UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
	FORM 10-Q
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended June 30, 2018
	OR
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Transition Period from ___________ to ___________
	Commission file number 001-35095
UNITED COMMUNITY BANKS, INC.
	(Exact name of registrant as specified in its charter)

Georgia	58-1807304
(State of Incorporation)	(I.R.S. Employer Identification No.)

125 Highway 515 East
Blairsville, Georgia	30512
Address of Principal Executive Offices	(Zip Code)

(706) 781-2265

(Telephone Number)

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 ý NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date File required to be submitted and posted 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 and post such files).

YES ý NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	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 ý

Common stock, par value $1 per share 79,141,038 shares outstanding as of July 31, 2018.

INDEX

PART I - Financial Information
	Item 1.	Financial Statements.
		Consolidated Statements of Income (unaudited) for the Three and Six Months Ended June 30, 2018 and 2017	3
		Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2018 and 2017	4
		Consolidated Balance Sheets (unaudited) at June 30, 2018 and December 31, 2017	5
		Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2018 and 2017	6
		Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2018 and 2017	7
		Notes to Consolidated Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	48
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	71
	Item 4.	Controls and Procedures.	71
PART II - Other Information
	Item 1.	Legal Proceedings.	71
	Item 1A.	Risk Factors.	71
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	72
	Item 3.	Defaults Upon Senior Securities.	72
	Item 4.	Mine Safety Disclosures.	72
	Item 5.	Other Information.	72
	Item 6.	Exhibits.	73

2

Part I – Financial Information

UNITED COMMUNITY BANKS, INC. Consolidated Statements of Income(Unaudited)
	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except per share data)	2018			2017		2018			2017
Interest revenue:
Loans, including fees	$	103,492		$	74,825	$	199,961		$	147,552
Investment securities, including tax exempt of $1,025 and $357, and $1,997 and $636	18,254			17,778		36,549			35,490
Deposits in banks and short-term investments	469			563		995			1,082
Total interest revenue	122,215			93,166		237,505			184,124
Interest expense:
Deposits:
NOW	1,303			635		2,416			1,232
Money market	2,583			1,559		4,758			2,985
Savings	35			28		84			55
Time	4,198			1,379		7,154			2,387
Total deposit interest expense	8,119			3,601		14,412			6,659
Short-term borrowings	198			101		498			141
Federal Home Loan Bank advances	1,636			1,464		3,760			2,894
Long-term debt	3,786			2,852		7,074			5,728
Total interest expense	13,739			8,018		25,744			15,422
Net interest revenue	108,476			85,148		211,761			168,702
Provision for credit losses	1,800			800		5,600			1,600
Net interest revenue after provision for credit losses	106,676			84,348		206,161			167,102
Noninterest income:
Service charges and fees	8,794			10,701		17,719			21,305
Mortgage loan and other related fees	5,307			4,811		10,666			9,235
Brokerage fees	1,201			1,146		2,073			2,556
Gains from sales of SBA/USDA loans	2,401			2,626		4,179			4,585
Securities (losses) gains, net	(364		)	4		(1,304		)	2
Other	6,001			4,397		12,403			8,076
Total noninterest income	23,340			23,685		45,736			45,759
Total revenue	130,016			108,033		251,897			212,861
Noninterest expenses:
Salaries and employee benefits	45,363			37,338		88,238			74,029
Communications and equipment	4,849			4,978		9,481			9,896
Occupancy	5,547			4,908		11,160			9,857
Advertising and public relations	1,384			1,260		2,899			2,321
Postage, printing and supplies	1,685			1,346		3,322			2,716
Professional fees	3,464			2,371		7,508			5,415
FDIC assessments and other regulatory charges	1,973			1,348		4,449			2,631
Amortization of intangibles	1,847			900		3,745			1,873
Merger-related and other charges	2,280			1,830		4,334			3,884
Other	8,458			6,950		15,189			13,433
Total noninterest expenses	76,850			63,229		150,325			126,055
Net income before income taxes	53,166			44,804		101,572			86,806
Income tax expense	13,532			16,537		24,280			35,015
Net income	$	39,634		$	28,267	$	77,292		$	51,791
Net income available to common shareholders	$	39,359		$	28,267	$	76,740		$	51,791
Earnings per common share:
Basic	$	0.49		$	0.39	$	0.97		$	0.72
Diluted	0.49			0.39		0.97			0.72
Weighted average common shares outstanding:
Basic	79,745			71,810		79,477			71,798
Diluted	79,755			71,820		79,487			71,809

See accompanying notes to consolidated financial statements. 

3

UNITED COMMUNITY BANKS, INC. Consolidated Statements of Comprehensive Income(Unaudited)
(in thousands)	Three Months Ended June 30,									Six Months Ended June 30,
	Before-tax Amount			Tax (Expense) Benefit			Net of Tax Amount			Before-tax Amount			Tax (Expense) Benefit			Net of Tax Amount
2018
Net income	$	53,166		$	(13,532	)	$	39,634		$	101,572		$	(24,280	)	$	77,292
Other comprehensive loss:
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during period	(9,574		)	2,310			(7,264		)	(38,838		)	9,464			(29,374		)
Reclassification adjustment for losses included in net income	364			(97		)	267			1,304			(317		)	987
Net unrealized losses	(9,210		)	2,213			(6,997		)	(37,534		)	9,147			(28,387		)
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity	218			(55		)	163			439			(109		)	330
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges	143			(38		)	105			290			(76		)	214
Net actuarial loss on defined benefit pension plan	—			—			—			(5		)	1			(4		)
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan	227			(73		)	154			454			(131		)	323
Net defined benefit pension plan activity	227			(73		)	154			449			(130		)	319
Total other comprehensive loss	(8,622		)	2,047			(6,575		)	(36,356		)	8,832			(27,524		)
Comprehensive income	$	44,544		$	(11,485	)	$	33,059		$	65,216		$	(15,448	)	$	49,768
2017
Net income	$	44,804		$	(16,537	)	$	28,267		$	86,806		$	(35,015	)	$	51,791
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period	11,120			(4,217		)	6,903			17,628			(6,681		)	10,947
Reclassification adjustment for gains included in net income	(4		)	—			(4		)	(2		)	(1		)	(3		)
Net unrealized gains	11,116			(4,217		)	6,899			17,626			(6,682		)	10,944
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity	261			(98		)	163			571			(214		)	357
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges	177			(69		)	108			590			(230		)	360
Reclassification of disproportionate tax effect related to terminated cash flow hedges	—			—			—			—			3,400			3,400
Net cash flow hedge activity	177			(69		)	108			590			3,170			3,760
Net actuarial gain (loss) on defined benefit pension plan	82			(32		)	50			(718		)	280			(438		)
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan	200			(78		)	122			400			(157		)	243
Net defined benefit pension plan activity	282			(110		)	172			(318		)	123			(195		)
Total other comprehensive income	11,836			(4,494		)	7,342			18,469			(3,603		)	14,866
Comprehensive income	$	56,640		$	(21,031	)	$	35,609		$	105,275		$	(38,618	)	$	66,657

See accompanying notes to consolidated financial statements.

4

UNITED COMMUNITY BANKS, INC. Consolidated Balance Sheets(Unaudited)
	June 30, 2018			December 31, 2017
(in thousands, except share data)
ASSETS
Cash and due from banks	$	125,013		$	129,108
Interest-bearing deposits in banks	191,355			185,167
Cash and cash equivalents	316,368			314,275
Securities available for sale	2,536,294			2,615,850
Securities held to maturity (fair value $291,463 and $321,276)	297,569			321,094
Loans held for sale (includes $34,813 and $26,252 at fair value)	34,813			32,734
Loans and leases, net of unearned income	8,220,271			7,735,572
Less allowance for loan and lease losses	(61,071		)	(58,914		)
Loans and leases, net	8,159,200			7,676,658
Premises and equipment, net	202,098			208,852
Bank owned life insurance	190,649			188,970
Accrued interest receivable	33,114			32,459
Net deferred tax asset	77,274			88,049
Derivative financial instruments	29,896			22,721
Goodwill and other intangible assets	327,174			244,397
Other assets	181,091			169,401
Total assets	$	12,385,540		$	11,915,460
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand	$	3,245,701		$	3,087,797
NOW	2,031,396			2,131,939
Money market	2,036,588			2,016,748
Savings	683,689			651,742
Time	1,524,635			1,548,460
Brokered	444,079			371,011
Total deposits	9,966,088			9,807,697
Short-term borrowings	9,325			50,000
Federal Home Loan Bank advances	560,000			504,651
Long-term debt	308,434			120,545
Derivative financial instruments	37,261			25,376
Accrued expenses and other liabilities	125,323			103,857
Total liabilities	11,006,431			10,612,126
Shareholders' equity:
Common stock, $1 par value; 150,000,000 shares authorized;     79,137,810 and 77,579,561 shares issued and outstanding	79,138			77,580
Common stock issuable; 616,549 and 607,869 shares	9,509			9,083
Capital surplus	1,497,517			1,451,814
Accumulated deficit	(154,290		)	(209,902		)
Accumulated other comprehensive loss	(52,765		)	(25,241		)
Total shareholders' equity	1,379,109			1,303,334
Total liabilities and shareholders' equity	$	12,385,540		$	11,915,460

See accompanying notes to consolidated financial statements.

5

UNITED COMMUNITY BANKS, INC. Consolidated Statement of Changes in Shareholders’ Equity(Unaudited) For the Six Months Ended June 30,
(in thousands, except share and per share data)	Common Stock		Common Stock Issuable			Capital Surplus			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
Balance, December 31, 2016	$	70,899	$	7,327		$	1,275,849		$	(251,857	)	$	(26,483	)	$	1,075,735
Net income									51,791						51,791
Other comprehensive income												14,866			14,866
Common stock issued to dividend    reinvestment plan and employee benefit    plans (8,569 shares)	9					207									216
Amortization of stock option and restricted    stock awards						3,149									3,149
Vesting of restricted stock, net of shares    surrendered to cover payroll taxes (40,954    shares issued, 58,784 shares deferred)	41		887			(1,612		)							(684		)
Deferred compensation plan, net, including   dividend equivalents			216												216
Shares issued from deferred compensation    plan, net of shares surrendered to cover    payroll taxes (32,279 shares)	32		(368		)	229									(107		)
Common stock dividends ($0.18 per share)									(12,978		)				(12,978		)
Cumulative effect of change in accounting    principle									437						437
Balance, June 30, 2017	$	70,981	$	8,062		$	1,277,822		$	(212,607	)	$	(11,617	)	$	1,132,641
Balance, December 31, 2017	$	77,580	$	9,083		$	1,451,814		$	(209,902	)	$	(25,241	)	$	1,303,334
Net income									77,292						77,292
Other comprehensive loss												(27,524		)	(27,524		)
Exercise of stock options (12,000 shares)	12					130									142
Common stock issued to dividend    reinvestment plan and employee benefit    plans (9,853 shares)	10					275									285
Common stock issued for acquisition    (1,443,987 shares)	1,444					44,302									45,746
Amortization of stock option and restricted    stock awards						2,276									2,276
Vesting of restricted stock, net of shares    surrendered to cover payroll taxes (46,409    shares issued, 47,419 shares deferred)	46		884			(1,916		)							(986		)
Deferred compensation plan, net, including    dividend equivalents			234												234
Shares issued from deferred compensation    plan, net of shares surrendered to cover    payroll taxes (46,000 shares)	46		(692		)	636									(10		)
Common stock dividends ($0.27 per share)									(21,680		)				(21,680		)
Balance, June 30, 2018	$	79,138	$	9,509		$	1,497,517		$	(154,290	)	$	(52,765	)	$	1,379,109

See accompanying notes to consolidated financial statements.

6

UNITED COMMUNITY BANKS, INC. Consolidated Statements of Cash Flows(Unaudited)
	Six Months Ended June 30,
(in thousands)	2018			2017
Operating activities:
Net income	$	77,292		$	51,791
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	17,068			12,932
Provision for credit losses	5,600			1,600
Stock based compensation	2,276			3,149
Deferred income tax expense	22,782			35,685
Securities losses (gains), net	1,304			(2		)
Gains from sales of SBA/USDA loans	(4,179		)	(4,585		)
Net losses and write downs on sales of other real estate owned	260			471
Changes in assets and liabilities:
Other assets and accrued interest receivable	(18,799		)	(425		)
Accrued expenses and other liabilities	12,273			(7,191		)
Mortgage loans held for sale	513			4,167
Net cash provided by operating activities	116,390			97,592
Investing activities:
Investment securities held to maturity:
Proceeds from maturities and calls of securities held to maturity	35,531			31,369
Purchases of securities held to maturity	(11,983		)	(13,433		)
Investment securities available for sale:
Proceeds from sales of securities available for sale	140,296			94,650
Proceeds from maturities and calls of securities available for sale	174,284			309,054
Purchases of securities available for sale	(280,241		)	(412,407		)
Net increase in loans	(117,492		)	(115,952		)
Purchase of bank owned life insurance	—			(10,000		)
Proceeds from sales of premises and equipment	589			5
Purchases of premises and equipment	(9,959		)	(11,687		)
Net cash paid for acquisition	(56,800		)	—
Proceeds from sale of other real estate	1,986			5,781
Net cash used in investing activities	(123,789		)	(122,620		)
Financing activities:
Net change in deposits	159,015			98,694
Net change in short-term borrowings	(255,598		)	(5,000		)
Repayments of long-term debt	(30,023		)	—
Proceeds from FHLB advances	1,375,000			2,710,000
Repayments of FHLB advances	(1,319,003		)	(2,750,000		)
Proceeds from issuance of subordinated debt, net of issuance costs	98,188			—
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans	285			216
Proceeds from exercise of stock options	142			—
Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock	(996		)	(791		)
Cash dividends on common stock	(17,518		)	(12,253		)
Net cash provided by financing activities	9,492			40,866
Net change in cash and cash equivalents, including restricted cash	2,093			15,838
Cash and cash equivalents, including restricted cash, at beginning of period	314,275			217,348
Cash and cash equivalents, including restricted cash, at end of period	$	316,368		$	233,186
Supplemental disclosures of cash flow information:
Interest paid	$	23,518		$	15,346
Income taxes paid	4,345			4,651
Significant non-cash investing and financing transactions:
Unsettled securities purchases	—			20,269
Unsettled government guaranteed loan sales	18,800			26,107
Transfers of loans to foreclosed properties	1,609			1,042
Acquisitions:
Assets acquired	481			—
Liabilities assumed	351			—
Net assets acquired	130			—

See accompanying notes to consolidated financial statements. 

7

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 – Accounting Policies

The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States (“GAAP”) and reporting guidelines of banking regulatory authorities and regulators. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. In addition to those items mentioned below, a more detailed description of United’s accounting policies is included in its Annual Report on Form 10-K for the year ended December 31, 2017.

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate statement. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods.

Cash and Cash Equivalents

Restricted Cash

The terms of securitizations acquired with NLFC Holdings Corp. (“NLFC”) require various restricted cash accounts. These cash accounts were funded from either a portion of the proceeds from the issuance of notes or from the collections on leases and loans that were conveyed in the securitization. These restricted cash accounts provide additional collateral to the note holders under specific provisions of the securitizations which govern when funds in these accounts may be released as well as conditions under which collections on contracts transferred to the securitizations may be used to fund deposits into the restricted cash accounts. At June 30, 2018, these restricted cash accounts totaled $10.8 million and were included in interest-bearing deposits in banks on the consolidated balance sheet.

Loans and Leases

Equipment Financing Lease Receivables

Equipment financing lease receivables are recorded as the sum of the future minimum lease payments, initial deferred costs and estimated or contractual residual values less unearned income. The determination of residual value is derived from a variety of sources including equipment valuation services, appraisals, and publicly available market data on recent sales transactions on similar equipment. The length of time until contract termination, the cyclical nature of equipment values and the limited marketplace for re-sale of certain leased assets are important variables considered in making this determination. Interest income is recognized as earned using the effective interest method. Direct fees and costs associated with the origination of leases are deferred and included as a component of equipment financing receivables. Net deferred fees or costs are recognized as an adjustment to interest income over the contractual life of the lease using the effective interest method.

Note 2 –Accounting Standards Updates and Recently Adopted Standards

Accounting Standards Updates

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. For public entities, this update is effective for fiscal years beginning after December 15, 2018, with modified retrospective application to prior periods presented. Upon adoption, United expects to report higher assets and liabilities as a result of including leases on the consolidated balance sheet. At December 31, 2017, future minimum lease payments amounted to $27.1 million. United does not expect the new guidance to have a material impact on the consolidated statements of income or the consolidated statements of shareholders’ equity.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. Application of this update will primarily be on a modified retrospective

8

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

approach, although the guidance for debt securities for which an other-than-temporary impairment has been recognized before the effective date and for loans previously covered by ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality will be applied on a prospective basis. For public entities, this update is effective for fiscal years beginning after December 15, 2019. Upon adoption, United expects that the allowance for credit losses will be higher given the change to estimated losses for the estimated life of the financial asset, however management is still in the process of determining the magnitude of the increase. Management has formed a steering committee and has completed a gap assessment that became the basis for a full project plan. In addition, management has selected a vendor model and begun the implementation phase of the project plan. United expects to run parallel for the four quarters leading up to the effective date to ensure it is prepared for implementation by the effective date.

In May 2018, the FASB issued ASU No. 2018-06, Codification Improvements to Topic 942, Financial Services - Depository and Lending. This update superseded outdated guidance related to the Office of the Comptroller of the Currency’s Banking Circular 202, Accounting for Net Deferred Tax Charges. United does not expect the new guidance to have a material impact on the consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based payment awards will be measured at the grant-date fair value of the equity instruments that an entity is obligated to issue when the service has been rendered, subject to the probability of satisfying performance conditions when applicable. For public entities, this update is effective for fiscal years beginning after December 15, 2018. United does not expect the new guidance to have a material impact on the consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-08, Not for Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This update clarifies the guidance about whether a transfer of assets (or the reduction, settlement or cancellation of liabilities) is a contribution or an exchange transaction. In addition, the guidance clarifies the determination of whether a transaction is conditional. For public entities, this update is effective for contributions made in fiscal years beginning after December 15, 2018. United does not expect the new guidance to have a material impact on the consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements to address stakeholder suggestions for minor corrections and clarifications within the codification. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in this update do not require transition guidance and will be effective upon issuance of this update. However, many of the amendments in this update do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. United does not expect the new guidance to have a material impact on the consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842. Leases to address certain narrow aspects of the guidance issued in ASU No. 2016-02. This guidance did not change United’s assessment of the impact of ASU No. 2016-02 on the consolidated financial statements as described above.

Recently Adopted Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers.  This ASU provides guidance on the recognition of revenue from contracts with customers.  The core principle of the guidance is that an entity should recognize revenue to depict 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 or services.  This guidance was effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and was applied retrospectively either to each prior reporting period or with a cumulative effect recognized at the date of initial application. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, and revenue sources within scope were not materially affected, the new revenue recognition guidance did not have a material impact on the consolidated financial statements. United used the modified retrospective approach to adopting this guidance.

In January 2016, the FASB issued ASU 2016-1, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities. The guidance in this update requires that equity investments (except those accounted for under the equity method of accounting) be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The guidance also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. In addition, the guidance addresses various disclosure and presentation issues related to financial instruments. For public entities, this update was effective for fiscal years beginning after December 15, 2017 with early application

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

permitted. The adoption of this update did not have a material impact on the consolidated financial statements. There was no opening balance sheet adjustment as a result of the adoption and the remainder of the standard was applied prospectively.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). This ASU requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance was effective for public entities for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, and was applied retrospectively to each period presented. The adoption of this update did not have a material impact on the consolidated financial statements. There was no adjustment to prior periods as a result of the adoption.

In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost and allow only the service cost component to be eligible for capitalization. For public entities, this update was effective for fiscal years beginning after December 15, 2017, with retrospective presentation of the service cost and other components and prospective application for any capitalization of service cost. The adoption of this update did not have a material impact on the consolidated financial statements.

Note 3 – Acquisitions

Acquisition of NLFC Holdings Corp.

On February 1, 2018, United completed the acquisition of NLFC and its wholly-owned subsidiary, Navitas Credit Corp (“Navitas”). Navitas is a specialty lending company providing equipment finance credit services to small and medium-sized businesses nationwide. In connection with the acquisition, United acquired $393 million of assets and assumed $350 million of liabilities. Under the terms of the merger agreement, NLFC shareholders received $130 million in total consideration, of which $84.5 million was paid in cash and $45.7 million was paid in United common stock. The fair value of consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the establishment of goodwill in the amount of $87.4 million, representing the intangible value of NLFC’s business and reputation within the markets it served. None of the goodwill recognized is expected to be deductible for income tax purposes.

United’s operating results for the three and six months ended June 30, 2018 include the operating results of the acquired assets and assumed liabilities for the period subsequent to the acquisition date of February 1, 2018.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The purchased assets and assumed liabilities were recorded at their acquisition date fair values and are summarized in the table below (in thousands).

	As Recorded by NLFC		Fair Value Adjustments (1)			As Recorded by United
Assets
Cash and cash equivalents	$	27,700	—			$	27,700
Loans and leases, net	365,533		(7,181		)	358,352
Premises and equipment, net	628		(304		)	324
Net deferred tax asset	—		2,873			2,873
Other assets	5,117		(1,066		)	4,051
Total assets acquired	$	398,978	$	(5,678	)	$	393,300
Liabilities
Short-term borrowings	$	214,923	$	—		$	214,923
Long-term debt	119,402		—			119,402
Other liabilities	17,059		(951		)	16,108
Total liabilities assumed	351,384		(951		)	350,433
Excess of assets acquired over liabilities assumed	$	47,594
Aggregate fair value adjustments			$	(4,727	)
Total identifiable net assets						$	42,867
Consideration transferred
Cash						84,500
Common stock issued (1,443,987 shares)						45,746
Total fair value of consideration transferred						130,246
Goodwill						$	87,379

⁽¹⁾ Fair values are preliminary and are subject to refinement for a period not to exceed one year after the closing date of an acquisition as information relative to closing date fair values becomes available.

Since the acquisition date, within the one year measurement period, United received additional information regarding the fair value of loans. As a result, the provisional value assigned to the acquired loans was reduced by $526,000, partially offset by acquisition-related adjustments to deferred tax assets. The net of the adjustments was reflected as a $390,000 increase to goodwill.  

