage of
Plan Assets at
 
  
 
  
 
  
December 31,
2019
 
  
December 31,
2018
 
Equity Securities
   
62
 %    
50-70
 %    
63
 %    
67%
 
Debt Securities
   
35
 %    
20-50
 %    
35
 %    
26%
 
Other
   
3
 %    
3-15
 %    
2
 %    
7%
 
                       
Total
   
     
     
100
 %    
100%
 
                       
Equity securities include United common stock in the amounts of $4,091,000 (3%) at December 31, 2019 and $3,292,000 (4%) at December 31, 2018
.
The policy, as established by the Pension Committee, primarily consisting of United’s Executive Management, is to invest assets based upon the target allocations stated above. The assets are reallocated periodically to meet the above target allocations. The investment policy is reviewed at least annually, subject to the approval of the Pension Committee, to determine if the policy should be changed. Prohibited investments include, but are not limited to, futures contracts, private placements, uncovered options, real estate, the use of margin, short sales, derivatives for speculative purposes, and other investments that are speculative in nature. In order to achieve a prudent level of portfolio diversification, the securities of any one company are not to exceed 10% of the total plan assets, and no more than the 15% of total plan assets is to be
 
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invested in any one industry (other than securities of U.S. Government or Agencies). Additionally, no more than 15% of the plan assets is to be invested in foreign securities, both equity and fixed. The expected long-term rate of return for the plan’s total assets is based on the expected return of each of the above categories, weighted based on the median of the target allocation for each class. United uses the corridor approach based on 10% of the greater of the projected benefit obligation and the market-related value of plan assets to amortize actuarial gains and losses.
At December 31, 2019, the benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five years thereafter are as follows:
Year
 
    Amount    
 
(In thousands)
   
 
2020
      $
   5,906
 
2021
   
6,267
 
2022
   
6,637
 
2023
   
7,055
 
2024
   
7,390
 
2025 through 2029
   
42,310
 
United did not contribute to the plan in 2019 as no contributions were required by funding regulations or law. During the first quarter of 2018 and the third quarter of 2017, United made discretionary contributions of $7,000,000 and $10,000,000, respectively. For 2020, no contributions to the plan are required by funding regulations or law. However, United may make a discretionary contribution in 2020, the amount of which cannot be reasonably estimated at this time.
 
In accordance with ASC Topic 715 and using the guidance contained in ASC Topic 820, the following is a description of the valuation methodologies used to measure the plan assets at fair value.
Cash and Cash Equivalents:
These underlying assets are highly liquid U.S. government obligations. The fair value of cash and cash equivalents approximates cost (Level 1).
Debt Securities
: Securities of the U.S. Government, municipalities, private issuers and corporations are valued at the closing price reported in the active market in which the individual security is traded, 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 from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2).
Common and Preferred Stock:
These securities are valued at the closing price on the respective stock exchange (Level 1).
Mutual Funds:
Generally, these securities are valued at the closing price reported in the active market in which the individual mutual fund is traded (Level 1). However, certain funds are valued by the fund administrator using pricing models that considers observable market data (Level 2).
The following tables present the balances of the plan assets, by fair value hierarchy level, as of December 31, 2019 and 2018:
                                 
 
 
 
Fair Value Measurements at December 31, 2019 Using
 
(In thousands)
 
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)
 
Cash and Cash equivalents
 
    $
2,504
 
 
    $
2,504
 
 
    $
0
 
 
    $
0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Income Mutual Funds:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
 
55,588
 
 
 
55,588
 
 
 
0
 
 
 
0
 
Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
 
23,932
 
 
 
23,932
 
 
 
0
 
 
 
0
 
Equity Mutual Funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Fair Value Measurements at December 31, 2019 Using
 
(In thousands)
 
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)
 
Global equity
 
 
 
5,247
 
 
 
5,247
 
 
 
0
 
 
 
0
 
Domestic equity large cap
   
28,743
     
28,743
     
0
     
0
 
Domestic equity small cap
   
22,216
     
22,216
     
0
     
0
 
International emerging equity
   
8,228
     
8,228
     
0
     
0
 
International equity develope
d
    
13,102
     
13,102
     
0
     
0
 
                                 
Total
      $
     159,560
        $
   159,560
        $
     0
        $
     0
 
                                 
 
 
 
 
                                 
 
 
  
Fair Value Measurements at December 31, 2018 Using
 
(In thousands)
 
Description
 
Balance as of
December 31,
2018
 
  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
  
Significant
Other
Observable
Inputs
(Level 2)
 
  
Significant
Unobservable
Inputs
(Level 3)
 
Cash and Cash equivalents
      $
 
 
 
 
10,086
        $
10,086
        $
     0
        $
     0
 
Fixed Income Mutual Funds:
   
     
     
     
 
Taxable
   
35,086
     
35,086
     
0
     
0
 
Equity Securities:
   
     
     
     
 
Common stock
   
22,846
     
22,846
     
0
     
0
 
Equity Mutual Funds:
   
     
     
     
 
Domestic equity large cap
   
28,090
     
28,090
     
0
     
0
 
Domestic equity small cap
   
15,212
     
15,212
     
0
     
0
 
International emerging equity
   
8,791
     
8,791
     
0
     
0
 
International equity developed
   
17,297
     
17,297
     
0
     
0
 
                                 
Total
      $
137,408
        $
137,408
        $
0
        $
0
 
                                 
 
 
 
 
  
Common stock investments are diversified amongst various industries with no industry representing more than 5% of the total plan assets.
The United Bankshares, Inc. Savings and Stock Investment Plan (the Plan) is a defined contribution plan under Section 401(k) of the Internal Revenue Code. Each employee of United, who completes ninety (90) days of qualified service, is eligible to participate in the Plan. Each participant may contribute from 1% to 100% of compensation to his/her account, subject to Internal Revenue Service maximum deferral limits. United matches 100% of the first 4% of salary deferred with United stock. Vesting is 100% for employee deferrals and the company match at the time the employee makes his/her deferral. United’s expense relating to the Plan approximated $4,565,000, $4,486,000, and $3,201,000 in 2019, 2018 and 2017, respectively.
The assets of United’s defined benefit plan and 401(k) Plan each include investments in United common stock. At December 31, 2019 and 2018, the combined plan assets included 1,176,283 and 1,099,386 shares, respectively, of United common stock with an approximate fair value of $45,475,000 and $34,202,000, respectively. Dividends paid on United common stock held by the plans approximated $1,566,000, $1,401,000, and $1,218,000 for the years ended December 31, 2019, 2018, and 2017, respectively.
United has certain other supplemental deferred compensation plans covering various key employees. Periodic charges are made to operations so that the liability due each employee is fully recorded as of the date of their retirement. Amounts charged to expense have not been significant in any year.
 
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NOTE P—STOCK BASED COMPENSATION
On May 18, 2016, United’s shareholders approved the 2016 Long-Term Incentive Plan (2016 LTI Plan). The 2016 LTI Plan became effective as of May 18, 2016. An award granted under the 2016 LTI Plan may consist of any
non-qualified
stock options or incentive stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, performance units or other-stock-based award. These awards all relate to the common stock of United. The maximum number of shares of United common stock which may be issued under the 2016 LTI Plan is 1,700,000. The 2016 LTI Plan will be administered by a board committee appointed by United’s Board of Directors (the Board). Unless otherwise determined by the Board, the Compensation Committee of the Board (the Committee) shall administer the 2016 LTI Plan. Any and all shares may be issued in respect of any of the types of Awards, provided that (1) the aggregate number of shares that may be issued in respect of restricted stock awards, and restricted stock unit awards which are settled in shares is 500,000, and (2) the aggregate number of shares that may be issued pursuant to stock options is 1,200,000. The shares to be offered under the 2016 LTI Plan may be authorized and unissued shares or treasury shares. The maximum number of options and SARs, in the aggregate, which may be awarded to any individual key employee during any calendar year is 100,000. The maximum number of stock options and SARs, in the aggregate, which may be awarded to any
non-employee
director during any calendar year is 10,000. The maximum number of shares of restricted stock or shares subject to a restricted stock units award that may be granted during any calendar year is 50,000 shares to any individual key employee and 5,000 shares to any individual
non-employee
director. Subject to certain change in control provisions, the 2016 LTI Plan provides that awards of restricted stock and restricted stock units will vest as the Committee determines in the award agreement, provided that no awards will vest sooner than 1/3 per year over the first three anniversaries of the award. Awards granted to executive officers of United typically will have performance based vesting conditions. A Form
S-8
was filed on July 29, 2016 with the Securities and Exchange Commission to register all the shares which were available for the 2016 LTI Plan.
 
During the year of 2019, a total of 240,205
non-qualified
stock options and 126,427 of restricted stock were granted under the 2016 LTI Plan. Compensation expense of $4,914,000, $4,073,000, and $3,555,000 related to the nonvested awards under United’s Long-Term Incentive Plans was incurred for the years 2019, 2018 and 2017, respectively. Compensation expense was included in employee compensation in the Consolidated Statements of Income.
Stock Options
United currently has options outstanding from various option plans other than the 2016 LTI Plan (the Prior Plans); however, no common shares of United stock are available for grants under the Prior Plans as these plans have expired. Awards outstanding under the Prior Plans will remain in effect in accordance with their respective terms. The maximum term for options granted under the plans is ten (
10
) years.
The fair value of the options for 2019 was estimated at the date of grant using a binomial lattice option pricing model with the following weighted-average assumptions: risk-free interest rates of 2.54%; dividend yield of 3.00%; volatility factors of the expected market price of United’s common stock of 0.243; and a weighted-average expected option life of 6.72 years, respectively. The estimated fair value of the options at the date of grant was $7.16 for the options granted during 2019. ASC Topic 718, “Compensation – Stock Compensation” defines a lattice model as a model that produces an estimated fair value based on the assumed changes in prices of a financial instrument over successive periods of time. A binomial lattice model assumes at least two price movements are possible in each period of time.
A summary of activity under the United’s stock option plans as of December 31, 2019, and the changes during the year of 2019 are presented below:
 
Year ended December 31, 2019
 
  
 
  
 
  
Weighted Average
 
(Dollars in thousands, except per share data)
 
 
  
Aggregate
Intrinsic
 
  
Remaining
Contractual
 
  
Exercise
 
  
Shares
 
  
Value
 
  
Term (Yrs.)
 
