ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes. The discussion of the components of our results of operations focuses on financial trends and events occurring between 2021 and 2022.
For additional information related to financial trends between 2021 and 2020 please see the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 25, 2022, which information under that caption is incorporated herein by this reference. Historical results of operations are not necessarily predictive of future results.
GAAP Reconciliation and Explanation
This Report contains financial information determined by methods other than in accordance with GAAP. Such non-GAAP financial information includes the following measures: “tangible book value per common share” and “tangible common equity to tangible assets.” In addition, management presents non-GAAP operating performance measures, which exclude merger-related and other items that are not part of our core business operations. Operating performance measures include “noninterest expenses – operating,” “net income – operating,” “diluted net income per common share – operating,” “return on common equity – operating,” “return on tangible common equity – operating,” “return on assets – operating” and “efficiency ratio – operating.” Management has developed internal processes and procedures to accurately capture and account for merger-related and other charges and those charges are reviewed with the audit committee of our Board each quarter. Management uses these non-GAAP measures because it believes they may provide useful supplemental information for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP measures may also provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as a comparison to financial results for prior periods. These non-GAAP measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP and are not necessarily comparable to other similarly titled measures used by other companies. To the extent applicable, reconciliations of these non-GAAP measures to the most directly comparable measures as reported in accordance with GAAP are included in Table 1 of MD&A.
Overview
We offer a wide array of commercial and consumer banking services and investment advisory services, which as of December 31, 2022, was comprised of a 192 branch network located throughout Georgia, South Carolina, North Carolina, Tennessee and Florida. Our equipment finance and SBA/USDA lending businesses operate throughout the United States. We have grown organically as well as through strategic acquisitions. At December 31, 2022, we had consolidated total assets of $24.0 billion and 2,843 full-time equivalent employees.
Recent Developments
Mergers and Acquisitions
In the past two years, we have continued to expand through acquisitions as follows:
•On January 1, 2022, we acquired Reliant, a bank which operated a 25-branch network primarily located in Middle Tennessee. In this acquisition, we acquired $2.96 billion of assets and assumed $2.66 billion of liabilities.
•On October 1, 2021, we acquired Aquesta, a bank which operated a network of branches primarily located in the Charlotte, North Carolina metropolitan area. We acquired total assets of $756 million, including $498 million in loans, and we assumed $658 million in deposits as of the acquisition date.
•On July 6, 2021, we acquired FinTrust, an investment advisory firm headquartered in Greenville, South Carolina, with additional locations in Anderson, South Carolina, and Athens and Macon, Georgia. The firm provides wealth and investment management services to individuals and institutions within its markets, which expanded our Wealth Management division.
Subsequent to year-end, on January 3, 2023, we completed the acquisition of Progress, a bank headquartered in Huntsville, Alabama that operates 13 offices in Alabama and the Florida Panhandle. As of December 31, 2022, Progress reported total assets of $1.76 billion, total loans of $1.48 billion and total deposits of $1.34 billion.
Also subsequent to year-end, on February 13, 2023, we announced an agreement to acquire First Miami, a bank headquartered in South Miami, Florida. First Miami operates 3 offices in the Miami metropolitan area and, as of December 31, 2022, had total assets of $1.0 billion, total loans of $594 million, and total deposits of $867 million. In addition to traditional banking products, First Miami
offers private banking, trust and wealth management services with approximately $312 million in assets under administration. The merger, which is subject to regulatory approval, the approval of First Miami shareholders, and other customary conditions, is expected to close in the third quarter of 2023.
The acquired entities’ results are included in our consolidated results beginning on the respective acquisition dates. We continue to evaluate potential transactions as opportunities arise.
LIBOR and Other Benchmark Rates
As previously disclosed, to facilitate an orderly transition from Affected Benchmarks to ARRs, we maintain an enterprise-wide program to identify, assess and monitor risks associated with the expected discontinuation or non-representativeness of Affected Benchmarks. This program includes active involvement of senior management and regular reports through our risk management structure. Our activities are focused on operational implementation of the transition to ARRs, modification of financial contracts, internal and external communications, technology and operational system modifications and program strategy and governance. A significant majority of our derivative contracts and non-derivative contracts contain fallback provisions, fall within the scope of the Final Rule, or otherwise have an expected path that should allow for transition upon cessation of the Affected Benchmarks. Proactive efforts to transition Affected Benchmark-related arrangements in advance of cessation continue where applicable.
For more information on the expected replacement of LIBOR and other benchmark rates, see Part I, Item 1A. Risk Factors – Interest Rate and Yield Curve Risks of this Report.
Results of Operations
We reported net income of $277 million and net income - operating (non-GAAP) of $293 million in 2022. Net income - operating excludes merger related and other charges, which consists mostly of acquisition and branch closure costs. The following provides highlights of our financial results for 2022:
•We recorded a provision for credit losses of $63.9 million compared to a release of provision expense of $37.6 million for 2021. Provision expense for 2022 included $18.3 million related to the establishment of the ACL for the acquired Reliant non-PCD loans and unfunded commitments. The negative provision in 2021 was mostly driven by a more favorable economic forecast as the effects of the COVID-19 pandemic subsided.