The following table presents additional information related to the acquired loan and lease portfolio at the acquisition date (in thousands):

	February 1, 2018
Accounted for pursuant to ASC 310-30:
Contractually required principal and interest	$	24,711
Non-accretable difference	5,505
Cash flows expected to be collected	19,206
Accretable yield	1,977
Fair value	$	17,229
Excluded from ASC 310-30:
Fair value	$	341,123
Gross contractual amounts receivable	389,432
Estimate of contractual cash flows not expected to be collected	8,624

In January 2018, after announcement of its intention to acquire NLFC but prior to the completion of the acquisition, United purchased $19.9 million in loans from NLFC in a transaction separate from the business combination.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Pro forma information

The following table discloses the impact of the merger with NLFC since the acquisition date through June 30, 2018. The table also presents certain pro forma information as if NLFC had been acquired on January 1, 2017. These results combine the historical results of the acquired entity with United’s consolidated statement of income and, while adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not necessarily indicative of what would have occurred had the acquisition taken place in earlier years.

Merger-related costs from the NLFC acquisition of $118,000 and $4.83 million, respectively, have been excluded from the three and six months 2018 pro forma information presented below and included in the three and six months 2017 pro forma information below. The actual results and pro forma information were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	Revenue		Net Income		Revenue		Net Income
2018
Actual NLFC results included in statement of income since acquisition date	$	6,624	$	2,686	$	10,237	$	3,496
Supplemental consolidated pro forma as if NLFC had been acquired January 1, 2017	130,288		39,924		255,119		78,989
2017
Supplemental consolidated pro forma as if NLFC had been acquired January 1, 2017	$	112,004	$	28,715	$	220,510	$	49,595

Acquisition of Four Oaks Fincorp, Inc.

On November 1, 2017, United completed the acquisition of Four Oaks FinCorp, Inc. (“FOFN”) and its wholly-owned bank subsidiary, Four Oaks Bank & Trust Company. Information related to the fair value of assets and liabilities acquired from FOFN is included in United’s Annual Report on Form 10-K for the year ended December 31, 2017. During first quarter 2018, within the one-year measurement period, United received additional information regarding the acquisition date fair values of loans held for sale and servicing assets. As a result, the provisional values assigned to the acquired loans held for sale and servicing assets have been adjusted to $10.7 million and $65,000, respectively, which represent an increase of $2.59 million and a decrease of $354,000, respectively, from amounts previously disclosed. The tax effect of these adjustments was reflected as a decrease to the deferred tax asset of $1.08 million, with the net amount of $1.16 million reflected as a decrease to goodwill.

Acquisition of HCSB Financial Corporation

On July 31, 2017, United completed the acquisition of HCSB Financial Corporation (“HCSB”) and its wholly-owned bank subsidiary, Horry County State Bank. Information related to the fair value of assets and liabilities acquired from HCSB is included in United’s Annual Report on Form 10-K for the year ended December 31, 2017. During second quarter 2018, within the one-year measurement period, United received additional information regarding the acquisition date fair value of premises and equipment. As a result, the provisional value assigned to the acquired premises and equipment has been adjusted to $7.42 million, which represents a decrease of $493,000 from the amount previously disclosed. The tax effect of this adjustment was reflected as an increase to the deferred tax asset of $190,000, resulting in a net $303,000 increase to goodwill.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

The following table presents a summary of amounts outstanding under reverse repurchase agreements and derivative financial instruments including those entered into in connection with the same counterparty under master netting agreements as of the dates indicated (in thousands).

	Gross Amounts of Recognized Assets			Gross Amounts Offset on the Balance Sheet					Gross Amounts not Offset in the Balance Sheet
June 30, 2018							Net Asset Balance		Financial Instruments			Collateral Received			Net Amount
Repurchase agreements / reverse repurchase agreements	$	50,000		$	(50,000	)	$	—	$	—		$	—		$	—
Derivatives	29,896			—			29,896		(553		)	(13,799		)	15,544
Total	$	79,896		$	(50,000	)	$	29,896	$	(553	)	$	(13,799	)	$	15,544
Weighted average interest rate of reverse repurchase agreements	2.70		%
	Gross Amounts of Recognized Liabilities			Gross Amounts Offset on the Balance Sheet			Net Liability Balance		Gross Amounts not Offset in the Balance Sheet
									Financial Instruments			Collateral Pledged			Net Amount
Repurchase agreements / reverse repurchase agreements	$	50,000		$	(50,000	)	$	—	$	—		$	—		$	—
Derivatives	37,261			—			37,261		(553		)	(18,438		)	18,270
Total	$	87,261		$	(50,000	)	$	37,261	$	(553	)	$	(18,438	)	$	18,270
Weighted average interest rate of repurchase agreements	1.95		%
	Gross Amounts of Recognized Assets			Gross Amounts Offset on the Balance Sheet					Gross Amounts not Offset in the Balance Sheet
December 31, 2017							Net Asset Balance		Financial Instruments			Collateral Received			Net Amount
Repurchase agreements / reverse repurchase agreements	$	100,000		$	(100,000	)	$	—	$	—		$	—		$	—
Derivatives	22,721			—			22,721		(1,490		)	(6,369		)	14,862
Total	$	122,721		$	(100,000	)	$	22,721	$	(1,490	)	$	(6,369	)	$	14,862
Weighted average interest rate of reverse repurchase agreements	1.95		%
	Gross Amounts of Recognized Liabilities			Gross Amounts Offset on the Balance Sheet			Net		Gross Amounts not Offset in the Balance Sheet
							Liability Balance		Financial Instruments			Collateral Pledged			Net Amount
Repurchase agreements / reverse repurchase agreements	$	100,000		$	(100,000	)	$	—	$	—		$	—		$	—
Derivatives	25,376			—			25,376		(1,490		)	(17,190		)	6,696
Total	$	125,376		$	(100,000	)	$	25,376	$	(1,490	)	$	(17,190	)	$	6,696
Weighted average interest rate of repurchase agreements	1.20		%

At June 30, 2018, United recognized the right to reclaim cash collateral of $18.4 million and the obligation to return cash collateral of $13.8 million. At December 31, 2017, United recognized the right to reclaim cash collateral of $17.2 million and the obligation to return cash collateral of $6.37 million. The right to reclaim cash collateral and the obligation to return cash collateral were included in the consolidated balance sheets in other assets and other liabilities, respectively.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table presents additional detail regarding repurchase agreements accounted for as secured borrowings and the securities underlying these agreements as of the dates indicated (in thousands).

	Remaining Contractual Maturity of the Agreements
	Overnight and
As of June 30, 2018	Continuous		Up to 30 Days		30 to 90 Days		91 to 110 days		Total
Mortgage-backed securities	$	—	$	—	$	—	$	50,000	$	50,000
Total	$	—	$	—	$	—	$	50,000	$	50,000
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure									$	50,000
Amounts related to agreements not included in offsetting disclosure									$	—

	Remaining Contractual Maturity of the Agreements
	Overnight and
As of December 31, 2017	Continuous		Up to 30 Days		30 to 90 Days		91 to 110 days		Total
Mortgage-backed securities	$	—	$	—	$	100,000	$	—	$	100,000
Total	$	—	$	—	$	100,000	$	—	$	100,000
Gross amount of recognized liabilities for repurchase agreements in offsetting disclosure									$	100,000
Amounts related to agreements not included in offsetting disclosure									$	—

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

Note 5 – Securities

The amortized cost basis, unrealized gains and losses and fair value of securities held-to-maturity as of the dates indicated are as follows (in thousands).

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
As of June 30, 2018
State and political subdivisions	$	71,125	$	954	$	1,238	$	70,841
Mortgage-backed securities(1)	226,444		987		6,809		220,622
Total	$	297,569	$	1,941	$	8,047	$	291,463
As of December 31, 2017
State and political subdivisions	$	71,959	$	1,574	$	178	$	73,355
Mortgage-backed securities(1)	249,135		2,211		3,425		247,921
Total	$	321,094	$	3,785	$	3,603	$	321,276

⁽¹⁾ All are residential type mortgage-backed securities or U.S. government agency commercial mortgage backed securities.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The cost basis, unrealized gains and losses, and fair value of securities available-for-sale as of the dates indicated are presented below (in thousands).

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
As of June 30, 2018
U.S. Treasuries	$	122,290	$	—	$	3,251	$	119,039
U.S. Government agencies	25,778		240		440		25,578
State and political subdivisions	200,486		123		2,978		197,631
Mortgage-backed securities(1)	1,844,310		1,992		39,441		1,806,861
Corporate bonds	199,303		793		1,931		198,165
Asset-backed securities	189,067		610		714		188,963
Other	57		—		—		57
Total	$	2,581,291	$	3,758	$	48,755	$	2,536,294
As of December 31, 2017
U.S. Treasuries	$	122,025	$	—	$	912	$	121,113
U.S. Government agencies	26,129		269		26		26,372
State and political subdivisions	195,663		2,019		396		197,286
Mortgage-backed securities(1)	1,738,056		7,089		17,934		1,727,211
Corporate bonds	305,265		1,513		425		306,353
Asset-backed securities	236,533		1,078		153		237,458
Other	57		—		—		57
Total	$	2,623,728	$	11,968	$	19,846	$	2,615,850

⁽¹⁾ All are residential type mortgage-backed securities or U.S. government agency commercial mortgage backed securities.

Securities with a carrying value of $816 million and $1.04 billion were pledged to secure public deposits, derivatives and other secured borrowings at June 30, 2018 and December 31, 2017, respectively.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 The following table summarizes held-to-maturity securities in an unrealized loss position as of the dates indicated (in thousands).

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
As of June 30, 2018
State and political subdivisions	$	43,131	$	1,238	$	—	$	—	$	43,131	$	1,238
Mortgage-backed securities	82,473		2,856		79,198		3,953		161,671		6,809
Total unrealized loss position	$	125,604	$	4,094	$	79,198	$	3,953	$	204,802	$	8,047
As of December 31, 2017
State and political subdivisions	$	8,969	$	178	$	—	$	—	$	8,969	$	178
Mortgage-backed securities	95,353		1,448		65,868		1,977		161,221		3,425
Total unrealized loss position	$	104,322	$	1,626	$	65,868	$	1,977	$	170,190	$	3,603

The following table summarizes available-for-sale securities in an unrealized loss position as of the dates indicated (in thousands).

	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
As of June 30, 2018
U.S. Treasuries	$	119,039	$	3,251	$	—	$	—	$	119,039	$	3,251
U.S. Government agencies	19,790		413		1,624		27		21,414		440
State and political subdivisions	171,147		2,899		5,061		79		176,208		2,978
Mortgage-backed securities	1,212,603		24,160		339,456		15,281		1,552,059		39,441
Corporate bonds	116,563		1,921		990		10		117,553		1,931
Asset-backed securities	75,232		714		—		—		75,232		714
Total unrealized loss position	$	1,714,374	$	33,358	$	347,131	$	15,397	$	2,061,505	$	48,755
As of December 31, 2017
U.S. Treasuries	$	121,113	$	912	$	—	$	—	$	121,113	$	912
U.S. Government agencies	1,976		13		1,677		13		3,653		26
State and political subdivisions	61,494		365		5,131		31		66,625		396
Mortgage-backed securities	964,205		8,699		328,923		9,235		1,293,128		17,934
Corporate bonds	55,916		325		900		100		56,816		425
Asset-backed securities	28,695		126		5,031		27		33,726		153
Total unrealized loss position	$	1,233,399	$	10,440	$	341,662	$	9,406	$	1,575,061	$	19,846

At June 30, 2018, there were 294 available-for-sale securities and 70 held-to-maturity securities that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at June 30, 2018 were primarily attributable to changes in interest rates.

Management evaluates securities for other-than-temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

agencies have occurred, and industry analysts’ reports. No impairment charges were recognized during the three and six months ended June 30, 2018 or 2017.

Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes available-for-sale securities sales activity for the three and six months ended June 30, 2018 and 2017(in thousands). 

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Proceeds from sales	$	26,335		$	70,453		$	140,296		$	94,650
Gross gains on sales	$	232		$	227		$	649		$	325
Gross losses on sales	(596		)	(223		)	(1,953		)	(323		)
Net (losses) gains on sales of securities	$	(364	)	$	4		$	(1,304	)	$	2
Income tax benefit attributable to sales	$	(97	)	$	—		$	(317	)	$	(1	)

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The amortized cost and fair value of held-to-maturity and available-for-sale securities at June 30, 2018, by contractual maturity, are presented in the following table (in thousands). 

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
US Treasuries:
1 to 5 years	$	74,525	$	72,568	$	—	$	—
5 to 10 years	47,765		46,471		—		—
	122,290		119,039		—		—
US Government agencies:
1 to 5 years	20,854		20,422		—		—
More than 10 years	4,924		5,156		—		—
	25,778		25,578		—		—
State and political subdivisions:
Within 1 year	1,500		1,510		5,929		5,991
1 to 5 years	44,769		44,024		10,670		10,960
5 to 10 years	26,393		25,908		10,157		10,759
More than 10 years	127,824		126,189		44,369		43,131
	200,486		197,631		71,125		70,841
Corporate bonds:
1 to 5 years	181,027		180,412		—		—
5 to 10 years	17,276		16,763		—		—
More than 10 years	1,000		990		—		—
	199,303		198,165		—		—
Asset-backed securities:
1 to 5 years	5,624		5,771		—		—
5 to 10 years	31,025		31,105		—		—
More than 10 years	152,418		152,087		—		—
	189,067		188,963		—		—
Other:
More than 10 years	57		57		—		—
	57		57		—		—
Total securities other than mortgage-backed securities:
Within 1 year	1,500		1,510		5,929		5,991
1 to 5 years	326,799		323,197		10,670		10,960
5 to 10 years	122,459		120,247		10,157		10,759
More than 10 years	286,223		284,479		44,369		43,131
Mortgage-backed securities	1,844,310		1,806,861		226,444		220,622
	$	2,581,291	$	2,536,294	$	297,569	$	291,463

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

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 6 – Loans and Leases and Allowance for Credit Losses

Major classifications of the loan and lease portfolio (collectively referred to as the “loan portfolio” or “loans”) are summarized as of the dates indicated as follows (in thousands).

	June 30, 2018			December 31, 2017
Owner occupied commercial real estate	$	1,681,737		$	1,923,993
Income producing commercial real estate	1,821,384			1,595,174
Commercial & industrial	1,193,046			1,130,990
Commercial construction	735,575			711,936
Equipment financing	464,594			—
Total commercial	5,896,336			5,362,093
Residential mortgage	1,020,606			973,544
Home equity lines of credit	707,718			731,227
Residential construction	195,580			183,019
Consumer direct	122,756			127,504
Indirect auto	277,275			358,185
Total loans	8,220,271			7,735,572
Less allowance for loan losses	(61,071		)	(58,914		)
Loans, net	$	8,159,200		$	7,676,658

At June 30, 2018 and December 31, 2017, loans totaling $3.95 billion and $3.73 billion, respectively, were pledged as collateral to secure Federal Home Loan Bank advances, securitized notes payable and other contingent funding sources.

At June 30, 2018, the carrying value and outstanding balance of purchased credit impaired (“PCI”) loans accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, were $89.8 million and $131 million, respectively. At December 31, 2017, the carrying value and outstanding balance of PCI loans were $98.5 million and $142 million, respectively. The following table presents changes in the value of the accretable yield for PCI loans for the periods indicated (in thousands): 

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Balance at beginning of period	$	18,036		$	7,762		$	17,686		$	7,981
Additions due to acquisitions	147			—			1,977			—
Accretion	(2,965		)	(1,412		)	(5,511		)	(3,102		)
Reclassification from nonaccretable difference	6,527			3,827			7,118			4,716
Changes in expected cash flows that do not affect nonaccretable difference	1,661			1,188			2,136			1,770
Balance at end of period	$	23,406		$	11,365		$	23,406		$	11,365

In addition to the accretable yield on PCI loans, the fair value adjustments on purchased loans outside the scope of ASC 310-30 are also accreted to interest revenue over the life of the loans. At June 30, 2018 and December 31, 2017, the remaining accretable net fair value discount on loans acquired through a business combination and not accounted for under ASC 310-30 was $4.41 million and $14.7 million, respectively. At June 30, 2018, the net fair value discount of $4.41 million included a net premium on loans acquired with NLFC. In addition, indirect auto loans purchased at a premium outside of a business combination had a remaining premium of $5.47 million and $7.84 million, respectively, as of June 30, 2018 and December 31, 2017. During the three and six months ended June 30, 2018, United did not purchase any indirect auto loans. During the three and six months ended June 30, 2017, United purchased indirect auto loans of $40.5 million and $81.7 million, respectively.

19

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

At June 30, 2018, equipment financing assets included leases of $25.5 million. The components of the net investment in leases are presented below (in thousands). 

	June 30, 2018
Minimum future lease payments receivable	$	26,396
Estimated residual value of leased equipment	3,314
Initial direct costs	764
Security deposits	(1,192		)
Purchase accounting premium	1,197
Unearned income	(4,930		)
Net investment in leases	$	25,549

Minimum future lease payments expected to be received from lease contracts as of June 30, 2018 are as follows (in thousands): 

Year
Remainder of 2018	$	5,900
2019	9,325
2020	6,396
2021	3,185
2022	1,373
Thereafter	217
Total	$	26,396

20

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Allowance for Credit Losses and Loans Individually Evaluated for Impairment

The allowance for loan losses represents management’s estimate of probable incurred losses in the loan portfolio as of the end of the period. The allowance for unfunded commitments is included in other liabilities in the consolidated balance sheet. Combined, the allowance for loan losses and allowance for unfunded commitments are referred to as the allowance for credit losses.

The following table presents the balance and activity in the allowance for credit losses by portfolio segment for the periods indicated (in thousands). 

	2018												2017
Three Months Ended June 30,	Beginning Balance		Charge-Offs			Recoveries		(Release)Provision			Ending Balance		Beginning Balance		Charge-Offs			Recoveries		(Release) Provision			Ending Balance
Owner occupied commercial real estate	$	14,561	$	(7	)	$	585	$	(2,230	)	$	12,909	$	15,669	$	(158	)	$	120	$	(209	)	$	15,422
Income producing commercial real estate	9,776		(1,653		)	232		2,507			10,862		8,878		(203		)	20		659			9,354
Commercial & industrial	4,075		(233		)	217		146			4,205		3,725		(598		)	244		249			3,620
Commercial construction	10,034		(53		)	159		(17		)	10,123		12,790		(361		)	20		(1,411		)	11,038
Equipment financing	2,291		(23		)	71		1,222			3,561		—		—			—		—			—
Residential mortgage	10,221		(112		)	101		(365		)	9,845		9,071		(131		)	105		753			9,798
Home equity lines of credit	4,932		(211		)	190		32			4,943		4,530		(424		)	171		313			4,590
Residential construction	3,044		(8		)	67		(513		)	2,590		3,267		(70		)	123		(236		)	3,084
Consumer direct	733		(552		)	195		389			765		609		(457		)	195		237			584
Indirect auto	1,418		(379		)	55		174			1,268		2,004		(313		)	94		225			2,010
Total allowance for loan losses	61,085		(3,231		)	1,872		1,345			61,071		60,543		(2,715		)	1,092		580			59,500
Allowance for unfunded commitments	2,440		—			—		455			2,895		2,002		—			—		220			2,222
Total allowance for credit losses	$	63,525	$	(3,231	)	$	1,872	$	1,800		$	63,966	$	62,545	$	(2,715	)	$	1,092	$	800		$	61,722

	2018												2017
Six Months Ended June 30,	Beginning Balance		Charge-Offs			Recoveries		(Release) Provision			Ending Balance		Beginning Balance		Charge-Offs			Recoveries		(Release) Provision			Ending Balance
Owner occupied commercial real estate	$	14,776	$	(67	)	$	688	$	(2,488	)	$	12,909	$	16,446	$	(183	)	$	357	$	(1,198	)	$	15,422
Income producing commercial real estate	9,381		(2,310		)	467		3,324			10,862		8,843		(1,100		)	47		1,564			9,354
Commercial & industrial	3,971		(617		)	606		245			4,205		3,810		(814		)	612		12			3,620
Commercial construction	10,523		(416		)	256		(240		)	10,123		13,405		(563		)	592		(2,396		)	11,038
Equipment financing	—		(162		)	168		3,555			3,561		—		—			—		—			—
Residential mortgage	10,097		(182		)	224		(294		)	9,845		8,545		(673		)	117		1,809			9,798
Home equity lines of credit	5,177		(335		)	225		(124		)	4,943		4,599		(895		)	220		666			4,590
Residential construction	2,729		(8		)	131		(262		)	2,590		3,264		(70		)	132		(242		)	3,084
Consumer direct	710		(1,203		)	355		903			765		708		(899		)	402		373			584
Indirect auto	1,550		(815		)	135		398			1,268		1,802		(733		)	149		792			2,010
Total allowance for loan losses	58,914		(6,115		)	3,255		5,017			61,071		61,422		(5,930		)	2,628		1,380			59,500
Allowance for unfunded commitments	2,312		—			—		583			2,895		2,002		—			—		220			2,222
Total allowance for credit losses	$	61,226	$	(6,115	)	$	3,255	$	5,600		$	63,966	$	63,424	$	(5,930	)	$	2,628	$	1,600		$	61,722

21

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table represents the recorded investment in loans by portfolio segment and the balance of the allowance for loan losses assigned to each segment based on the method of evaluating the loans for impairment as of the dates indicated (in thousands).