  
Price
 
Outstanding at January 1, 2019
   
1,730,389
     
     
    $
 
 
   32.43
 
Granted
   
240,205
     
     
     
38.49
 
Exercised
   
(128,742
 )    
     
     
23.12
 
Forfeited or expired
   
(126,536
 )    
     
     
25.44
 
                                 
 
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Year ended December 31, 2019
 
 
 
 
 
 
Weighted Average
 
(Dollars in thousands, except per share data)
 
 
 
Aggregate
Intrinsic
 
 
Remaining
Contractual
 
 
Exercise
 
 
Shares
 
 
Value
 
 
Term (Yrs.)
 
 
Price
 
Outstanding at December 31, 2019
 
 
1,715,316
 
 
    $
8,707
 
 
 
5.6
 
 
    $
34.49
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercisable at December 31, 2019
 
 
1,125,579
 
 
    $
8,342
 
 
 
4.2
 
 
    $
31.97
 
The following table summarizes the status of United’s nonvested awards for the year ended December 31, 2019:
 
Shares
 
  
Weighted-Average
 
Grant Date Fair Value 
Per Share
 
Nonvested at January 1, 2019
   
575,672
     
    $  7.86
 
Granted
   
240,205
     
        7.16
 
Vested
   
(211,326
 )    
        7.74
 
Forfeited or expired
   
(14,814
 )    
        7.55
 
                 
Nonvested at December 31, 2019
   
589,737
     
    $  7.62
 
                 
As of December 31, 2019, the total unrecognized compensation cost related to nonvested option awards was $2,871,000 with a weighted-average expense recognition period of 1.2 years. The total fair value of awards vested during the year ended December 31, 2019, was $1,636,000.
Cash received from options exercised under the Plans for the years ended December 31, 2019, 2018 and 2017 was $1,272,000, $
1,500,000
, and $
4,619,000
, respectively. During 2019 and 2018, 128,742 and 72,296 shares, respectively, were issued in connection with stock option exercises. All shares issued in connection with stock option exercises for 2019 and 2018 were issued from authorized and unissued stock. The weighted-average grant-date fair value of options granted in the year of 2019, 2018, and 2017 was $7.16, $7.56, and $8.85, respectively. The total intrinsic value of options exercised under the Plans during the years ended December 31, 2019, 2018, and 2017 was $1,932,000, $1,057,000, and $3,721,000, respectively.
 
ASC Topic 230, “Statement of Cash Flows,” requires the benefits of tax deductions in excess of recognized compensation cost to be reported as an operating cash flow. This requirement reduces net operating cash flows. While the company cannot estimate what those amounts will be in the future (because they depend on, among other things, the date employees exercise stock options), United recognized cash flows used in operating activities of $
223,000,
 $
158,000
, and $
2,201,000
 from excess tax benefits related to share-based compensation arrangements for the year of 2019, 2018 and 2017, respectively.
Restricted Stock
Under the
2016
LTI Plan, United may award restricted common shares to key employees and
non-employee
directors. Restricted shares granted to participants have a four-year time-based vesting period. Recipients of restricted shares do not pay any consideration to United for the shares, have the right to vote all shares subject to such grant and receive all dividends with respect to such shares, whether or not the shares have vested. Presently, these nonvested participating securities have an immaterial impact on diluted earnings per share. As of December 31, 2019, the total unrecognized compensation cost related to nonvested stock awards was $6,041,000 with a weighted-average expense recognition period of 1.3 years.
The following summarizes the changes to United’s restricted common shares for the year ended December 31, 2019:
 
Number of
Shares
 
  
Weighted-Average
 
Grant Date Fair Value 
Per Share
 
Outstanding at January 1, 2019
   
199,303
     
    $    39.67
 
Granted
   
126,427
     
          38.49
 
Vested
   
(73,685)
     
          39.28
 
Forfeited
   
(4,149)
     
          39.08
 
                 
Outstanding at December 31, 2019
   
247,896
     
    $    39.20
 
                 
 
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NOTE Q—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 $3,610,777,000 and $3,826,370,000 of loan commitments outstanding as of December 31, 2019 and 2018,
respectively, approximately half of which contractually expire
 within
one year. Included in the December 31, 2019 amount are commitments to extend credit of $235,883,000 related to George Mason’s mortgage loan funding commitments and are of a shot-term nature.
Commercial and standby letters of credit are agreements used by United’s customers as a means of improving their credit standing in their dealings with others. Under these agreements, United guarantees certain financial commitments of its customers. A commercial letter of credit is issued specifically to facilitate trade or commerce. Typically, under the terms of a commercial letter of credit, a commitment is drawn upon when the underlying transaction is consummated as intended between the customer and a third party. As of December 31, 2019
,
United had approximately $5,092,000 of outstanding commercial letters of credit. As of December 31,
2018, United had no outstanding commercial letters
 
of credit. A standby letter of credit is generally contingent upon the failure of a customer to perform according to the terms of an underlying contract with a third party. United has issued standby letters of credit of $145,105,000 and $141,032,000 as of December 31, 2019 and 2018, respectively. In accordance with ASC Topic 450, “Contingencies,” 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
George Mason provides for its estimated exposure to repurchase loans previously sold to investors for which borrowers failed to provide full and accurate information on their loan application or for which appraisals have not been acceptable or where the loan was not underwritten in accordance with the loan program specified by the loan investor, and for other exposure to its investors related to loan sales activities. United evaluates the merits of each claim and estimates its reserve based on actual and expected claims received and considers the historical amounts paid to settle such claims. George Mason has a reserve of $
1,377,000
as of December 
31
,
2019
.
United has derivative counter-party risk that may arise from the possible inability of George Mason’s third party investors to meet the terms of their forward sales contracts. George Mason works with third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk. United does not expect any third-party investor to fail to meet its obligation.
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.
 
11
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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.
NOTE R—DERIVATIVE FINANCIAL INSTRUMENTS
United uses derivative instruments to help aid against adverse price changes or interest rate movements on the value of certain assets or liabilities and on future cash flows. These derivatives may consist of interest rate swaps, caps, floors, collars, futures, forward contracts, written and purchased options. United also executes derivative instruments with its commercial banking customers to facilitate its risk management strategies.
United accounts for its derivative financial instruments in accordance with ASC Topic 815 which requires all derivative instruments to be carried at fair value on the balance sheet. United has designated certain derivative instruments used to manage interest rate risk as hedge relationships with certain assets, liabilities or cash flows being hedged. Certain derivatives used for interest rate risk management are not designated in a hedge relationship.
Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
For a fair value hedge, the fair value of the interest rate swap is recognized on the balance sheet as either a freestanding asset or liability with a corresponding adjustment to the hedged financial instrument. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a fair value hedge are 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 other comprehensive income within shareholders’ equity, net of tax. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a cash flow hedge are offset to other comprehensive income, net of tax. The portion of a hedge that is ineffective is recognized immediately in earnings.
At inception of a hedge relationship, United formally documents the hedged item, the particular risk management objective, the nature of the risk being hedged, the derivative being used, how effectiveness of the hedge will be assessed and how the ineffectiveness of the hedge will be measured. United also assesses hedge effectiveness at inception and on an ongoing basis using regression analysis. Hedge ineffectiveness is measured by using the change in fair value method. The change in fair value method compares the change in the fair value of the hedging derivative to the change in the fair value of the hedged exposure, attributable to changes in the benchmark rate. The portion of a hedge that is ineffective is recognized immediately in earnings.
United through George Mason enters into interest rate lock commitments to finance residential mortgage loans with its customers. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by United. Interest rate risk arises on these commitments and subsequently closed loans if interest rates change between the time of the interest rate lock and the delivery of the loan to the investor. Market risk on interest rate lock commitments and mortgage loans held for sale is managed using corresponding forward mortgage loan sales contracts. United is a party to these forward mortgage loan sales contracts to sell loans servicing released and short sales of mortgage-backed securities. When the interest rate is locked with the borrower, the rate lock commitment, forward sale agreement, and mortgage-backed security position are undesignated derivatives and marked to fair value through earnings. The fair value of the rate lock derivative includes the servicing premium and the interest spread for the difference between retail and wholesale mortgage rates. Income from mortgage banking activities includes the gain recognized for the period presented and associated elements of fair value.
 
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United sells mortgage loans on either a best efforts or mandatory delivery basis. For loans sold on a mandatory delivery basis, United enters into forward mortgage-backed securities (the “residual hedge”) to mitigate the effect of interest rate risk. Both the rate lock commitment under mandatory delivery and the residual hedge are recorded at fair value through earnings and are not designated as accounting hedges. At the closing of the loan, the loan commitment derivative expires and United records a loan held for sale at fair value and continues to mark these assets to market under the election of fair value option. United closes out of the trading mortgage-backed securities assigned within the residual hedge and replaces the securities with a forward sales contract once a price has been accepted by an investor and recorded at fair value. For those loans selected to be sold under best efforts delivery, at the closing of the loan, the rate lock commitment derivative expires and the Company records a loan held for sale at fair value under the election of fair value option and continues to be obligated under the same forward loan sales contract entered into at inception of the rate lock commitment.
The derivative portfolio also includes derivative financial instruments not included in hedge relationships. These derivatives consist of interest rate swaps used for interest rate management purposes and derivatives executed with commercial banking customers to facilitate their interest rate management strategies. For derivatives that are not designated in a hedge relationship, changes in the fair value of the derivatives are recognized in earnings in the same period as the change in fair value. Gains and losses on other derivative financial instruments are included in noninterest income and noninterest expense, respectively.
The following tables disclose the derivative instruments’ location on the Company’s Consolidated Balance Sheets and the notional amount and fair value of those instruments at December 31, 2019 and 2018.
 
