SEC Filing | United Community Banks, Inc.

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2018

¨ 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 x 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 x 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 x	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 x

Common stock, par value $1 per share 79,125,271 shares outstanding as of April 30, 2018.

INDEX

PART I - Financial Information

	Item 1.	Financial Statements.

		Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2018 and 2017	3

		Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2018 and 2017	4

		Consolidated Balance Sheets (unaudited) at March 31, 2018 and December 31, 2017	5

		Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2018 and 2017	6

		Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2018 and 2017	7

		Notes to Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	42

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	62

	Item 4.	Controls and Procedures.	62

PART II - Other Information

	Item 1.	Legal Proceedings.	63
	Item 1A.	Risk Factors.	63
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	63
	Item 3.	Defaults Upon Senior Securities.	63
	Item 4.	Mine Safety Disclosures.	63
	Item 5.	Other Information.	63
	Item 6.	Exhibits.	64

Part I – Financial Information

UNITED COMMUNITY BANKS, INC.

Consolidated Statements of Income (Unaudited)

	Three Months Ended
	March 31,
(in thousands, except per share data)	2018			2017

Interest revenue:
Loans, including fees	$	96,469		$	72,727
Investment securities, including tax exempt of $972 and $279		18,295			17,712
Deposits in banks and short-term investments		526			519
Total interest revenue		115,290			90,958

Interest expense:
Deposits:
NOW		1,113			597
Money market		2,175			1,426
Savings		49			27
Time		2,956			1,008
Total deposit interest expense		6,293			3,058
Short-term borrowings		300			40
Federal Home Loan Bank advances		2,124			1,430
Long-term debt		3,288			2,876
Total interest expense		12,005			7,404
Net interest revenue		103,285			83,554
Provision for credit losses		3,800			800
Net interest revenue after provision for credit losses		99,485			82,754

Fee revenue:
Service charges and fees		8,925			10,604
Mortgage loan and other related fees		5,359			4,424
Brokerage fees		872			1,410
Gains from sales of SBA/USDA loans		1,778			1,959
Securities losses, net		(940	)		(2	)
Other		6,402			3,679
Total fee revenue		22,396			22,074
Total revenue		121,881			104,828

Operating expenses:
Salaries and employee benefits		42,875			36,691
Communications and equipment		4,632			4,918
Occupancy		5,613			4,949
Advertising and public relations		1,515			1,061
Postage, printing and supplies		1,637			1,370
Professional fees		4,044			3,044
FDIC assessments and other regulatory charges		2,476			1,283
Amortization of intangibles		1,898			973
Merger-related and other charges		2,054			2,054
Other		6,731			6,483
Total operating expenses		73,475			62,826
Net income before income taxes		48,406			42,002
Income tax expense		10,748			18,478
Net income	$	37,658		$	23,524

Net income available to common shareholders	$	37,381		$	23,524

Earnings per common share:
Basic	$	.47		$	.33
Diluted		.47			.33
Weighted average common shares outstanding:
Basic		79,205			71,700
Diluted		79,215			71,708

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended
	March 31,
(in thousands)	2018									2017
	Before-tax Amount			Tax (Expense) Benefit			Net of Tax Amount			Before-tax Amount			Tax (Expense) Benefit			Net of Tax Amount

Net income	$	48,406		$	(10,748	)	$	37,658		$	42,002		$	(18,478	)	$	23,524
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period		(29,265	)		7,155			(22,110	)		6,508			(2,464	)		4,044
Reclassification adjustment for losses included in net income		940			(221	)		719			2			(1	)		1
Net unrealized gains (losses)		(28,325	)		6,934			(21,391	)		6,510			(2,465	)		4,045
Amortization of losses included in net income on available-for-sale securities transferred to held-to- maturity		222			(54	)		168			310			(116	)		194
Amortization of losses included in net income on terminated derivative financial instruments that were previously accounted for as cash flow hedges		147			(38	)		109			413			(161	)		252
Reclassification of disproportionate tax effect related to terminated cash flow hedges		-			-			-			-			3,400			3,400
Net cash flow hedge activity		147			(38	)		109			413			3,239			3,652
Net actuarial loss on defined benefit pension plan		(5	)		1			(4	)		(800	)		312			(488	)
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan		227			(58	)		169			200			(79	)		121
Net defined benefit pension plan activity		222			(57	)		165			(600	)		233			(367	)

Total other comprehensive income (loss)		(27,734	)		6,785			(20,949	)		6,633			891			7,524

Comprehensive income	$	20,672		$	(3,963	)	$	16,709		$	48,635		$	(17,587	)	$	31,048

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Balance Sheets (Unaudited)

	March 31,			December 31,
(in thousands, except share and per share data)	2018			2017