•Net interest revenue increased $203 million, which reflects, in addition to organic loan growth, the impact of rising interest rates and the acquisitions of Reliant and Aquesta. During 2022, our net interest margin increased 31 basis points to 3.38% as the Federal Reserve increased the target federal funds rate by 425 basis points over the course of 2022, which allowed our loan yields to increase while we were able to slowly raise deposit rates and remain competitive. The widening net interest margin and the resulting increase in net interest revenue more than offset the $101 million increase in the provision for credit losses noted above.
•Noninterest income for 2022 was down $20.1 million, or 13%, compared to 2021, which substantially resulted from lower mortgage fees which were down $25.9 million from 2021 reflecting the natural slowing of the mortgage origination business as a result of higher mortgage rates. The slowing of the mortgage origination business is reflected in the dollar amount of loans closed, which was $1.53 billion in 2022 compared with $2.43 billion in 2021. Our mortgage servicing business generally performs inversely to our origination business and provides a natural, albeit imperfect, hedge due to slowing prepayment of mortgages as rates rise. This resulted in less reduction in our mortgage servicing rights asset and a positive market value adjustment, which combined added $9.92 million to mortgage fees, offsetting some of the decline in the origination business. Securities losses of $3.87 million realized in 2022 also contributed to the decrease in noninterest income. Most other noninterest income sources were up from 2021 reflecting the acquisitions of FinTrust, Aquesta and Reliant as well as general business growth. See Tables 4 through 6 of MD&A for further detail on noninterest income.
•Noninterest expenses increased $73.5 million, or 19%, compared to 2021, largely driven by the addition of FinTrust, Aquesta and Reliant operating expenses. Most notably, salaries and employee benefits increased $34.8 million, primarily due to growth in our employee base from acquisitions, partially offset by higher deferred loan origination costs from high loan production. Merger-related and other charges were up $5.41 million compared to 2021, which mostly reflects Reliant merger costs, including systems conversion. See Table 7 of MD&A for further detail on noninterest expense.
Critical Accounting Estimates
Our accounting and reporting policies are in accordance with GAAP and conform to general practices within the banking industry. Application of these principles requires management to make estimates, assumptions or judgments that affect the amounts reported in
the financial statements and the accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments.
Estimates, assumptions or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon future events. Carrying assets and liabilities at fair value results in more financial statement volatility. The fair values and the information used to record the valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.
Certain policies inherently have a greater reliance on the use of estimates, assumptions or judgments and as such, have a greater possibility of producing results that could be materially different than originally reported. We have identified the determination of our ACL and fair value measurements to be the accounting areas that require the most subjective or complex judgments, estimates and assumptions, and where changes in those judgments, estimates and assumptions (based on new or additional information, changes in the economic climate and/or market interest rates, etc.) could have a significant effect on our financial statements. Therefore, we consider these policies, discussed below, to be critical accounting estimates and discuss them directly with the Audit Committee of our Board.
Our most significant accounting policies are presented in Note 1 to the accompanying consolidated financial statements. These policies, along with the disclosures presented in the other notes to the consolidated financial statements and in this MD&A, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.
Allowance for Credit Losses
The ACL represents management’s current estimate of credit losses for the remaining estimated life of financial instruments, with particular applicability on our balance sheet to loans and unfunded loan commitments. Estimating the amount of the ACL requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable and supportable forecasts, and the value of collateral on collateral-dependent loans. The loan portfolio also represents the largest asset type on our consolidated balance sheet. Loan losses are charged against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.
There are many factors affecting the ACL; some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all the potential factors that could potentially result in credit losses, the process includes subjective elements and is susceptible to significant change. To the extent actual outcomes are worse than management estimates, additional provision for credit losses could be required that could adversely affect our earnings or financial position in future periods.
Additional information on the loan portfolio and ACL can be found in the sections of MD&A titled “Asset Quality and Risk Elements” and “Nonperforming Assets.” Note 1 to the consolidated financial statements includes additional information on accounting policies related to the ACL.
Fair Value Measurements
At December 31, 2022, the percentage of our total assets measured at fair value on a recurring basis was 16%. See Note 15 “Fair Value Measurements” in the consolidated financial statements herein for additional disclosures regarding the fair value of our assets and liabilities, including a description of the fair value hierarchy.
Fair value is defined by GAAP “as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.” GAAP further defines an “orderly transaction” as “a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets. It is not a forced transaction (for example, a forced liquidation or distress sale).”
The fair values for AFS and HTM securities are generally based upon quoted market prices or observable market prices for similar instruments. Management utilizes a third-party pricing service to assist with determining the fair value of our securities portfolio. The pricing service uses observable inputs when available including benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers. These values take into account recent market activity as well as other market
observable data such as interest rate, spread and prepayment information. When market observable data is not available, which generally occurs due to the lack of liquidity for certain securities, the valuation of the security is subjective and may involve substantial judgment by management.
We have elected the fair value option for the majority of our portfolio of 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, and as such is categorized as level 2.
We use derivatives primarily to manage our interest rate risk or to help our customers manage their interest rate risk. The fair values of derivative financial instruments are determined based on quoted market prices, dealer quotes and internal pricing models that are primarily sensitive to market observable data. However, we do evaluate the level of these observable inputs and there are some instances where we have determined that the inputs are not directly observable.