Asset Derivatives
 
  
December 31, 2019
   
December 31, 2018
 
(In thousands)
 
Balance
Sheet
Location
 
  
Notional
Amount
 
  
Fair
Value
 
  
Balance
Sheet
Location
 
  
Notional
Amount
 
  
Fair
Value
 
Derivatives designated as hedging instruments
   
     
     
     
     
     
 
Fair Value Hedges:
   
     
     
     
     
     
 
Interest rate swap contracts (hedging commercial loans)
   
Other assets
    $
     0
        $
     0
     
Other assets
        $
85,623
        $
1,859
 
                             
Total derivatives designated as hedging instruments
   
        $
0
    $
0
     
    $
85,623
    $
1,859
 
                             
Derivatives not designated as hedging instruments
   
     
     
     
     
     
 
Interest rate swap contracts
   
Other assets
    $
0
    $
0
     
Other assets
    $
0
    $
0
 
Forward loan sales commitments
   
Other assets
     
27,260
     
9
     
Other assets
     
21,604
     
542
 
Interest rate lock commitments
   
Other assets
     
117,252
     
4,518
     
Other assets
     
93,955
     
4,103
 
                             
Total derivatives not designated as hedging instruments
   
    $
144,512
    $
4,527
     
    $
115,559
    $
4,645
 
                             
Total asset derivatives
   
    $
 
 
 
144,512
    $
4,527
     
    $
     201,182
    $
     6,504
 
                             
 
Liability Derivatives
 
  
December 31, 2019
   
December 31, 2018
 
(In thousands)
 
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
        $
82,243
         $
2,394
      
Other liabilities
        $
0
         $
0
  
                                                 
Total derivatives designated as hedging instruments
   
        $
82,243
         $
2,394
      
        $
0
         $
0
  
                                                 
 
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Liability Derivatives
 
 
December 31, 2019
 
 
December 31, 2018
 
(In thousands)
 
Balance
Sheet
Location
 
 
Notional
Amount
 
 
Fair
Value
 
 
Balance
Sheet
Location
 
 
Notional
Amount
 
 
Fair
Value
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
 
Other liabilities
 
 
    $
0
 
 
    $
0
 
 
 
Other liabilities
 
 
    $
0
 
 
    $
0
 
TBA mortgage-backed securities
 
 
Other liabilities
 
 
 
274,000
 
 
 
671
 
 
 
Other liabilities
 
 
 
200,281
 
 
 
3,002
 
Interest rate lock commitments
 
 
Other liabilities
 
 
 
0
 
 
 
0
 
 
 
Other liabilities
 
 
 
0
 
 
 
0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives not designated as hedging instruments
 
 
 
 
    $
274,000
 
 
    $
671
 
 
 
 
 
    $
200,281
 
 
    $
3,002
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liability derivatives
 
 
 
 
    $
356,243
 
 
    $
3,065
 
 
 
 
 
    $
200,281
 
 
    $
3,002
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following table represents the carrying amount of the hedged assets/(liabilities) and the cumulative amount of fair value hedging
adjustment
included in the carrying amount of the hedged assets/(liabilities) that are designated as a fair value accounting relationship as of December 31, 2019.
 
 
December 31, 2019
 
(In thousands)
Derivatives in Fair Value
Hedging Relationships
 
Location in the Statement
of Condition
 
Carrying Amount of
the Hedged
Assets/(Liabilities)
 
  
Cumulative Amount
of Fair Value Hedging
Adjustment Included
in the Carrying
Amount of the Hedged
Assets/(Liabilities)
 
  
Cumulative Amount of
Fair Value Hedging
Adjustment Remaining for
any Hedged Assets/
(Liabilities) for which
Hedge Accounting has
been Discontinued
 
Interest rate swaps
 
Loans, net of unearned income
 
    $
     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.
 
 
The effect of United’s derivative financial instruments on its Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017 is presented as follows:
 
 
Year Ended
 
(In thousands)
 
Income Statement
Location
 
December 31,
2019
 
  
December 31,
2018
 
  
December 31,
2017
 
Derivatives in hedging relationships
Fair Value Hedges:
 
   
     
     
 
Interest rate swap contracts
 
Interest income/ (expense)
  $
(95
)    $
(170
)    $
(781
 )
                             
Total derivatives in hedging relationships
 
  $
(95
)    $
(170
)    $
(781
) 
                             
Derivatives not designated as hedging instruments
 
   
     
     
 
Forward loan sales commitments
 
Income from Mortgage Banking Activities
   
925
     
530
     
(426
 )
TBA mortgage-backed securities
 
Income from Mortgage Banking Activities
   
2,331
      
(2,690
 )    
1,547
 
Interest rate lock commitments
 
Income from Mortgage Banking Activities
   
3,607
      
(2,413
 )    
(7,730
 )
                             
Total derivatives not designated as hedging instruments
 
  $
6,863
    $
(4,573
 )   $
(6,609
 )
                             
Total derivatives
 
  $
6,768
    $
(4,743
)    $
(7,390
) 
                             
 
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For the years ended December 31, 2019, 2018 and 2017, changes in the fair value of any interest rate swaps attributed to hedge ineffectiveness were recorded, but not significant to United’s Consolidated Statements of Income.
NOTE S—COMPREHENSIVE INCOME
The changes in accumulated other comprehensive income are as follows:
 
For the Years Ended December 31
 
(In thousands)
 
2019
 
  
2018
 
  
2017
 
Net Income
 
$
     260,099
 
  
$
     256,342
 
  
$
     150,581
 
Available for sale (“AFS”) securities:
   
     
     
 
AFS securities with OTTI charges during the period
   
(641
 )     
(1,456
 )     
(60
 ) 
Related income tax effect
   
149
      
339
      
22
  
Less : OTTI charges recognized in net income
   
198
      
1,456
      
60
  
Related income tax benefit
   
(46
 )     
(339
 )     
(22
 ) 
Reclassification of previous noncredit OTTI to credit OTTI
   
2,188
      
0
      
0
  
Related income tax benefit
   
(510
 )     
0
      
0
  
                         
Net unrealized gains on AFS securities with OTTI
   
1,338
      
0
      
0
  
AFS securities – all other:
   
     
     
 
Change in net unrealized gains (losses) on AFS securities arising during the period
   
32,376
      
(14,715
 )     
8,371
  
Related income tax effect
   
(7,543
 )     
5,109
      
(3,097
 ) 
Net reclassification adjustment for gains included in net income
   
97
      
770
      
(1,874
 ) 
Related income tax (benefit) expense
   
(23
 )     
(179
 )     
693
  
                         
    
24,907
      
(9,015
 )     
4,093
  
                         
Net effect of AFS securities on other comprehensive income
 
 
26,245
 
  
 
(9,015
 )
 
  
 
4,093
 
                         
Held to maturity (“HTM”) securities:
   
     
     
 
Accretion on the unrealized loss for securities transferred from AFS to the HTM investment portfolio prior to call or maturity
   
0
      
8
      
8
  
Related income tax benefit
   
(0
 )     
(2
 )     
(3
 ) 
                         
Net effect of HTM securities on other comprehensive income
   
0
 
    
6
 
  
 
5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Defined benefit pension plan:
 
 
 
 
 
 
 
 
 
Net actuarial loss during the period
 
 
(10,324)
 
 
 
(4,232)
 
 
 
(6,784)
 
Related income tax expense
 
 
2,384
 
 
 
1,063
 
 
 
2,510
 
Amortization of prior service cost recognized in net income
 
 
0
 
 
 
0
 
 
 
0
 
Related income tax benefit
 
 
0
 
 
 
0
 
 
 
0
 
Amortization of net actuarial loss recognized in net income
 
 
4,965
 
 
 
4,919
 
 
 
4,553
 
Related income tax benefit
 
 
(1,170)
 
 
 
(1,246)
 
 
 
(1,685)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net effect of change in defined benefit pension plan on other comprehensive
income
 
 
(4,145)
 
 
 
504
 
 
 
(1,406)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total change in other comprehensive income, net of tax
 
 
22,100
 
 
 
(8,505
)
 
 
2,692
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Comprehensive Income
 
$
282,199
 
 
$
247,837
 
 
$
153,273
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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The components of accumulated other comprehensive income for the year ended December 31, 2019 are as follows:
                                 
Changes in Accumulated Other Comprehensive Income (AOCI) by Component
(a)
  
For the Year Ended December 31, 2019
 
(Dollars in thousands)
 
Unrealized
Gains/
Losses on
AFS
Securities
 
  
Accretion
on the
unrealized
loss for
securities
transferred
from AFS
to the
HTM
 
  
Defined
Benefit
Pension
Items
 
  
Total
 
Balance at January 1, 2019
  $
(18,289
)   $
(50
)   $
(38,680
)   $
(57,019
)
Reclass due to adopting Accounting Standard Update
2017-12
   
0
     
50
     
0
     
50
  
Other comprehensive income before reclassification
   
24,493
     
0
     
0
     
24,493
  
Amounts reclassified from accumulated other comprehensive income
   
1,752
     
0
     
(4,145
)    
(2,393
 )
                                 
Net current-period other comprehensive income, net of tax
   
26,245
     
0
     
(4,145
)    
22,100
  
                                 
Balance at December 31, 2019
  $
7,956
    $
0
    $
(42,825
)   $
(34,869
 )
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) All amounts are
net-of-tax.
                 