ASSETS
Cash and due from banks	$	136,201		$	129,108
Interest-bearing deposits in banks		216,052			185,167
Cash and cash equivalents		352,253			314,275
Securities available for sale		2,419,049			2,615,850
Securities held to maturity (fair value $308,007 and $321,276)		312,080			321,094
Loans held for sale (includes $26,493 and $26,252 at fair value)		26,493			32,734
Loans and leases, net of unearned income		8,184,249			7,735,572
Less allowance for loan and lease losses		(61,085	)		(58,914	)
Loans and leases, net		8,123,164			7,676,658
Premises and equipment, net		208,243			208,852
Bank owned life insurance		189,759			188,970
Accrued interest receivable		31,349			32,459
Net deferred tax asset		86,520			88,049
Derivative financial instruments		27,202			22,721
Goodwill and other intangible assets		328,328			244,397
Other assets		159,815			169,401
Total assets	$	12,264,255		$	11,915,460
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand	$	3,226,111		$	3,087,797
NOW		2,106,145			2,131,939
Money market		2,052,486			2,016,748
Savings		677,020			651,742
Time		1,520,931			1,548,460
Brokered		410,747			371,011
Total deposits		9,993,440			9,807,697
Short-term borrowings		-			50,000
Federal Home Loan Bank advances		434,574			504,651
Long-term debt		325,955			120,545
Derivative financial instruments		33,236			25,376
Accrued expenses and other liabilities		120,295			103,857
Total liabilities		10,907,500			10,612,126
Shareholders' equity:
Common stock, $1 par value; 150,000,000 shares authorized; 79,122,620 and 77,579,561 shares issued and outstanding		79,123			77,580
Common stock issuable; 612,831 and 607,869 shares		9,392			9,083
Capital surplus		1,496,307			1,451,814
Accumulated deficit		(181,877	)		(209,902	)
Accumulated other comprehensive loss		(46,190	)		(25,241	)
Total shareholders' equity		1,356,755			1,303,334
Total liabilities and shareholders' equity	$	12,264,255		$	11,915,460

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Changes in Shareholders' Equity (Unaudited)

For the Three Months Ended March 31,

												Accumulated
			Common									Other
*(in thousands, except share and*	Common		Stock			Capital			Accumulated			Comprehensive
*per share data)*	Stock		Issuable			Surplus			Deficit			Loss			Total

Balance, December 31, 2016	$	70,899	$	7,327		$	1,275,849		$	(251,857	)	$	(26,483	)	$	1,075,735
Net income										23,524						23,524
Other comprehensive income													7,524			7,524
Common stock issued to dividend reinvestment plan and employee benefit plans (4,239 shares)		4					106									110
Amortization of stock option and restricted stock awards							1,321									1,321
Vesting of restricted stock, net of shares surrendered to cover payroll taxes (37,121 shares issued, 58,553 shares deferred)		38		883			(1,551	)								(630	)
Deferred compensation plan, net, including dividend equivalents				117												117
Shares issued from deferred compensation plan, net of shares surrendered to cover payroll taxes (32,279 shares)		32		(368	)		229									(107	)
Common stock dividends ($.09 per share)										(6,488	)					(6,488	)
Cumulative effect of change in accounting principle										437						437
Balance, March 31, 2017	$	70,973	$	7,959		$	1,275,954		$	(234,384	)	$	(18,959	)	$	1,101,543

Balance, December 31, 2017	$	77,580	$	9,083		$	1,451,814		$	(209,902	)	$	(25,241	)	$	1,303,334
Net income										37,658						37,658
Other comprehensive income													(20,949	)		(20,949	)
Common stock issued to dividend reinvestment plan and employee benefit plans (5,204 shares)		5					139									144
Common stock issued for acquisition (1,443,987 shares)		1,444					44,302									45,746
Amortization of stock option and restricted stock awards							1,148									1,148
Vesting of restricted stock and exercise of stock options, net of shares surrendered to cover payroll taxes (48,310 shares issued, 46,074 shares deferred)		48		850			(1,725	)								(827	)
Deferred compensation plan, net, including dividend equivalents				143												143
Shares issued from deferred compensation plan, net of shares surrendered to cover payroll taxes (45,558 shares)		46		(684	)		629									(9	)
Common stock dividends ($.12 per share)										(9,633	)					(9,633	)
Balance, March 31, 2018	$	79,123	$	9,392		$	1,496,307		$	(181,877	)	$	(46,190	)	$	1,356,755

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended
	March 31,
(in thousands)	2018			2017
Operating activities:
Net income	$	37,658		$	23,524
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		10,487			6,394
Provision for credit losses		3,800			800
Stock based compensation		1,148			1,321
Deferred income tax expense		10,225			19,059
Securities losses, net		940			2
Gains from sales of SBA/USDA loans		(1,778	)		(1,959	)
Net losses and write downs on sales of other real estate owned		188			373
Changes in assets and liabilities:
Other assets and accrued interest receivable		(385	)		4,784
Accrued expenses and other liabilities		1,371			(5,115	)
Loans held for sale		8,833			13,387
Net cash provided by operating activities		72,487			62,570

Investing activities:
Investment securities held to maturity:
Proceeds from maturities and calls of securities held to maturity		13,832			13,351
Purchases of securities held to maturity		(4,781	)		(13,433	)
Investment securities available for sale:
Proceeds from sales of securities available for sale		113,961			24,197
Proceeds from maturities and calls of securities available for sale		85,331			137,312
Purchases of securities available for sale		(30,161	)		(147,614	)
Net increase in loans		(79,404	)		(15,873	)
Purchase of bank owned life insurance		-			(10,000	)
Proceeds from sales of premises and equipment		195			5
Purchases of premises and equipment		(6,107	)		(3,404	)
Net cash paid for acquisition		(56,800	)		-
Proceeds from sale of other real estate		957			3,077
Net cash provided by (used in) investing activities		37,023			(12,382	)