We recognize a servicing rights asset upon the sale of residential mortgage loans and SBA/USDA loans sold with servicing retained. Servicing right assets are carried at fair value. Given the nature of these SBA/USDA and residential mortgage servicing assets, the key valuation inputs are unobservable and we disclose them as a level 3 item.
As of December 31, 2022, we had level 3 assets, those valued using unobservable inputs, of $55.5 million. The total level 3 assets consisted of $36.6 million in residential mortgage servicing rights, $11.5 million in derivative assets, $5.19 million in servicing rights for SBA/USDA loans and $2.21 million of AFS debt securities. We also had level 3 derivative liabilities totaling $12.8 million.
From time to time, we may record assets at fair value on a nonrecurring basis, usually as a result of the write-downs of individual assets due to impairment. In particular, nonaccrual loans may be carried at the fair value of collateral if repayment is expected solely from the collateral. Although management believes its processes for determining the fair value of collateral-dependent loans are appropriate, the processes require management judgment and assumptions and the value of such assets at the time they are revalued or divested may be significantly different from management’s determination of fair value.
For business combinations, we measure and record assets acquired and liabilities assumed at fair value at the date of acquisition, including identifiable intangible assets. Note 1 to the consolidated financial statements includes additional information on accounting policies and estimates related to acquisition activities.
UNITED COMMUNITY BANKS, INC.
Table 1 Selected Financial Information
For the Years Ended December 31,
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
INCOME SUMMARY | | | | | | |
Interest revenue | | $ | 813,155 | | | $ | 578,794 | | | $ | 557,996 | |
Interest expense | | 60,798 | | | 29,760 | | | 56,237 | |
Net interest revenue | | 752,357 | | | 549,034 | | | 501,759 | |
Provision for credit losses | | 63,913 | | | (37,550) | | | 80,434 | |
Noninterest income | | 137,707 | | | 157,818 | | | 156,109 | |
Total revenue | | 826,151 | | | 744,402 | | | 577,434 | |
Noninterest expenses | | 470,149 | | | 396,639 | | | 367,989 | |
Income before income tax expense | | 356,002 | | | 347,763 | | | 209,445 | |
Income tax expense | | 78,530 | | | 77,962 | | | 45,356 | |
Net income | | 277,472 | | | 269,801 | | | 164,089 | |
Merger-related and other charges | | 19,375 | | | 13,970 | | | 7,018 | |
Income tax benefit of merger-related and other charges | | (4,246) | | | (3,174) | | | (1,340) | |
| | | | | | |
| | | | | | |
| | | | | | |
Net income - operating (1)* | | $ | 292,601 | | | $ | 280,597 | | | $ | 169,767 | |
| | | | | | |
PERFORMANCE MEASURES | | | | | | |
Per common share: | | | | | | |
Diluted net income - GAAP | | $ | 2.52 | | | $ | 2.97 | | | $ | 1.91 | |
Diluted net income - operating (1)* | | 2.66 | | | 3.09 | | | 1.98 | |
Common stock cash dividends declared | | 0.86 | | | 0.78 | | | 0.72 | |
Book value | | 24.38 | | | 23.63 | | | 21.90 | |
Tangible book value (3)* | | 17.13 | | | 18.42 | | | 17.56 | |
Key Performance Ratios: | | | | | | |
Return on common equity - GAAP (2) | | 9.54 | % | | 13.14 | % | | 9.25 | % |
Return on common equity - operating (1)(2)* | | 10.07 | | | 13.68 | | | 9.58 | |
Return on tangible common equity - operating (1)(2)(3)* | | 14.04 | | | 17.33 | | | 12.24 | |
Return on assets - GAAP | | 1.13 | | | 1.37 | | | 1.04 | |
Return on assets - operating (1)* | | 1.19 | | | 1.42 | | | 1.07 | |
| | | | | | |
| | | | | | |
Net interest margin (FTE) | | 3.38 | | | 3.07 | | | 3.55 | |
Efficiency ratio - GAAP | | 52.31 | | | 55.80 | | | 55.71 | |
Efficiency ratio - operating (1)* | | 50.16 | | | 53.83 | | | 54.64 | |
Equity to total assets | | 11.25 | | | 10.61 | | | 11.29 | |
Tangible common equity to tangible assets (3)* | | 7.88 | | | 8.09 | | | 8.81 | |
| | | | | | |
| | | | | | |
| | | | | | |
ASSET QUALITY | | | | | | |
| | | | | | |
| | | | | | |
Total NPAs | | $ | 44,281 | | | $ | 32,855 | | | $ | 62,246 | |
ACL - loans | | 159,357 | | | 102,532 | | | 137,010 | |
Net charge-offs | | 9,654 | | | 38 | | | 18,316 | |
ACL - loans to loans | | 1.04 | % | | 0.87 | % | | 1.20 | % |
Net charge-offs to average loans | | 0.07 | | | — | | | 0.17 | |
| | | | | | |
NPAs to total assets | | 0.18 | | | 0.16 | | | 0.35 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
AT PERIOD END ($ in millions) | | | | | | |
Loans | | $ | 15,335 | | | $ | 11,760 | | | $ | 11,371 | |
Investment securities | | 6,228 | | | 5,653 | | | 3,645 | |
Total assets | | 24,009 | | | 20,947 | | | 17,794 | |
Deposits | | 19,877 | | | 18,241 | | | 15,232 | |
Shareholders’ equity | | 2,701 | | | 2,222 | | | 2,008 | |
Common shares outstanding (thousands) | | 106,223 | | | 89,350 | | | 86,675 | |
(1) Excludes merger-related and other charges. (2) Net income less preferred stock dividends, divided by average realized common equity, which excludes AOCI. (3) Excludes effect of acquisition related intangibles and associated amortization.