Reclassifications out of Accumulated Other Comprehensive Income (AOCI)
 
For the Year Ended December 31, 2019
 
(Dollars in thousands)
 
Details about AOCI Components
 
Amount
Reclassified
from AOCI
 
  
Affected Line Item in the Statement Where
Net Income is Presented
 
Available for sale (“AFS”) securities:
   
   
Reclassification of previous noncredit OTTI to credit OTTI
    $
2,188
   
Total other-than-temporary impairment losses
Net reclassification adjustment for losses (gains) included in net income
   
97
   
Net gains on sales/calls of investment securities
             
   
2,285
   
Total before tax
Related income tax effect
   
(533
)   
Tax expense
             
   
1,752
   
Net of tax
Pension plan:
   
   
Net actuarial loss
   
(10,324
 )(a)  
Amortization of net actuarial loss
   
4,965
 (b)  
             
   
(5,359
)   
Total before tax
Related income tax effect
   
1,214
   
Tax expense
             
   
(4,145
)   
Net of tax
             
Total reclassifications for the period
    $
(2,393
)   
             
 
(a) This AOCI component is included in the computation of changes in plan assets (see Note
O
, Employee Benefit Plans)
(b) This AOCI component is included in the computation of net periodic pension cost (see Note
O
, Employee Benefit Plans)
 
 
 
 
 
 
 
 
 
 
NOTE T—UNITED BANKSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
                 
Condensed Balance Sheets
 
 
  
 
 
December 31
 
(In thousands)
 
2019
 
  
2018
 
Assets
   
     
 
Cash and due from banks
  $
126,697
    $
68,186
 
Securities available for sale
   
7,451
     
6,822
 
Securities held to maturity
   
20
     
997
 
Equity securities
   
4,126
     
5,094
 
Other investment securities
   
10,053
     
163
 
Investment in subsidiaries:
   
     
 
Bank subsidiaries
   
3,519,661
      
3,478,956
 
Nonbank subsidiaries
   
22,439
     
14,706
 
Goodwill
   
(16,008
 )    
(16,008
 )
 
 
 
 
 
 
 
 
 
 
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Condensed Balance Sheets
 
 
 
 
 
December 31
 
(In thousands)
 
2019
 
 
2018
 
Other assets
 
 
12,286
 
 
 
10,615
 
 
 
 
 
 
 
 
 
 
Total Assets
 
    $
3,686,725
 
 
    $
3,569,531
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
Junior subordinated debentures of subsidiary trusts
 
    $
236,164
 
 
    $
234,905
 
Accrued expenses and other liabilities
 
 
86,728
 
 
 
83,002
 
Shareholders’ equity (including other accumulated comprehensive loss of $34,869 and $57,019 at December 31, 2019 and 2018, respectively)
 
 
3,363,833
 
 
 
3,251,624
 
 
 
 
 
 
 
 
 
 
Total Liabilities and Shareholders’ Equity
 
    $
3,686,725
 
 
    $
3,569,531
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
                         
Condensed Statements of Income
 
 
  
 
  
 
 
Year Ended December 31
 
(In thousands)
 
2019
 
  
2018
 
  
2017
 
Income
   
     
     
 
Dividends from banking subsidiaries:
   
     
     
 
Bank subsidiaries
      $
   249,000
        $
   215,000
    $
   115,000
 
Nonbank subsidiaries
   
0
     
0
     
58
 
Net interest income
   
126
     
227
     
437
 
Management fees:
   
     
     
 
Bank subsidiaries
   
27,325
     
25,026
     
45,693
 
Nonbank subsidiaries
   
27
     
27
     
27
 
Other income
   
147
      
(596
 )    
1,766
 
                         
Total Income
   
276,625
     
239,684
     
162,981
 
                         
Expenses
   
     
     
 
Operating expenses
   
38,569
     
37,214
     
71,653
 
                         
Income Before Income Taxes and Equity in Undistributed Net Income of Subsidiaries
   
238,056
     
202,470
     
91,328
 
Applicable income tax benefit
   
(2,123
 )    
(2,470
 )    
(6,126
 )
                         
Income Before Equity in Undistributed Net Income of Subsidiaries
   
240,179
     
204,940
     
97,454
 
Equity in undistributed net income of subsidiaries:
   
     
     
 
Bank subsidiaries
   
19,557
     
51,392
     
50,560
 
Nonbank subsidiaries
   
363
     
10
     
2,567
 
                         
Net Income
  $
   260,099
    $
   256,342
        $
   150,581
 
                         
 
 
 
 
 
 
 
 
 
 
                         
Condensed Statements of Cash Flows
 
 
  
 
  
 
 
Year Ended December 31
 
(In thousands)
 
2019
 
  
2018
 
  
2017
 
Operating Activities
   
     
     
 
Net income
 
    $
   260,099
 
 
    $
   256,342
 
 
    $
    150,581
 
Adjustments to reconcile net income to net cash provided by operating activities:
   
     
     
 
Equity in undistributed net income of subsidiaries
   
(19,920
)     
(51,402)
     
(53,127)
 
Amortization of net periodic pension costs
   
302
     
293
     
228
 
Stock-based compensation
   
4,914
     
4,073
     
3,555
 
Excess tax benefits from stock-based compensation arrangements
   
223
     
158
     
2,201
 
Net gain on securities transactions
   
0
     
607
     
(1,185)
 
Net change in other assets and liabilities
   
1,770
     
(1,904)
     
8,764
 
                         
Net Cash Provided by Operating Activities
   
247,388
     
208,167
     
111,017
 
                         
Investing Activities
   
     
     
 
Net proceeds from sales (purchases) of securities
   
236
     
9,446
     
(19,268)
 
Net proceeds from sales of equity securities
   
1,116
     
1,348
     
0
 
 
 
 
 
 
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Table of Contents
                         
Condensed Statements of Cash Flows
 
 
 
 
 
 
 
Year Ended December 31
 
(In thousands)
 
2019
 
  
2018
 
  
2017
 
Net cash paid in acquisition of subsidiary
 
 
0
 
 
 
0
 
 
 
22,146
 
Increase in investment in subsidiaries
 
 
(7,000)
 
 
 
(2,400)
 
 
 
(34,203)
 
Change in other investment securities
 
 
(9,890)
 
 
 
0
 
 
 
(63)
 
Net Cash (Used in) Provided by Investing Activities
 
 
(15,538)
 
 
 
8,394
 
 
 
(31,388)
 
Financing Activities
   
     
     
 
Proceeds from issuance of common stock
   
0
     
0
     
0
 
Cash dividends paid
   
(138,939
)     
(142,350)
     
(121,354)
 
Acquisition of treasury stock
   
(35,573
)     
(100,724)
     
(1)
 
Proceeds from sale of treasury stock from deferred compensation plan
   
1
     
1
     
1
 
Proceeds from exercise of stock options
   
1,272
     
1,500
     
4,619
 
                         
                         
Net Cash Used in Financing Activities
   
(173,339
)     
(241,573)
     
(116,735)
 
                         
                         
Increase
(De
crease)
in Cash and Cash Equivalents
   
58,511
     
(25,012)
     
(37,106)
 
                         
Cash and Cash Equivalents at Beginning of Year
   
68,186
     
93,198
     
130,304
 
                         
                         
Cash and Cash Equivalents at End of Year
  $
126,697
    $
68,186
    $
93,198
 
                         
 
 
 
 
 
 
 
 
NOTE U—REGULATORY MATTERS
The subsidiary banks are required to maintain average reserve balances with their respective Federal Reserve Bank. The average amount of those consolidated reserve balances maintained and required for the year ended December 31, 2019, were approximately $653,653,000 and $255,894,000, respectively. The average amount of those consolidated reserve balances maintained and required for the year ended December 31, 2018, was approximately $791,237,000 and $334,280,000, respectively.
The primary source of funds for the dividends paid by United to its shareholders is dividends received from its subsidiary bank. Dividends paid by United’s subsidiary banks are subject to certain regulatory limitations. Generally, the most restrictive provision requires regulatory approval if dividends declared in any year exceed that year’s net income, as defined, plus the retained net profits of the two preceding years.
During 2020, the retained net profits available for distribution to United by United Bank as dividends without regulatory approval, are approximately $70,949,000, plus net income for the interim period through the date of declaration.
Under Federal Reserve regulation, United Bank is also limited as to the amount they may loan to affiliates, including the parent company. Loans from United Bank to the parent company are limited to 10% of the banking subsidiaries’ capital and surplus, as defined, or $282,863,000 at December 31, 2019, and must be secured by qualifying collateral.
 
 
United’s subsidiary banks are subject to various regulatory capital requirements administered by federal banking agencies. Pursuant to capital adequacy guidelines, United’s subsidiary banks must meet specific capital guidelines that involve various quantitative measures of the banks’ assets, liabilities, and certain
off-balance-sheet
items as calculated under regulatory accounting practices. United’s subsidiary banks’ capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
As previously mentioned, the new Basel III Capital Rules became effective for United and United Bank on January 1, 2015 (subject to a
phase-in
period). These new quantitative measures established by regulation to ensure capital adequacy require United and United Bank to maintain minimum amounts and ratios of total, Tier I capital, and common Tier I capital as defined in the regulations, to risk-weighted assets, as defined, and of Tier I capital, as defined, to average assets, as defined. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on United’s financial statements. As of December 31, 201
9
, United exceeds all capital adequacy requirements to which it is subject.
 