Financing activities:
Net change in deposits		186,089			114,828
Net change in short-term borrowings		(264,923	)		(5,000	)
Repayments of long-term debt		(12,309	)		-
Proceeds from FHLB advances		760,000			1,510,000
Repayments of FHLB advances		(830,000	)		(1,650,000	)
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		144			110
Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock		(836	)		(737	)
Cash dividends on common stock		(7,885	)		(5,764	)
Net cash used in financing activities		(71,532	)		(36,563	)

Net change in cash and cash equivalents, including restricted cash		37,978			13,625

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	$	352,253		$	230,973

Supplemental disclosures of cash flow information:
Interest paid	$	13,069		$	8,089
Income taxes paid		811			680
Significant non-cash investing and financing transactions:
Unsettled security purchases		4,790			14,000
Unsettled government guaranteed loan purchases		-			14,674
Unsettled government guaranteed loan sales		14,240			16,115
Transfers of loans to foreclosed properties		625			561
Acquisitions:
Assets acquired		480,679			-
Liabilities assumed		350,433			-
Net assets acquired		130,246			-
Common stock issued in acquisitions		45,746			-

See accompanying notes to consolidated financial statements.

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 March 31, 2018, these restricted cash accounts totaled $11.8 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 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 will become the basis for a full 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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to 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 $394 million of assets and assumed $350 million of liabilities. Under the terms of the merger agreement, NLFC shareholders received $130 million in total consideration, $84.5 million of which 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 $87.0 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 period ended March 31, 2018 include the operating results of the acquired assets and assumed liabilities for the period subsequent to the acquisition date of February 1, 2018.

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		(6,655	)		358,878
Premises and equipment, net		628		(304	)		324
Net deferred tax asset		-		2,737			2,737
Other assets		5,117		(1,066	)		4,051
Total assets acquired	$	398,978	$	(5,288	)	$	393,690
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			$	(4,337	)
Total identifiable net assets						$	43,257
Consideration transferred
Cash							84,500
Common stock issued (1,443,987 shares)							45,746
Total fair value of consideration transferred							130,246
Goodwill						$	86,989

⁽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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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	$	22,164
Non-accretable difference		4,418
Cash flows expected to be collected		17,746
Accretable yield		1,830
Fair value	$	15,916

Excluded from ASC 310-30:
Fair value	$	342,962
Gross contractual amounts receivable		391,998
Estimate of contractual cash flows not expected to be collected		9,171

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.

Pro forma information

The following table discloses the impact of the merger with NLFC since the acquisition date through March 31, 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 $4.71 million have been excluded from the three months 2018 pro forma information presented below and included in the three months 2017 pro forma information below. The actual results and pro forma information were as follows (in thousands):

	Three Months Ended March 31,
	Revenue		Net Income
2018
Actual NLFC results included in statement of income since acquisition date	$	3,613	$	810
Supplemental consolidated pro forma as if NLFC had been acquired January 1, 2017		124,831		39,065

2017
Supplemental consolidated pro forma as if NLFC had been acquired January 1, 2017	$	108,506	$	20,880

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.

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			Gross Amounts Offset on					Gross Amounts not Offset in the Balance Sheet
March 31, 2018	Recognized Assets			the Balance Sheet			Net Asset Balance		Financial Instruments			Collateral Received			Net Amount

Repurchase agreements / reverse repurchase agreements	$	50,000		$	(50,000	)	$	-	$	-		$	-		$	-
Derivatives		27,202			-			27,202		(4,065	)		(12,069	)		11,068
Total	$	77,202		$	(50,000	)	$	27,202	$	(4,065	)	$	(12,069	)	$	11,068

Weighted average interest rate of reverse repurchase agreements		2.25	%

	Gross Amounts of			Gross Amounts Offset on			Net		Gross Amounts not Offset in the Balance Sheet
	Recognized Liabilities			the Balance Sheet			Liability Balance		Financial Instruments			Collateral Pledged			Net Amount

Repurchase agreements / reverse repurchase agreements	$	50,000		$	(50,000	)	$	-	$	-		$	-		$	-
Derivatives		33,236			-			33,236		(4,065	)		(18,461	)		10,710
Total	$	83,236		$	(50,000	)	$	33,236	$	(4,065	)	$	(18,461	)	$	10,710

Weighted average interest rate of repurchase agreements		1.50	%

	Gross Amounts of			Gross Amounts Offset on					Gross Amounts not Offset in the Balance Sheet
December 31, 2017	Recognized Assets			the Balance Sheet			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			Gross Amounts Offset on			Net		Gross Amounts not Offset in the Balance Sheet
	Recognized Liabilities			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 March 31, 2018, United recognized the right to reclaim cash collateral of $18.5 million and the obligation to return cash collateral of $12.1 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.

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 March 31, 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).

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

As of March 31, 2018

State and political subdivisions	$	67,258	$	1,118	$	633	$	67,743
Mortgage-backed securities ⁽¹⁾		244,822		1,372		5,930		240,264

Total	$	312,080	$	2,490	$	6,563	$	308,007

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

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).

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

As of March 31, 2018

U.S. Treasuries	$	122,156	$	-	$	2,570	$	119,586
U.S. Government agencies		25,955		265		319		25,901
State and political subdivisions		203,430		228		2,634		201,024
Mortgage-backed securities ⁽¹⁾		1,693,380		3,721		34,125		1,662,976
Corporate bonds		199,412		773		1,635		198,550
Asset-backed securities		210,445		992		482		210,955
Other		57		-		-		57

Total	$	2,454,835	$	5,979	$	41,765	$	2,419,049

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 $876 million and $1.04 billion were pledged to secure public deposits, derivatives and other secured borrowings at March 31, 2018 and December 31, 2017, respectively.

