Mergers and Acquisitions

6 Months Ended

Jun. 30, 2020

Business Combinations [Abstract]

Mergers and Acquisitions

2. MERGERS AND ACQUISITIONS

On May 1, 2020 (“Acquisition Date”), United acquired 100% of the outstanding shares of Carolina Financial Corporation (“Carolina Financial”), a Delaware corporation headquartered in Charleston, South Carolina. Carolina Financial was merged with and into United (the “Merger”), pursuant to the terms of the Agreement and Plan of Merger, dated November 17, 2019, by and between United and Carolina Financial (the “Merger Agreement”). Upon completion of the Merger, Carolina Financial ceased to exist and United survived and continues to exist as a West Virginia corporation.

Under the terms of the Merger Agreement, each outstanding share of common stock of Carolina Financial was converted into the right to receive 1.13 shares of United common stock, par value $2.50 per share. Also pursuant to the Merger Agreement, as of the effective time of the Merger, each outstanding Carolina Financial stock option, whether vested or unvested as of the date of the Merger, at such option holder’s election, (i) vested and converted into an option to acquire United common stock adjusted based on the 1.13 exchange ratio, or (ii) was entitled to receive cash consideration equal to the difference between (a) the option’s exercise price and (b) $28.99, representing the volume weighted average trading price of the Carolina Financial common stock on NASDAQ for the twenty full trading days ending on the second trading day immediately preceding the closing date (the “CFC Closing Price”) multiplied by the number of shares of Carolina Financial common stock subject to such stock option. Also, at the effective time of the Merger, each restricted stock grant, restricted stock unit grant or any other award of a share of Carolina Financial common stock subject to vesting, repurchase or other lapse restriction under a Carolina Financial stock plan (other than a stock option) (each, a “Stock Award”) that was outstanding immediately prior to the effective time of the Merger, vested in accordance with the terms of the Carolina Financial stock plan and at the election of the holder (i) converted into the right to receive shares of United common stock based on the 1.13 exchange ratio or (ii) converted into cash in an amount equal to the CFC Closing Price multiplied by the shares of Carolina Financial common stock subject to the Stock Award.

Immediately following the Merger, CresCom Bank, a wholly-owned subsidiary of Carolina Financial, merged with and into United Bank, a wholly-owned subsidiary of United (the “Bank Merger”). United Bank survived the Bank Merger and continues to exist as a Virginia banking corporation. CresCom Bank owned and operated Crescent Mortgage Company (“Crescent Mortgage”), which is based in Atlanta, Georgia. As a result of the Bank Merger, Crescent Mortgage Company is now a wholly-owned subsidiary of United Bank.

The Merger was accounted for under the acquisition method of accounting. The results of operations of Carolina Financial are included in the consolidated results of operations from the Acquisition Date. The acquisition of Carolina Financial affords United the opportunity to expand its existing footprint in North Carolina and South Carolina. As of the Acquisition Date, Carolina Financial had $5,005,744 in total assets, $3,292,635 in gross loans and $3,873,183 in deposits. Carolina Financial has banking locations in North Carolina and South Carolina.

The aggregate purchase price was approximately $817,877, including common stock valued at $815,997, stock options assumed valued at $1,833, and cash paid for fractional shares of $47. The number of shares issued in the transaction was 28,031,501, which were valued based on the closing market price of $29.11 for United’s common shares on May 1, 2020. The preliminary purchase price has been allocated to the identifiable tangible and intangible

assets resulting in preliminary additions to goodwill, core deposit intangibles and the Crescent Mortgage trade name intangible of $316,765, $3,037 and $1,370, respectively. The core deposit intangible are expected to be amortized on an accelerated basis over ten years. The Crescent Mortgage trade name provides a source of market recognition to attract potential clients and retain existing relationships. United believes the Crescent Mortgage trade name provides a competitive advantage and is likely going to be used into perpetuity and thus will not be subject to amortization, but rather be evaluated for impairment.

Because the consideration paid was greater than the net fair value of the acquired assets and liabilities, the Company recorded goodwill as part of the acquisition. None of the goodwill from the Carolina Financial acquisition is expected to be deductible for tax purposes. United used an independent third party to help determine the fair values of the assets and liabilities acquired from Carolina Financial. As a result of the merger, United recorded preliminary fair value discounts of $51,553 on the loans acquired, $562 on investment securities, $272 on OREO, $4,831 on trust preferred issuances and $135 on subordinated notes, respectively, and premiums of $8,848 on buildings acquired, $4,960 on land acquired, $12,818 on interest-bearing deposits, and $468 on long-term FHLB advances, respectively. United also recorded an allowance for credit losses, including a reserve for unfunded commitments, of $50,562 on the loans and commitments acquired split between $19,797 for purchased credit deteriorated (“PCD”) loans and $30,765 for non-PCD loans. The discounts and premium amounts, except for discount on the land and OREO acquired, are being accreted or amortized on an accelerated or straight-line basis over each asset’s or liability’s estimated remaining life at the time of acquisition. At June 30, 2020, the discounts on subordinated debt and trust preferred issuances had an average estimated remaining life of 6.75 years and 16.83 years, respectively, and the premiums on the buildings, interest-bearing deposits and the FHLB advances each had an average estimated remaining life of 31.5 years, 5.1 years and 0.58 years, respectively. The estimated fair values of the acquired assets and assumed liabilities, including identifiable intangible assets are preliminary as of June 30, 2020 and are subject to refinement as additional information relative to closing date fair values becomes available. Any subsequent adjustments to the fair values of acquired assets and liabilities assumed, identifiable intangible assets, or other purchase accounting adjustments will result in adjustments to goodwill within the measurement period following the date of acquisition.