	Allowance for Credit Losses
	June 30, 2018								December 31, 2017
	Individually evaluated for impairment		Collectively evaluated for impairment		PCI		Ending Balance		Individually evaluated for impairment		Collectively evaluated for impairment		PCI		Ending Balance
Owner occupied commercial real estate	$	985	$	11,647	$	277	$	12,909	$	1,255	$	13,521	$	—	$	14,776
Income producing commercial real estate	609		10,193		60		10,862		562		8,813		6		9,381
Commercial & industrial	35		4,135		35		4,205		27		3,944		—		3,971
Commercial construction	98		10,025		—		10,123		156		10,367		—		10,523
Equipment financing	—		3,561		—		3,561		—		—		—		—
Residential mortgage	1,007		8,838		—		9,845		1,174		8,919		4		10,097
Home equity lines of credit	—		4,943		—		4,943		—		5,177		—		5,177
Residential construction	52		2,538		—		2,590		75		2,654		—		2,729
Consumer direct	6		758		1		765		7		700		3		710
Indirect auto	29		1,239		—		1,268		—		1,550		—		1,550
Total allowance for loan losses	2,821		57,877		373		61,071		3,256		55,645		13		58,914
Allowance for unfunded commitments	—		2,895		—		2,895		—		2,312		—		2,312
Total allowance for credit losses	$	2,821	$	60,772	$	373	$	63,966	$	3,256	$	57,957	$	13	$	61,226

	Loans Outstanding
	June 30, 2018								December 31, 2017
	Individually evaluated for impairment		Collectively evaluated for impairment		PCI		Ending Balance		Individually evaluated for impairment		Collectively evaluated for impairment		PCI		Ending Balance
Owner occupied commercial real estate	$	18,932	$	1,649,437	$	13,368	$	1,681,737	$	21,823	$	1,876,411	$	25,759	$	1,923,993
Income producing commercial real estate	16,245		1,762,960		42,179		1,821,384		16,483		1,533,851		44,840		1,595,174
Commercial & industrial	1,510		1,190,900		636		1,193,046		2,654		1,126,894		1,442		1,130,990
Commercial construction	3,528		725,474		6,573		735,575		3,813		699,266		8,857		711,936
Equipment financing	—		452,620		11,974		464,594		—		—		—		—
Residential mortgage	14,012		995,072		11,522		1,020,606		14,193		946,210		13,141		973,544
Home equity lines of credit	232		705,591		1,895		707,718		101		728,235		2,891		731,227
Residential construction	1,498		193,156		926		195,580		1,577		180,978		464		183,019
Consumer direct	249		121,737		770		122,756		270		126,114		1,120		127,504
Indirect auto	1,215		276,060		—		277,275		1,396		356,789		—		358,185
Total loans	$	57,421	$	8,073,007	$	89,843	$	8,220,271	$	62,310	$	7,574,748	$	98,514	$	7,735,572

A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due according to the original contractual terms of the loan will not be collected. Management individually evaluates certain impaired loans, including all non-PCI relationships that are on nonaccrual with a balance of $500,000 or greater and all troubled debt restructurings (“TDRs”) regardless of accrual status, for impairment. Impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. A specific reserve is established for impaired loans for the amount of calculated impairment, if any. Interest payments received on impaired nonaccrual loans are applied as a reduction of the recorded investment in the loan. For impaired loans not on nonaccrual status, interest is accrued according to the terms of the loan agreement. Loans are evaluated for impairment quarterly and specific reserves are established in the allowance for loan losses for any measured impairment.

Each quarter, management prepares an analysis of the allowance for credit losses to determine the appropriate balance that measures and quantifies the amount of probable incurred losses in the loan portfolio and unfunded loan commitments. The allowance is comprised of

22

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

specific reserves on individually impaired loans, which are determined as described above, and general reserves which are determined based on historical loss experience as adjusted for current trends and economic conditions multiplied by a loss emergence period factor.

Management calculates the loss emergence period for each pool in the loan portfolio based on the weighted average length of time between the date a loan first exceeds 30 days past due and the date the loan is charged off.

On junior lien home equity loans, management has limited ability to monitor the delinquency status of the first lien unless the first lien is also held by United. As a result, management applies the weighted average historical loss factor for this category and appropriately adjusts it to reflect the increased risk of loss from these credits.

Management carefully reviews the resulting loss factors for each category of the loan portfolio and evaluates whether qualitative adjustments are necessary to take into consideration recent credit trends such as increases or decreases in past due, nonaccrual, criticized and classified loans, and other macro environmental factors such as changes in unemployment rates, lease vacancy rates and trends in property values and absorption rates.

Management believes that its method of determining the balance of the allowance for credit losses provides a reasonable and reliable basis for measuring and reporting losses that are incurred in the loan portfolio as of the reporting date.

When a loan officer determines that a loan is uncollectible, he or she is responsible for recommending that the loan be placed on nonaccrual status and evaluated for impairment, which, if necessary, could result in fully or partially charging off the loan or establishing a specific reserve. Full or partial charge-offs may also be recommended by the Collections Department, the Special Assets Department, the Loss Mitigation Department and the Foreclosure/OREO Department. Nonaccrual real estate loans are generally charged down to fair value less costs to sell at the time they are placed on nonaccrual status.

Commercial and consumer asset quality committees meet monthly to review charge-offs that have occurred during the previous month. Participants include the Chief Credit Officer, Senior Risk Officers and Senior Credit Officers.

Generally, closed-end retail loans (installment and residential mortgage loans) past due 90 cumulative days are written down to their collateral value less estimated selling costs. Open-end (revolving) unsecured retail loans which are past due 90 cumulative days from their contractual due date are generally charged-off.

23

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table presents loans individually evaluated for impairment by class as of the dates indicated (in thousands).

	June 30, 2018						December 31, 2017
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Owner occupied commercial real estate	$	8,292	$	6,763	$	—	$	1,238	$	1,176	$	—
Income producing commercial real estate	7,568		7,496		—		2,177		2,165		—
Commercial & industrial	160		123		—		1,758		1,471		—
Commercial construction	564		558		—		134		134		—
Equipment financing	—		—		—		—		—		—
Total commercial	16,584		14,940		—		5,307		4,946		—
Residential mortgage	5,125		4,520		—		2,661		2,566		—
Home equity lines of credit	284		229		—		393		101		—
Residential construction	712		576		—		405		330		—
Consumer direct	49		49		—		29		29		—
Indirect auto	139		137		—		1,396		1,396		—
Total with no related allowance recorded	22,893		20,451		—		10,191		9,368		—
With an allowance recorded:
Owner occupied commercial real estate	12,665		12,169		985		21,262		20,647		1,255
Income producing commercial real estate	9,017		8,749		609		14,419		14,318		562
Commercial & industrial	1,776		1,387		35		1,287		1,183		27
Commercial construction	3,216		2,970		98		3,917		3,679		156
Equipment financing	—		—		—		—		—		—
Total commercial	26,674		25,275		1,727		40,885		39,827		2,000
Residential mortgage	9,576		9,492		1,007		12,086		11,627		1,174
Home equity lines of credit	4		3		—		—		—		—
Residential construction	933		922		52		1,325		1,247		75
Consumer direct	207		200		6		244		241		7
Indirect auto	1,079		1,078		29		—		—		—
Total with an allowance recorded	38,473		36,970		2,821		54,540		52,942		3,256
Total	$	61,366	$	57,421	$	2,821	$	64,731	$	62,310	$	3,256

As of June 30, 2018 and December 31, 2017, $2.74 million and $3.26 million, respectively, of specific reserves were allocated to customers whose loan terms have been modified in TDRs. United committed to lend additional amounts totaling up to $75,000 as of December 31, 2017, to customers with outstanding loans classified as TDRs. As of June 30, 2018, there were no commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs.

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

24

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Loans modified under the terms of a TDR during the three and six months ended June 30, 2018 and 2017 are presented in the table below. In addition, the following table presents loans modified under the terms of a TDR that defaulted (became 90 days or more delinquent) during the periods presented and were initially restructured within one year prior to default (dollars in thousands).

	New TDRs
		Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment by Type of Modification								TDRs Modified Within the Previous Twelve Months That Have Subsequently Defaulted
	Number of Contracts			Rate   Reduction		Structure		Other		Total		Number of   Contracts	Recorded   Investment
Three Months Ended June 30, 2018
Owner occupied commercial real estate	1	$	282	$	—	$	282	$	—	$	282	1	$	283
Income producing commercial real estate	1	106		106		—		—		106		—	—
Commercial & industrial	1	27		—		27		—		27		—	—
Commercial construction	—	—		—		—		—		—		1	3
Equipment financing	—	—		—		—		—		—		—	—
Total commercial	3	415		106		309		—		415		2	286
Residential mortgage	2	425		—		424		—		424		1	101
Home equity lines of credit	—	—		—		—		—		—		—	—
Residential construction	—	—		—		—		—		—		—	—
Consumer direct	—	—		—		—		—		—		—	—
Indirect auto	17	236		—		—		236		236		—	—
Total loans	22	$	1,076	$	106	$	733	$	236	$	1,075	3	$	387
Six Months Ended June 30, 2018
Owner occupied commercial real estate	4	$	1,276	$	—	$	1,260	$	—	$	1,260	3	$	1,869
Income producing commercial real estate	1	106		106		—		—		106		—	—
Commercial & industrial	2	108		—		32		—		32		—	—
Commercial construction	—	—		—		—		—		—		1	3
Equipment financing	—	—		—		—		—		—		—	—
Total commercial	7	1,490		106		1,292		—		1,398		4	1,872
Residential mortgage	4	765		—		764		—		764		1	101
Home equity lines of credit	—	—		—		—		—		—		—	—
Residential construction	—	—		—		—		—		—		—	—
Consumer direct	—	—		—		—		—		—		—	—
Indirect auto	17	236		—		—		236		236		—	—
Total loans	28	$	2,491	$	106	$	2,056	$	236	$	2,398	5	$	1,973
Three Months Ended June 30, 2017
Owner occupied commercial real estate	3	$	1,860	$	—	$	1,860	$	—	$	1,860	—	$	—
Income producing commercial real estate	1	226		—		—		226		226		—	—
Commercial & industrial	1	28		—		28		—		28		—	—
Commercial construction	—	—		—		—		—		—		—	—
Equipment financing	—	—		—		—		—		—		—	—
Total commercial	5	2,114		—		1,888		226		2,114		—	—
Residential mortgage	5	483		—		483		—		483		—	—
Home equity lines of credit	1	296		—		—		176		176		—	—
Residential construction	—	—		—		—		—		—		—	—
Consumer direct	—	—		—		—		—		—		—	—
Indirect auto	—	—		—		—		—		—		—	—
Total loans	11	$	2,893	$	—	$	2,371	$	402	$	2,773	—	$	—
Six Months Ended June 30, 2017
Owner occupied commercial real estate	3	$	1,860	$	—	$	1,860	$	—	$	1,860	—	$	—
Income producing commercial real estate	1	226		—		—		226		226		—	—
Commercial & industrial	2	53		—		53		—		53		—	—
Commercial construction	—	—		—		—		—		—		—	—
Equipment financing	—	—		—		—		—		—		—	—
Total commercial	6	2,139		—		1,913		226		2,139		—	—
Residential mortgage	12	836		—		836		—		836		2	655
Home equity lines of credit	1	296		—		—		176		176		—	—
Residential construction	1	40		40		—		—		40		—	—
Consumer direct	1	6		—		6		—		6		—	—
Indirect auto	—	—		—		—		—		—		—	—
Total loans	21	$	3,317	$	40	$	2,755	$	402	$	3,197	2	$	655

25

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

TDRs that subsequently default and are placed on nonaccrual are charged down to the fair value of the collateral consistent with United’s policy for nonaccrual loans.

The average balances of impaired loans and income recognized on impaired loans while they were considered impaired are presented below for the periods indicated (in thousands). 

	2018						2017
Three Months Ended June 30,	Average Balance		Interest Revenue Recognized During Impairment		Cash Basis Interest Revenue Received		Average Balance		Interest Revenue Recognized During Impairment		Cash Basis Interest Revenue Received
Owner occupied commercial real estate	$	19,353	$	235	$	236	$	30,825	$	371	$	376
Income producing commercial real estate	16,408		215		212		28,768		359		347
Commercial & industrial	1,542		25		24		1,877		26		17
Commercial construction	3,564		47		44		6,670		70		77
Equipment financing	—		—		—		—		—		—
Total commercial	40,867		522		516		68,140		826		817
Residential mortgage	14,115		157		161		14,742		130		147
Home equity lines of credit	235		5		4		552		2		4
Residential construction	1,516		25		24		1,563		23		24
Consumer direct	256		5		5		307		6		6
Indirect auto	1,283		17		17		1,137		14		14
Total	$	58,272	$	731	$	727	$	86,441	$	1,001	$	1,012
Six Months Ended June 30,
Owner occupied commercial real estate	$	22,006	$	480	$	516	$	30,342	$	716	$	712
Income producing commercial real estate	16,421		425		447		28,589		710		692
Commercial & industrial	2,069		65		66		1,908		53		45
Commercial construction	3,750		98		96		5,836		123		130
Equipment financing	—		—		—		—		—		—
Total commercial	44,246		1,068		1,125		66,675		1,602		1,579
Residential mortgage	14,554		306		311		14,175		268		290
Home equity lines of credit	290		9		8		308		3		5
Residential construction	1,553		49		48		1,591		46		47
Consumer direct	274		10		10		297		11		12
Indirect auto	1,301		34		34		1,130		28		28
Total	$	62,218	$	1,476	$	1,536	$	84,176	$	1,958	$	1,961

Nonaccrual and Past Due Loans

Nonaccrual loans include both homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans. United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in full or when the loan becomes 90 days past due and is not well secured and in the process of collection. When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a nonaccrual loan are applied to reduce the loan’s recorded investment.

PCI loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered to be performing, even

26

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period loan loss provision or future period yield adjustments. The accrual of interest is discontinued on PCI loans if management can no longer reliably estimate future cash flows on the loan. No PCI loans were classified as nonaccrual at June 30, 2018 or December 31, 2017 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all PCI loans.

The gross additional interest revenue that would have been earned if the loans classified as nonaccrual had performed in accordance with the original terms was approximately $256,000 and $246,000 for the three months ended June 30, 2018 and 2017, respectively, and $599,000 and $523,000 for the six months ended June 30, 2018 and 2017, respectively.

The following table presents the recorded investment in nonaccrual loans by loan class as of the dates indicated (in thousands). 

	June 30, 2018		December 31, 2017
Owner occupied commercial real estate	$	5,772	$	4,923
Income producing commercial real estate	991		3,208
Commercial & industrial	2,180		2,097
Commercial construction	613		758
Equipment financing	1,075		—
Total commercial	10,631		10,986
Residential mortgage	7,918		8,776
Home equity lines of credit	1,812		2,024
Residential construction	637		192
Consumer direct	68		43
Indirect auto	751		1,637
Total	$	21,817	$	23,658

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Excluding PCI loans, substantially all loans more than 90 days past due were on nonaccrual status at June 30, 2018 and December 31, 2017. The following table presents the aging of the recorded investment in past due loans by class of loans as of the dates indicated (in thousands).

	Loans Past Due
As of June 30, 2018	30 - 59 Days		60 - 89 Days		> 90 Days		Total		Loans Not Past Due		PCI Loans		Total
Owner occupied commercial real estate	$	5,007	$	822	$	2,553	$	8,382	$	1,659,987	$	13,368	$	1,681,737
Income producing commercial real estate	2,045		269		49		2,363		1,776,842		42,179		1,821,384
Commercial & industrial	2,450		576		714		3,740		1,188,670		636		1,193,046
Commercial construction	992		343		253		1,588		727,414		6,573		735,575
Equipment financing	346		465		1,075		1,886		450,734		11,974		464,594
Total commercial	10,840		2,475		4,644		17,959		5,803,647		74,730		5,896,336
Residential mortgage	6,470		2,284		2,684		11,438		997,646		11,522		1,020,606
Home equity lines of credit	2,113		797		500		3,410		702,413		1,895		707,718
Residential construction	757		92		493		1,342		193,312		926		195,580
Consumer direct	536		142		1		679		121,307		770		122,756
Indirect auto	731		132		601		1,464		275,811		—		277,275
Total loans	$	21,447	$	5,922	$	8,923	$	36,292	$	8,094,136	$	89,843	$	8,220,271

	Loans Past Due
As of December 31, 2017	30 - 59 Days		60 - 89 Days		> 90 Days		Total		Loans Not Past Due		PCI Loans		Total
Owner occupied commercial real estate	$	3,810	$	1,776	$	1,530	$	7,116	$	1,891,118	$	25,759	$	1,923,993
Income producing commercial real estate	1,754		353		1,939		4,046		1,546,288		44,840		1,595,174
Commercial & industrial	2,139		869		1,133		4,141		1,125,407		1,442		1,130,990
Commercial construction	568		132		158		858		702,221		8,857		711,936
Equipment financing	—		—		—		—		—		—		—
Total commercial	8,271		3,130		4,760		16,161		5,265,034		80,898		5,362,093
Residential mortgage	6,717		1,735		3,438		11,890		948,513		13,141		973,544
Home equity lines of credit	3,246		225		578		4,049		724,287		2,891		731,227
Residential construction	885		105		93		1,083		181,472		464		183,019
Consumer direct	739		133		—		872		125,512		1,120		127,504
Indirect auto	1,152		459		1,263		2,874		355,311		—		358,185
Total loans	$	21,010	$	5,787	$	10,132	$	36,929	$	7,600,129	$	98,514	$	7,735,572

Risk Ratings

United categorizes commercial loans, with the exception of equipment financing receivables, into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current industry and economic trends, among other factors. United analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continual basis. United uses the following definitions for its risk ratings:

Watch. Loans in this category are presently protected from apparent loss; however, weaknesses exist that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. These loans require more than the ordinary amount of supervision. Collateral values generally afford adequate coverage, but may not be immediately marketable.

Substandard. These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged. Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. There is the distinct possibility that United will sustain some loss if deficiencies are not corrected. If possible, immediate corrective action is taken.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Doubtful. Specific weaknesses characterized as Substandard that are severe enough to make collection in full highly questionable and improbable. There is no reliable secondary source of full repayment.

Loss. Loans categorized as Loss have the same characteristics as Doubtful; however, probability of loss is certain. Loans classified as Loss are charged off.

Equipment Financing Receivables and Consumer Purpose Loans. United applies a pass / fail grading system to all equipment financing receivables and consumer purpose loans. Under the pass / fail grading system, loans that become past due 90 days or are in bankruptcy are classified as “fail” and all other loans are classified as “pass”. For reporting purposes, loans in these categories that are classified as “fail” are reported in the substandard column and all other loans are reported in the “pass” column.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

29

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Based on the most recent analysis performed, the risk category of loans by class of loans as of the dates indicated is as follows (in thousands).

	Pass		Watch		Substandard		Doubtful / Loss		Total
As of June 30, 2018
Owner occupied commercial real estate	$	1,607,152	$	21,030	$	40,187	$	—	$	1,668,369
Income producing commercial real estate	1,738,757		19,989		20,459		—		1,779,205
Commercial & industrial	1,158,458		14,103		19,849		—		1,192,410
Commercial construction	696,187		24,575		8,240		—		729,002
Equipment financing	451,545		—		1,075		—		452,620
Total commercial	5,652,099		79,697		89,810		—		5,821,606
Residential mortgage	989,403		—		19,681		—		1,009,084
Home equity lines of credit	699,455		—		6,368		—		705,823
Residential construction	192,656		—		1,998		—		194,654
Consumer direct	121,493		—		493		—		121,986
Indirect auto	275,233		—		2,042		—		277,275
Total loans, excluding PCI loans	$	7,930,339	$	79,697	$	120,392	$	—	$	8,130,428
Owner occupied commercial real estate	$	2,586	$	3,027	$	7,755	$	—	$	13,368
Income producing commercial real estate	12,918		22,609		6,652		—		42,179
Commercial & industrial	258		227		151		—		636
Commercial construction	3,345		753		2,475		—		6,573
Equipment financing	11,154		—		820		—		11,974
Total commercial	30,261		26,616		17,853		—		74,730
Residential mortgage	8,167		148		3,207		—		11,522
Home equity lines of credit	1,334		—		561		—		1,895
Residential construction	473		247		206		—		926
Consumer direct	697		—		73		—		770
Indirect auto	—		—		—		—		—
Total PCI loans	$	40,932	$	27,011	$	21,900	$	—	$	89,843
Total loan portfolio	$	7,971,271	$	106,708	$	142,292	$	—	$	8,220,271
As of December 31, 2017
Owner occupied commercial real estate	$	1,833,469	$	33,571	$	31,194	$	—	$	1,898,234
Income producing commercial real estate	1,495,805		30,780		23,749		—		1,550,334
Commercial & industrial	1,097,907		18,052		13,589		—		1,129,548
Commercial construction	693,873		2,947		6,259		—		703,079
Equipment financing	—		—		—		—		—
Total commercial	5,121,054		85,350		74,791		—		5,281,195
Residential mortgage	939,706		—		20,697		—		960,403
Home equity lines of credit	721,142		—		7,194		—		728,336
Residential construction	180,567		—		1,988		—		182,555
Consumer direct	125,860		—		524		—		126,384
Indirect auto	354,788		—		3,397		—		358,185
Total loans, excluding PCI loans	$	7,443,117	$	85,350	$	108,591	$	—	$	7,637,058
Owner occupied commercial real estate	$	2,400	$	8,163	$	15,196	$	—	$	25,759
Income producing commercial real estate	13,392		21,928		9,520		—		44,840
Commercial & industrial	383		672		387		—		1,442
Commercial construction	3,866		2,228		2,763		—		8,857
Equipment financing	—		—		—		—		—
Total commercial	20,041		32,991		27,866		—		80,898
Residential mortgage	9,566		173		3,402		—		13,141
Home equity lines of credit	1,579		427		885		—		2,891
Residential construction	423		—		41		—		464
Consumer direct	1,076		10		34		—		1,120
Indirect auto	—		—		—		—		—
Total PCI loans	$	32,685	$	33,601	$	32,228	$	—	$	98,514
Total loan portfolio	$	7,475,802	$	118,951	$	140,819	$	—	$	7,735,572

30

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 7 – Reclassifications Out of Accumulated Other Comprehensive Income

The following table presents the details regarding amounts reclassified out of accumulated other comprehensive income for the periods indicated (in thousands).

	Amounts Reclassified from Accumulated Other Comprehensive Income
Details about Accumulated Other Comprehensive Income Components	Three Months Ended June 30,						Six Months Ended June 30,						Affected Line Item in the Statement Where Net Income is Presented
	2018			2017			2018			2017
Realized (losses) gains on available-for-sale securities:
	$	(364	)	$	4		$	(1,304	)	$	2		Securities (losses) gains, net
	97			—			317			1			Income tax benefit
	$	(267	)	$	4		$	(987	)	$	3		Net of tax
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity:
	$	(218	)	$	(261	)	$	(439	)	$	(571	)	Investment securities interest revenue
	55			98			109			214			Income tax benefit
	$	(163	)	$	(163	)	$	(330	)	$	(357	)	Net of tax
Amortization of losses included in net income on derivative financial instruments accounted for as cash flow hedges:
Amortization of losses on de-designated positions	$	(143	)	$	(149	)	$	(290	)	$	(298	)	Money market deposit interest expense
Amortization of losses on de-designated positions	—			(28		)	—			(292		)	Federal Home Loan Bank advances interest expense
	(143		)	(177		)	(290		)	(590		)	Total before tax
	38			69			76			230			Income tax benefit
	$	(105	)	$	(108	)	$	(214	)	$	(360	)	Net of tax
Reclassification of disproportionate tax effect related to terminated cash flow hedges:
	$	—		$	—		$	—		$	(3,400	)	Income tax expense
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan:
Prior service cost	$	(167	)	$	(140	)	$	(334	)	$	(280	)	Salaries and employee benefits expense
Actuarial losses	(60		)	—			(120		)	—			Other expense
Actuarial losses	—			(60		)	—			(120		)	Salaries and employee benefits expense
	(227		)	(200		)	(454		)	(400		)	Total before tax
	73			78			131			157			Income tax benefit
	$	(154	)	$	(122	)	$	(323	)	$	(243	)	Net of tax
Total reclassifications for the period	$	(689	)	$	(389	)	$	(1,854	)	$	(4,357	)	Net of tax

Amounts shown above in parentheses reduce earnings.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 8 – Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data).

	Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018			2017
Net income	$	39,634		$	28,267	$	77,292		$	51,791
Dividends and undistributed earnings allocated to unvested shares	(275		)	—		(552		)	—
Net income available to common shareholders	$	39,359		$	28,267	$	76,740		$	51,791
Weighted average shares outstanding:
Basic	79,745			71,810		79,477			71,798
Effect of dilutive securities
Stock options	10			10		10			11
Diluted	79,755			71,820		79,487			71,809
Net income per common share:
Basic	$	0.49		$	0.39	$	0.97		$	0.72
Diluted	$	0.49		$	0.39	$	0.97		$	0.72

At June 30, 2018, United had potentially dilutive warrants outstanding to purchase 219,909 shares of common stock at $61.40 per share. At June 30, 2018, there were no shares of potentially dilutive common stock issuable upon exercise of stock options granted to employees.

At June 30, 2017, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,909 shares of common stock at $61.40 per share; 63,404 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $25.45; and 595,188 shares of common stock issuable upon the vesting of restricted stock unit awards.

Note 9 – Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

United is exposed to certain risks arising from both its business operations and economic conditions. United principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. United manages interest rate risk primarily by managing the amount, sources, and duration of its investment securities portfolio and wholesale funding and through the use of derivative financial instruments. Specifically, United enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined primarily by interest rates. Derivative financial instruments are used to manage differences in the amount, timing, and duration of known or expected cash receipts and known or expected cash payments principally related to loans, investment securities, wholesale borrowings and deposits.

In conjunction with the FASB’s fair value measurement guidance, United made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a gross basis.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents the fair value of derivative financial instruments as of the dates indicated as well as their classification on the consolidated balance sheet (in thousands). 

Derivatives designated as hedging instruments under ASC 815

Interest Rate Products	Balance Sheet Location	June 30, 2018		December 31, 2017
Fair value hedge of corporate bonds	Derivative assets	$	—	$	336
		$	—	$	336
Fair value hedge of brokered CDs	Derivative liabilities	$	2,425	$	2,053
		$	2,425	$	2,053

Derivatives not designated as hedging instruments under ASC 815

		Fair Value
Interest Rate Products	Balance Sheet Location	June 30, 2018		December 31, 2017
Customer derivative positions	Derivative assets	$	951	$	2,659
Dealer offsets to customer derivative positions	Derivative assets	14,433		6,867
Mortgage banking - loan commitment	Derivative assets	1,764		1,150
Mortgage banking - forward sales commitment	Derivative assets	2		13
Bifurcated embedded derivatives	Derivative assets	12,746		11,057
Interest rate caps	Derivative assets	—		639
		$	29,896	$	22,385
Customer derivative positions	Derivative liabilities	$	18,489	$	7,032
Dealer offsets to customer derivative positions	Derivative liabilities	217		1,551
Risk participations	Derivative liabilities	8		20
Mortgage banking - forward sales commitment	Derivative liabilities	189		49
Dealer offsets to bifurcated embedded derivatives	Derivative liabilities	15,471		14,279
De-designated hedges	Derivative liabilities	462		392
		$	34,836	$	23,323

Customer derivative positions are between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap/cap program. United also has three interest rate swap contracts that are not designated as hedging instruments but are economic hedges of market-linked brokered certificates of deposit. The market-linked brokered certificates of deposit contain embedded derivatives that are bifurcated from the host instruments and are marked to market through earnings. The fair value marks on the market linked swaps and the bifurcated embedded derivatives tend to move in opposite directions with changes in 90-day London Interbank Offered Rate (“LIBOR”) and therefore provide an economic hedge.

To accommodate customers, United occasionally enters into credit risk participation agreements with counterparty banks to accept a portion of the credit risk related to interest rate swaps. This allows customers to execute an interest rate swap with one bank while allowing for the distribution of the credit risk among participating members. Credit risk participation agreements arise when United contracts with other financial institutions, as a guarantor, to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third party default on the underlying swap. These transactions are typically executed in conjunction with a participation in a loan with the same customer. Collateral used to support the credit risk for the underlying lending relationship is also available to offset the risk of the credit risk participation.

In addition, United originates certain residential mortgage loans with the intention of selling these loans. Between the time United enters into an interest-rate lock commitment to originate a residential mortgage loan that is to be held for sale and the time the loan is funded and eventually sold, United is subject to the risk of variability in market prices. United enters into forward sale agreements to mitigate risk and to protect the expected gain on the eventual loan sale. Most of this hedging activity is executed on a matched basis, with a loan sale commitment hedging a specific loan. The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding derivative instruments. United accounts for most newly originated mortgage loans at fair value pursuant to the fair value option, and these loans are not reflected in the table above. Fair value adjustments on these derivative instruments are recorded within mortgage loan and other related fee income in the consolidated statement of income.

33

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Cash Flow Hedges of Interest Rate Risk

At June 30, 2018 and December 31, 2017 United did not have any active cash flow hedges. Changes in balance sheet composition and interest rate risk position made cash flow hedges no longer necessary as protection against rising interest rates. The loss remaining in other comprehensive income from prior hedges that have been de-designated is being amortized into earnings over the original term of the swaps as the forecasted transactions that the swaps were originally designated to hedge are still expected to occur. United expects that $361,000 will be reclassified as an increase to interest expense over the next twelve months related to these cash flow hedges.

The table below presents the effect of cash flow hedges on the consolidated statements of income for the periods indicated (in thousands). 

	Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)
	Location	2018			2017
Three Months Ended June 30,
Interest rate swaps	Interest expense	$	(143	)	$	(177	)
Six Months Ended June 30,
Interest rate swaps	Interest expense	$	(290	)	$	(590	)

Fair Value Hedges of Interest Rate Risk

United is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in interest rates. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in interest rates. Interest rate swaps designated as fair value hedges of brokered deposits involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. Interest rate swaps designated as fair value hedges of fixed-rate investments involve the receipt of variable-rate payments from a counterparty in exchange for United making fixed-rate payments over the life of the instrument without the exchange of the underlying notional amount. At June 30, 2018, United had four interest rate swaps with a notional amount of $39.0 million that were designated as fair value hedges of interest rate risk and were pay-variable / receive-fixed swaps hedging the changes in the fair value of fixed-rate brokered time deposits resulting from changes in interest rates. At December 31, 2017, United had four interest rate swaps with an aggregate notional amount of $40.7 million that were designated as fair value hedges of interest rate risk and were pay-variable / receive-fixed, hedging the changes in the fair value of fixed-rate brokered time deposits resulting from changes in interest rates. Also at December 31, 2017, United had one interest rate swap with a notional value of $30 million that was designated as a pay-fixed / receive-variable fair value hedge of changes in the fair value of a fixed-rate corporate bond.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same income statement line item as the offsetting loss or gain on the related derivatives. During the three and six months ended June 30, 2018, United recognized net losses of $119,000 and $199,000 , respectively, related to ineffectiveness in the fair value hedging relationships. During the three and six months ended June 30, 2017, United recognized net losses of $327,000 and $452,000, respectively, related to ineffectiveness in the fair value hedging relationships. United also recognized a net increase in interest expense of $66,000 and $80,000, respectively, for the three and six months ended June 30, 2018, and net reductions of interest expense of $65,000 and $97,000, respectively, for the three and six months ended June 30, 2017 related to fair value hedges of brokered time deposits, which includes net settlements on the derivatives. United recognized an increase in interest revenue on securities for the six months ended June 30, 2018 of $17,000 and reductions of interest revenue on securities during the three and six months ended June 30, 2017 of $80,000 and $173,000, respectively, related to fair value hedges of corporate bonds. For the three months ended June 30, 2018, there was no impact on interest revenue on securities related to fair value hedges of corporate bonds.

34

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents the effect of derivatives in fair value hedging relationships on the consolidated statement of income for the periods indicated (in thousands). 

	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative						Amount of Gain (Loss) Recognized in Income on Hedged Item
		2018			2017			2018		2017
Three Months Ended June 30,
Fair value hedges of brokered CDs	Interest expense	$	(144	)	$	73		$	25	$	(344	)
Fair value hedges of corporate bonds	Interest revenue	—			(323		)	—		267
		$	(144	)	$	(250	)	$	25	$	(77	)
Six Months Ended June 30,
Fair value hedges of brokered CDs	Interest expense	$	(837	)	$	(201	)	$	569	$	(155	)
Fair value hedges of corporate bonds	Interest revenue	(336		)	(217		)	405		121
		$	(1,173	)	$	(418	)	$	974	$	(34	)

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

Derivatives Not Designated as Hedging Instruments under ASC 815

The table below presents the gains and losses recognized in income on derivatives not designated as hedging instruments under ASC 815 for the periods indicated (in thousands). 

	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
		2018			2017
Three Months Ended June 30,
Customer derivatives and dealer offsets	Other noninterest income	$	643		$	775
Bifurcated embedded derivatives and dealer offsets	Other noninterest income	12			119
Interest rate caps	Other noninterest income	—			90
De-designated hedges	Other noninterest income	(17		)	28
Mortgage banking derivatives	Mortgage loan revenue	156			(1,000		)
Risk participations	Other noninterest income	15			1
		$	809		$	13
Six Months Ended June 30,
Customer derivatives and dealer offsets	Other noninterest income	$	1,417		$	1,250
Bifurcated embedded derivatives and dealer offsets	Other noninterest income	381			206
Interest rate caps	Other noninterest income	276			90
De-designated hedges	Other noninterest income	(83		)	4
Mortgage banking derivatives	Mortgage loan revenue	1,420			(876		)
Risk participations	Other noninterest income	12			5
		$	3,423		$	679

35

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Credit-Risk-Related Contingent Features

United manages its credit exposure on derivatives transactions by entering into a bilateral credit support agreement with each counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty. As of June 30, 2018, collateral totaling $18.4 million was pledged toward derivatives in a liability position.

United’s agreements with each of its derivative counterparties contain a provision where if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with derivatives counterparties also include provisions that if not met, could result in United being declared in default. United has agreements with certain of its derivative counterparties that contain a provision where if United fails to maintain its status as a well-capitalized institution or is subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and United would be required to settle its obligations under the agreements. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), all newly eligible derivatives entered into are cleared through a central clearinghouse. Derivatives that are centrally cleared do not have credit-risk-related features that require additional collateral if our credit rating were downgraded.

Note 10 – Stock-Based Compensation

United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards (also referred to as “nonvested stock” awards), stock awards, performance share awards or stock appreciation rights. Options granted under the plan can have an exercise price no less than the fair market value of the underlying stock at the date of grant. The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years. Certain options, restricted stock and restricted stock unit awards provide for accelerated vesting if there is a change in control (as defined in the plan). Through June 30, 2018, incentive stock options, nonqualified stock options, restricted stock and restricted stock unit awards, base salary stock grants and performance share awards have been granted under the plan. As of June 30, 2018, 1.74 million additional awards remained available for grant under the plan.

The following table shows stock option activity for the first six months of 2018.

Options	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value ($000)
Outstanding at December 31, 2017	60,287		$	24.12
Exercised	(12,000	)	11.85
Cancelled/forfeited	(181	)	31.50
Outstanding at June 30, 2018	48,106		27.16		2.4	$	169
Exercisable at June 30, 2018	45,606		27.73		2.1	134

The fair value of each option is estimated on the date of grant using the Black-Scholes model. No stock options were granted during the six months ended June 30, 2018 and 2017.

United recognized $12,000 and $15,000 in compensation expense related to stock options during each of the six months ended June 30, 2018 and 2017, respectively. The amount of compensation expense was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized over the vesting period.

36

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents restricted stock units activity for the first six months of 2018.

Restricted Stock Unit Awards	Shares		Weighted- Average Grant- Date Fair Value		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value ($000)
Outstanding at December 31, 2017	663,817		$	22.40
Granted	206,123		31.07
Vested	(124,551	)	18.53			$	3,998
Cancelled	(13,665	)	21.95
Outstanding at June 30, 2018	731,724		25.51		5.4	22,442

Compensation expense for restricted stock units is based on the market value of United’s common stock on the date of grant. United recognizes the impact of forfeitures as they occur. The value of restricted stock unit awards is amortized into expense over the vesting period. For the six months ended June 30, 2018 and 2017, expense of $2.11 million and $3.02 million, respectively, was recognized related to restricted stock unit awards. Of the expense recognized related to restricted stock unit awards during the six months ended June 30, 2017, $696,000 relates to the modification of existing awards resulting from an acceleration of vesting of unvested awards due to retirement which was recognized in merger-related and other charges in the consolidated statement of income. The remaining expense of $2.33 million was recognized in compensation expense. In addition, for the six months ended June 30, 2018 and 2017, $156,000 and $113,000, respectively, was recognized in other operating expense for restricted stock unit awards granted to members of United’s board of directors.

A deferred income tax benefit related to expense for options and restricted stock of $581,000 and $1.23 million was included in the determination of income tax expense for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, there was $14.9 million of unrecognized expense related to non-vested stock options and restricted stock unit awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.4 years.

Note 11 – Common and Preferred Stock Issued / Common Stock Issuable

United sponsors a Dividend Reinvestment and Share Purchase Plan (“DRIP”) that allows participants who already own United’s common stock to purchase additional shares directly from United. The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission. In the six months ended June 30, 2018 and 2017, 3,364 shares and 1,714 shares, respectively, were issued through the DRIP.

In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 10% discount, with no commission charges. During the first six months of 2018 and 2017, United issued 6,489 shares and 6,855 shares, respectively, through the ESPP.

United offers its common stock as an investment option in its deferred compensation plan. United also allows for the deferral of restricted stock unit awards. The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. The deferred compensation plan does not allow for diversification once an election is made to invest in United’s common stock and settlement must be accomplished in shares at the time the deferral period is completed. At June 30, 2018 and December 31, 2017, 616,549 and 607,869 shares of common stock, respectively, were issuable under the deferred compensation plan.

On March 22, 2016, United announced that its Board of Directors had authorized a program to repurchase up to $50 million of United’s outstanding common stock through December 31, 2017. In November 2017, the Board of Directors extended this program to December 31, 2018. Under the program, the shares may be repurchased periodically in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the program depends on a number of factors, including the market price of United’s common stock, general market and economic conditions, and applicable legal requirements. During the first six months of 2018 and 2017, United did not repurchase any shares under the program. As of June 30, 2018, $36.3 million of United’s outstanding common stock may be repurchased under the program.

37

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 12 – Income Taxes

The income tax provision for the three and six months ended June 30, 2018 was $13.5 million and $24.3 million, respectively, which represents an effective tax rate of 25.5% and 23.9%, respectively, for each period. The effective tax rate for the second quarter and first six months of 2018 reflect the lower federal income tax rate enacted in the fourth quarter of 2017 following the passage of H.R. 1, commonly known as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The income tax provision for the second quarter of 2018 also includes $509,000 of additional tax expense resulting from the partial impairment of United’s deferred tax asset due to Georgia’s announcement that it has reduced its corporate income tax rate from 6.00% to 5.75% effective January 1, 2019. The income tax provision for the three and six months ended June 30, 2017 was $16.5 million and $35.0 million, respectively, which represents an effective tax rate of 36.9% and 40.3%, respectively, for each period. Upon reversal of United’s former full deferred tax valuation allowance in 2013, certain disproportionate tax effects were retained in accumulated other comprehensive income (loss). During the first quarter of 2017, with the maturity and termination of certain dedesignated cash flow hedges, the disproportionate tax effect associated with these hedges was reversed and recorded as a tax expense of $3.40 million, which was the primary reason for the increase in the effective tax rate for that period.

At June 30, 2018 and December 31, 2017, United maintained a valuation allowance on its net deferred tax asset of $4.71 million and $4.41 million, respectively. Management assesses the valuation allowance recorded against its net deferred tax asset at each reporting period. The determination of whether a valuation allowance for its net deferred tax asset is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence.

The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management’s conclusion at June 30, 2018 that it was more likely than not that the net deferred tax asset of $77.3 million will be realized is based upon management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts that consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the valuation allowance may need to be increased for some or all of its net deferred tax asset.

United is subject to income taxation in the United States and various state jurisdictions. United’s federal and state income tax returns are filed on a consolidated basis. Currently, no years for which United filed a federal income tax return are under examination by the IRS, and there are no state tax examinations currently in progress. United is no longer subject to income tax examinations from state and local income tax authorities for years before 2014. Although it is not possible to know the ultimate outcome of future examinations, management believes that the liability recorded for uncertain tax positions is appropriate. At June 30, 2018 and December 31, 2017, unrecognized income tax benefits totaled $3.39 million and $3.16 million, respectively.

38

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 13 – Assets and Liabilities Measured at Fair Value

Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, United uses a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). United has processes in place to review the significant valuation inputs and to reassess how the instruments are classified in the valuation framework.

Fair Value Hierarchy

Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that United has the ability to access.

Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.

Level 3 Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.

Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, United States Department of Treasury (“Treasury”) securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds, corporate debt securities and asset-backed securities and are valued based on observable inputs that include: quoted market prices for similar assets, quoted market prices that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the securities. Securities classified as Level 3 include asset-backed securities in less liquid markets. Securities classified as Level 3 are valued based on estimates obtained from broker-dealers and are not directly observable.

Deferred Compensation Plan Assets and Liabilities

Included in other assets in the consolidated balance sheet are assets related to employee deferred compensation plans. The assets associated with these plans are invested in mutual funds and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which mirrors the fair value of the invested assets and is included in other liabilities in the consolidated balance sheet.

Mortgage Loans Held for Sale

United has elected the fair value option for most of its newly originated mortgage loans held for sale in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the value of derivative instruments used to economically hedge them. The fair value of mortgage loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

39

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Loans

United does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for credit losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if repayment of the loan is dependent upon the sale of the underlying collateral.

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with ASC 820, Fair Value Measures and Disclosures, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the impaired loan as nonrecurring Level 3.

Derivative Financial Instruments

United uses interest rate swaps and interest rate floors to manage its interest rate risk. The valuation of these instruments is typically determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. United also uses best effort and mandatory delivery forward loan sale commitments to hedge risk in its mortgage lending business.

To comply with the provisions of ASC 820, United incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, United has considered the effect of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although management has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, management had assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. Derivatives classified as Level 3 included structured derivatives for which broker quotes, used as a key valuation input, were not observable consistent with a Level 2 disclosure. The fair value of risk participations incorporates Level 3 inputs to evaluate the likelihood of customer default. The fair value of interest rate lock commitments, which is related to mortgage loan commitments, is categorized as Level 3 based on unobservable inputs for commitments that United does not expect to fund.

Servicing Rights for SBA/USDA Loans

United recognizes servicing rights upon the sale of SBA/USDA loans sold with servicing retained. Management has elected to carry this asset at fair value. Given the nature of the asset, the key valuation inputs are unobservable and management classifies this asset as Level 3.

Residential Mortgage Servicing Rights

United recognizes servicing rights upon the sale of residential mortgage loans sold with servicing retained. Effective January 1, 2017, management elected to carry this asset at fair value. Given the nature of the asset, the key valuation inputs are unobservable and management classifies this asset as Level 3.

Pension Plan Assets

For information on the fair value of pension plan assets, see Note 18 in the Annual Report on Form 10-K for the year ended December 31, 2017.

40

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of the dates indicated, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).

June 30, 2018	Level 1		Level 2		Level 3		Total
Assets:
Securities available for sale:
U.S. Treasuries	$	119,039	$	—	$	—	$	119,039
U.S. Agencies	—		25,578		—		25,578
State and political subdivisions	—		197,631		—		197,631
Mortgage-backed securities	—		1,806,861		—		1,806,861
Corporate bonds	—		197,175		990		198,165
Asset-backed securities	—		188,963		—		188,963
Other	—		57		—		57
Mortgage loans held for sale	—		34,813		—		34,813
Deferred compensation plan assets	6,199		—		—		6,199
Servicing rights for SBA/USDA loans	—		—		7,509		7,509
Residential mortgage servicing rights	—		—		10,801		10,801
Derivative financial instruments	—		15,386		14,510		29,896
Total assets	$	125,238	$	2,466,464	$	33,810	$	2,625,512
Liabilities:
Deferred compensation plan liability	$	6,199	$	—	$	—	$	6,199
Derivative financial instruments	—		18,895		18,366		37,261
Total liabilities	$	6,199	$	18,895	$	18,366	$	43,460

December 31, 2017	Level 1		Level 2		Level 3		Total
Assets:
Securities available for sale
U.S. Treasuries	$	121,113	$	—	$	—	$	121,113
U.S. Agencies	—		26,372		—		26,372
State and political subdivisions	—		197,286		—		197,286
Mortgage-backed securities	—		1,727,211		—		1,727,211
Corporate bonds	—		305,453		900		306,353
Asset-backed securities	—		237,458		—		237,458
Other	—		57		—		57
Mortgage loans held for sale	—		26,252		—		26,252
Deferred compensation plan assets	5,716		—		—		5,716
Servicing rights for SBA/USDA loans	—		—		7,740		7,740
Residential mortgage servicing rights	—		—		8,262		8,262
Derivative financial instruments	—		10,514		12,207		22,721
Total assets	$	126,829	$	2,530,603	$	29,109	$	2,686,541
Liabilities:
Deferred compensation plan liability	$	5,716	$	—	$	—	$	5,716
Derivative financial instruments	—		8,632		16,744		25,376
Total liabilities	$	5,716	$	8,632	$	16,744	$	31,092

41

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table shows a reconciliation of the beginning and ending balances for the periods indicated for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands).