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 March 31, 2018

State and political subdivisions	$	37,160	$	633	$	-	$	-	$	37,160	$	633
Mortgage-backed securities		110,751		3,012		62,629		2,918		173,380		5,930
Total unrealized loss position	$	147,911	$	3,645	$	62,629	$	2,918	$	210,540	$	6,563

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

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 March 31, 2018

U.S. Treasuries	$	119,586	$	2,570	$	-	$	-	$	119,586	$	2,570
U.S. Government agencies		19,895		303		1,640		16		21,535		319
State and political subdivisions		155,125		2,549		5,066		85		160,191		2,634
Mortgage-backed securities		1,065,689		21,354		312,916		12,771		1,378,605		34,125
Corporate bonds		117,081		1,535		900		100		117,981		1,635
Asset-backed securities		68,962		478		5,053		4		74,015		482
Total unrealized loss position	$	1,546,338	$	28,789	$	325,575	$	12,976	$	1,871,913	$	41,765

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 March 31, 2018, there were 276 available-for-sale securities and 67 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 March 31, 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 agencies have occurred, and industry analysts’ reports. No impairment charges were recognized during the three months ended March 31, 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 months ended March 31, 2018 and 2017 (in thousands).

	Three Months Ended March 31,
	2018			2017

Proceeds from sales	$	113,961		$	24,197

Gross gains on sales	$	417		$	98
Gross losses on sales		(1,357	)		(100	)

Net losses on sales of securities	$	(940	)	$	(2	)

Income tax benefit attributable to sales	$	(221	)	$	(1	)

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 March 31, 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	$	74,495	$	72,916	$	-	$	-
5 to 10 years		47,661		46,670		-		-
		122,156		119,586		-		-

US Government agencies:
1 to 5 years		18,859		18,588		-		-
5 to 10 years		1,990		1,945		-		-
More than 10 years		5,106		5,368		-		-
		25,955		25,901		-		-

State and political subdivisions:
Within 1 year		1,500		1,503		5,431		5,475
1 to 5 years		45,297		44,826		13,075		13,497
5 to 10 years		27,558		27,167		10,509		11,160
More than 10 years		129,075		127,528		38,243		37,611
		203,430		201,024		67,258		67,743

Corporate bonds:
1 to 5 years		181,136		180,705		-		-
5 to 10 years		17,276		16,945		-		-
More than 10 years		1,000		900		-		-
		199,412		198,550		-		-

Asset-backed securities:
1 to 5 years		5,842		5,995		-		-
5 to 10 years		48,479		48,643		-		-
More than 10 years		156,124		156,317		-		-
		210,445		210,955		-		-

Other:
More than 10 years		57		57		-		-
		57		57		-		-

Total securities other than mortgage-backed securities:
Within 1 year		1,500		1,503		5,431		5,475
1 to 5 years		325,629		323,030		13,075		13,497
5 to 10 years		142,964		141,370		10,509		11,160
More than 10 years		291,362		290,170		38,243		37,611

Mortgage-backed securities		1,693,380		1,662,976		244,822		240,264

	$	2,454,835	$	2,419,049	$	312,080	$	308,007

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

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).

	March 31,			December 31,
	2018			2017

Owner occupied commercial real estate	$	1,897,826		$	1,923,993
Income producing commercial real estate		1,677,300			1,595,174
Commercial & industrial		1,142,428			1,130,990
Commercial construction		690,530			711,936
Equipment financing		422,532			-
Total commercial		5,830,616			5,362,093
Residential mortgage		992,111			973,544
Home equity lines of credit		712,275			731,227
Residential construction		189,662			183,019
Consumer direct		143,737			127,504
Indirect auto		315,848			358,185

Total loans		8,184,249			7,735,572

Less allowance for loan losses		(61,085	)		(58,914	)

Loans, net	$	8,123,164		$	7,676,658

At March 31, 2018 and December 31, 2017, loans totaling $3.84 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 March 31, 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 $101 million and $146 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 March 31,
	2018			2017
Balance at beginning of period	$	17,686		$	7,981
Additions due to acquisitions		1,830			-
Accretion		(2,546	)		(1,690	)
Reclassification from nonaccretable difference		591			889
Changes in expected cash flows that do not affect nonaccretable difference		475			582
Balance at end of period	$	18,036		$	7,762

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 March 31, 2018 and December 31, 2017, the remaining accretable fair value discount on loans acquired through a business combination and not accounted for under ASC 310-30 were $4.97 million and $14.7 million, respectively. In addition, indirect auto loans purchased at a premium outside of a business combination have a remaining premium of $6.55 million and $7.84 million, respectively, as of March 31, 2018 and December 31, 2017. During the three months ended March 31, 2018, United did not purchase any indirect auto loans. During the three months ended March 31, 2017, United purchased indirect auto loans of $39.8 million.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

At March 31, 2018, equipment financing assets included leases of $24.9 million. The components of the net investment in leases are presented below (in thousands).

	March 31,
	2018

Minimum future lease payments receivable	$	26,098
Estimated residual value of leased equipment		3,480
Initial direct costs		111
Security deposits		(1,184	)
Purchase accounting premium		1,388
Unearned income		(4,949	)
Net investment in leases	$	24,944

Minimum future lease payments expected to be received from lease contracts as of March 31, 2018 are as follows (in thousands):

Year
Remainder of 2018	$	8,469
2019		8,337
2020		5,504
2021		2,656
2022		1,053
Thereafter		79
Total	$	26,098

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Allowance for Credit Losses

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).