Portfolio loans acquired from Carolina Financial were recorded at their fair value at the Acquisition Date based on a discounted cash flow methodology. The estimated fair value incorporates adjustments related to expected credit losses, prevailing market interest rates for comparable assets and other market factors such as liquidity from the perspective of a market participant. Also, acquired portfolio loans were evaluated upon acquisition and classified as either PCD, which indicates that the loan has experienced a more-than-insignificant deterioration in credit quality since origination, or non-PCD. United considered a variety of factors in evaluating the acquired loans for a more-than-insignificant deterioration in credit quality, including but not limited to risk grades, delinquency, nonperforming status, current or previous troubled debt restructurings or bankruptcies, watch list credits and other qualitative factors that indicated a deterioration in credit quality since origination. For PCD loans, an initial allowance is determined based on the same methodology as other portfolio loans. This initial allowance for credit losses is allocated to individual PCD loans and added to the acquisition date fair values to establish the initial amortized cost basis for the PCD loans. The difference between the unpaid principal balance (“UPB”), or par value, of PCD loans and the amortized cost basis is considered to relate to noncredit factors and resulted in a discount of $10,259 at Acquisition Date. This discount will be recognized through interest income on a level-yield method over the life of the loans which is estimated to be a weighted-average of 4.6 years. For non-PCD acquired loans, the differences between the initial fair value and the UPB, or par value, are recognized as interest income on a level-yield basis over the lives of the related loans which is estimated to be a weighted-average of 7.3 years. The total fair value mark on the non-PCD loans at the Acquisition Date was $41,294. At the Acquisition Date, an initial allowance for expected credit losses of $28,948 was recorded with a corresponding charge to the provision for credit losses in the Consolidated Statements of Income. Subsequent changes in the allowance for credit losses related to PCD and non-PCD loans are recognized in the provision for credit losses.

The following table provides a reconciliation of the difference between the purchase price and the par value of portfolio loans acquired from Carolina Financial as of the Acquisition Date:

Purchase price of PCD loans at acquisition	$	1,053,014
Allowance for credit losses at acquisition		18,635
Non-credit discount at acquisition		10,259
Par value (UPB) of acquired PCD loans at acquisition	$	1,081,908

The consideration paid for Carolina Financial’s common equity and the preliminary amounts of acquired identifiable assets and liabilities assumed as of the Carolina Financial Acquisition Date were as follows:

Purchase price:
Value of common shares issued (28,031,501 shares)	$	815,997
Fair value of stock options assumed		1,833
Cash for fractional shares		47
Total purchase price		817,877
Identifiable assets:
Cash and cash equivalents		629,154
Investment securities		580,849
Loans held for sale		65,757
Net loans		3,242,812
Premises and equipment		83,859
Operating lease right-of-use asset		9,861
Crescent Mortgage trade name intangible		1,370
Core deposit intangible		3,037
Mortgage servicing rights		20,123
Other assets		166,175
Total identifiable assets	$	4,802,997
Identifiable liabilities:
Deposits	$	3,884,977
Short-term borrowings		332,000
Long-term borrowings		42,738
Operating lease liability		9,861
Other liabilities		32,309
Total identifiable liabilities		4,301,885
Preliminary fair value of net assets acquired including identifiable intangible assets		501,112
Preliminary resulting goodwill	$	316,765

The operating results of United for the six months ended June 30, 2020 include operating results of acquired assets and assumed liabilities subsequent to the Carolina Financial Acquisition Date. The operations of United’s North Carolina and South Carolina geographic area, which includes the acquired operations of Carolina Financial, and Crescent Mortgage provided $40,419 in total revenues (net interest income plus other income), and $22,858 in net income from the period from the Carolina Financial Acquisition Date to June 30, 2020. These amounts are included in United’s consolidated financial statements as of and for the six months ended June 30, 2020. Carolina Financial’s results of operations prior to the Carolina Financial Acquisition Date are not included in United’s consolidated results of operations.

The following table presents certain unaudited pro forma information for the results of operations for the six months ended June 30, 2020 and 2019, as if the Carolina Financial merger had occurred on January 1, 2020 and 2019, respectively. These results combine the historical results of Carolina Financial into United’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on the indicated date nor are they intended to represent or be indicative of future results of operations. In particular, no