	2018														2017
	Derivative Asset			Derivative Liability			Servicing rights for SBA/USDA loans			Residential mortgage servicing rights			Securities Available- for-Sale		Derivative Asset			Derivative Liability			Servicing rights for SBA/USDA loans			Residential mortgage servicing rights			Securities Available- for-Sale
Three Months Ended June 30,
Balance at beginning of period	$	13,877		$	17,788		$	7,470		$	9,718		$	900	$	12,649		$	16,580		$	5,997		$	5,971		$	675
Additions	—			—			613			1,182			—		—			—			668			947			—
Sales and settlements	—			—			(316		)	(126		)	—		(702		)	(964		)	(36		)	(74		)	—
Other comprehensive income	—			—			—			—			90		—			—			—			—			135
Amounts included in earnings - fair value adjustments	633			578			(258		)	27			—		(91		)	475			11			(345		)	—
Balance at end of period	$	14,510		$	18,366		$	7,509		$	10,801		$	990	$	11,856		$	16,091		$	6,640		$	6,499		$	810
Six Months Ended June 30,
Balance at beginning of period	$	12,207		$	16,744		$	7,740		$	8,262		$	900	$	11,777		$	16,347		$	5,752		$	—		$	675
Business combinations	—			—			(354		)	—			—		—			—			—			—			—
Transfer from amortization method to fair value	—			—			—			—			—		—			—			—			5,070			—
Additions	—			—			1,092			2,108			—		—			—			1,221			1,813			—
Sales and settlements	(1,029		)	(1,347		)	(407		)	(206		)	—		(1,086		)	(1,514		)	(299		)	(114		)	—
Other comprehensive income	—			—			—			—			90		—			—			—			—			135
Amounts included in earnings - fair value adjustments	3,332			2,969			(562		)	637			—		1,165			1,258			(34		)	(270		)	—
Balance at end of period	$	14,510		$	18,366		$	7,509		$	10,801		$	990	$	11,856		$	16,091		$	6,640		$	6,499		$	810

The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis as of the dates indicated (in thousands). 

	Fair Value						Weighted Average
Level 3 Assets and Liabilities	June 30, 2018		December 31, 2017		Valuation Technique		June 30, 2018		December 31, 2017
						Unobservable Inputs
Servicing rights for SBA/USDA loans	$	7,509	$	7,740	Discounted cash flow	Discount rate	12.7	%	12.5	%
						Prepayment rate	10.1		8.3
Residential mortgage servicing rights	10,801		8,262		Discounted cash flow	Discount rate	10.0		10.0
						Prepayment rate	8.6		9.5
Corporate bonds	990		900		Indicative bid provided by a broker	Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the company	N/A		N/A
Derivative assets - mortgage	1,764		1,150		Internal model	Pull through rate	81.1		80.0
Derivative assets - other	12,746		11,057		Dealer priced	Dealer priced	N/A		N/A
Derivative liabilities - risk participations	8		20		Internal model	Probable exposure rate	0.5		0.4
						Probability of default rate	1.8		1.8
Derivative liabilities - other	18,358		16,724		Dealer priced	Dealer priced	N/A		N/A

42

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fair Value Option

At June 30, 2018, mortgage loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $34.8 million and $33.7 million, respectively. At December 31, 2017, mortgage loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $26.3 million and $25.4 million, respectively. Interest income on these loans is calculated based on the note rate of the loan and is recorded in interest revenue. During the three and six months ended June 30, 2018, changes in fair value of these loans resulted in net gains of $326,000 and $254,000, respectively. During the three and six months ended June 30, 2017, changes in fair value of these loans resulted in net gains of $192,000 and $444,000, respectively, which were recorded in mortgage loan and other related fees. These changes in fair value were mostly offset by hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of the lower of the amortized cost or fair value accounting or write-downs of individual assets due to impairment. The following table presents the fair value hierarchy and carrying value of all assets that were still held as of June 30, 2018 and December 31, 2017, for which a nonrecurring fair value adjustment was recorded during the year-to-date periods presented (in thousands).

	Level 1		Level 2		Level 3		Total
June 30, 2018
Loans	$	—	$	—	$	6,570	$	6,570
December 31, 2017
Loans	$	—	$	—	$	6,905	$	6,905

Loans that are reported above as being measured at fair value on a nonrecurring basis are generally impaired loans that have either been partially charged off or have specific reserves assigned to them. Nonaccrual impaired loans that are collateral dependent are generally written down to 80% of appraised value which considers the estimated costs to sell. Specific reserves are established for impaired loans based on appraised value of collateral or discounted cash flows, although only those specific reserves based on the fair value of collateral are considered nonrecurring fair value adjustments.

Assets and Liabilities Not Measured at Fair Value

For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.

Cash and cash equivalents and repurchase agreements have short maturities and therefore the carrying value approximates fair value. Due to the short-term settlement of accrued interest receivable and payable, the carrying amount closely approximates fair value.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings. All estimates are inherently subjective in nature. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The carrying amount and fair values as of the dates indicated for other financial instruments that are not measured at fair value on a recurring basis are as follows (in thousands).

	Carrying		Fair Value Level
	Amount		Level 1		Level 2		Level 3		Total
June 30, 2018
Assets:
Securities held to maturity	$	297,569	$	—	$	291,463	$	—	$	291,463
Loans and leases, net	8,159,200		—		—		8,132,734		8,132,734
Liabilities:
Deposits	9,966,088		—		9,958,439		—		9,958,439
Federal Home Loan Bank advances	560,000		—		559,979		—		559,979
Long-term debt	308,434		—		—		321,424		321,424
December 31, 2017
Assets:
Securities held to maturity	$	321,094	$	—	$	321,276	$	—	$	321,276
Loans, net	7,676,658		—		—		7,674,460		7,674,460
Loans held for sale	6,482		—		6,514		—		6,514
Liabilities:
Deposits	9,807,697		—		9,809,264		—		9,809,264
Federal Home Loan Bank advances	504,651		—		504,460		—		504,460
Long-term debt	120,545		—		—		123,844		123,844

Note 14 – Commitments and Contingencies

United is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of these instruments reflect the extent of involvement United has in particular classes of financial instruments.  The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. United uses the same credit policies in making commitments and conditional obligations as it uses for underwriting on-balance sheet instruments. In most cases, collateral or other security is required to support financial instruments with credit risk.

The following table summarizes the contractual amount of off-balance sheet instruments as of the dates indicated (in thousands).

	June 30, 2018		December 31, 2017
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	2,047,081	$	1,910,777
Letters of credit	26,396		28,075

United’s wholly-owned bank subsidiary, United Community Bank (the “Bank”), holds minor investments in certain limited partnerships for Community Reinvestment Act purposes. As of June 30, 2018, the Bank had committed to fund an additional $9.16 million related to future capital calls that has not been reflected in the consolidated balance sheet.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

United, in the normal course of business, is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted.  Although it is not possible to predict the outcome of these lawsuits, or the range of any possible loss, management, after consultation with legal counsel, does not anticipate that the ultimate aggregate liability, if any, arising from these lawsuits will have a material adverse effect on United’s financial position or results of operations.

Note 15 – Goodwill and Other Intangible Assets

The carrying amount of goodwill and other intangible assets as of the dates indicated is summarized below (in thousands): 

	June 30, 2018			December 31, 2017
Core deposit intangible	$	62,652		$	62,652
Less: accumulated amortization	(43,786		)	(41,229		)
Net core deposit intangible	18,866			21,423
Noncompete agreements	3,144			3,144
Less: accumulated amortization	(1,948		)	(761		)
Net noncompete agreements	1,196			2,383
Total intangibles subject to amortization, net	20,062			23,806
Goodwill	307,112			220,591
Total goodwill and other intangible assets, net	$	327,174		$	244,397

The following is a summary of changes in the carrying amounts of goodwill (in thousands): 

	For the Three Months Ended June 30,							For the Six Months Ended June 30,
2018	Goodwill		Accumulated Impairment Losses			Goodwill, net of Accumulated Impairment Losses		Goodwill			Accumulated Impairment Losses			Goodwill, net of Accumulated Impairment Losses
Balance, beginning of period	$	612,009	$	(305,590	)	$	306,419	$	526,181		$	(305,590	)	$	220,591
Acquisition of NLFC	390		—			390		87,379			—			87,379
Measurement period adjustments- FOFN and HCSB	303		—			303		(858		)	—			(858		)
Balance, end of period	$	612,702	$	(305,590	)	$	307,112	$	612,702		$	(305,590	)	$	307,112
2017
Balance, beginning of period	$	447,615	$	(305,590	)	$	142,025	$	447,615		$	(305,590	)	$	142,025
Balance, end of period	$	447,615	$	(305,590	)	$	142,025	$	447,615		$	(305,590	)	$	142,025

The estimated aggregate amortization expense for future periods for core deposit intangibles and noncompete agreements is as follows (in thousands): 

Year
Remainder of 2018	$	3,102
2019	4,551
2020	3,315
2021	2,557
2022	1,982
Thereafter	4,555
Total	$	20,062

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 16 - Long-term Debt

Long-term debt consisted of the following (in thousands):

	June 30, 2018			December 31, 2017			Issue Date	Stated Maturity Date	Earliest Call Date	Interest Rate
Obligations of the Bank and its Subsidiaries:
NER 15-1 Class C notes	$	7,025		$	—		2015	2019	n/a	4.500%
NER 15-1 Class D notes	3,421			—			2015	2021	n/a	5.750%
NER 16-1 Class A-2 notes	43,912			—			2016	2021	n/a	2.200%
NER 16-1 Class B notes	25,489			—			2016	2021	n/a	3.220%
NER 16-1 Class C notes	6,319			—			2016	2021	n/a	5.050%
NER 16-1 Class D notes	3,213			—			2016	2023	n/a	7.870%
Total securitized notes payable	89,379			—
Obligations of the Holding Company:
2022 senior debentures	50,000			50,000			2015	2022	2020	5.000% through August 13, 2020, 3-month LIBOR plus 3.814% thereafter
2027 senior debentures	35,000			35,000			2015	2027	2025	5.500% through August 13, 2025 3-month LIBOR plus 3.71% thereafter
Total senior debentures	85,000			85,000
2028 subordinated debentures	100,000			—			2018	2028	2023	4.500% through January 30, 2023, 3-month LIBOR plus 2.12% thereafter
2025 subordinated debentures	11,500			11,500			2015	2025	2020	6.250%
Total subordinated debentures	111,500			11,500
Southern Bancorp Capital Trust I	4,382			4,382			2004	2034	2009	Prime + 1.00%
United Community Statutory Trust III	1,238			1,238			2008	2038	2013	Prime + 3.00%
Tidelands Statutory Trust I	8,248			8,248			2006	2036	2011	3-month LIBOR plus 1.38%
Tidelands Statutory Trust II	6,186			6,186			2008	2038	2013	3-month LIBOR plus 5.075%
Four Oaks Statutory Trust I	12,372			12,372			2006	2036	2011	3-month LIBOR plus 1.35%
Total trust preferred securities	32,426			32,426
Less discount	(9,871		)	(8,381		)
Total long-term debt	$	308,434		$	120,545

Interest is currently paid semiannually or quarterly for all senior and subordinated debentures and trust preferred securities.

Senior Debentures

The 2022 senior debentures are redeemable, in whole or in part, on or after August 14, 2020 at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest, and will mature on February 14, 2022 if not redeemed prior to that date. The 2027 senior debentures are redeemable, in whole or in part, on or after August 14, 2025 at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest, and will mature on February 14, 2027 if not redeemed prior to that date.

Subordinated Debentures

United acquired, as part of the FOFN acquisition, $11.5 million aggregate principal amount of subordinated debentures. The notes are due on November 30, 2025. United may prepay the notes at any time after November 30, 2020, subject to compliance with applicable laws. In January 2018, United issued $100 million fixed to floating rate subordinated notes due January 30, 2028. The subordinated debentures qualify as Tier 2 regulatory capital.

Securitized Notes Payable

United acquired, as part of the NLFC acquisition, Navitas Equipment Receivables LLC 2015-1 (“NER 15-1”) and Navitas Equipment Receivables LLC 2016-1 (“NER 16-1”), which are bankruptcy-remote special purpose entities (“SPEs”) whose sole purpose is to receive loans to secure financings. Each of these SPEs provided financing by issuing notes to investors through a private offering of Receivable-Backed Notes under Rule 144A of the Securities and Exchange Act of 1934. These notes are collateralized by specific qualifying loans

46

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

and by cash placed in restricted cash accounts. These notes will continue amortizing sequentially based on collections on the underlying loans available to pay the note holders at each monthly payment date after payment of certain amounts as specified in the securitization documents including fees to various parties to the securitizations, interest due to the note holders and certain other payments. Sequentially, each subsequent class of note holders receive principal payments until paid down in full prior to the remaining subsequent class of note holders receiving principal payments. In addition to the pay-downs on these notes, they also have legal final maturity dates as reflected in the table above.

Trust Preferred Securities

Trust preferred securities qualify as Tier 1 capital under risk based capital guidelines subject to certain limitations. The trust preferred securities are mandatorily redeemable upon maturity, or upon earlier redemption as provided in the indentures.

Note 17 - Subsequent Events

On August 1, 2018, United’s Board of Directors approved a regular quarterly cash dividend of $0.15 per common share. The dividend is payable October 5, 2018, to shareholders of record on September 15, 2018.

47

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about United and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates”, the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about the future performance, operations, products and services of United and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.

Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experiences may differ materially from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experiences to differ from those projected include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017 as well as the following factors:

• the condition of the general business and economic environment, banking system and financial markets;

• deteriorating conditions in the stock market, the public debt market, and other capital markets, which could affect our ability to raise capital;

• our ability to maintain profitability;

• changes in prevailing interest rates may negatively affect our net income and the value of our assets and other interest rate risks;

• our ability to maintain liquidity or access other sources of funding, as well as changes in the cost and availability of funding;

• the results of our internal credit stress tests may not accurately predict the impact on our financial condition if the economy were to deteriorate;

• our lack of geographic diversification and the success of the local economies in which we operate;

• our concentrations of commercial construction and development loans and commercial real estate loans are subject to unique risks that could adversely affect our earnings;

• risks with respect to our ability to successfully expand and complete acquisitions and integrate businesses and operations that are acquired;

• competition from financial institutions and other financial service providers including financial technology providers;

• losses due to fraudulent and negligent conduct of our customers, third party service providers or employees;

• risks related to our communications and information systems, including risks with respect to cybersecurity breaches;

• our reliance on third parties to provide key components of our business infrastructure and services required to operate our business;

• changes in laws and regulations or failures to comply with such laws and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and related regulations (the “Dodd-Frank Act”) and the Tax Cuts and Jobs Act of 2017 and related regulations (the “Tax Act”);

• changes in tax laws, regulations and interpretations or challenges to our income tax provision;

• changes in regulatory capital and other requirements as well as the impact on regulatory capital of changing accounting standards related to the allowance for loan and lease losses and lease accounting;

• the costs and effects of litigation, examinations, investigations, or similar matters, or adverse facts and developments related thereto;

• possible regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators;

• if our allowance for loan losses is not sufficient to cover actual loan losses;

• our ability to fully realize the balance of our net deferred tax asset, including net operating loss carryforwards;

• our accounting and reporting policies; and

• our ability to maintain effective internal controls over financial reporting and disclosure controls and procedures.

Additional information with respect to factors that may cause actual results to differ materially from those contemplated by such forward-looking statements may also be included in other reports that United files with the Securities and Exchange Commission (the “SEC”). United cautions that the foregoing list of factors is not exclusive and not to place undue reliance on forward-looking statements. United does not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Form 10-Q. The financial statements and information contained herein have not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation.

48

Overview

The following discussion is intended to provide insight into the results of operations and financial condition of United Community Banks, Inc. (“United”) and its subsidiaries and should be read in conjunction with United’s consolidated financial statements and accompanying notes.

United is a bank holding company registered with the Board of Governors of the Federal Reserve under the Bank Holding Company Act of 1956 that was incorporated under the laws of the State of Georgia in 1987 and commenced operations in 1988. At June 30, 2018, United had total consolidated assets of $12.4 billion, total loans of $8.22 billion, total deposits of $9.97 billion, and shareholders’ equity of $1.38 billion.

United conducts substantially all of its operations through its wholly-owned bank subsidiary, United Community Bank (the “Bank”), which as of June 30, 2018, operated at 150 locations throughout markets in Georgia, South Carolina, North Carolina, and Tennessee.

Since June 30, 2017 United has completed the following acquisitions (the “Acquisitions”):

Entity	Date Acquired
NLFC Holdings Corp. (“NLFC”)	February 1, 2018
Four Oaks Fincorp, Inc. (“FOFN”)	November 1, 2017
HCSB Financial Corporation (“HCSB”)	July 31, 2017

The acquired entities’ results are included in United’s consolidated results beginning on the respective acquisition dates.

United reported net income of $39.6 million, or $0.49 per diluted share, for the second quarter of 2018, compared to net income of $28.3 million, or $0.39 per diluted share, for the second quarter of 2017. For the six months ended June 30, 2018, United reported net income of $77.3 million, or $0.97 per diluted share, compared to $51.8 million, or $0.72 per diluted share for the first six months of 2017.

Net interest revenue increased to $108 million for the second quarter of 2018, compared to $85.1 million for the second quarter of 2017, primarily due to higher loan volume, much of which resulted from the Acquisitions. Net interest margin increased to 3.90% for the three months ended June 30, 2018 from 3.47% for the same period in 2017 due to the effect of rising interest rates on floating rate loans and investment securities and a more favorable earning asset mix due to the Acquisitions. For the six months ended June 30, 2018, net interest revenue was $212 million and the net interest margin was 3.85% compared to net interest revenue of $169 million and net interest margin of 3.46% for the same period in 2017.

The provision for credit losses was $1.80 million for the second quarter of 2018, compared to $800,000 for the second quarter of 2017. For the six months ended June 30, 2018, the provision for credit losses was $5.60 million, compared to $1.60 million for the same period in 2017. Net charge-offs for the second quarter of 2018 were $1.36 million, compared to $1.62 million for the second quarter of 2017. Since credit quality remained stable, the increase in the provision reflects growth in the loan and lease portfolio (collectively referred to as the “loan portfolio” or “loans”), including a $2.29 million increase resulting from including NLFC’s loans in the allowance for loan losses model in the first quarter of 2018. Because NLFC’s loans were recorded at a premium, the allowance for loan losses model required us to establish an allowance for loan losses sufficient to cover estimated credit losses inherent in the NLFC loan portfolio.

As of June 30, 2018, United’s allowance for loan losses was $61.1 million, or 0.74% of loans, compared to $58.9 million, or 0.76% of loans, at December 31, 2017 reflecting stable asset quality. Nonperforming assets of $24.4 million were 0.20% of total assets at June 30, 2018, down from 0.23% at December 31, 2017. During the second quarter of 2018, $3.61 million in loans were placed on nonaccrual compared with $8.11 million in the second quarter of 2017.

Noninterest income of $23.3 million for the second quarter of 2018 was down$345,000, or 1%, from the second quarter of 2017. Service charges and fees decreased 18% compared to the second quarter of 2017 due mainly to the effect of the Durbin Amendment of the Dodd-Frank Act (the “Durbin Amendment”), which took effect for United in the third quarter of 2017 and limited the amount of interchange fees charged on debit card transactions. Decreases in service charges and fees were offset by increases in other noninterest income comprising of volume driven increases in miscellaneous banking fees, fee revenues from the equipment finance business, which came through acquisition of NLFC, and gains on extinguishment of debt. Mortgage fees of $5.31 million for the second quarter of 2018increased from $4.81 million in the second quarter of 2017. The increase was due to United’s emphasis on growing its mortgage business by recruiting lenders in metropolitan markets. For the first six months of 2018, total noninterest income remained relatively consistent compared to the same period of 2017 due to the decrease in service charges and fees and increase in securities losses being offset by increases in mortgage fees and other noninterest income, including gains on derivative cancellations recognized in the first quarter.

49

For the second quarter of 2018, noninterest expenses of $76.9 millionincreased$13.6 million from the second quarter of 2017, primarily due to the addition of noninterest expenses related to the Acquisitions. Salaries and benefits expense increased$8.03 million from second quarter and $14.2 million from the first half of 2017, mostly due to the Acquisitions and investment in additional staff and new teams to expand the Commercial Banking Solutions area as well as higher incentive compensation in connection with increased lending activities and improvement in earnings performance.

Critical Accounting Policies

The accounting and reporting policies of United are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to general practices within the banking industry. The more critical accounting and reporting policies include United’s accounting for the allowance for loan losses, fair value measurements, and income taxes which involve the use of estimates and require significant judgments to be made by management. Different assumptions in the application of these policies could result in material changes in United’s consolidated financial position or consolidated results of operations. See “Asset Quality and Risk Elements” herein for additional discussion of United’s accounting methodologies related to the allowance for loan losses.

GAAP Reconciliation and Explanation

This Form 10-Q contains financial information determined by methods other than in accordance with GAAP. Such non-GAAP financial information includes the following measures: “tangible book value per common share,” “average tangible equity to average assets,” “average tangible common equity to average assets,” “tangible common equity to assets” and “tangible common equity to risk-weighted assets.” In addition, management presents non-GAAP operating performance measures, which exclude merger-related and other items that are not part of United’s ongoing business operations. Operating performance measures include “expenses – operating,” “net income – operating,” “net income available to common shareholders – operating,” “diluted net income per common share – operating,” “return on common equity – operating,” “return on tangible common equity – operating,” “return on assets – operating,” “dividend payout ratio – operating” and “efficiency ratio – operating.” Management has developed internal policies and procedures to accurately capture and account for merger-related and other charges and those charges are reviewed with the audit committee of United’s Board of Directors each quarter. Management uses these non-GAAP measures because it believes they may provide useful supplemental information for evaluating United’s operations and performance over periods of time, as well as in managing and evaluating United’s business and in discussions about United’s operations and performance. Management believes these non-GAAP measures may also provide users of United’s financial information with a meaningful measure for assessing United’s financial results and credit trends, as well as a comparison to financial results for prior periods. These non-GAAP measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP and are not necessarily comparable to other similarly titled measures used by other companies. To the extent applicable, reconciliations of these non-GAAP measures to the most directly comparable measures as reported in accordance with GAAP are included in the table on page 52.

Results of Operations

United reported net income and diluted earnings per common share of $39.6 million and $0.49, respectively, for the second quarter of 2018. This compared to net income and diluted earnings per common share of $28.3 million and $0.39, respectively, for the same period in 2017. For the six months ended June 30, 2018, United reported net income of $77.3 million compared to net income of $51.8 million for the same period in 2017.