Three Months Ended March 31, 2018	Beginning Balance		Charge- Offs			Recoveries		(Release) Provision			Ending Balance

Owner occupied commercial real estate	$	14,776	$	(60	)	$	103	$	(258	)	$	14,561
Income producing commercial real estate		9,381		(657	)		235		817			9,776
Commercial & industrial		3,971		(384	)		389		99			4,075
Commercial construction		10,523		(363	)		97		(223	)		10,034
Equipment financing		-		(139	)		97		2,333			2,291
Residential mortgage		10,097		(70	)		123		71			10,221
Home equity lines of credit		5,177		(124	)		35		(156	)		4,932
Residential construction		2,729		-			64		251			3,044
Consumer direct		710		(651	)		160		514			733
Indirect auto		1,550		(436	)		80		224			1,418
Total allowance for loan losses		58,914		(2,884	)		1,383		3,672			61,085
Allowance for unfunded commitments		2,312		-			-		128			2,440
Total allowance for credit losses	$	61,226	$	(2,884	)	$	1,383	$	3,800		$	63,525

Three Months Ended March 31, 2017	Beginning Balance		Charge- Offs			Recoveries		(Release) Provision			Ending Balance

Owner occupied commercial real estate	$	16,446	$	(25	)	$	237	$	(989	)	$	15,669
Income producing commercial real estate		8,843		(897	)		27		905			8,878
Commercial & industrial		3,810		(216	)		368		(237	)		3,725
Commercial construction		13,405		(202	)		572		(985	)		12,790
Residential mortgage		8,545		(542	)		12		1,056			9,071
Home equity lines of credit		4,599		(471	)		49		353			4,530
Residential construction		3,264		-			9		(6	)		3,267
Consumer direct		708		(442	)		207		136			609
Indirect auto		1,802		(420	)		55		567			2,004
Total allowance for loan losses		61,422		(3,215	)		1,536		800			60,543
Allowance for unfunded commitments		2,002		-			-		-			2,002
Total allowance for credit losses	$	63,424	$	(3,215	)	$	1,536	$	800		$	62,545

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
	March 31, 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	$	1,686	$	12,875	$	-	$	14,561	$	1,255	$	13,521	$	-	$	14,776
Income producing commercial real estate		631		9,085		60		9,776		562		8,813		6		9,381
Commercial & industrial		61		4,014		-		4,075		27		3,944		-		3,971
Commercial construction		151		9,775		108		10,034		156		10,367		-		10,523
Equipment financing		-		2,291		-		2,291		-		-		-		-
Residential mortgage		1,151		9,070		-		10,221		1,174		8,919		4		10,097
Home equity lines of credit		90		4,842		-		4,932		-		5,177		-		5,177
Residential construction		73		2,962		9		3,044		75		2,654		-		2,729
Consumer direct		7		724		2		733		7		700		3		710
Indirect auto		35		1,383		-		1,418		-		1,550		-		1,550
Total allowance for loan losses		3,885		57,021		179		61,085		3,256		55,645		13		58,914
Allowance for unfunded commitments		-		2,440		-		2,440		-		2,312		-		2,312
Total allowance for credit losses	$	3,885	$	59,461	$	179	$	63,525	$	3,256	$	57,957	$	13	$	61,226

	Loans Outstanding
	March 31, 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	$	24,051	$	1,853,032	$	20,743	$	1,897,826	$	21,823	$	1,876,411	$	25,759	$	1,923,993
Income producing commercial real estate		16,320		1,621,347		39,633		1,677,300		16,483		1,533,851		44,840		1,595,174
Commercial & industrial		2,536		1,139,101		791		1,142,428		2,654		1,126,894		1,442		1,130,990
Commercial construction		3,910		676,727		9,893		690,530		3,813		699,266		8,857		711,936
Equipment financing		-		408,935		13,597		422,532		-		-		-		-
Residential mortgage		14,921		964,665		12,525		992,111		14,193		946,210		13,141		973,544
Home equity lines of credit		341		709,853		2,081		712,275		101		728,235		2,891		731,227
Residential construction		1,571		187,642		449		189,662		1,577		180,978		464		183,019
Consumer direct		268		142,090		1,379		143,737		270		126,114		1,120		127,504
Indirect auto		1,355		314,493		-		315,848		1,396		356,789		-		358,185
Total loans	$	65,273	$	8,017,885	$	101,091	$	8,184,249	$	62,310	$	7,574,748	$	98,514	$	7,735,572

Impaired Loans

Management considers all non-PCI relationships that are on nonaccrual with a balance of $500,000 or greater and all troubled debt restructurings (“TDRs”) to be impaired. 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. All TDRs are considered impaired regardless of accrual status. 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. 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 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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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, evaluating the loan for impairment, and, if necessary, 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.