12
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Table of Contents
At December 31, 2019, the most recent notification from its regulators, United and United Bank were categorized as well-capitalized. To be categorized as well-capitalized, United must maintain minimum total risk-based, Tier I risk-based, Common Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would impact United’s well-capitalized status.
United’s and United Bank, capital amounts (in thousands of dollars) and ratios are presented in the following table.
                                                 
(Dollars in thousands)
 
Actual
   
For Capital
Adequacy Purposes
   
To Be Well-
Capitalized
 
 
    Amount    
 
  
    Ratio    
 
  
    Amount    
 
  
    Ratio    
 
  
    Amount    
 
  
    Ratio    
 
As of December 31, 2019:
    
     
     
     
     
     
 
Total Capital (to Risk-Weighted Assets):
   
     
     
     
     
     
 
United Bankshares
  $
   2,217,547
     
14.7
 %   $
   1,206,812
     
≥
8.0%
     $
   1,508,515
     
≥
10.0%
  
United Bank
   
2,106,457
     
14.0
 %    
1,204,264
     
≥
8.0%
      
1,505,330
     
≥
10.0%
  
Tier I Capital (to Risk-Weighted Assets):
   
     
     
     
     
     
 
United Bankshares
  $
1,890,757
     
12.5
 %   $
905,109
     
≥
6.0%
     $
1,206,812
     
≥
8.0%
  
United Bank
   
2,027,667
     
13.5
 %    
903,198
     
≥
6.0%
      
1,204,264
     
≥
8.0%
  
Common Tier I Capital (to Risk Weighted Assets):
   
     
     
     
     
     
 
United Bankshares
  $
1,890,757
     
12.5
 %   $
678,832
     
≥
4.5%
     $
980,535
     
≥
6.5%
  
United Bank
   
2,027,667
     
13.5
 %    
677,399
     
≥
4.5%
      
978,465
     
≥
6.5%
  
Tier I Capital (to Average Assets):
   
     
     
     
     
     
 
United Bankshares
  $
1,890,757
     
10.5
 %   $
721,691
     
≥
4.0%
     $
902,114
     
≥
5.0%
  
United Bank
   
2,027,667
     
11.3
 %    
720,232
     
≥
4.0%
      
900,290
     
≥
5.0%
  
As of December 31, 2018:
    
     
     
     
     
     
 
Total Capital (to Risk-Weighted Assets):
   
     
     
     
     
     
 
United Bankshares
  $
2,119,774
     
14.4
 %   $
1,179,708
     
≥
8.0%
     $
1,474,635
     
≥
10.0%
  
United Bank
   
2,080,234
     
14.1
 %    
1,177,953
     
≥
8.0%
      
1,472,441
     
≥
10.0%
  
Tier I Capital (to Risk-Weighted Assets):
   
     
     
     
     
     
 
United Bankshares
  $
1,793,682
     
12.2
 %   $
884,781
     
≥
6.0%
     $
1,179,708
     
≥
8.0%
  
United Bank
   
2,002,142
     
13.6
 %    
883,465
     
≥
6.0%
      
1,177,953
     
≥
8.0%
  
Common Tier I Capital (to Risk Weighted Assets):
   
     
     
     
     
     
 
United Bankshares
  $
1,793,682
     
12.2
 %   $
663,586
     
≥
4.5%
     $
958,513
     
≥
6.5%
  
United Bank
   
2,002,142
     
13.6
 %    
662,599
     
≥
4.5%
      
957,087
     
≥
6.5%
  
Tier I Capital (to Average Assets):
   
     
     
     
     
     
 
United Bankshares
  $
1,793,682
     
10.1
 %   $
707,916
     
≥
4.0%
     $
884,895
     
≥
5.0%
  
United Bank
   
2,002,142
     
11.3
 %    
706,977
     
≥
4.0%
      
883,721
     
≥
5.0%
  
 
 
 
 
United’s mortgage banking entity, George Mason, is subject to net worth requirements issued by the U.S. Department of Housing and Urban Development (HUD). Failure to meet minimum capital requirements of HUD can result in certain mandatory and possibly additional discretionary actions that, if undertaken, could have a direct material effect on George Mason’s operations.
The minimum net worth requirement of HUD at December 31, 2019 was $2,500,000. George Mason’s net worth was $35,556,000 at December 31, 2019, which exceeded the HUD requirements.
NOTE V—FAIR VALUES OF FINANCIAL INSTRUMENTS
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.
 
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Table of Contents
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 December 31, 2019, management determined that the prices provided by its third party pricing source were reasonable and in line with management’s expectations for the market values of these securities. Therefore, prices obtained from third party vendors that did not reflect forced liquidation or distressed sales were not adjusted by management at December 31, 2019. Management utilizes a number of factors to determine if a market is inactive, all of which may require a significant level of judgment. Factors that management considers include: a significant widening of the
bid-ask
spread, a considerable decline in the volume and level of trading activity in the instrument, a significant variance in prices among market participants, and a significant reduction in the level of observable inputs. Any securities available for sale not valued based upon quoted market prices or third party pricing models that consider observable market data are considered Level 3. Currently, United considers its valuation of
available-for-sale
Trup
Cdos
as Level 3. Based upon management’s review of the market conditions for
Trup
Cdos
, it was determined that an income approach valuation technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs is the most representative measurement technique for these securities. The present value technique discounts expected future cash flows of a security to arrive at a present value. Management considers the following items when calculating the appropriate discount rate: the implied rate of return when the market was last active, changes in the implied rate of return as markets moved from very active to inactive, recent changes in credit ratings, and recent activity showing that the market has built in increased liquidity and credit premiums. Management’s internal credit review of each security was also factored in to determine the appropriate discount rate. The credit review considered each security’s collateral, subordination, excess spread, priority of claims, principal and interest.
 
 
Loans held for sale
: For residential mortgage loans sold in the mortgage banking segment, the loans closed are recorded at fair value using the fair value option which is measured using valuations from investors for loans with similar characteristics adjusted for the Company’s actual sales experience versus the investor’s indicated pricing. These valuations fall into the Level 3 category. The unobservable input is the Company’s historical sales prices. The range of historical sales prices increased the investor’s indicated pricing by a range of 0.06% to 0.53% with a weighted average increase of 0.30%.
Derivatives
: United utilizes interest rate swaps to hedge exposure to interest rate risk and variability of cash flows associated to changes in the underlying interest rate of the hedged item. These hedging interest rate swaps are classified as either a fair value hedge or a cash flow hedge. United’s derivative portfolio also includes derivative financial instruments not included in hedge relationships. These derivatives consist of interest rate swaps used for interest rate management purposes and derivatives executed with commercial banking customers to facilitate their interest rate management strategies. United utilizes third-party vendors for derivative valuation purposes. These vendors determine the appropriate fair value based on a net present value calculation of the cash flows related to the interest rate swaps using primarily observable market inputs such as interest rate yield curves (Level 2). Valuation adjustments to derivative fair values for liquidity and credit risk are also taken into consideration, as well as the likelihood of default by United and derivative counterparties, the net counterparty exposure and the remaining maturities of the positions. Values obtained from third party vendors are typically not adjusted by management. Management internally reviews the derivative values provided by third party vendors on a quarterly basis. All derivative values are tested for reasonableness by management utilizing a net present value calculation.
 
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Table of Contents
For a fair value hedge, the fair value of the interest rate swap is recognized on the balance sheet as either a freestanding asset or liability with a corresponding adjustment to the hedged financial instrument. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a fair value hedge are offset in current period earnings either in interest income or interest expense depending on the nature of the hedged financial instrument. For a cash flow hedge, the fair value of the interest rate swap is recognized on the balance sheet as either a freestanding asset or liability with a corresponding adjustment to other comprehensive income within shareholders’ equity, net of tax. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a cash flow hedge are offset to other comprehensive income, net of tax. The portion of a hedge that is ineffective is recognized immediately in earnings.
The Company records its interest rate lock commitments and forward loan sales commitments at fair value determined as the amount that would be required to settle each of these derivative financial instruments at the balance sheet date. In the normal course of business, George Mason enters into contractual interest rate lock commitments to extend credit to borrowers with fixed expiration dates. The commitments become effective when the borrowers
“lock-in”
a specified interest rate within the timeframes established by the mortgage companies. All borrowers are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to the investor. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, George Mason enters into either a forward sales contract to sell loans to investors when using best efforts or a TBA mortgage-backed security under mandatory delivery. As TBA mortgage-backed securities are actively traded in an open market, TBA mortgage-backed securities fall into a Level 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. For residential mortgage loans sold in the mortgage banking segment, the interest rate lock commitments are recorded at fair value which is measured using valuations from investors for loans with similar characteristics adjusted for the Company’s actual sales experience versus the investor’s indicated pricing. These valuations fall into the Level 3 category. The unobservable input is the Company’s historical sales prices. The range of historical sales prices increased the investor’s indicated pricing by a range of 0.06% to 0.53% with a weighted average increase of 0.30%.
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 table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018, segregated by the level of the valuation inputs within the fair value hierarchy:
 
 
  
Fair Value at December 31, 2019 Using
 
(In thousands)
 
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
   
3,832
     
0
     
3,832
     
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
   
4,704
     
0
     
0
     
4,704
 
 
12
3
Table of Contents
  
 
  
Fair Value at December 31, 2019 Using
 
(In thousands)
 
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)
 
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
 
 
 
2,426,006
 
 
 
4,704
 
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:
   
     
     
     
 