United reported operating net income of $42.4 million and $82.1 million, respectively, for the second quarter and first half of 2018, compared to $29.4 million and $57.6 million, respectively, for the same periods in 2017. For the second quarter and first half of 2018, operating net income excludes merger-related and branch closure charges and a deferred tax asset impairment charge resulting from Georgia lowering its corporate income tax rate, which net of tax, totaled $2.75 million and $4.77 million, respectively. For the second quarter of 2017, operating net income excludes merger-related and executive retirement charges, net of the associated income tax benefit, of $1.16 million. For the first half of 2017, operating net income excludes merger-related and executive retirement charges and the release from accumulated other comprehensive income of the disproportionate tax effect related to cash flow hedges, which, net of tax, totaled $2.45 million and $3.40 million, respectively.

50

UNITED COMMUNITY BANKS, INC.
Table 1 - Financial Highlights
Selected Financial Information
	2018						2017									Second Quarter 2018 - 2017 Change		For the Six Months Ended June 30,						YTD 2018 - 2017 Change
(in thousands, except per share data)	Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter					2018			2017
INCOME SUMMARY
Interest revenue	$	122,215		$	115,290		$	106,757		$	98,839		$	93,166				$	237,505		$	184,124
Interest expense	13,739			12,005			9,249			9,064			8,018					25,744			15,422
Net interest revenue	108,476			103,285			97,508			89,775			85,148			27	%	211,761			168,702			26	%
Provision for credit losses	1,800			3,800			1,200			1,000			800					5,600			1,600
Noninterest income	23,340			22,396			21,928			20,573			23,685			(1	)	45,736			45,759			—
Total revenue	130,016			121,881			118,236			109,348			108,033			20		251,897			212,861			18
Expenses	76,850			73,475			75,882			65,674			63,229			22		150,325			126,055			19
Income before income tax expense	53,166			48,406			42,354			43,674			44,804			19		101,572			86,806			17
Income tax expense	13,532			10,748			54,270			15,728			16,537			(18	)	24,280			35,015			(31	)
Net income (loss)	39,634			37,658			(11,916		)	27,946			28,267			40		77,292			51,791			49
Merger-related and other charges	2,873			2,646			7,358			3,420			1,830					5,519			3,884
Income tax benefit of merger-related and other charges	(121		)	(628		)	(1,165		)	(1,147		)	(675		)			(749		)	(1,433		)
Impact of remeasurement of deferred tax asset resulting  from 2017 Tax Cuts and Jobs Act	—			—			38,199			—			—					—			—
Release of disproportionate tax effects lodged in OCI	—			—			—			—			—					—			3,400
Net income - operating (1)	$	42,386		$	39,676		$	32,476		$	30,219		$	29,422		44		$	82,062		$	57,642		42
PERFORMANCE MEASURES
Per common share:
Diluted net income (loss) - GAAP	$	0.49		$	0.47		$	(0.16	)	$	0.38		$	0.39		26		$	0.97		$	0.72		35
Diluted net income - operating (1)	0.53			0.50			0.42			0.41			0.41			29		1.03			0.80			29
Cash dividends declared	0.15			0.12			0.10			0.10			0.09			67		0.27			0.18			50
Book value	17.29			17.02			16.67			16.50			15.83			9		17.29			15.83			9
Tangible book value (3)	13.25			12.96			13.65			14.11			13.74			(4	)	13.25			13.74			(4	)
Key performance ratios:
Return on common equity - GAAP (2)(4)	11.20		%	11.11		%	(3.57		)%	9.22		%	9.98		%			11.15		%	9.27		%
Return on common equity - operating (1)(2)(4)	11.97			11.71			9.73			9.97			10.39					11.84			10.32
Return on tangible common equity - operating (1)(2)(3)(4)	15.79			15.26			11.93			11.93			12.19					15.53			12.15
Return on assets - GAAP (4)	1.30			1.26			(0.40		)	1.01			1.06					1.28			0.98
Return on assets - operating (1)(4)	1.39			1.33			1.10			1.09			1.10					1.36			1.09
Dividend payout ratio - GAAP	30.61			25.53			(62.50		)	26.32			23.08					27.84			25.00
Dividend payout ratio - operating (1)	28.30			24.00			23.81			24.39			21.95					26.21			22.50
Net interest margin (fully taxable equivalent) (4)	3.90			3.80			3.63			3.54			3.47					3.85			3.46
Efficiency ratio - GAAP	57.94			57.83			63.03			59.27			57.89					57.89			58.58
Efficiency ratio - operating (1)	55.77			55.75			56.92			56.18			56.21					55.76			56.77
Average equity to average assets	11.21			11.03			11.21			10.86			10.49					11.13			10.36
Average tangible equity to average assets (3)	8.83			8.82			9.52			9.45			9.23					8.82			9.09
Average tangible common equity to average assets (3)	8.83			8.82			9.52			9.45			9.23					8.82			9.09
Tangible common equity to risk-weighted assets (3)	11.36			11.19			12.05			12.80			12.44					11.36			12.44
ASSET QUALITY
Nonperforming loans	$	21,817		$	26,240		$	23,658		$	22,921		$	23,095		(6	)	$	21,817		$	23,095		(6	)
Foreclosed properties	2,597			2,714			3,234			2,736			2,739			(5	)	2,597			2,739			(5	)
Total nonperforming assets (NPAs)	24,414			28,954			26,892			25,657			25,834			(5	)	24,414			25,834			(5	)
Allowance for loan losses	61,071			61,085			58,914			58,605			59,500			3		61,071			59,500			3
Net charge-offs	1,359			1,501			1,061			1,635			1,623			(16	)	2,860			3,302			(13	)
Allowance for loan losses to loans	0.74		%	0.75		%	0.76		%	0.81		%	0.85		%			0.74		%	0.85		%
Net charge-offs to average loans (4)	0.07			0.08			0.06			0.09			0.09					0.07			0.10
NPAs to loans and foreclosed properties	0.30			0.35			0.35			0.36			0.37					0.30			0.37
NPAs to total assets	0.20			0.24			0.23			0.23			0.24					0.20			0.24
AVERAGE BALANCES ($ in millions)
Loans	$	8,177		$	7,993		$	7,560		$	7,149		$	6,980		17		$	8,086		$	6,942		16
Investment securities	2,802			2,870			2,991			2,800			2,775			1		2,836			2,798			1
Earning assets	11,193			11,076			10,735			10,133			9,899			13		11,135			9,885			13
Total assets	12,213			12,111			11,687			10,980			10,704			14		12,163			10,691			14
Deposits	9,978			9,759			9,624			8,913			8,659			15		9,869			8,626			14
Shareholders’ equity	1,370			1,336			1,310			1,193			1,123			22		1,353			1,108			22
Common shares - basic (thousands)	79,753			79,205			76,768			73,151			71,810			11		79,477			71,798			11
Common shares - diluted (thousands)	79,755			79,215			76,768			73,162			71,820			11		79,487			71,809			11
AT PERIOD END($ in millions)
Loans	$	8,220		$	8,184		$	7,736		$	7,203		$	7,041		17		$	8,220		$	7,041		17
Investment securities	2,834			2,731			2,937			2,847			2,787			2		2,834			2,787			2
Total assets	12,386			12,264			11,915			11,129			10,837			14		12,386			10,837			14
Deposits	9,966			9,993			9,808			9,127			8,736			14		9,966			8,736			14
Shareholders’ equity	1,379			1,357			1,303			1,221			1,133			22		1,379			1,133			22
Common shares outstanding (thousands)	79,138			79,123			77,580			73,403			70,981			11		79,138			70,981			11

(1) Excludes merger-related and other charges which includes amortization of certain executive change of control benefits, the fourth quarter 2017 impact of remeasurement of United’s deferred tax assets following the passage of tax reform legislation and a first quarter 2017 release of disproportionate tax effects lodged in OCI. (2) Net income less preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss). (3) Excludes effect of acquisition related intangibles and associated amortization. (4) Annualized.

51

UNITED COMMUNITY BANKS, INC.
Table 1 (Continued) - Non-GAAP Performance Measures Reconciliation
Selected Financial Information
	2018						2017									For the Six Months Ended June 30,
	Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter			2018			2017
(in thousands, except per share data)
Expense reconciliation
Expenses (GAAP)	$	76,850		$	73,475		$	75,882		$	65,674		$	63,229		$	150,325		$	126,055
Merger-related and other charges	(2,873		)	(2,646		)	(7,358		)	(3,420		)	(1,830		)	(5,519		)	(3,884		)
Expenses - operating	$	73,977		$	70,829		$	68,524		$	62,254		$	61,399		$	144,806		$	122,171
Net income (loss) reconciliation
Net income (loss) (GAAP)	$	39,634		$	37,658		$	(11,916	)	$	27,946		$	28,267		$	77,292		$	51,791
Merger-related and other charges	2,873			2,646			7,358			3,420			1,830			5,519			3,884
Income tax benefit of merger-related and other charges	(121		)	(628		)	(1,165		)	(1,147		)	(675		)	(749		)	(1,433		)
Impact of tax reform on remeasurement of deferred tax asset	—			—			38,199			—			—			—			—
Release of disproportionate tax effects lodged in OCI	—			—			—			—			—			—			3,400
Net income - operating	$	42,386		$	39,676		$	32,476		$	30,219		$	29,422		$	82,062		$	57,642
Diluted income (loss) per common share reconciliation
Diluted income (loss) per common share (GAAP)	$	0.49		$	0.47		$	(0.16	)	$	0.38		$	0.39		$	0.97		$	0.72
Merger-related and other charges	0.04			0.03			0.08			0.03			0.02			0.06			0.03
Impact of tax reform on remeasurement of deferred tax asset	—			—			0.50			—			—			—			—
Release of disproportionate tax effects lodged in OCI	—			—			—			—			—			—			0.05
Diluted income per common share - operating	$	0.53		$	0.50		$	0.42		$	0.41		$	0.41		$	1.03		$	0.80
Book value per common share reconciliation
Book value per common share (GAAP)	$	17.29		$	17.02		$	16.67		$	16.50		$	15.83		$	17.29		$	15.83
Effect of goodwill and other intangibles	(4.04		)	(4.06		)	(3.02		)	(2.39		)	(2.09		)	(4.04		)	(2.09		)
Tangible book value per common share	$	13.25		$	12.96		$	13.65		$	14.11		$	13.74		$	13.25		$	13.74
Return on tangible common equity reconciliation
Return on common equity (GAAP)	11.20		%	11.11		%	(3.57		)%	9.22		%	9.98		%	11.15		%	9.27		%
Merger-related and other charges	0.77			0.60			1.86			0.75			0.41			0.69			0.44
Impact of tax reform on remeasurement of deferred tax asset	—			—			11.44			—			—			—			—
Release of disproportionate tax effects lodged in OCI	—			—			—			—			—			—			0.61
Return on common equity - operating	11.97			11.71			9.73			9.97			10.39			11.84			10.32
Effect of goodwill and other intangibles	3.82			3.55			2.20			1.96			1.80			3.69			1.83
Return on tangible common equity - operating	15.79		%	15.26		%	11.93		%	11.93		%	12.19		%	15.53		%	12.15		%
Return on assets reconciliation
Return on assets (GAAP)	1.30		%	1.26		%	(0.40		)%	1.01		%	1.06		%	1.28		%	0.98		%
Merger-related and other charges	0.09			0.07			0.20			0.08			0.04			0.08			0.05
Impact of tax reform on remeasurement of deferred tax asset	—			—			1.30			—			—			—			—
Release of disproportionate tax effects lodged in OCI	—			—			—			—			—			—			0.06
Return on assets - operating	1.39		%	1.33		%	1.10		%	1.09		%	1.10		%	1.36		%	1.09		%
Dividend payout ratio reconciliation
Dividend payout ratio (GAAP)	30.61		%	25.53		%	(62.50		)%	26.32		%	23.08		%	27.84		%	25.00		%
Merger-related and other charges	(2.31		)	(1.53		)	12.04			(1.93		)	(1.13		)	(1.63		)	(1.00		)
Impact of tax reform on remeasurement of deferred tax asset	—			—			74.27			—			—			—			—
Release of disproportionate tax effects lodged in OCI	—			—			—			—			—			—			(1.50		)
Dividend payout ratio - operating	28.30		%	24.00		%	23.81		%	24.39		%	21.95		%	26.21		%	22.50		%
Efficiency ratio reconciliation
Efficiency ratio (GAAP)	57.94		%	57.83		%	63.03		%	59.27		%	57.89		%	57.89		%	58.58		%
Merger-related and other charges	(2.17		)	(2.08		)	(6.11		)	(3.09		)	(1.68		)	(2.13		)	(1.81		)
Efficiency ratio - operating	55.77		%	55.75		%	56.92		%	56.18		%	56.21		%	55.76		%	56.77		%
Average equity to assets reconciliation
Equity to assets (GAAP)	11.21		%	11.03		%	11.21		%	10.86		%	10.49		%	11.13		%	10.36		%
Effect of goodwill and other intangibles	(2.38		)	(2.21		)	(1.69		)	(1.41		)	(1.26		)	(2.31		)	(1.27		)
Tangible common equity to assets	8.83		%	8.82		%	9.52		%	9.45		%	9.23		%	8.82		%	9.09		%
Tangible common equity to risk-weighted assets reconciliation
Tier 1 capital ratio (Regulatory)	11.94		%	11.61		%	12.24		%	12.27		%	11.91		%	11.94		%	11.91		%
Effect of other comprehensive income	(0.57		)	(0.50		)	(0.29		)	(0.13		)	(0.15		)	(0.57		)	(0.15		)
Effect of deferred tax limitation	0.33			0.42			0.51			0.94			0.95			0.33			0.95
Effect of trust preferred	(0.34		)	(0.34		)	(0.36		)	(0.24		)	(0.25		)	(0.34		)	(0.25		)
Basel III intangibles transition adjustment	—			—			(0.05		)	(0.04		)	(0.02		)	—			(0.02		)
Tangible common equity to risk-weighted assets	11.36		%	11.19		%	12.05		%	12.80		%	12.44		%	11.36		%	12.44		%

52

Net Interest Revenue

Net interest revenue (the difference between the interest earned on assets and the interest paid on deposits and borrowed funds) is the single largest component of total revenue. Management seeks to optimize this revenue while balancing interest rate, credit and liquidity risks. Net interest revenue for the second quarter of 2018 was $108 million, compared to $85.1 million for the second quarter of 2017. Taxable equivalent net interest revenue for the second quarter of 2018 was $109 million, which represents an increase of $23.4 million from the same period in 2017. The combination of the larger earning asset base from the Acquisitions, growth in the loan portfolio and a wider net interest margin were responsible for the increase in net interest revenue.

Average interest-earning assets for the second quarter of 2018increased$1.29 billion, or 13%, from the second quarter of 2017, which was due primarily to the increase in loans. Average loans increased$1.20 billion, or 17%, from the second quarter of last year, which includes the effect of the Acquisitions. The yield on loans increased77 basis points, reflecting the effect of rising interest rates on the floating rate loans in the portfolio and the acquisition of higher yielding loans from NLFC and FOFN.

Average interest-bearing liabilities of $7.49 billion for the second quarter of 2018increased$751 million from the second quarter of 2017. Average non-interest-bearing deposits increased$458 million from the second quarter of 2017 to $3.19 billion for the second quarter of 2018. The average cost of interest-bearing liabilities for the second quarter of 2018 was 0.74% compared to 0.48% for the same period in 2017, reflecting higher average rates on interest-bearing deposits and short-term borrowings. Although the fed funds rate has increased 75 basis points since June 30, 2017, United’s cost of interest-bearing deposits has increased only 24 basis points over that same time period, which has contributed to margin expansion and an increase in net interest revenue.

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

For the second quarters of 2018 and 2017, the net interest spread was 3.65% and 3.31%, respectively, while the net interest margin was 3.90% and 3.47%, respectively. The increase in the net interest margin reflects the impact of higher short-term interest rates on floating-rate loans and securities while the pricing on interest-bearing liabilities increased slightly from the prior year. Additionally, United was able to improve its overall yield on interest-earning assets through growth in the loan portfolio, which had a positive impact on the composition of interest-earning assets.

For the first six months of 2018, net interest revenue was $212 million, an increase of $43.1 million, or 26%, from the first six months

of 2017. Similarly, fully taxable equivalent net interest revenue for the first six months of 2018 was $213 million, an increase of $43.2 million, or 26%, from the first six months of 2017. Average earning assets increased 13% to $11.1 billion during the first six months of 2018 compared to the same period a year ago, primarily due to the increase in loans, including the Acquisitions. The yield on earning assets increased55 basis points to 4.31% in the first six months of 2018 primarily due to higher loan and securities yields. The higher loan portfolio yield reflects the effect of rising interest rates and changes in portfolio composition, primarily due to the NLFC acquisition. Taxable investment yield increased 3 basis points for the first six months of 2018 compared to the same period in 2017, which further improved the net interest margin. The rate on interest-bearing liabilities over the same period increased23 basis points. The higher yield on interest-earning assets more than offset the higher cost of interest-bearing liabilities and resulted in an 39 basis point increase in the net interest margin from the first half of 2017 to the first half of 2018.

The following tables show the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the periods indicated.

53

Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis

For the Three Months Ended June 30,

	2018							2017
(dollars in thousands, fully taxable equivalent (FTE))	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
Assets:
Interest-earning assets:
Loans, net of unearned income (FTE) (1)(2)	$	8,177,343		$	103,395	5.07	%	$	6,979,980		$	74,811	4.30	%
Taxable securities (3)	2,651,816			17,229		2.60		2,719,390			17,421		2.56
Tax-exempt securities (FTE) (1)(3)	150,503			1,380		3.67		55,992			584		4.17
Federal funds sold and other interest-earning assets	212,849			674		1.27		143,143			743		2.08
Total interest-earning assets (FTE)	11,192,511			122,678		4.39		9,898,505			93,559		3.79
Non-interest-earning assets:
Allowance for loan losses	(62,275		)					(61,163		)
Cash and due from banks	133,060							104,812
Premises and equipment	218,517							192,906
Other assets (3)	731,514							569,435
Total assets	$	12,213,327						$	10,704,495
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW	$	2,071,289		1,303		0.25		$	1,901,890		635		0.13
Money market	2,214,077			2,583		0.47		2,064,143			1,559		0.30
Savings	678,988			35		0.02		575,960			28		0.02
Time	1,524,124			2,696		0.71		1,274,009			1,136		0.36
Brokered time deposits	300,389			1,502		2.01		111,983			243		0.87
Total interest-bearing deposits	6,788,867			8,119		0.48		5,927,985			3,601		0.24
Federal funds purchased and other borrowings	45,241			198		1.76		37,317			101		1.09
Federal Home Loan Bank advances	335,521			1,636		1.96		594,815			1,464		0.99
Long-term debt	316,812			3,786		4.79		175,281			2,852		6.53
Total borrowed funds	697,574			5,620		3.23		807,413			4,417		2.19
Total interest-bearing liabilities	7,486,441			13,739		0.74		6,735,398			8,018		0.48
Non-interest-bearing liabilities:
Non-interest-bearing deposits	3,188,847							2,731,217
Other liabilities	168,417							114,873
Total liabilities	10,843,705							9,581,488
Shareholders' equity	1,369,622							1,123,007
Total liabilities and shareholders' equity	$	12,213,327						$	10,704,495
Net interest revenue (FTE)				$	108,939						$	85,541
Net interest-rate spread (FTE)						3.65	%						3.31	%
Net interest margin (FTE) (4)						3.90	%						3.47	%

(1) Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 26% in 2018 and 39% in 2017, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.

(2) Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued and loans that are held for sale.

(3) Securities available for sale are shown at amortized cost. Pretax unrealized losses of $42.9 million in 2018 and $6.58 million in 2017 are included in other assets for purposes of this presentation.

(4) Net interest margin is taxable equivalent net-interest revenue divided by average interest-earning assets.

54

Table 3 - Average Consolidated Balance Sheets and Net Interest Analysis

For the Six Months Ended June 30,

	2018							2017
(dollars in thousands, fully taxable equivalent (FTE))	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
Assets:
Interest-earning assets:
Loans, net of unearned income (FTE) (1)(2)	$	8,085,849		$	199,784	4.98	%	$	6,942,130		$	147,552	4.29	%
Taxable securities (3)	2,687,200			34,552		2.57		2,749,339			34,854		2.54
Tax-exempt securities (FTE) (1)(3)	148,528			2,689		3.62		49,125			1,041		4.24
Federal funds sold and other interest-earning assets	212,951			1,372		1.29		144,577			1,407		1.95
Total interest-earning assets (FTE)	11,134,528			238,397		4.31		9,885,171			184,854		3.76
Non-interest-earning assets:
Allowance for loan losses	(60,718		)					(61,414		)
Cash and due from banks	146,697							102,048
Premises and equipment	217,625							191,509
Other assets (3)	724,488							573,281
Total assets	$	12,162,620						$	10,690,595
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW	$	2,077,461		2,416		0.23		$	1,930,624		1,232		0.13
Money market	2,222,304			4,758		0.43		2,064,792			2,985		0.29
Savings	667,431			84		0.03		568,339			55		0.02
Time	1,529,639			4,937		0.65		1,269,005			1,951		0.31
Brokered time deposits	229,766			2,217		1.95		105,199			436		0.84
Total interest-bearing deposits	6,726,601			14,412		0.43		5,937,959			6,659		0.23
Federal funds purchased and other borrowings	61,894			498		1.62		28,225			141		1.01
Federal Home Loan Bank advances	423,137			3,760		1.79		637,728			2,894		0.92
Long-term debt	295,763			7,074		4.82		175,212			5,728		6.59
Total borrowed funds	780,794			11,332		2.93		841,165			8,763		2.10
Total interest-bearing liabilities	7,507,395			25,744		0.69		6,779,124			15,422		0.46
Non-interest-bearing liabilities:
Non-interest-bearing deposits	3,142,384							2,687,665
Other liabilities	159,734							115,808
Total liabilities	10,809,513							9,582,597
Shareholders' equity	1,353,107							1,107,998
Total liabilities and shareholders' equity	$	12,162,620						$	10,690,595
Net interest revenue (FTE)				$	212,653						$	169,432
Net interest-rate spread (FTE)						3.62	%						3.30	%
Net interest margin (FTE) (4)						3.85	%						3.46	%

(1) Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 26% in 2018 and 39% in 2017, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.

(2) Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued and loans that are held for sale.

(3) Securities available for sale are shown at amortized cost. Pretax unrealized losses of $35.6 million in 2018 and $638 thousand in 2017 are included in other assets for purposes of this presentation.

(4) Net interest margin is taxable equivalent net-interest revenue divided by average interest-earning assets.