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

	March 31, 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	$	6,804	$	5,880	$	-	$	1,238	$	1,176	$	-
Income producing commercial real estate		7,632		7,610		-		2,177		2,165		-
Commercial & industrial		248		134		-		1,758		1,471		-
Commercial construction		130		130		-		134		134		-
Equipment financing		-		-		-		-		-		-
Total commercial		14,814		13,754		-		5,307		4,946		-
Residential mortgage		3,587		3,404		-		2,661		2,566		-
Home equity lines of credit		550		234		-		393		101		-
Residential construction		455		395		-		405		330		-
Consumer direct		23		23		-		29		29		-
Indirect auto		62		61		-		1,396		1,396		-
Total with no related allowance recorded		19,491		17,871		-		10,191		9,368		-

With an allowance recorded:
Owner occupied commercial real estate		18,912		18,171		1,686		21,262		20,647		1,255
Income producing commercial real estate		8,979		8,710		631		14,419		14,318		562
Commercial & industrial		2,869		2,402		61		1,287		1,183		27
Commercial construction		4,028		3,780		151		3,917		3,679		156
Equipment financing		-		-		-		-		-		-
Total commercial		34,788		33,063		2,529		40,885		39,827		2,000
Residential mortgage		11,961		11,517		1,151		12,086		11,627		1,174
Home equity lines of credit		116		107		90		-		-		-
Residential construction		1,262		1,176		73		1,325		1,247		75
Consumer direct		251		245		7		244		241		7
Indirect auto		1,295		1,294		35		-		-		-
Total with an allowance recorded		49,673		47,402		3,885		54,540		52,942		3,256
Total	$	69,164	$	65,273	$	3,885	$	64,731	$	62,310	$	3,256

As of March 31, 2018 and December 31, 2017, $3.89 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 $82,000 and $75,000 as of March 31, 2018 and December 31, 2017, respectively, to customers with outstanding loans that are classified as TDRs.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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.

Loans modified under the terms of a TDR during the three months ended March 31, 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		Post- Modification Outstanding Recorded Investment by Type of Modification							TDRs Modified Within the Previous Twelve Months That Have Subsequently Defaulted during the Three Months Ended March 31,
	Number of Contracts		Recorded Investment		Rate Reduction		Structure		Other	Total		Number of Contracts		Recorded Investment
Three Months Ended March 31, 2018

Owner occupied commercial real estate		3	$	994	$	-	$	978	$ -	$	978		2	$	1,586
Income producing commercial real estate		-		-		-		-	-		-		-		-
Commercial & industrial		1		81		-		5	-		5		-		-
Commercial construction		-		-		-		-	-		-		-		-
Equipment financing		-		-		-		-	-		-		-		-
Total commercial		4		1,075		-		983	-		983		2		1,586
Residential mortgage		2		340		-		340	-		340		-		-
Home equity lines of credit		-		-		-		-	-		-		-		-
Residential construction		-		-		-		-	-		-		-		-
Consumer direct		-		-		-		-	-		-		-		-
Indirect auto		-		-		-		-	-		-		-		-
Total loans	$	6	$	1,415	$	-	$	1,323	$ -	$	1,323		2	$	1,586

Three Months Ended March 31, 2017

Owner occupied commercial real estate		-	$	-	$	-	$	-	$ -	$	-		-	$	-
Income producing commercial real estate		-		-		-		-	-		-		-		-
Commercial & industrial		1		25		-		25	-		25		-		-
Commercial construction		-		-		-		-	-		-		-		-
Total commercial		1		25		-		25	-		25		-		-
Residential mortgage		7		353		-		353	-		353		2		655
Home equity lines of credit		-		-		-		-	-		-		-		-
Residential construction		1		40		40		-	-		40		-		-
Consumer direct		1		6		-		6	-		6		-		-
Indirect auto		-		-		-		-	-		-		-		-
Total loans		10	$	424	$	40	$	384	$ -	$	424		2	$	655

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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 March 31,	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	$	24,658	$	245	$	280	$	29,858	$	345	$	336
Income producing commercial real estate		16,433		210		235		28,410		351		345
Commercial & industrial		2,596		40		42		1,939		27		28
Commercial construction		3,936		51		52		5,001		53		53
Equipment financing		-		-		-		-		-		-
Total commercial		47,623		546		609		65,208		776		762
Residential mortgage		14,993		149		150		13,608		138		143
Home equity lines of credit		344		4		4		63		1		1
Residential construction		1,590		24		24		1,619		23		23
Consumer direct		291		5		5		287		5		6
Indirect auto		1,378		18		18		1,122		14		14
Total	$	66,219	$	746	$	810	$	81,907	$	957	$	949

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 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 March 31, 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 $342,000 and $277,000 for the three months ended March 31, 2018 and 2017, respectively.

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

	March 31,		December 31,
	2018		2017

Owner occupied commercial real estate	$	6,757	$	4,923
Income producing commercial real estate		3,942		3,208
Commercial & industrial		1,917		2,097
Commercial construction		574		758
Equipment financing		428		-
Total commercial		13,618		10,986
Residential mortgage		8,724		8,776
Home equity lines of credit		2,149		2,024
Residential construction		378		192
Consumer direct		146		43
Indirect auto		1,225		1,637
Total	$	26,240	$	23,658

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 March 31, 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								Loans Not
As of March 31, 2018	30 - 59 Days		60 - 89 Days		> 90 Days		Total		Past Due		PCI Loans		Total