Forward sales commitments
   
9
      
0
      
9
      
0
  
Interest rate lock commitments
   
4,518
      
0
      
0
      
4,518
  
Total derivative financial assets
    
4,527
      
0
      
9
      
4,518
  
                                 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
   
2,394
      
0
      
2,394
      
0
  
TBA mortgage-backed securities
   
671
      
0
      
671
      
0
  
 
                                
Total derivative financial liabilities
   
3,065
      
0
      
3,065
      
0
  
 
 
 
 
Fair Value at December 31, 2018 Using
 
(In thousands)
 
Description
 
Balance as of
    December 31,  
2018
 
  
  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
  
  Significant  
Other
Observable
Inputs
(Level 2)
 
  
Significant
  Unobservable  
Inputs
(Level 3)
 
Assets
   
     
     
     
 
Available for sale debt securities:
   
     
     
     
 
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
      $
     85,890
        $
             0
        $
   85,890
        $
             0
 
State and political subdivisions
   
208,988
     
0
     
208,988
     
0
 
Residential mortgage-backed securities
   
    
      
     
     
 
Agency
   
1,035,650
     
0
     
1,035,650
     
0
 
Non-agency
   
4,259
     
0
     
4,259
     
0
 
Commercial mortgage-backed securities
   
     
     
     
 
Agency
   
554,600
     
0
     
554,600
     
0
 
Asset-backed securities
   
271,970
     
0
     
271,970
     
0
 
Trust preferred collateralized debt obligations
   
5,917
     
0
     
0
     
5,917
 
Single issue trust preferred securities
   
8,362
     
0
     
8,362
     
0
 
Other corporate securities
   
161,403
     
6,822
     
154,581
     
0
 
                                 
Total available for sale securities
   
2,337,039
     
6,822
     
2,324,300
     
5,917
 
Equity securities:
   
     
     
     
 
Financial services industry
   
140
     
140
     
0
     
0
 
Equity mutual funds (1)
   
4,954
     
4,954
     
0
     
0
 
Other equity securities
   
4,640
     
4,640
     
0
     
0
 
                                 
Total equity securities
   
9,734
     
9,734
     
0
     
0
 
Loans held for sale
   
247,104
     
0
     
0
     
247,104
 
Derivative financial assets:
   
     
     
     
 
Interest rate swap contracts
   
1,859
     
0
     
1,859
     
0
 
 
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Fair Value at December 31, 2018 Using
 
(In thousands)
 
Description
 
Balance as of
  December 31,  
2018
 
 
  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
 
  Significant  
Other
Observable
Inputs
(Level 2)
 
 
Significant
  Unobservable  
Inputs
(Level 3)
 
Forward sales commitments
 
 
542
 
 
 
0
 
 
 
542
 
 
 
0
 
Interest rate lock commitments
 
 
4,103
 
 
 
0
 
 
 
0
 
 
 
4,103
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative financial assets
 
 
6,504
 
 
 
0
 
 
 
2,401
 
 
 
4,103
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
TBA mortgage-backed securities
 
 
3,002
 
 
 
0
 
 
 
3,002
 
 
 
0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative financial liabilities
 
 
3,002
 
 
 
0
 
 
 
3,002
 
 
 
0
 
(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, Level 2 and Level 3 for financial assets and liabilities measured at fair value on a recurring basis during the year ended December 31, 2019 and 2018.
The following table presents additional information about financial assets and liabilities measured at fair value at December 31, 2019 and 2018 on a recurring basis and for which United has utilized Level 3 inputs to determine fair value:
 
Available-for-sale

Securities
 
(In thousands)
 
Trust preferred
collateralized debt obligations
 
  
2019
 
  
2018
 
Balance, beginning of year
  $
5,917
    $
34,269
 
Total gains or losses (realized/unrealized):
   
     
 
Included in earnings (or changes in net assets)
   
(155
)     
28
 
Included in other comprehensive income
   
(1,059
)     
920
 
Purchases, issuances, and settlements
   
0
     
0
 
Sales
   
0
      
(29,300
 )
Transfers in and/or out of Level 3
   
0
     
0
 
                 
Balance, ending of year
  $
4,703
    $
5,917
 
                 
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at reporting date
   
0
     
0
 
                 
       
 
Loans held for sale
 
(In thousands)
 
2019
 
  
2018
 
Balance, beginning of period
 
        
$
    247,104
   
    
$
263,308
 
Originations
   
2,941,722
     
2,619,454
 
Sales
   
(2,888,257
 )    
(2,676,797
 )
Total gains or losses during the period recognized in earnings
   
83,806
     
68,555
 
Transfers in and/or out of Level 3
   
(0
 )    
(27,416
 )
                 
Balance, end of period
 
        
$
    384,375
   
    
$
247,104
 
                 
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at reporting date
 
        
$
    0
   
    
$
0
 
 
 
125
Table of Contents
                 
(In thousands)
 
Derivative Financial Assets
Interest Rate Lock Commitments
 
 
2019
 
  
2018
 
Balance, beginning of period
  $
4,103
    $
4,559
 
Transfers other
   
415
      
(456
 )
                 
Balance, end of perio
d
   $
4,518
    $
4,103
 
                 
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in 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.
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:
                 
(In thousands)
Description
 
Year Ended
December 31, 2019
 
  
Year Ended
December 31, 2018
 
Assets
   
     
 
Loans held for sale
   
     
 
Income from mortgage banking activities
      $
   3,705
        $
   (281)
 
 
 
 
 
 
 
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:
                                                 
 
December 31, 2019
   
December 31, 2018
 
(In thousands)
 
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
 
    
$
 
 
 
 
375,274
   
    
$
 
 
 
 
384,375
   
    
$
 
 
 
 
9,101
   
    
$
 
 
 
 
241,293
   
    
$
 
 
 
247,104
   
    
$
5,811
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following describes the valuation techniques used by United to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements.
Loans held for sale
: Loans held for sale within the community banking segment that are delivered on a best efforts basis are carried at the lower of cost or market value. These loans currently consist of
one-to-four
family residential loans originated for sale in the secondary market. 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 on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the year ended December 31, 2019. Gains and losses on sale of loans are recorded within income from mortgage banking on the Consolidated Statements of Income.
Impaired Loans
: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Impairment is measured based upon the present value of expected future cash flows from the loan discounted at the loan’s effective rate and the loan’s observable market price or the fair value of collateral, if the loan is collateral dependent. Fair value is measured using a market approach based on the value of the collateral securing the loans. Collateral may be in the
 
12
6
 
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form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate.
The value of real estate collateral is determined utilizing an appraisal conducted by an independent, licensed appraiser outside of the Company using comparable property sales (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). For impaired loans, a specific reserve is established through the Allowance for Loan Losses, if necessary, by estimating the fair value of the underlying collateral on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for credit losses expense on the Consolidated Statements of Income.
OREO
: OREO consists of real estate acquired in foreclosure or other settlement of loans. Such assets are carried on the balance sheet at the lower of the investment in the assets or the fair value of the assets less estimated selling costs. Fair value is determined by one of two market approach methods depending on whether the property has been vacated and an appraisal can be conducted. If the property has yet to be vacated and thus an appraisal cannot be performed, a Brokers Price Opinion (i.e. BPO), is obtained. A BPO represents a best estimate valuation performed by a realtor based on knowledge of current property values and a visual examination of the exterior condition of the property. Once the property is subsequently vacated, a formal appraisal is obtained and the recorded asset value appropriately adjusted. On the other hand, if the OREO property has been vacated and an appraisal can be conducted, the fair value of the property is determined based upon the appraisal using a market approach. An authorized independent appraiser conducts appraisals for United. Appraisals for property other than ongoing construction are based on consideration of comparable property sales (Level 2). In contrast, valuation of ongoing construction assets requires some degree of professional judgment. In conducting an appraisal for ongoing construction property, the appraiser develops two appraised amounts: an “as is” appraised value and a “completed” value. Based on professional judgment and their knowledge of the particular situation, management determines the appropriate fair value to be utilized for such property (Level 3). As a matter of policy, valuations are reviewed at least annually and appraisals are generally updated on a
bi-annual
basis with values lowered as necessary.
 
Intangible Assets:
For United, intangible assets consist of goodwill and core deposit intangibles. Goodwill is tested for impairment at least annually or sooner if indicators of impairment exist. Goodwill impairment would be defined as the difference between the recorded value of goodwill (i.e. book value) and the implied fair value of goodwill. In determining the implied fair value of goodwill for purposes of evaluating goodwill impairment, United determines the fair value of the reporting unit 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. United used the qualitative analysis to determine that no goodwill impairment occurred in 2019. Core deposit intangibles relate to the estimated value of the deposit base of acquired institutions. Management reviews core deposit intangible assets on an annual basis, or sooner if indicators of impairment exist, and evaluates changes in facts and circumstances that may indicate impairment in the carrying value.
 
No
other fair value measurement of intangible assets was made during the year of 2019 and
2018
.
 