* Represents a non-GAAP measure. See reconciliation of non-GAAP measures to related GAAP financial measures on the following page. For more information, see “GAAP Reconciliation and Explanation” in the MD&A section of this Report.
UNITED COMMUNITY BANKS, INC.
Table 1 (Continued) - Non-GAAP Performance Measures Reconciliation
Selected Financial Information
For the Years Ended December 31,
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | |
| | |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
Noninterest expense reconciliation | | | | | | |
Noninterest expenses (GAAP) | | $ | 470,149 | | | $ | 396,639 | | | $ | 367,989 | |
Merger-related and other charges | | (19,375) | | | (13,970) | | | (7,018) | |
Noninterest expenses - operating | | $ | 450,774 | | | $ | 382,669 | | | $ | 360,971 | |
| | | | | | |
| | | | | | |
Net income reconciliation | | | | | | |
Net income (GAAP) | | $ | 277,472 | | | $ | 269,801 | | | $ | 164,089 | |
Merger-related and other charges | | 19,375 | | | 13,970 | | | 7,018 | |
Income tax benefit of merger-related and other charges | | (4,246) | | | (3,174) | | | (1,340) | |
| | | | | | |
| | | | | | |
| | | | | | |
Net income - operating | | $ | 292,601 | | | $ | 280,597 | | | $ | 169,767 | |
| | | | | | |
| | | | | | |
Diluted income per common share reconciliation | | | | | | |
Diluted income per common share (GAAP) | | $ | 2.52 | | | $ | 2.97 | | | $ | 1.91 | |
Merger-related and other charges | | 0.14 | | | 0.12 | | | 0.07 | |
| | | | | | |
| | | | | | |
| | | | | | |
Diluted income per common share - operating | | $ | 2.66 | | | $ | 3.09 | | | $ | 1.98 | |
| | | | | | |
| | | | | | |
Book value per common share reconciliation | | | | | | |
Book value per common share (GAAP) | | $ | 24.38 | | | $ | 23.63 | | | $ | 21.90 | |
Effect of goodwill and other intangibles | | (7.25) | | | (5.21) | | | (4.34) | |
Tangible book value per common share | | $ | 17.13 | | | $ | 18.42 | | | $ | 17.56 | |
| | | | | | |
| | | | | | |
Return on tangible common equity reconciliation | | | | | | |
Return on common equity (GAAP) | | 9.54 | % | | 13.14 | % | | 9.25 | % |
Merger-related and other charges | | 0.53 | | | 0.54 | | | 0.33 | |
| | | | | | |
| | | | | | |
| | | | | | |
Return on common equity - operating | | 10.07 | | | 13.68 | | | 9.58 | |
Effect of goodwill and other intangibles | | 3.97 | | | 3.65 | | | 2.66 | |
Return on tangible common equity - operating | | 14.04 | % | | 17.33 | % | | 12.24 | % |
| | | | | | |
| | | | | | |
Return on assets reconciliation | | | | | | |
Return on assets (GAAP) | | 1.13 | % | | 1.37 | % | | 1.04 | % |
Merger-related and other charges | | 0.06 | | | 0.05 | | | 0.03 | |
| | | | | | |
| | | | | | |
| | | | | | |
Return on assets - operating | | 1.19 | % | | 1.42 | % | | 1.07 | % |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Efficiency ratio reconciliation | | | | | | |
Efficiency ratio (GAAP) | | 52.31 | % | | 55.80 | % | | 55.71 | % |
Merger-related and other charges | | (2.15) | | | (1.97) | | | (1.07) | |
Efficiency ratio - operating | | 50.16 | % | | 53.83 | % | | 54.64 | % |
| | | | | | |
Tangible common equity to tangible assets reconciliation | | | | | | |
Equity to assets (GAAP) | | 11.25 | % | | 10.61 | % | | 11.29 | % |
Effect of goodwill and other intangibles | | (2.97) | | | (2.06) | | | (1.94) | |
| | | | | | |
Effect of preferred equity | | (0.40) | | | (0.46) | | | (0.54) | |
Tangible common equity to tangible assets | | 7.88 | % | | 8.09 | % | | 8.81 | % |
| | | | | | |
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Net Interest Revenue
Net interest revenue, which is the difference between the interest earned on assets and the interest paid on deposits and borrowed funds, is the single largest component of revenue. Management seeks to optimize this revenue while balancing interest rate, credit, and liquidity risks. The banking industry uses two key ratios to measure relative profitability of net interest revenue, which are the net interest spread and the net interest margin. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest spread eliminates the effect of noninterest-earning assets as well as noninterest-bearing deposits and other noninterest-bearing funding sources and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company’s balance sheet and is defined as net interest revenue as a percentage of total average interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with noninterest-bearing deposits and shareholders’ equity.