Owner occupied commercial real estate	$	2,515	$	3,034	$	2,295	$	7,844	$	1,869,239	$	20,743	$	1,897,826
Income producing commercial real estate		518		732		2,865		4,115		1,633,552		39,633		1,677,300
Commercial & industrial		1,591		762		165		2,518		1,139,119		791		1,142,428
Commercial construction		643		261		316		1,220		679,417		9,893		690,530
Equipment financing		1,227		171		426		1,824		407,111		13,597		422,532
Total commercial		6,494		4,960		6,067		17,521		5,728,438		84,657		5,830,616
Residential mortgage		4,040		2,325		3,373		9,738		969,848		12,525		992,111
Home equity lines of credit		2,405		236		759		3,400		706,794		2,081		712,275
Residential construction		1,031		75		246		1,352		187,861		449		189,662
Consumer direct		724		92		85		901		141,457		1,379		143,737
Indirect auto		425		278		1,004		1,707		314,141		-		315,848
Total loans		15,119		7,966		11,534		34,619		8,048,539		101,091		8,184,249

	Loans Past Due								Loans Not
As of December 31, 2017	30 - 59 Days		60 - 89 Days		> 90 Days		Total		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
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.

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.

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 March 31, 2018
Owner occupied commercial real estate	$	1,807,564	$	31,628	$	37,891	$	-	$	1,877,083
Income producing commercial real estate		1,596,626		17,825		23,216		-		1,637,667
Commercial & industrial		1,108,779		20,129		12,729		-		1,141,637
Commercial construction		653,223		22,459		4,955		-		680,637
Equipment financing		408,509		-		426		-		408,935
Total commercial		5,574,701		92,041		79,217		-		5,745,959
Residential mortgage		959,613		37		19,936		-		979,586
Home equity lines of credit		703,199		-		6,995		-		710,194
Residential construction		187,382		-		1,831		-		189,213
Consumer direct		140,783		595		980		-		142,358
Indirect auto		313,124		-		2,724		-		315,848
Total loans, excluding PCI loans	$	7,878,802	$	92,673	$	111,683	$	-	$	8,083,158

Owner occupied commercial real estate	$	4,816	$	4,970	$	10,957	$	-	$	20,743
Income producing commercial real estate		13,695		20,265		5,673		-		39,633
Commercial & industrial		330		270		191		-		791
Commercial construction		4,166		1,722		4,005		-		9,893
Equipment financing		13,183		-		414		-		13,597
Total commercial		36,190		27,227		21,240		-		84,657
Residential mortgage		8,555		395		3,575		-		12,525
Home equity lines of credit		1,436		-		645		-		2,081
Residential construction		396		-		53		-		449
Consumer direct		891		193		295		-		1,379
Indirect auto		-		-		-		-		-
Total PCI loans	$	47,468	$	27,815	$	25,808	$	-	$	101,091

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
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
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

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	For the three months ended March 31,						Affected Line Item in the Statement
Comprehensive Income Components	2018			2017			Where Net Income is Presented

Realized losses on available-for-sale securities:
	$	(940	)	$	(2	)	Securities losses, net
		221			1		Income tax benefit
	$	(719	)	$	(1	)	Net of tax

Amortization of losses included in net income on available-for-sale securities transferred to held to maturity:
	$	(222	)	$	(310	)	Investment securities interest revenue
		54			116		Income tax benefit
	$	(168	)	$	(194	)	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	$	(147	)	$	(149	)	Money market deposit interest expense
Amortization of losses on de-designated positions		-			(264	)	Federal Home Loan Bank advances interest expense
		(147	)		(413	)	Total before tax
		38			161		Income tax benefit
	$	(109	)	$	(252	)	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	)	Salaries and employee benefits expense
Actuarial losses		(60	)		(60	)	Salaries and employee benefits expense
		(227	)		(200	)	Total before tax
		58			79		Income tax benefit
	$	(169	)	$	(121	)	Net of tax
Total reclassifications for the period	$	(1,165	)	$	(3,968	)	Net of tax

Amounts shown above in parentheses reduce earnings.

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
	March 31,
	2018			2017

Net income	$	37,658		$	23,524
Dividends and undistributed earnings allocated to unvested shares		(277	)		-
Net income available to common shareholders	$	37,381		$	23,524

Weighted average shares outstanding:
Basic		79,205			71,700
Effect of dilutive securities
Stock options		10			8
Diluted		79,215			71,708

Net income per common share:
Basic	$	.47		$	.33
Diluted	$	.47		$	.33

At March 31, 2018, 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; 32,464 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $31.50.

At March 31, 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; 64,942 shares of common stock issuable upon exercise of stock options granted to employees with a weighted average exercise price of $28.34; and 575,835 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 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.

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).

Interest Rate Products	Balance Sheet Location	March 31, 2018		December 31, 2017

Fair value hedge of corporate bonds	Derivative assets	$	-	$	336
		$	-	$	336

Fair value hedge of brokered CD's	Derivative liabilities	$	2,377	$	2,053
		$	2,377	$	2,053

Derivatives not designated as hedging instruments under ASC 815

		Fair Value
Interest Rate Products	Balance Sheet Location	March 31, 2018		December 31, 2017

Customer derivative positions	Derivative assets	$	993	$	2,659
Dealer offsets to customer derivative positions	Derivative assets		12,332		6,867
Mortgage banking - loan commitment	Derivative assets		1,733		1,150
Mortgage banking - forward sales commitment	Derivative assets		-		13
Bifurcated embedded derivatives	Derivative assets		12,144		11,057
Interest rate caps	Derivative assets		-		639
		$	27,202	$	22,385