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The following table summarizes United’s financial assets that were measured at fair value on a nonrecurring basis during the period:
 
 
  
Carrying value at December 31, 2019
    
 
(In thousands)
 
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
) 
  
 
  
Carrying value at December 31, 2018
    
 
(In thousands)
 
Description
 
Balance as of
December 31,
2018
 
  
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
  
Significant
Other
Observable
Inputs
(Level 2)
 
  
Significant
Unobservable
Inputs
(Level 3)
 
  
YTD
Losses
 
Assets
   
     
     
     
     
 
Loans held for sale
  $
2,742
    $
0
    $
2,742
    $
0
    $
3
 
Impaired Loans
   
121,355
     
0
     
108,899
     
12,456
     
12,301
 
OREO
   
16,865
     
0
     
16,865
     
0
     
910
 
Fair Value of Other Financial Instruments
The following methods and assumptions were used by United in estimating its fair value disclosures for other financial instruments:
Cash and Cash Equivalents:
The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values.
Securities held to maturity and other securities
: The estimated fair values of securities held to maturity are based on quoted market prices, where available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data. Any securities held to maturity, not valued based upon the methods above, are valued based on a discounted cash flow methodology using appropriately adjusted discount rates reflecting nonperformance and liquidity risks. Other securities consist mainly of shares of Federal Home Loan Bank and Federal Reserve Bank stock that do not have readily determinable fair values and are carried at cost.
Loans:
The fair values of certain mortgage loans (e.g.,
one-to-four
family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values of other loans (e.g., commercial real estate and rental property mortgage loans, commercial and industrial loans, financial institution loans and agricultural loans) are estimated using discounted
 
cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar creditworthiness, which include adjustments for liquidity concerns. For acquired impaired loans, fair value is assumed to equal United’s carrying value, which represents the present value of expected future principal and interest cash flows, as adjusted for any Allowance for Loan Losses recorded for these loans.
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.
 
12
8
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Short-term Borrowings:
The carrying amounts of federal funds purchased, borrowings under repurchase agreements and any other short-term borrowings approximate their fair values.
Long-term Borrowings:
The fair values of United’s Federal Home Loan Bank borrowings and trust preferred securities are estimated using discounted cash flow analyses, based on United’s current incremental borrowing rates for similar types of borrowing
arrangements
.
Summary of Fair Values for All Financial Instruments
The estimated fair values of United’s financial instruments are summarized below:
 
 
  
 
  
Fair Value Measurements
 
(In thousands)
 
  
    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)
 
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
     
2,426,006
     
4,704
 
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
 
                                         
December 31, 2018
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
Cash and cash equivalents
  $
1,020,396
    $
1,020,396
    $
0
    $
1,020,396
    $
0
 
Securities available for sale
   
2,337,039
     
2,337,039
     
6,822
     
2,324,300
     
5,917
 
Securities held to maturity
   
19,999
     
18,655
     
0
     
15,635
     
3,020
 
Equity securities
   
9,734
     
9,734
     
9,734
     
0
     
0
 
Other securities
   
176,955
     
168,107
     
0
     
0
     
168,107
 
Loans held for sale
   
249,846
     
249,846
     
0
     
2,742
     
247,104
 
Net loans
   
13,345,519
     
12,657,073
     
0
     
0
     
12,657,073
 
Derivative financial assets
   
6,504
     
6,504
     
0
     
2,401
     
4,103
 
Deposits
   
13,994,749
     
13,954,574
     
0
     
13,954,574
     
0
 
Short-term borrowings
   
351,327
     
351,327
     
0
     
351,327
     
0
 
Long-term borrowings
   
1,499,103
     
1,475,237
     
0
     
1,475,237
     
0
 
Derivative financial liabilities
   
3,002
     
3,002
     
0
     
3,002
     
0
 
 
N
OTE W—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.
1
29
Table of Contents
United currently sponsors fourteen statutory business trusts that were
created
for the purpose of raising funds that qualify for Tier I 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.
The trusts utilized in these transactions are variable interest entities (VIEs) as the third-party equity holders lack a controlling financial interest in the trusts through their inability to make decisions that have a significant effect on the operations and success of the entities. United does not consolidate these trusts as it is not the primary beneficiary of these entities because United does not hold a controlling financial interest as evidenced by the power to direct the activities of the VIEs that most significantly impact their economic performance and the obligation to absorb losses of, or the right to receive benefits from, the VIEs that could potentially be significant to the VIEs. Information related to United’s statutory trusts is presented in Note
L
, Notes to Consolidated Financial Statements.
United, through its banking subsidiaries, 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 December 31, 2019
   
As of December 31, 2018
 
(In thousands)
 
  Aggregate  
Assets
 
  
  Aggregate  
Liabilities
 
  
  Risk   
  Of  
Loss 
(1)
 
  
  Aggregate  
Assets
 
  
  Aggregate  
Liabilities
 
  
  Risk   
  Of  
Loss 
(1)
 
Trust preferred securities
  $
257,941
    $
248,680
    $
9,261
    $
257,754
    $
248,741
    $
9,013
 
   
(1)
Represents investment in VIEs.
  
 
NOTE X—SEGMENT INFORMATION
United operates in two business segments: community banking and mortgage banking. Through its community banking segment, United offers a full range of products and services through various delivery channels. In particular, the community banking segment includes both commercial and consumer lending and provides customers with such products as commercial loans, real estate loans, business financing and consumer loans. In addition, this segment provides customers with several choices of deposit products including demand deposit accounts, savings accounts and certificates of deposit as well as investment and financial advisory services to businesses and individuals, including financial planning, retirement/estate planning, and investment management. The mortgage banking segment engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market though George Mason.
The community banking segment provides the mortgage banking segment (George Mason) with short-term funds to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest based on
a
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.
 
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Information about the reportable segments and reconciliation of this information to the consolidated financial statements at and for the years ended December 31, 2019, 2018 and 2017 is as follows:
 
At and For the Year Ended December 31, 2019
 
(In thousands)
 
Community
Banking
 
  
Mortgage
Banking
 
  
Other
 
  
Intersegment
Eliminations
 
  
Consolidated
 
Net interest income
      $
583,547
        $
916
        $
(12,472
 )       $
5,931
        $
      577,922
 
Provision for loans losses
   
21,313
     
0
     
0
     
0
     
21,313
 
Other income
   
74,956
     
83,884
     
392
      
(8,748
 )    
150,484
 
Other expense
   
314,710
     
72,288
     
(1,527
)     
(2,817
 )    
382,654
 
Income taxes
   
64,080
     
2,355
      
(2,095
 )    
0
     
64,340
 
                                         
Net income (loss)
      $
      258,400
        $
10,157
         $
(8,458
 )       $
0
        $
260,099
 
                                         
Total assets (liabilities)
      $
  19,564,036
        $
507,124
        $
17,777
        $
(426,613
 )       $
19,662,324
 
Average assets (liabilities)
   
19,401,397
     
358,087
     
8,411
     
(292,427
 )    
19,475,468
 
       
  
At and For the Year Ended December 31, 2018
 
(In thousands)
 
Community
Banking
 
  
Mortgage
Banking
 
  
Other
 
  
Intersegment
Eliminations
 
  
Consolidated
 
Net interest income
      $
     593,108
        $
1,315
        $
 (11,886
 )       $
6,108
        $
588,645
 
Provision for loans losses
   
22,013
     
0
     
0
     
0
     
22,013
 
Other income
   
72,539
     
68,555
     
(667
 )    
(11,715
 )    
128,712
 
Other expense
   
301,123
     
72,632
     
31
     
(5,607
 )    
368,179
 
Income taxes
   
73,861
     
(505
 )    
(2,533
 )    
0
     
70,823
 
                                         
Net income (loss)
      $
268,650
        $
(2,257
 )       $
(10,051
 )       $
0
        $
256,342
 
                                         
Total assets (liabilities)
      $
19,191,215
        $
320,299
        $
3,222
        $
(264,238
 )       $
19,250,498
 
Average assets (liabilities)
   
18,798,880
     
279,618
     
6,104
     
(236,575
 )    
18,848,027
 
 
  
At and For the Year Ended December 31, 2017
 
(In thousands)
 
Community
Banking
 
  
Mortgage
Banking
 
  
Other
 
  
Intersegment
Eliminations
 
  
Consolidated
 
Net interest income
      $
     558,622
        $
(69
 )       $
(9,556
 )
 
 
       $
0
        $
548,997
 
Provision for loans losses
   
28,406
     
0
     
0
     
0
     
28,406
 
Other income
   
69,615
     
58,532
     
3,498
     
0
     
131,645
 
Other expense
   
291,584
     
62,072
     
13,753
     
0
     
367,409
 
Income taxes
   
139,980
     
(901
 )    
(4,833
 )    
0
     
134,246
 
                                         
Net income (loss)
      $
168,267
        $
(2,708
 )       $
(14,978
 )       $
0
        $
150,581
 
                                         
Total assets (liabilities)
      $
 19,016,619
        $
 280,293
        $
17,158
        $
(255,111
 )    $
19,058,959
 
Average assets (liabilities)
   
17,565,464
     
212,212
     
19,769
     
(180,016
 )    
17,617,429
 
NOTE Y—QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for
2019
and
2018
is summarized below (dollars in thousands, except for per share data):
(Dollars in thousands)
 
1st Quarter
 
  
2nd Quarter
 
  
3rd Quarter
 
  
4th Quarter
 
2019
 
 
 
  
 
 
  
 
 
  
 
 
Interest income
  $
189,097
    $
199,245
    $
190,351
    $
183,869
 
Interest expense
   
44,929
     
48,692
     
48,433
     
42,586
 
Net interest income
   
144,168
     
150,553
     
141,918
     
141,283
 
Provision for credit losses
   
4,996
     
5,417
     
5,033
     
5,867
 
Mortgage banking income
   
13,681
     
21,704
     
24,019
     
17,547
 
Securities gains (losses), net
   
(159
 )    
109
      
116
      
109
  
Other noninterest income
   
17,701
     
17,982
     
18,089
     
19,586
 
Noninterest expense
   
89,425
     
100,195
     
96,134
     
96,900
 
Income taxes
   
17,328
     
17,529
     
17,010
     
12,473
 
Net income
(1)
    
63,642
     
67,207
     
65,965
     
63,285
 
 
13
1
 
Table of Contents
(Dollars in thousands)
 
1st Quarter
 
 
2nd Quarter
 
 
3rd Quarter
 
 
4th Quarter
 
Per share data:
    
     
     
     
 
Average shares outstanding (000s):
   
     
     
     
 
Basic
 
 
101,895
 
 
 