Net interest revenue for 2022 was $752 million, compared to $549 million for 2021. The net interest spread was 3.18% and 2.96% for 2022 and 2021, respectively, while the net interest margin was 3.38% and 3.07%, respectively. The following tables indicate the relationship between interest revenue and expense and the average amounts of assets and liabilities, which provide further insight into net interest spread and net interest margin for the periods indicated. The following discussion provides additional detail on the average balances and net interest revenue for the years ended December 31, 2022 and 2021.
For 2022, we reported a $235 million, or 40%, increase in FTE interest revenue compared to 2021. The main driver of the increase was the impact of rising interest rates on our asset sensitive balance sheet resulting from the Federal Reserve’s 425 basis point increase in the target federal funds rate. We were able to control the increase in interest rates on deposits while benefiting from increases in interest rates in our interest-earning assets, leading our net interest margin to expand by 31 basis points. Growth in average loans for the year ended December 31, 2022 of $3.09 billion, or 27%, compared to 2021 also contributed to the increase in interest revenue. The acquisitions of Reliant and Aquesta contributed $2.25 billion and $320 million, respectively, to the increase in average loans. PPP loan forgiveness, which resulted in a $368 million decrease in average loans for 2022 compared to 2021, partially offset net loan growth. Loan interest revenue included PPP-related interest income and accelerated recognition of deferred fees upon loan forgiveness and purchased loan accretion, which decreased $40.3 million and $10.3 million, respectively, in 2022 compared to 2021. These decreases in loan interest revenue were more than offset by the effect of rising interest rates and increased volume.
Controlling the increase in interest expense while maintaining liquidity was a key aspect of our 2022 margin expansion. In 2020 and 2021, we experienced significant deposit growth, which allowed us to grow our investment portfolio with the surplus liquidity. Much of this deposit growth appeared to be related to the pandemic, which we believed would eventually leave the bank as conditions returned to normal. As interest rates began to rise, our interest earning assets began to reprice faster than our cost of funds leading to the widening of our net interest margin. However, later in the year, we saw deposit balances begin to leave the bank as customers could achieve better returns in other investments. To address deposit balance attrition, we raised deposit pricing, which contributed to an increase in deposit interest expense of $27.3 million in 2022 compared to 2021, and we relied more heavily on wholesale funding sources to meet our short-term funding needs. These factors caused our cost of funds to increase and slowed the margin expansion. The average balance of interest-bearing deposits increased $2.35 billion for the year ended December 31, 2022 compared to 2021, mostly as a result of the acquisitions of Reliant and Aquesta.
As noted above, we began using wholesale funding sources to meet our short-term liquidity needs. The daily average balance of FHLB advances and short-term borrowings for 2022 were $34.0 million and $13.0 million, respectively. Our use of wholesale funding increased toward the end of 2022, with the year-end balances of FHLB advances and short-term borrowings rising to $550 million and $159 million, respectively. This shift in funding mix toward more expensive wholesale sources contributed to the 19 basis point increase in the average rate on interest-bearing liabilities from 2021 to 2022.
Table 2 - Average Consolidated Balance Sheets and Net Interest Margin Analysis
For the Years Ended December 31,
(in thousands, FTE)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Average Balance | | Interest | | Avg. Rate | | Average Balance | | Interest | | Avg. Rate | | Average Balance | | Interest | | Avg. Rate |
Assets: | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | |
Loans, net of unearned income (FTE) (1)(2) | $ | 14,571,746 | | | $ | 673,491 | | | 4.62 | % | | $ | 11,485,876 | | | $ | 504,015 | | | 4.39 | % | | $ | 10,466,653 | | | $ | 492,223 | | | 4.70 | % |