55

The following table shows the relative effect on net interest revenue for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate). Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.

Table 4 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis

(in thousands)

	Three Months Ended June 30, 2018									Six Months Ended June 30, 2018
	Compared to 2017 Increase (decrease) Due to Changes in
	Volume			Rate			Total			Volume			Rate			Total
Interest-earning assets:
Loans (FTE)	$	13,960		$	14,624		$	28,584		$	26,298		$	25,934		$	52,232
Taxable securities	(437		)	245			(192		)	(795		)	493			(302		)
Tax-exempt securities (FTE)	875			(79		)	796			1,820			(172		)	1,648
Federal funds sold and other interest-earning assets	283			(352		)	(69		)	534			(569		)	(35		)
Total interest-earning assets (FTE)	14,681			14,438			29,119			27,857			25,686			53,543
Interest-bearing liabilities:
NOW accounts	61			607			668			100			1,084			1,184
Money market accounts	120			904			1,024			243			1,530			1,773
Savings deposits	5			2			7			11			18			29
Time deposits	260			1,300			1,560			470			2,516			2,986
Brokered deposits	709			550			1,259			839			942			1,781
Total interest-bearing deposits	1,155			3,363			4,518			1,663			6,090			7,753
Federal funds purchased & other borrowings	25			72			97			236			121			357
Federal Home Loan Bank advances	(831		)	1,003			172			(1,216		)	2,082			866
Long-term debt	1,843			(909		)	934			3,180			(1,834		)	1,346
Total borrowed funds	1,037			166			1,203			2,200			369			2,569
Total interest-bearing liabilities	2,192			3,529			5,721			3,863			6,459			10,322
Increase in net interest revenue (FTE)	$	12,489		$	10,909		$	23,398		$	23,994		$	19,227		$	43,221

Provision for Credit Losses

The provision for credit losses is based on management’s evaluation of probable incurred losses in the loan portfolio and corresponding analysis of the allowance for credit losses at quarter-end. Provision for credit losses was $1.8 million and $5.6 million for the three and six months ended June 30, 2018, compared to $800,000 and $1.6 million for the same periods in 2017. The amount of provision recorded in each period was the amount required such that the total allowance for loan losses reflected the appropriate balance, in the estimation of management, sufficient to cover incurred losses in the loan portfolio. In accordance with the accounting guidance for business combinations, there was no allowance for loan losses brought forward on loans acquired from NLFC on February 1, 2018. At June 30, 2018, United included the performing non-impaired loans acquired from NLFC in its general allowance calculation in order to reflect the necessary allowance for incurred losses, which accounted for a majority of the increase in the provision expense. For the six months ended June 30, 2018, net loan charge-offs as an annualized percentage of average outstanding loans were 0.07% compared to 0.10% for the same period in 2017.

The allowance for unfunded commitments represents probable incurred losses on unfunded loan commitments that are expected to result in outstanding loan balances. The allowance for unfunded loan commitments was established through the provision for credit losses.

Additional discussion on credit quality and the allowance for loan losses is included in the “Asset Quality and Risk Elements” section of this report.

56

Noninterest income

Noninterest income for the second quarter of 2018 was $23.3 million, a decrease of $345,000, or 1%, compared to the second quarter of 2017. For the six months ended June 30, 2018, noninterest income totaled $45.7 million, flat compared to the same period of 2017. The following table presents the components of noninterest income for the periods indicated.

Table 5 - Noninterest Income

(in thousands)

	Three Months Ended June 30,					Change					Six Months Ended June 30,					Change
	2018			2017		Amount			Percent		2018			2017		Amount			Percent
Overdraft fees	$	3,480		$	3,321	$	159		5	%	$	7,132		$	6,718	$	414		6	%
ATM and debit card fees	3,071			5,536		(2,465		)	(45	)	6,342			10,924		(4,582		)	(42	)
Other service charges and fees	2,243			1,844		399			22		4,245			3,663		582			16
Service charges and fees	8,794			10,701		(1,907		)	(18	)	17,719			21,305		(3,586		)	(17	)
Mortgage loan and related fees	5,307			4,811		496			10		10,666			9,235		1,431			15
Brokerage fees	1,201			1,146		55			5		2,073			2,556		(483		)	(19	)
Gains on sales of SBA/USDA loans	2,401			2,626		(225		)	(9	)	4,179			4,585		(406		)	(9	)
Customer derivatives	657			776		(119		)	(15	)	1,430			1,254		176			14
Securities losses, net	(364		)	4		(368		)			(1,304		)	2		(1,306		)
Other	5,344			3,621		1,723			48		10,973			6,822		4,151			61
Total noninterest income	$	23,340		$	23,685	$	(345	)	(1	)	$	45,736		$	45,759	$	(23	)	—

Service charges and fees of $8.79 million for the second quarter of 2018decreased$1.91 million, or 18%, from the second quarter of 2017. Service charges and fees for the six months ended June 30, 2018decreased$3.59 million, or 17% compared to the same period of 2017. The decrease is primarily due to the effect of the Durbin Amendment, which took effect for United in the third quarter of 2017 and limited the amount of interchange fees charged on debit card transactions.

Mortgage loan and related fees for the second quarter of 2018increased$496,000, or 10%, from the second quarter of 2017. For the six months ended June 30, 2018 mortgage loan and related fees increased$1.43 million from the same period of 2017. The increase reflects United’s focus on growing the mortgage business by recruiting new mortgage lenders in key metropolitan markets and an increase in purchase and refinancing activity. In the second quarter of 2018, United closed 1,077 loans totaling $259 million compared with 888 loans totaling $204 million in the second quarter of 2017. Year-to-date mortgage production in 2018 amounted to 1,876 loans totaling $450 million, compared to 1,585 loans totaling $355 million for the same period in 2017. United had $151 million and $254 million in home purchase mortgage originations in the second quarter and first half of 2018, which accounted for 59% and 58% of production volume, respectively, compared with $141 million and $234 million, or 69% and 66%, respectively, of production volume for the same periods a year ago.

Brokerage fees for the first six months of 2018decreased19%, compared to the same period of 2017, reflecting downtime in the first quarter of 2018 associated with transitioning to a new third-party broker dealer. Brokerage fees for the second quarter of 2018increased5% compared to the second quarter 2017.

In the second quarter and first six months of 2018, United realized $2.40 million and $4.18 million, respectively, in gains from the sales of the guaranteed portion of Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) loans, compared to $2.63 million and $4.59 million in the same periods of 2017. United’s SBA/USDA lending strategy includes selling a portion of the loan production each quarter. In the second quarter and first six months of 2018, United sold the guaranteed portion of loans in the amount of $28.5 million and $50.7 million, respectively, compared to $30.3 million and $53.7 million, respectively, for the same periods a year ago.

Other noninterest income for the second quarter and first six months of 2018 was up $1.72 million and $4.15 million, respectively, from the same periods of 2017. Much of the increase in both periods is due to the Acquisitions. Noninterest income from NLFC added approximately $1.06 million and $1.85 million, respectively, to fee revenue for the second quarter and first six months of 2018. Second quarter 2018 other noninterest income also includes $533,000 in gains from the prepayment of fixed rate FHLB advances. In addition to

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those gains, other noninterest income for the first six months of 2018 includes $1.16 million in gains from the first quarter cancellation of interest rate swaps and caps that were serving as economic hedges to protect against rising interest rates.

The securities losses of $364,000 and $1.30 million recognized in the second quarter and first six months of 2018, respectively, were part of the same balance sheet management activities described above that resulted in the gains from prepayment of FHLB advances and cancellation of the derivative instruments. The gains from those activities and the securities losses are mostly offsetting.

Noninterest Expenses

The following table presents the components of noninterest expenses for the periods indicated. 

Table 6 - Noninterest Expenses

(in thousands)

	Three Months Ended June 30,				Change					Six Months Ended June 30,				Change
	2018		2017		Amount			Percent		2018		2017		Amount			Percent
Salaries and employee benefits	$	45,363	$	37,338	$	8,025		21	%	$	88,238	$	74,029	$	14,209		19	%
Communications and equipment	4,849		4,978		(129		)	(3	)	9,481		9,896		(415		)	(4	)
Occupancy	5,547		4,908		639			13		11,160		9,857		1,303			13
Advertising and public relations	1,384		1,260		124			10		2,899		2,321		578			25
Postage, printing and supplies	1,685		1,346		339			25		3,322		2,716		606			22
Professional fees	3,464		2,371		1,093			46		7,508		5,415		2,093			39
FDIC assessments and other regulatory charges	1,973		1,348		625			46		4,449		2,631		1,818			69
Amortization of intangibles	1,847		900		947			105		3,745		1,873		1,872			100
Other	8,458		6,950		1,508			22		15,189		13,433		1,756			13
Total excluding merger-related and other charges	74,570		61,399		13,171			21		145,991		122,171		23,820			19
Merger-related and other charges	2,280		1,830		450					4,334		3,884		450
Total noninterest expenses	$	76,850	$	63,229	$	13,621		22		$	150,325	$	126,055	$	24,270		19

Noninterest expenses for the second quarter and first six months of 2018 totaled $76.9 million and $150 million, respectively, up $13.6 million or 22% and $24.3 million, or 19% from the same periods of 2017. The increase reflects the inclusion of the operating expenses of Acquisitions.

Salaries and employee benefits for the second quarter of 2018 were $45.4 million, up $8.03 million, or 21%, from the second quarter of 2017. For the first six months of 2018, salaries and employee benefits were $88.2 million, up $14.2 million, or 19% from the same period of 2017. The increase was due to a number of factors including investments in additional staff and new teams to expand Commercial Banking Solutions and other key areas, additional staff resulting from the Acquisitions, and annual merit based salary increases awarded in the second quarter. Full time equivalent headcount totaled 2,289 at June 30, 2018, up from 1,928 at June 30, 2017.

Occupancy expenses increased primarily due to higher depreciation and lease rental charges for the expanded branch network resulting from the Acquisitions. Professional fees for the second quarter of 2018 of $3.46 million were up $1.09 million or 46%, from the second quarter of 2017. For the first six months of 2018, professional fees increased $2.09 million, or 39% from the same period of 2017. The increase was due primarily to the Acquisitions and increased legal fees associated with loan growth.

Amortization of intangibles of $1.85 million and $3.75 million in the second quarter and first six months of 2018 increased relative to the same periods in 2017 due to the additional amortization resulting from intangibles related to the Acquisitions.

In the second quarter and first six months of 2018, merger-related and other charges of $2.28 million and $4.33 million, respectively, consisted primarily of severance, conversion costs, branch closure costs, and legal and professional fees. In the second quarter of 2017, merger-related and other charges of $1.83 million consisted primarily of costs associated with executive retirements. In the first half of

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2017, merger-related and other charges of $3.88 million included executive retirement costs as well as severance, branch closure costs and technology equipment write offs.

Income Taxes

The income tax provision for the three and six months ended June 30, 2018 was $13.5 million and $24.3 million, respectively, which represents an effective tax rate of 25.5% and 23.9% respectively, for each period. The income tax provision for the three and six months ended June 30, 2017 was $16.5 million and $35.0 million, respectively, which represents an effective tax rate of 36.9% and 40.3%, respectively, for each period. The effective tax rate for the second quarter and first six months of 2018 reflects the lower federal income tax rate enacted following the passage of the Tax Act in the fourth quarter of 2017. The income tax provision for the second quarter of 2018 also included $509,000 of additional tax expense caused by the partial impairment of United’s net deferred tax asset as a result of the announcement that Georgia has elected to lower its corporate income tax rate from 6.00% to 5.75% effective January 1, 2019. The effective tax rate in the first six months of 2017 was affected by the release of disproportionate tax effects in the first quarter of 2017.

At June 30, 2018 and December 31, 2017, United maintained a valuation allowance on its net deferred tax asset of $4.71 million and $4.41 million, respectively. Management assesses the valuation allowance recorded against its net deferred tax asset at each reporting period. The determination of whether a valuation allowance for its net deferred tax asset is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence.

The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management’s conclusion at June 30, 2018 that it was more likely than not that the net deferred tax asset of $77.3 million will be realized is based upon management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts that consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, the valuation allowance may need to be increased for some or all of its net deferred tax asset.

United is subject to income taxation in the United States and various state jurisdictions. United’s federal and state income tax returns are filed on a consolidated basis. Currently, no years for which United filed a federal income tax return are under examination by the IRS, and there are no state tax examinations currently in progress. United is no longer subject to income tax examinations from state and local income tax authorities for years before 2014. Although it is not possible to know the ultimate outcome of future examinations, management believes that the liability recorded for uncertain tax positions is appropriate.

Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the amount of income tax computed by applying the statutory federal income tax rate to income before income taxes, can be found in Note 17 to the consolidated financial statements filed with United’s Annual Report on Form 10-K for the year ended December 31, 2017.

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Balance Sheet Review

Total assets at June 30, 2018 and December 31, 2017 were $12.4 billion and $11.9 billion, respectively. Average total assets for both the second quarter and first half of 2018 were $12.2 billion, up from $10.7 billion in both the second quarter and first half of 2017.

The following table presents a summary of the loan portfolio.

Table 7 - Loans Outstanding

(in thousands)

	June 30, 2018			December 31, 2017
By Loan Type
Owner occupied commercial real estate	$	1,681,737		$	1,923,993
Income producing commercial real estate	1,821,384			1,595,174
Commercial & industrial	1,193,046			1,130,990
Commercial construction	735,575			711,936
Equipment financing	464,594			—
Total commercial	5,896,336			5,362,093
Residential mortgage	1,020,606			973,544
Home equity lines of credit	707,718			731,227
Residential construction	195,580			183,019
Consumer direct	122,756			127,504
Indirect auto	277,275			358,185
Total loans	$	8,220,271		$	7,735,572
As a percentage of total loans:
Owner occupied commercial real estate	20		%	25		%
Income producing commercial real estate	22			21
Commercial & industrial	15			15
Commercial construction	9			9
Equipment financing	6			—
Total commercial	72			70
Residential mortgage	12			13
Home equity lines of credit	9			9
Residential construction	2			2
Consumer direct	2			2
Indirect auto	3			4
Total	100		%	100		%
By Geographic Location
North Georgia	$	1,000,943		$	1,018,945
Atlanta MSA	1,533,064			1,510,067
North Carolina	1,067,356			1,049,592
Coastal Georgia	622,845			629,919
Gainesville MSA	229,431			248,060
East Tennessee	474,196			474,515
South Carolina	1,571,171			1,485,632
Commercial Banking Solutions	1,443,979			960,657
Indirect auto	277,286			358,185
Total loans	$	8,220,271		$	7,735,572

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Substantially all of United’s loans are to customers located in the immediate market areas of its community banks in Georgia, North Carolina, South Carolina and Tennessee, including customers who have a seasonal residence in United’s market areas, or are generated by the Commercial Banking Solutions division that focuses on specific commercial loan businesses, such as SBA and franchise lending. Approximately 75% of United’s loans are secured by real estate. Total loans averaged $8.18 billion in the second quarter of 2018, compared with $6.98 billion in the second quarter of 2017, an increase of 17% due in part to the Acquisitions. At June 30, 2018, total loans were $8.22 billion, an increase of $485 million from December 31, 2017, of which $359 million came through the acquisition of NLFC.

United’s home equity lines generally require the payment of interest only for a set period after origination. After this initial period, the outstanding balance begins amortizing and requires the payment of both principal and interest. At June 30, 2018 and December 31, 2017, the funded portion of home equity lines totaled $708 million and $731 million, respectively. Approximately 3% of the home equity lines at June 30, 2018 were amortizing. Of the $708 million in balances outstanding at June 30, 2018, $428 million, or 60%, were secured by first liens. At June 30, 2018, 53% of the total available home equity lines were drawn upon.

United monitors the performance of its home equity loans and lines secured by second liens similar to other consumer loans and utilizes assumptions specific to these loans in determining the necessary allowance. United also receives notification when the first lien holder is in the process of foreclosure and upon that notification, management reviews current valuations to determine if any charge-offs are warranted and whether it is in United’s best interest to pay off the first lien creditor.

Asset Quality and Risk Elements

United manages asset quality and controls credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices. United’s credit administration function is responsible for monitoring asset quality and Board of Directors approved portfolio limits, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures among all lending units. Additional information on the credit administration function is included in Item 1 under the heading Loan Review and Nonperforming Assets in United’s Annual Report on Form 10-K for the year ended December 31, 2017.

United classifies commercial performing loans as “substandard” when there is a well-defined weakness or weaknesses that jeopardizes the repayment by the borrower and there is a distinct possibility that United could sustain some loss if the deficiency is not corrected. United classifies consumer performing loans as “substandard” when the loan is in bankruptcy.

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The table below presents performing classified loans for the last five quarters.

Table 8 - Performing Classified Loans

(in thousands)

	June 30, 2018		March 31, 2018		December 31, 2017		September 30, 2017		June 30, 2017
By Category
Owner occupied commercial real estate	$	42,169	$	42,096	$	41,467	$	37,147	$	34,427
Income producing commercial real estate	26,120		24,984		30,061		20,922		22,457
Commercial & industrial	17,820		11,003		11,879		10,740		7,247
Commercial construction	10,102		8,422		8,264		6,213		4,808
Equipment financing	820		414		—		—		—
Total commercial	97,031		86,919		91,671		75,022		68,939
Residential mortgage	14,970		14,824		15,323		15,914		12,929
Home equity	5,117		5,491		6,055		5,603		5,733
Residential construction	1,567		1,506		1,837		1,754		1,822
Consumer direct	498		1,142		515		508		627
Indirect auto	1,291		1,498		1,760		1,685		1,697
Total	$	120,474	$	111,380	$	117,161	$	100,486	$	91,747
By Market
North Georgia	$	25,417	$	26,243	$	30,952	$	30,049	$	34,638
Atlanta MSA	13,640		12,145		9,358		9,936		10,384
North Carolina	24,886		27,186		30,670		11,341		11,916
Coastal Georgia	3,550		3,075		3,322		2,791		3,062
Gainesville MSA	966		662		750		456		475
East Tennessee	12,737		12,402		10,953		10,620		7,089
South Carolina	22,841		26,800		27,212		31,123		21,763
Commercial Banking Solutions	15,146		1,369		2,184		2,485		723
Indirect auto	1,291		1,498		1,760		1,685		1,697
Total loans	$	120,474	$	111,380	$	117,161	$	100,486	$	91,747

At June 30, 2018, performing classified loans totaled $120 million and increased $9.09 million from the prior quarter-end primarily due to the downgrade of two commercial relationships.

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

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The following table presents a summary of the changes in the allowance for credit losses for the periods indicated.

Table 9 - Allowance for Credit Losses

(in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Allowance for loan and lease losses at beginning of period	$	61,085		$	60,543		$	58,914		$	61,422
Charge-offs:
Owner occupied commercial real estate	7			158			67			183
Income producing commercial real estate	1,653			203			2,310			1,100
Commercial & industrial	233			598			617			814
Commercial construction	53			361			416			563
Equipment financing	23			—			162			—
Residential mortgage	112			131			182			673
Home equity lines of credit	211			424			335			895
Residential construction	8			70			8			70
Consumer direct	552			457			1,203			899
Indirect auto	379			313			815			733
Total loans charged-off	3,231			2,715			6,115			5,930
Recoveries:
Owner occupied commercial real estate	585			120			688			357
Income producing commercial real estate	232			20			467			47
Commercial & industrial	217			244			606			612
Commercial construction	159			20			256			592
Equipment financing	71			—			168			—
Residential mortgage	101			105			224			117
Home equity lines of credit	190			171			225			220
Residential construction	67			123			131			132
Consumer direct	195			195			355			402
Indirect auto	55			94			135			149
Total recoveries	1,872			1,092			3,255			2,628
Net charge-offs	1,359			1,623			2,860			3,302
Provision for loan and lease losses	1,345			580			5,017			1,380
Allowance for loan and lease losses at end of period	61,071			59,500			61,071			59,500
Allowance for unfunded commitments at beginning of period	2,440			2,002			2,312			2,002
Provision for losses on unfunded commitments	455			220			583			220
Allowance for unfunded commitments at end of period	2,895			2,222			2,895			2,222
Allowance for credit losses	$	63,966		$	61,722		$	63,966		$	61,722
Total loans and leases:
At period-end	$	8,220,271		$	7,040,932		$	8,220,271		$	7,040,932
Average	8,177,343			6,979,980			8,085,849			6,942,130
Allowance for loan and lease losses as a percentage of period-end loans and leases	0.74		%	0.85		%	0.74		%	0.85		%
As a percentage of average loans (annualized):
Net charge-offs	0.07			0.09			0.07			0.10
Provision for loan and lease losses	0.07			0.03			0.13			0.04

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

The allowance for credit losses, which includes a portion related to unfunded commitments, totaled $64.0 million at June 30, 2018, compared with $61.2 million at December 31, 2017. At June 30, 2018, the allowance for loan losses was $61.1 million, or 0.74% of loans, compared with $58.9 million, or 0.76% of total loans, at December 31, 2017.

Management believes that the allowance for credit losses at June 30, 2018 reflects the probable incurred losses in the loan portfolio and unfunded loan commitments. This assessment involves uncertainty and judgment and is subject to change in future periods. The amount of any changes could be significant if management’s assessment of loan quality or collateral values change substantially with respect to one or more loan relationships or portfolios. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for credit losses in future periods if, in their opinion, the results of their review warrant such additions.

Nonperforming Assets

The table below summarizes nonperforming assets.

Table 10 - Nonperforming Assets

(in thousands)

	June 30, 2018			December 31, 2017
Nonperforming loans	$	21,817		$	23,658
Foreclosed properties/other real estate owned (OREO)	2,597			3,234
Total nonperforming assets	$	24,414		$	26,892
Nonperforming loans as a percentage of total loans and leases	0.27		%	0.31		%
Nonperforming assets as a percentage of total loans and OREO	0.30			0.35
Nonperforming assets as a percentage of total assets	0.20			0.23

At June 30, 2018, nonperforming loans were $21.8 million compared to $23.7 million at December 31, 2017. Nonperforming assets, which include nonperforming loans and foreclosed real estate, totaled $24.4 million at June 30, 2018 and $26.9 million at December 31, 2017.

United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in full or when the loan becomes 90 days past due. When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a nonaccrual loan are applied to reduce the loan’s recorded investment.

Purchased credit impaired (“PCI”) loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered as performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or future period yield adjustments. The accrual of interest is discontinued on PCI loans if management can no longer reliably estimate future cash flows on the loan. No PCI loans were classified as nonaccrual at June 30, 2018 or December 31, 2017 as the carrying value of the respective loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all PCI loans.