101,774
 
 
 
101,432
 
 
 
101,250
 
Diluted
 
 
102,163
 
 
 
102,048
 
 
 
101,712
 
 
 
101,538
 
Net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.62
 
 
$
0.66
 
 
$
0.65
 
 
$
0.62
 
Diluted
 
$
0.62
 
 
$
0.66
 
 
$
0.65
 
 
$
0.62
 
Dividends per share
 
$
0.34
 
 
$
0.34
 
 
$
0.34
 
 
$
0.35
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
167,185
 
 
$
178,000
 
 
$
185,030
 
 
$
187,500
 
Interest expense
 
 
23,142
 
 
 
28,878
 
 
 
36,255
 
 
 
40,795
 
Net interest income
 
 
144,043
 
 
 
149,122
 
 
 
148,775
 
 
 
146,705
 
Provision for credit losses
 
 
5,178
 
 
 
6,204
 
 
 
4,808
 
 
 
5,823
 
Mortgage banking income
 
 
14,570
 
 
 
18,692
 
 
 
13,277
 
 
 
11,570
 
Securities losses, net
 
 
(485
)
 
 
(55
)
 
 
(152
)
 
 
(1,926
)
Other noninterest income
 
 
17,107
 
 
 
17,370
 
 
 
18,561
 
 
 
20,183
 
Noninterest expense
 
 
90,452
 
 
 
93,410
 
 
 
93,315
 
 
 
91,002
 
Income taxes
 
 
17,899
 
 
 
19,241
 
 
 
17,926
 
 
 
15,757
 
Net income
(1)
 
 
61,706
 
 
 
66,274
 
 
 
64,412
 
 
 
63,950
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per share data:
 
 
 
 
 
 
 
 
 
 
 
 
Average shares outstanding (000s):
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
104,859
 
 
 
104,683
 
 
 
103,618
 
 
 
102,930
 
Diluted
 
 
105,163
 
 
 
104,953
 
 
 
103,934
 
 
 
103,164
 
Net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.59
 
 
$
0.63
 
 
$
0.62
 
 
$
0.62
 
Diluted
 
$
0.59
 
 
$
0.63
 
 
$
0.62
 
 
$
0.62
 
Dividends per share
 
$
0.34
 
 
$
0.34
 
 
$
0.34
 
 
$
0.34
 
(1)
For further information, see the related discussion “Quarterly Results” included in Management’s Discussion and Analysis.
 
 
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
 
 
This item is omitted since it is not applicable.
Item 9A.
CONTROLS AND PROCEDURES
 
 
Disclosure Controls and Procedures
United Bankshares, Inc. (the Company) maintains controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of the Company’s disclosure controls and procedures as of the end of the period covered by this report conducted by the Company’s management, with the participation of the Chief Executive and Chief Financial Officer, the Chief Executive and Chief Financial Officer believe that these controls and procedures are effective to ensure that the Company is able to collect, process and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods.
Management’s Report on Internal Control over Financial Reporting
Management’s Report on internal control over financial reporting and the audit report of Ernst & Young LLP, the Company’s independent registered public accounting firm, on internal control over financial reporting is included on pages 60-61 of this report and are incorporated in this Item 9A by reference.
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Table of Contents
Changes In Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule
 13a-15(f)
under the Exchange Act) during the fiscal quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
OTHER INFORMATION
 
 
None
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Table of Contents
UNITED BANKSHARES, INC.
FORM
10-K,
PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 
Information regarding directors and executive officers of the registrant including their reporting compliance under Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from United’s definitive proxy statement for the 2020 Annual Meeting of Shareholders under the caption “Directors Whose Terms Expire in 2020 and Nominees for Directors” under the heading “PROPOSAL 1: ELECTION OF DIRECTORS”, under the caption “Delinquent Section 16(a) Reports” under the heading “COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” and under the captions “Executive Officers” and “Family Relationships” under the heading “GOVERNANCE OF THE COMPANY.”
United has adopted a code of ethics for its Chief Executive Officer, Chief Financial Officer, Controller and persons performing similar functions of the registrant in accordance with Section 406 of the Sarbanes-Oxley Act of 2002. A copy of the code of ethics is posted on United’s web site at
www.ubsi-inc.com.
Information related to the registrant’s audit committee and its financial expert in accordance with Section 407 of the Sarbanes-Oxley Act of 2002 is incorporated by reference from United’s definitive proxy statement for the 2020 Annual Meeting of Shareholders under the captions “The Audit Committee” and the “Audit Committee Financial Expert” under the heading “GOVERNANCE OF THE COMPANY.”
Since the disclosure of the procedures in the definitive proxy statement for the 2019 Annual Meeting of Shareholders, United has not adopted any changes to the procedures by which shareholders may recommend nominees to United’s Board of Directors as set forth in Article II, Section 5 of the Restated Bylaws of United.
Item 11.
EXECUTIVE COMPENSATION
 
 
Information regarding executive compensation is incorporated by reference from United’s definitive proxy statement for the 2020 Annual Meeting of Shareholders under the heading of “EXECUTIVE COMPENSATION”, under the heading “COMPENSATION DISCUSSION AND ANALYSIS (CD&A)”, and under the heading “REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION.”
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 
Information regarding security ownership of certain beneficial owners and management and securities authorized under equity compensation plans is incorporated by reference from United’s definitive proxy statement for the 2020 Annual Meeting of Shareholders under the caption “Directors Whose Terms Expire in 2020 and Nominees for Directors” under the heading “PROPOSAL 1: ELECTION OF DIRECTORS” and under the captions “Beneficial Ownership of Directors and Named Executive Officers”, “Principal Shareholders of United” and “Related Shareholder Matters” under the heading “COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.”
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
 
Information regarding certain relationships and related transactions is incorporated by reference from United’s definitive proxy statement for the 2020 Annual Meeting of Shareholders under the captions of “Related Party Transactions” and “Independence of Directors” under the heading “GOVERNANCE OF THE COMPANY.”
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Table of Contents
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
 
 
Information regarding approval of audit and
non-audit
services by the Audit Committee as well as fees paid to auditors is incorporated by reference from United’s definitive proxy statement for the 2020 Annual Meeting of Shareholders under the captions
“Pre-Approval
Policies and Procedures” and “Independent Registered Public Accounting Firm Fees Information” under the heading “AUDIT COMMITTEE AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.”
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Table of Contents
UNITED BANKSHARES, INC.
FORM
10-K,
PART IV
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
 
  (a) List of Documents Filed as Part of This Report:
 
 
  (1) Financial Statements
 
 
United’s consolidated financial statements required in response to this Item are incorporated by reference from Item 8 of this Annual Report on Form
10-K.
  (2) Financial Statement Schedules
 
 
United is not filing separate financial statement schedules because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto.
  (3) Exhibits Required by Item 601
 
 
Listing of Exhibits—See the Exhibits’ Index on page
137
of this Form
10-K.
  (b) Exhibits — The exhibits to this Form
10-K
begin on page
141
.
 
 
  (c) Consolidated Financial Statement Schedules — All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable or pertain to items as to which the required disclosures have been made elsewhere in the financial statements and notes thereto, and therefore have been omitted.
 
 
All reports filed electronically by United with the Securities and Exchange Commission (SEC), including the annual report on Form
10-K,
quarterly reports on Form
10-Q,
and current reports on Form
8-K,
as well as any amendments to those reports, are accessible at no cost on United’s web site at
www.ubsi-inc.com.
These filings are also accessible on the SEC’s web site at www.sec.gov.
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Table of Contents
UNITED BANKSHARES, INC.
FORM
10-K
INDEX TO EXHIBITS
         
Exhibit
No.
    
Description
         
 
  2.1
    
         
 
  3.1
    
         
 
  3.2
    
         
 
  4.1
    
         
 
10.1
    
         
 
10.2
    
         
 
10.3
    
         
 
10.4
    
         
 
10.5
    
         
 
10.6
    
         
 
10.7
    
 
 
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Table of Contents
         
Exhibit
No.
    
Description
         
 
10.8
    
         
 
10.9
    
         
 
10.10
    
         
 
10.11
    
         
 
10.12
    
         
 
10.13
    
         
 
10.14
    
         
 
10.15
    
         
 
10.16
    
         
 
10.17
    
         
 
10.18
    
 
 
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Table of Contents
         
Exhibit
No.
    
Description
         
 
10.19
    
         
 
10.20
    
         
 
10.21
    
         
 
21.1
    
         
 
23.1
    
         
 
31.1
    
         
 
31.2
    
         
 
32.1
    
         
 
32.2
    
         
 
101
    
Interactive data file (Inline XBRL) (filed herewith)
         
 
104
    
Cover Page Interactive Data File (embedded within the Inline XBRL document)
 
 
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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)
 
/s/ Richard M. Adams
Chairman of the Board
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
             
Signatures
 
 
Title
 
Date
             
/s/ Richard M. Adams
 
 
Chairman of the Board, Director, and Chief Executive Officer
 
March 2, 2020
             
/s/ W. Mark Tatterson
 
 
Chief Financial Officer Chief Accounting Officer
 
March 2, 2020
             
/s/ Theodore J. Georgelas
 
 
Director
 
March 2, 2020
             
/s/ J. Paul McNamara
 
 
Director
 
March 2, 2020
             
/s/ Peter A. Converse
 
 
Director
 
March 2, 2020
             
/s/ Mark R. Nesselroad
  
 
Director
 
March 2, 2020
             
/s/ P. Clinton Winter
 
 
Director
 
March 2, 2020
             
/s/ Mary K. Weddle
 
 
Director
 
March 2, 2020
             
/s/ Gary G. White
 
 
Director
 
March 2, 2020
 
 
140