Taxable securities (3) | 6,284,603 | | | 121,501 | | | 1.93 | | | 4,446,712 | | | 61,994 | | | 1.39 | | | 2,532,750 | | | 55,031 | | | 2.17 | |
Tax-exempt securities (FTE) (1)(3) | 496,327 | | | 13,865 | | | 2.79 | | | 382,915 | | | 12,059 | | | 3.15 | | | 219,668 | | | 9,458 | | | 4.31 | |
Federal funds sold and other interest-earning assets | 1,065,057 | | | 9,104 | | | 0.85 | | | 1,680,151 | | | 4,784 | | | 0.28 | | | 1,007,059 | | | 4,753 | | | 0.47 | |
Total interest-earning assets (FTE) | 22,417,733 | | | 817,961 | | | 3.65 | | | 17,995,654 | | | 582,852 | | | 3.24 | | | 14,226,130 | | | 561,465 | | | 3.95 | |
Noninterest-earning assets: | | | | | | | | | | | | | | | | | |
Allowance for credit losses | (135,144) | | | | | | | (121,586) | | | | | | | (106,812) | | | | | |
Cash and due from banks | 204,852 | | | | | | | 139,728 | | | | | | | 136,702 | | | | | |
Premises and equipment | 288,044 | | | | | | | 230,276 | | | | | | | 217,751 | | | | | |
Other assets (3) | 1,275,263 | | | | | | | 1,013,956 | | | | | | | 993,584 | | | | | |
Total assets | $ | 24,050,748 | | | | | | | $ | 19,258,028 | | | | | | | $ | 15,467,355 | | | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | |
NOW and interest-bearing demand | $ | 4,486,263 | | | 17,312 | | | 0.39 | | | $ | 3,610,601 | | | 5,468 | | | 0.15 | | | $ | 2,759,383 | | | 7,735 | | | 0.28 | |
Money market | 4,900,667 | | | 18,274 | | | 0.37 | | | 3,972,358 | | | 5,380 | | | 0.14 | | | 3,023,928 | | | 13,165 | | | 0.44 | |
Savings deposits | 1,482,599 | | | 693 | | | 0.05 | | | 1,095,071 | | | 217 | | | 0.02 | | | 821,344 | | | 169 | | | 0.02 | |
Time deposits | 1,693,307 | | | 5,152 | | | 0.30 | | | 1,529,072 | | | 3,663 | | | 0.24 | | | 1,832,319 | | | 20,146 | | | 1.10 | |
Brokered deposits | 61,636 | | | 668 | | | 1.08 | | | 67,230 | | | 117 | | | 0.17 | | | 97,788 | | | 557 | | | 0.57 | |
Total interest-bearing deposits | 12,624,472 | | | 42,099 | | | 0.33 | | | 10,274,332 | | | 14,845 | | | 0.14 | | | 8,534,762 | | | 41,772 | | | 0.49 | |
Federal funds purchased and other borrowings | 13,004 | | | 507 | | | 3.90 | | | 44 | | | — | | | — | | | 1,220 | | | 3 | | | 0.25 | |
FHLB advances | 34,027 | | | 1,424 | | | 4.18 | | | 1,195 | | | 3 | | | 0.25 | | | 749 | | | 28 | | | 3.74 | |
Long-term debt | 323,102 | | | 16,768 | | | 5.19 | | | 276,492 | | | 14,912 | | | 5.39 | | | 274,069 | | | 14,434 | | | 5.27 | |
Total borrowed funds | 370,133 | | | 18,699 | | | 5.05 | | | 277,731 | | | 14,915 | | | 5.37 | | | 276,038 | | | 14,465 | | | 5.24 | |
Total interest-bearing liabilities | 12,994,605 | | | 60,798 | | | 0.47 | | | 10,552,063 | | | 29,760 | | | 0.28 | | | 8,810,800 | | | 56,237 | | | 0.64 | |
Noninterest-bearing liabilities: | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | 7,967,321 | | | | | | | 6,276,094 | | | | | | | 4,600,152 | | | | | |
Other liabilities | 377,221 | | | | | | | 322,566 | | | | | | | 235,120 | | | | | |
Total liabilities | 21,339,147 | | | | | | | 17,150,723 | | | | | | | 13,646,072 | | | | | |
Shareholders’ equity | 2,711,601 | | | | | | | 2,107,305 | | | | | | | 1,821,283 | | | | | |
Total liabilities and shareholders’ equity | $ | 24,050,748 | | | | | | | $ | 19,258,028 | | | | | | | $ | 15,467,355 | | | | | |
Net interest revenue (FTE) | | | $ | 757,163 | | | | | | | $ | 553,092 | | | | | | | $ | 505,228 | | | |
Net interest-rate spread (FTE) | | | | | 3.18 | % | | | | | | 2.96 | % | | | | | | 3.31 | % |
Net interest margin (FTE) (4) | | | | | 3.38 | % | | | | | | 3.07 | % | | | | | | 3.55 | % |
(1)Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used for each year was 26% reflecting the statutory federal rate and the federal tax adjusted state tax rate.
(2)Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued.
(3)Unrealized gains and losses, including those related to the transfer from AFS to HTM, have been reclassified to other assets. Pretax unrealized losses of $277 million in 2022 and pretax unrealized gains of $28.7 million and $67.3 million in 2021 and 2020, respectively, are included in other assets for purposes of this presentation.
(4)Net interest margin is taxable equivalent net interest revenue divided by average interest-earning assets.
The following table shows the relative effect on net interest revenue resulting from changes in the average outstanding balances (volume) of interest-earning assets and interest-bearing liabilities and the rates we earned and paid on such assets and liabilities.