Customer derivative positions	Derivative liabilities	$	14,942	$	7,032
Dealer offsets to customer derivative positions	Derivative liabilities		273		1,551
Risk participations	Derivative liabilities		23		20
Mortgage banking - forward sales commitment	Derivative liabilities		233		49
Dealer offsets to bifurcated embedded derivatives	Derivative liabilities		14,935		14,279
De-designated hedges	Derivative liabilities		453		392
		$	30,859	$	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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Cash Flow Hedges of Interest Rate Risk

At March 31, 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 on the de-designated swaps 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 $454,000 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 March 31,

Interest rate swaps	Interest expense	$	(147	)	$	(413	)

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 March 31, 2018, United had four interest rate swaps with a notional amount of $40.7 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 was 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 months ended March 31, 2018 and 2017, United recognized net losses of $79,000 and net losses of $125,000, respectively, related to ineffectiveness in the fair value hedging relationships. United also recognized a net increase in interest expense of $14,000 and a net reduction in interest expense of $32,000, respectively, for the three months ended March 31, 2018 and 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 of $17,000 and a reduction of interest revenue on securities of $93,000 during the three months ended March 31, 2018 and 2017, respectively, related to fair value hedges of corporate bonds.

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	Amount of Gain (Loss)						Amount of Gain (Loss)
	(Loss) Recognized	Recognized in Income						Recognized in Income
	in Income on	on Derivative						on Hedged Item
	Derivative	2018			2017			2018		2017

Three Months Ended March 31,
Fair value hedges of brokered CDs	Interest expense	$	(693	)	$	(274	)	$	545	$	189
Fair value hedges of corporate bonds	Interest revenue		(336	)		106			405		(146	)
		$	(1,029	)	$	(168	)	$	950	$	43

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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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	Amount of Gain (Loss)
	(Loss) Recognized	Recognized in Income
	in Income on	on Derivative
	Derivative	2018			2017

Three Months Ended March 31,
Customer derivatives and dealer offsets	Other fee revenue	$	772		$	475
Bifurcated embedded derivatives and dealer offsets	Other fee revenue		370			63
Interest rate caps	Other fee revenue		276			-
De-designated hedges	Other fee revenue		(67	)		-
Mortgage banking derivatives	Mortgage loan revenue		1,264			124
Risk participations	Other fee revenue		(2	)		4
		$	2,613		$	666

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 March 31, 2018, collateral totaling $18.5 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 March 31, 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 March 31, 2018, 1.93 million additional awards remained available for grant under the plan.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinisic Value ($000)

Outstanding at December 31, 2017		60,287		$	24.12
Exercised		(7,000	)		12.31
Outstanding at March 31, 2018		53,287			25.67		2.7	$	318

Exercisable at March 31, 2018		50,787			26.12		2.5		281

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 three months ended March 31, 2018 and 2017.

United recognized $6,000 and $7,000 in compensation expense related to stock options during each of the three months ended March 31, 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.

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

Restricted Stock Unit Awards	Shares			Weighted- Average Grant- Date Fair Value		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinisic Value ($000)

Outstanding at December 31, 2017		663,817		$	22.40
Granted		7,507			28.94
Vested		(115,899	)		18.34			$	3,713
Cancelled		(3,170	)		21.45
Outstanding at March 31, 2018		552,255			23.34		2.8		17,479

Compensation expense for restricted stock units is based on the fair value of restricted stock unit awards at the time of grant, which is equal to the 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 three months ended March 31, 2018 and 2017, compensation expense of $1.07 million and $1.26 million, respectively, was recognized related to restricted stock unit awards. In addition, for the three months ended March 31, 2018 and 2017, $68,000 and $52,000, 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 $296,000 and $514,000 was included in the determination of income tax expense for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, there was $10.1 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 2.8 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 three months ended March 31, 2018 and 2017, 1,411 shares and 904 shares, respectively, were issued through the DRIP.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 three months of 2018 and 2017, United issued 3,793 shares and 3,335 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 March 31, 2018 and December 31, 2017, 612,831 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 three months of 2018 and 2017, United did not repurchase any shares under the program. As of March 31, 2018, $36.3 million of United’s outstanding common stock may be repurchased under the program.

Note 12 – Income Taxes

The income tax provision for the three months ended March 31, 2018 and 2017 was $10.7 million and $18.5 million, respectively, which represents an effective tax rate of 22.2% and 44.0%, 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 March 31, 2018 and December 31, 2017, United maintained a valuation allowance on its net deferred tax asset of $4.57 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.

United evaluated the need for a valuation allowance at March 31, 2018. Based on the assessment of all the positive and negative evidence, management concluded that it is more likely than not that nearly all of its net deferred tax asset will be realized based upon future taxable income. The remaining valuation allowance of $4.57 million is related to specific state income tax credits that have short carryforward periods and are expected to expire unused.

The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management's conclusion at March 31, 2018 that it was more likely than not that the net deferred tax asset of $86.5 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. Such an increase to the net deferred tax asset valuation allowance could have a material adverse effect on United’s financial condition and results of operations.

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 March 31, 2018 and December 31, 2017, unrecognized income tax benefits totaled $3.27 million and $3.16 million, respectively.

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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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. United’s 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).

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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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, as of March 31, 2017, 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.

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).

March 31, 2018	Level 1		Level 2		Level 3		Total
Assets:
Securities available for sale:
U.S. Treasuries	$	119,586	$	-	$	-	$	119,586
U.S. Agencies		-		25,901		-		25,901
State and political subdivisions		-		201,024		-		201,024