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The following table summarizes nonperforming assets by category and market as of the dates indicated.

Table 11 - Nonperforming Assets by Category and Market

(in thousands)

	June 30, 2018						December 31, 2017
	Nonaccrual Loans		Foreclosed Properties		Total NPAs		Nonaccrual Loans		Foreclosed Properties		Total NPAs
BY CATEGORY
Owner occupied commercial real estate	$	5,772	$	812	$	6,584	$	4,923	$	1,955	$	6,878
Income producing commercial real estate	991		455		1,446		3,208		244		3,452
Commercial & industrial	2,180		—		2,180		2,097		—		2,097
Commercial construction	613		576		1,189		758		884		1,642
Equipment financing	1,075		—		1,075		—		—		—
Total commercial	10,631		1,843		12,474		10,986		3,083		14,069
Residential mortgage	7,918		184		8,102		8,776		136		8,912
Home equity lines of credit	1,812		550		2,362		2,024		15		2,039
Residential construction	637		20		657		192		—		192
Consumer direct	68		—		68		43		—		43
Indirect auto	751		—		751		1,637		—		1,637
Total NPAs	$	21,817	$	2,597	$	24,414	$	23,658	$	3,234	$	26,892
BY MARKET
North Georgia	$	7,583	$	640	$	8,223	$	7,310	$	94	$	7,404
Atlanta MSA	1,928		132		2,060		1,395		279		1,674
North Carolina	3,029		750		3,779		4,543		1,213		5,756
Coastal Georgia	943		—		943		2,044		20		2,064
Gainesville MSA	186		—		186		739		—		739
East Tennessee	1,473		143		1,616		1,462		—		1,462
South Carolina	3,093		362		3,455		3,433		1,059		4,492
Commercial Banking Solutions	2,831		570		3,401		1,095		569		1,664
Indirect auto	751		—		751		1,637		—		1,637
Total NPAs	$	21,817	$	2,597	$	24,414	$	23,658	$	3,234	$	26,892

At June 30, 2018 and December 31, 2017, United had $54.7 million and $58.1 million, respectively, in loans with terms that have been modified in TDRs. Included therein were $7.38 million and $5.50 million, respectively, of TDRs that were classified as nonaccrual and were included in nonperforming loans. The remaining TDRs with an aggregate balance of $47.3 million and $52.6 million, respectively, were performing according to their modified terms and are therefore not considered to be nonperforming assets.

At June 30, 2018 and December 31, 2017, there were $57.4 million and $62.3 million, respectively, of loans classified as impaired under the definition outlined in the Accounting Standards Codification, including TDRs which are by definition considered impaired. Included in impaired loans at June 30, 2018 and December 31, 2017 was $20.5 million and $9.37 million, respectively, that did not require specific reserves or had previously been charged down to net realizable value. The remaining balance of impaired loans at June 30, 2018 and December 31, 2017 of $37.0 million and $52.9 million, respectively, had specific reserves that totaled $2.82 million and $3.26 million, respectively. The average recorded investment in impaired loans for the second quarters of 2018 and 2017 was $58.3 million and $86.4 million, respectively. For the six months ended June 30, 2018 and 2017, the average recorded investment in impaired loans was $62.2 million and $84.2 million, respectively. For the three and six months ended June 30, 2018, United recognized $731,000 and $1.48 million, respectively, in interest revenue on impaired loans compared to $1.00 million and $1.96 million, respectively, for the same periods of the prior year.

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The table below summarizes activity in nonperforming assets for the periods indicated.

Table 12 - Activity in Nonperforming Assets

(in thousands)

	Second Quarter 2018									Second Quarter 2017
	Nonaccrual Loans			Foreclosed Properties			Total NPAs			Nonaccrual Loans			Foreclosed Properties			Total NPAs
Beginning Balance	$	26,240		$	2,714		$	28,954		$	19,812		$	5,060		$	24,872
Loans placed on non-accrual	3,612			—			3,612			8,110			—			8,110
Payments received	(5,314		)	—			(5,314		)	(2,955		)	—			(2,955		)
Loan charge-offs	(2,065		)	—			(2,065		)	(1,564		)	—			(1,564		)
Foreclosures	(656		)	984			328			(308		)	481			173
Property sales	—			(1,029		)	(1,029		)	—			(2,704		)	(2,704		)
Write downs	—			(106		)	(106		)	—			(294		)	(294		)
Net gains (losses) on sales	—			34			34			—			196			196
Ending Balance	$	21,817		$	2,597		$	24,414		$	23,095		$	2,739		$	25,834
	First Six Months of 2018									First Six Months of 2017
	Nonaccrual Loans			Foreclosed Properties			Total NPAs			Nonaccrual Loans			Foreclosed Properties			Total NPAs
Beginning Balance	$	23,658		$	3,234		$	26,892		$	21,539		$	7,949		$	29,488
Acquisitions	428			—			428			—			—			—
Loans placed on non-accrual	11,075			—			11,075			11,282			—			11,282
Payments received	(8,848		)	—			(8,848		)	(6,001		)	—			(6,001		)
Loan charge-offs	(3,215		)	—			(3,215		)	(2,856		)	—			(2,856		)
Foreclosures	(1,281		)	1,609			328			(869		)	1,042			173
Property sales	—			(1,986		)	(1,986		)	—			(5,781		)	(5,781		)
Write downs	—			(178		)	(178		)	—			(774		)	(774		)
Net gains (losses) on sales	—			(82		)	(82		)	—			303			303
Ending Balance	$	21,817		$	2,597		$	24,414		$	23,095		$	2,739		$	25,834

Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell, at the time of foreclosure is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the lesser of fair value, less estimated costs to sell, or the listed selling price, less the costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property expense. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. During the second quarter of 2018, United transferred $984,000 of loans into foreclosed property through foreclosures. During the same period, proceeds from sales of foreclosed property were $1.03 million.

Investment Securities

The composition of the investment securities portfolio reflects United’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits and borrowings, including repurchase agreements.

At June 30, 2018 and December 31, 2017, United had securities held-to-maturity with a carrying amount of $298 million and $321 million, respectively, and securities available-for-sale totaling $2.54 billion and $2.62 billion, respectively. At June 30, 2018 and December 31, 2017, the securities portfolio represented approximately 23% and 25%, respectively, of total assets.

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The investment securities portfolio primarily consists of Treasury securities, U.S. government agency securities, U.S. government sponsored agency mortgage-backed securities, non-agency mortgage-backed securities, corporate securities, municipal securities and asset-backed securities. Mortgage-backed securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest. The actual maturities of these securities will usually differ from contractual maturities because loans underlying the securities can prepay. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining or prolonged low interest rate environment, United may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields. In a rising rate environment, the opposite occurs - prepayments tend to slow and the weighted average life extends. This is referred to as extension risk which can lead to lower levels of liquidity due to the delay of cash receipts and can result in the holding of a below market yielding asset for a longer period of time. United’s asset-backed securities include collateralized loan obligations and securities backed by student loans.

Management evaluates its securities portfolio each quarter to determine if any security is considered to be other than temporarily impaired. In making this evaluation, management considers its ability and intent to hold securities to recover current market losses. Losses on United’s fixed income securities at June 30, 2018 primarily reflect the effect of changes in interest rates. United did not recognize any other than temporary impairment losses on its investment securities during the three and six months ended June 30, 2018 or 2017.

At June 30, 2018 and December 31, 2017, 12% and 15%, respectively, of the securities portfolio was invested in floating-rate securities or fixed-rate securities that were swapped to floating rates in order to manage exposure to rising interest rates.

Goodwill and Core Deposit Intangibles

Goodwill represents the premium paid for acquired companies above the fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets.

Core deposit intangibles, representing the value of acquired deposit relationships, and noncompete agreements are amortizing intangible assets that are required to be tested for impairment only when events or circumstances indicate that impairment may exist. There were no events or circumstances that led management to believe that any impairment exists in goodwill or other intangible assets.

Deposits

Total customer deposits, excluding brokered deposits, as of June 30, 2018 were $9.52 billion, compared to $9.44 billion at December 31, 2017. Total core transaction deposits (demand, NOW, money market and savings deposits, excluding public funds deposits) of $6.94 billion at June 30, 2018 increased $175 million since December 31, 2017. United’s high level of service, as evidenced by its strong customer satisfaction scores, has been instrumental in attracting and retaining core transaction deposit accounts.

Total time deposits, excluding brokered deposits, as of June 30, 2018 were $1.52 billion, down $23.8 million from December 31, 2017. United has allowed some attrition of certificates of deposit, as funding needs have been met with lower cost transaction account deposits.

Borrowing Activities

The Bank is a shareholder in the Federal Home Loan Bank of Atlanta (“FHLB”). Through this affiliation, FHLB secured advances totaled $560 million and $505 million, respectively, as of June 30, 2018 and December 31, 2017. United anticipates continued use of this short and long-term source of funds. Additional information regarding FHLB advances is provided in Note 13 to the consolidated financial statements included in United’s Annual Report on Form 10-K for the year ended December 31, 2017.

Contractual Obligations

There have not been any material changes to United’s contractual obligations since December 31, 2017.

Off-Balance Sheet Arrangements

United is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit, letters of credit and financial guarantees.

A commitment to extend credit is an agreement to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Letters of credit and financial guarantees are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as extending loan facilities to customers. Those commitments are primarily issued to local businesses.

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The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, letters of credit and financial guarantees is represented by the contractual amount of these instruments. United uses the same credit underwriting procedures for making commitments, letters of credit and financial guarantees, as it uses for underwriting on-balance sheet instruments. Management evaluates each customer’s creditworthiness on a case-by-case basis and the amount of the collateral, if deemed necessary, is based on the credit evaluation. Collateral held varies, but may include unimproved and improved real estate, certificates of deposit, personal property or other acceptable collateral.

All of these instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The total amount of these instruments does not necessarily represent future cash requirements because a significant portion of these instruments expire without being used. United is not involved in off-balance sheet contractual relationships, other than those disclosed in this report, that could result in liquidity needs or other commitments, or that could significantly affect earnings. See Note 14 to the consolidated financial statements for additional information on off-balance sheet arrangements.

Interest Rate Sensitivity Management

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

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

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

United’s policy is based on the 12-month impact on net interest revenue of interest rate shocks and ramps that increase from 100 to 400 basis points or decrease 100 basis points from the base scenario. In the shock scenarios, rates immediately change the full amount at the scenario onset. In the ramp scenarios, rates change by 25 basis points per month. United’s policy limits the projected change in net interest revenue over the first 12 months to a 5% decrease for each 100 basis point change in the increasing and decreasing rate ramp and shock scenarios. The following table presents the interest sensitivity position at the dates indicated.

Table 13 - Interest Sensitivity

	Increase (Decrease) in Net Interest Revenue from Base Scenario at
	June 30, 2018				December 31, 2017
Change in Rates	Shock		Ramp		Shock		Ramp
100 basis point increase	(0.26	)%	(0.76	)%	0.11	%	(0.33	)%
100 basis point decrease	(5.58	)	(4.03	)	(7.37	)	(6.24	)

Interest rate sensitivity is a function of the re-pricing characteristics of the portfolio of assets and liabilities. These re-pricing characteristics are the time frames within which the interest-earning assets and interest-bearing liabilities are subject to change in interest rates either at replacement, re-pricing or maturity. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and

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their re-pricing characteristics during periods of changes in market interest rates. Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates on a net basis within an acceptable timeframe, thereby minimizing the potentially adverse effect of interest rate changes on net interest revenue.

United has some discretion in the extent and timing of deposit re-pricing depending upon the competitive pressures in the markets in which it operates. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. The interest rate spread between an asset and its supporting liability can vary significantly even when the timing of re-pricing for both the asset and the liability remains the same, due to the two instruments re-pricing according to different indices. This is commonly referred to as basis risk.

In order to manage interest rate sensitivity, management uses derivative financial instruments. Derivative financial instruments can be a cost-effective and capital-effective means of modifying the re-pricing characteristics of on-balance sheet assets and liabilities. These contracts generally consist of interest rate swaps under which United pays a variable rate (or fixed rate, as the case may be) and receives a fixed rate (or variable rate, as the case may be). In addition to derivative instruments, management uses a variety of balance sheet instruments to manage interest rate risk such as investment securities, wholesale funding, and bank-issued deposits.

Derivative financial instruments that are designated as accounting hedges are classified as either cash flow or fair value hedges. The change in fair value of cash flow hedges is recognized in other comprehensive income. Fair value hedges recognize in earnings both the effect of the change in the fair value of the derivative financial instrument and the offsetting effect of the change in fair value of the hedged asset or liability associated with the particular risk of that asset or liability being hedged. United has other derivative financial instruments that are not designated as accounting hedges but are used for interest rate risk management purposes and as effective economic hedges. Derivative financial instruments that are not accounted for as accounting hedges are marked to market through earnings.

From time to time, United will terminate hedging positions when conditions change and the position is no longer necessary to manage overall sensitivity to changes in interest rates. In those situations where the terminated contract was in an effective hedging relationship at the time of termination and the hedging relationship is expected to remain effective throughout the original term of the contract, the resulting gain or loss is amortized over the remaining life of the original contract. For swap contracts, the gain or loss is amortized over the remaining original contract term using the straight line method of amortization. United expects that $361,000 will be reclassified as an increase to interest expense from other comprehensive income over the next twelve months related to these terminated cash flow hedges.

United’s policy requires all non-customer facing derivative financial instruments be used only for asset/liability management through the hedging of specific transactions or positions, and not for trading or speculative purposes. Management believes that the risk associated with using derivative financial instruments to mitigate interest rate risk sensitivity is appropriately monitored and controlled and will not have any material adverse effect on financial condition or results of operations. In order to mitigate potential credit risk, from time to time United may require the counterparties to derivative contracts to pledge cash and/or securities as collateral to cover the net exposure.

Liquidity Management

The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of United to maintain a sufficient level of liquidity in all expected economic environments. To assist in determining the adequacy of its liquidity, United performs a variety of liquidity stress tests including idiosyncratic, systemic and combined scenarios for both moderate and severe events. Liquidity is defined as the ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the ability to meet the daily cash flow requirements of customers, both depositors and borrowers. United maintains an unencumbered liquid asset reserve to help ensure its ability to meet its obligations under normal conditions for at least a 12-month period and under severely adverse liquidity conditions for a minimum of 30 days.

An important part of the Bank’s liquidity resides in the asset portion of the balance sheet, which provides liquidity primarily through loan interest and principal repayments and the maturities and sales of securities, as well as the ability to use these assets as collateral for borrowings on a secured basis. The Bank also maintains excess funds in short-term interest-bearing assets that provide additional liquidity.

The Bank’s main source of liquidity is customer interest-bearing and noninterest-bearing deposit accounts. Liquidity is also available from wholesale funding sources consisting primarily of Federal funds purchased, FHLB advances, brokered deposits and securities sold under agreements to repurchase. These sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs.

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In addition, because United’s holding company is a separate entity and apart from the Bank, it must provide for its own liquidity. United’s holding company is responsible for the payment of dividends declared for its common shareholders, and interest and principal on any outstanding debt or trust preferred securities. United’s holding company currently has internal capital resources to meet these obligations. While United’s holding company has access to the capital markets, the ultimate source of holding company liquidity is subsidiary service fees and dividends from the Bank, which are limited by applicable law and regulations.

At June 30, 2018, United had cash and cash equivalent balances of $316 million and had sufficient qualifying collateral to increase FHLB advances by $774 million and Federal Reserve discount window borrowing capacity of $1.40 billion. United also has the ability to raise substantial funds through brokered deposits. In addition to these wholesale sources, United has the ability to attract retail deposits by competing more aggressively on pricing.

As disclosed in the consolidated statement of cash flows, net cash provided by operating activities was $116 million for the six months ended June 30, 2018. Net income of $77.3 million for the six month period included non-cash expenses for the following: deferred income tax expense of $22.8 million, depreciation, amortization and accretion of $17.1 million, provision expense of $5.60 million and stock-based compensation expense of $2.28 million. Other sources of cash from operating activities included an increase in accrued expenses and other liabilities of $12.3 million, offset by an increase in other assets and accrued interest receivable of $18.8 million. Net cash used in investing activities of $124 million consisted primarily of $280 million in purchases of securities of available for sale, cash paid for acquisitions of $56.8 million and a net increase in loans of $117 million. These uses of cash were partially offset by maturities and calls and proceeds from the sale of investment securities available for sale of $174 million and $140 million, respectively. Net cash provided by financing activities of $9.49 million consisted primarily of a net increase in deposits of $159 million, issuance of subordinated debt of $98.2 million and a net increase in FHLB advances of $56.0 million. These sources of cash were partially offset by a net decrease in short-term borrowings of $256 million, cash dividends of $17.5 million and repayments of long-term debt of $30.0 million. In the opinion of management, United’s liquidity position at June 30, 2018, was sufficient to meet its expected cash flow requirements.

Capital Resources and Dividends

Shareholders’ equity at June 30, 2018 was $1.38 billion, an increase of $75.8 million from December 31, 2017 due to shares issued for the NLFC acquisition plus year-to-date earnings less dividends declared and a decrease in the value of available-for-sale securities. Accumulated other comprehensive loss, which includes unrealized gains and losses on securities available-for-sale, the unrealized gains and losses on derivatives qualifying as cash flow hedges and unamortized prior service cost and actuarial gains and losses on United’s modified retirement plan, is excluded in the calculation of regulatory capital adequacy ratios.

The following table shows United’s capital ratios, as calculated under applicable regulatory guidelines, at June 30, 2018 and December 31, 2017. As of June 30, 2018, capital levels remained characterized as “well-capitalized” under the Basel III Capital Rules in effect at the time.

Table 14 – Capital Ratios

(dollars in thousands)

	Basel III Guidelines				United Community Banks, Inc. (Consolidated)						United Community Bank
	Minimum		Well Capitalized		June 30, 2018			December 31, 2017			June 30, 2018			December 31, 2017
Risk-based ratios:
Common equity tier 1 capital	4.5	%	6.5	%	11.60		%	11.98		%	13.19		%	12.93		%
Tier I capital	6.0		8.0		11.94			12.24			13.19			12.93
Total capital	8.0		10.0		13.83			13.06			13.88			13.63
Leverage ratio	4.0		5.0		9.31			9.44			10.27			9.98
Common equity tier 1 capital					$	1,074,861		$	1,053,983		$	1,220,098		$	1,135,728
Tier I capital					1,106,311			1,076,465			1,220,098			1,135,728
Total capital					1,281,909			1,149,191			1,284,064			1,196,954
Risk-weighted assets					9,267,868			8,797,387			9,252,050			8,781,177
Average total assets					11,887,877			11,403,248			11,885,069			11,385,716

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United’s common stock trades on the Nasdaq Global Select Market under the symbol “UCBI”. Below is a quarterly schedule of high, low and closing stock prices and average daily volume for 2018 and 2017.

Table 15 - Stock Price Information

	2018							2017
	High		Low		Close		Avg Daily Volume	High		Low		Close		Avg Daily Volume
First quarter	$	33.60	$	27.73	$	31.65	529,613	$	30.47	$	25.29	$	27.69	459,018
Second quarter	34.18		30.52		30.67		402,230	28.57		25.39		27.80		402,802
Third quarter								29.02		24.47		28.54		365,102
Fourth quarter								29.60		25.76		28.14		365,725

Effect of Inflation and Changing Prices

A bank’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature with relatively little investment in fixed assets or inventories. Inflation has an important effect on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio.

Management believes the effect of inflation on financial results depends on United’s ability to react to changes in interest rates, and by such reaction, reduce the inflationary effect on performance. United has an asset/liability management program to manage interest rate sensitivity. In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.

Item 3.    Quantitative and Qualitative Disclosure About Market Risk

There have been no material changes in United’s market risk as of June 30, 2018 from that presented in the Annual Report on Form 10-K for the year ended December 31, 2017. The interest rate sensitivity position at June 30, 2018 is included in Table 13 in management’s discussion and analysis of this report.

Item 4.    Controls and Procedures

United’s management, including the Chief Executive Officer and Chief Financial Officer, supervised and participated in an evaluation of United’s disclosure controls and procedures as of June 30, 2018. Based on, and as of the date of that evaluation, United’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective in accumulating and communicating information to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the SEC’s rules and forms and that the disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted by United under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no significant changes in the internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Part II.    Other Information

Item 1. Legal Proceedings

In the ordinary course of operations, United and the Bank are defendants in various legal proceedings. Additionally, in the ordinary course of business, United and the Bank are subject to regulatory examinations and investigations. Based on our current knowledge and advice of counsel, in the opinion of management there is no such pending or threatened legal matter which would result in a material adverse change in the consolidated financial condition or results of operations of United.

Items 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in United’s Annual Report on Form 10-K for the year ended December 31, 2017. 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table contains information for shares repurchased during the second quarter of 2018.

(Dollars in thousands, except for per share amounts)	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1, 2018 - April 30, 2018	—	—		—	36,342
May 1, 2018 - May 31, 2018	—	—		—	36,342
June 1, 2018 - June 30, 2018	—	—		—	36,342
Total	—	$	—	—	$	36,342

⁽¹⁾On March 22, 2016, United announced that its Board of Directors had authorized a program to repurchase up to $50 million of United’s outstanding common stock through December 31, 2017. In November of 2017, the Board of Directors extended this program through December 31, 2018. Under the program, the shares may be repurchased periodically in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the program depends on a number of factors, including the market price of United’s common stock, general market and economic conditions, and applicable legal requirements. As of June 30, 2018, the remaining authorization was $36.3 million.

Item 3. Defaults upon Senior Securities – None

Item 4. Mine Safety Disclosures – None

Item 5. Other Information – None

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Item 6. Exhibits

Exhibit No.	Description
10.1	Executive Transition Agreement, dated May 10, 2018, by and between United Community Banks, Inc. and Jimmy C. Tallent
31.1	Certification by H. Lynn Harton, Chief Executive Officer of United Community Banks, Inc., pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by Jefferson L. Harralson, Executive Vice President and Chief Financial Officer of United Community Banks, Inc., pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

UNITED COMMUNITY BANKS, INC.

/s/ H. Lynn Harton

H. Lynn Harton

Chief Executive Officer

(Principal Executive Officer)

/s/ Jefferson L. Harralson

Jefferson L. Harralson

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

/s/ Alan H. Kumler

Alan H. Kumler

Senior Vice President and Chief Accounting Officer

(Principal Accounting Officer)

Date:  August 6, 2018

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