Table 3 - Change in Interest Revenue and Interest Expense
(in thousands, FTE)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 Compared to 2021 | | 2021 Compared to 2020 |
| Increase (decrease) due to changes in | | Total | | Increase (decrease) due to changes in | | Total |
| Volume | | Rate | | Change | | Volume | | Rate | | Change |
Interest-earning assets: | | | | | | | | | | | |
Loans | $ | 141,433 | | | $ | 28,043 | | | $ | 169,476 | | | $ | 46,031 | | | $ | (34,239) | | | $ | 11,792 | |
Taxable securities | 30,742 | | | 28,765 | | | 59,507 | | | 31,477 | | | (24,514) | | | 6,963 | |
Tax-exempt securities | 3,280 | | | (1,474) | | | 1,806 | | | 5,642 | | | (3,041) | | | 2,601 | |
Federal funds sold and other interest-earning assets | (2,293) | | | 6,613 | | | 4,320 | | | 2,386 | | | (2,355) | | | 31 | |
Total interest-earning assets | 173,162 | | | 61,947 | | | 235,109 | | | 85,536 | | | (64,149) | | | 21,387 | |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | |
NOW and interest-bearing demand | 1,604 | | | 10,240 | | | 11,844 | | | 1,946 | | | (4,213) | | | (2,267) | |
Money market | 1,517 | | | 11,377 | | | 12,894 | | | 3,239 | | | (11,024) | | | (7,785) | |
Savings deposits | 98 | | | 378 | | | 476 | | | 54 | | | (6) | | | 48 | |
Time deposits | 423 | | | 1,066 | | | 1,489 | | | (2,879) | | | (13,604) | | | (16,483) | |
Brokered deposits | (11) | | | 562 | | | 551 | | | (137) | | | (303) | | | (440) | |
Total interest-bearing deposits | 3,631 | | | 23,623 | | | 27,254 | | | 2,223 | | | (29,150) | | | (26,927) | |
Federal funds purchased and other short-term borrowings | 507 | | | — | | | 507 | | | (1) | | | (2) | | | (3) | |
FHLB advances | 905 | | | 516 | | | 1,421 | | | 11 | | | (36) | | | (25) | |
Long-term debt | 2,437 | | | (581) | | | 1,856 | | | 128 | | | 350 | | | 478 | |
Total borrowed funds | 3,849 | | | (65) | | | 3,784 | | | 138 | | | 312 | | | 450 | |
Total interest-bearing liabilities | 7,480 | | | 23,558 | | | 31,038 | | | 2,361 | | | (28,838) | | | (26,477) | |
Increase in net interest revenue | $ | 165,682 | | | $ | 38,389 | | | $ | 204,071 | | | $ | 83,175 | | | $ | (35,311) | | | $ | 47,864 | |
Any variance attributable jointly to volume and rate changes is allocated to the volume and rate variance in proportion to the relationship of the absolute dollar amount of the change in each.
Provision for Credit Losses
The ACL represents management’s estimate of life of loan credit losses in the loan portfolio and unfunded loan commitments. Management’s estimate of credit losses under CECL is determined using a model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and resulting provision for credit losses. We recorded a provision for credit losses of $63.9 million in 2022, compared to a release of provision expense of $37.6 million in 2021. The amount of provision recorded in each period was the amount required such that the total ACL reflected the appropriate balance as determined by management reflecting expected life of loan losses.
The provision expense recorded during 2022 was primarily a result of a more negative economic forecast as of December 31, 2022 compared to that of the prior year, combined with higher net charge-offs recognized during the period. The 2022 provision expense included the initial provision for credit losses on Reliant’s non-PCD loans and unfunded commitments of $15.2 million and $3.12 million, respectively.
The negative provision expense for 2021 was primarily a result of an improved economic forecast combined with low net charge-offs recognized during the period. The negative provision was partially offset by provision expense for the initial ACL recognized on Aquesta’s non-PCD loans and unfunded commitments of $2.98 million and $287,000, respectively, during the fourth quarter of 2021.
Additional discussion on credit quality and the ACL is included in the “Asset Quality and Risk Elements” and “Critical Accounting Estimates” sections of this Report, as well as Note 1 to the consolidated financial statements.
Noninterest Income
The following table presents the components of noninterest income for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
Table 4 - Noninterest Income | | | | | | | |
For the Years Ended December 31, | | | | | | | |
(in thousands) | | | | | | | Change |
| 2022 | | 2021 | | 2020 | | 2022-2021 |
Service charge and fees: | | | | | | | |
Overdraft fees | $ | 10,822 | | | $ | 10,137 | | | $ | 10,800 | | | 7 | % |
ATM and debit card interchange fees | 16,132 | | | 13,737 | | | 13,299 | | | 17 | |
Other service charges and fees | 11,209 | | | 9,994 | | | 8,302 | | | 12 | |
Total service charges and fees | 38,163 | | | 33,868 | | | 32,401 | | | 13 | |
Mortgage loan gains and related fees | 32,524 | | | 58,446 | | | 76,087 | | | (44) | |
Wealth management fees | 23,594 | | | 18,998 | | | 9,240 | | | 24 | |
Gains from sales of other loans, net | 10,730 | | | 11,267 | | | 5,420 | | | (5) | |
Other lending and loan servicing fees | 10,005 | | | 9,427 | | | 8,028 | | | 6 | |
Securities (losses) gains, net | (3,872) | | | 83 | | | 748 | | | |
Other noninterest income: | | | | | | | |
Customer derivatives | 2,180 | | | 3,198 | | | 6,392 | | | (32) | |
Other investment gains | 2,023 | | | 4,886 | | | 735 | | | (59) | |
BOLI | 6,603 | | | 3,552 | | | 5,080 | | | 86 | |
Treasury management income | 3,758 | | | 2,910 | | | 2,138 | | | 29 | |
Other | 11,999 | | | 11,183 | | | 9,840 | | | 7 | |
Total other noninterest income | 26,563 | | | 25,729 | | | 24,185 | | | 3 | |
Total noninterest income | $ | 137,707 | | | $ | 157,818 | | | $ | 156,109 | | | (13) | |
During 2022, total service charges and fees increased compared to 2021 primarily due to the addition of Reliant and Aquesta customers for the full year of 2022 in addition to increases in organic transaction volume. Growth in overdraft fees was partially moderated by the impact of updates to our consumer overdraft policy implemented in the fourth quarter of 2021. The policy updates included the addition of a fee forgiveness feature, an increase to the overdraft threshold and a lower daily fee item limit.
Mortgage loan gains and related fees consist primarily of fees earned on mortgage originations, gains on the sale of mortgages in the secondary market, mortgage derivative hedging gains and losses and fair value adjustments to our mortgage loans held for sale and our mortgage servicing asset. The change in mortgage income is strongly tied to the interest rate environment and industry conditions. We recognize the majority of income on mortgages when customers enter into mortgage rate lock commitments, making our mortgage rate lock volume a significant driver of mortgage gains in any given period.
The decrease in mortgage loan gains and related fees was primarily a result of tapering mortgage refinance and mortgage rate lock demand compared to 2021, as reflected in the following table. In addition, we held more of our mortgage production in portfolio in comparison to 2021, which contributed to the decrease in volume of loans sold. During 2022, we recorded $6.35 million in positive fair value adjustments, including decay, to the mortgage servicing rights asset, which partially offset the decrease in mortgage loan gains. In comparison, we recorded a negative fair value adjustment, including decay, to the mortgage servicing rights asset of $3.57 million during 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | |
Table 5 - Selected Mortgage Metrics | | | | | | | | |
For the Years Ended December 31, | | | | | | | | |
(dollars in thousands) | | | | | | | | | |
| | 2022 | | 2021 | | | | Change | |
| Mortgage rate locks | $ | 2,174,664 | | | $ | 3,120,137 | | | | | (30) | % | |
| # of mortgage rate locks | 5,562 | | | 8,956 | | | | | (38) | | |
| | | | | | | | | |
| Mortgage loans sold | $ | 528,231 | | | $ | 1,347,105 | | | | | (61) | | |
| # of mortgage loans sold | 2,086 | | 5,535 | | | | (62) | | |
| | | | | | | | | |
| Mortgage loans originated | | | | | | | | |
| Purchases | $ | 1,193,713 | | | $ | 1,386,046 | | | | | (14) | | |
| Refinances | 336,649 | | | 1,039,192 | | | | | (68) | | |
| Total | $ | 1,530,362 | | | $ | 2,425,238 | | | | | (37) | | |
| | | | | | | | | |
| # of mortgage loans originated | 3,921 | | | 7,169 | | | | | (45) | | |
Our SBA/USDA lending strategy includes selling a portion of the loan production each quarter. The amount of loans sold depends on several variables including the current lending environment and balance sheet management activities. From time to time, we also sell certain equipment financing receivables based on market conditions. During 2022, we sold a higher volume of SBA and equipment financing receivables, although the gain on sale spread was lower than the prior year. The following table presents loans sold and corresponding gains recognized on SBA/USDA loans and other loans sold for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 6 - Other Loan Sales | | | | | | | | |
For the Years Ended December 31, | | | | | | | | |
(in thousands) | 2022 | | 2021 | |
| | Loans Sold | | Gain | | Loans Sold | | Gain | |
| Guaranteed portion of SBA/USDA loans | $ | 104,813 | | | $ | 8,090 | | | $ | 90,903 | | | $ | 8,843 | | |
| Equipment financing receivables | 89,850 | | | 2,640 | | | 59,097 | | | 2,424 | | |
| | | | | | | | | |
| Total | $ | 194,663 | | | $ | 10,730 | | | $ | 150,000 | | | $ | 11,267 | | |
The increase in wealth management fees for 2022 compared to 2021 was largely due to the inclusion of FinTrust for the full year of 2022 compared with only six months of 2021. As of December 31, 2022, we had assets under management and assets under advisement totaling $4.30 billion, compared to $4.69 billion as of December 31, 2021.
The change in other noninterest income for 2022 compared to 2021 was primarily driven by the following factors:
•Other investment performance in 2022 yielded net lower positive fair value adjustments when compared to 2021. Unrealized losses in our deferred compensation plan assets in 2022 compared to unrealized gains in 2021 were the main driver of the decrease, partially offset by increased unrealized gains on equity securities and limited partnership investments.
•Lending and loan servicing fees for 2022 increased compared to 2021, mostly due to volume-driven fee income from our equipment finance business, partially offset by negative fair value adjustments to our SBA/USDA servicing asset.
•The increase in BOLI income in 2022 compared to 2021 reflects income earned on BOLI policies acquired with Reliant as well as death benefits recognized.
•Customer derivative income for 2022 decreased compared to 2021 due to rising interest rates negatively impacting the demand for customer derivative products. This was partially offset by improvements in the CVA on customer derivatives. The CVA improved due to rising interest rates, which lowered our overall credit exposure on customer derivative positions, and credit upgrades to underlying loans associated with the positions.
Noninterest Expenses
The following table presents the components of noninterest expenses for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
Table 7 - Noninterest Expenses | | | | | | | |
For the Years Ended December 31, | | | | | | | |
(in thousands) | | | | | | | Change |
| 2022 | | 2021 | | 2020 | | 2022-2021 |
Salaries and employee benefits | $ | 276,205 | | | $ | 241,443 | | | $ | 224,060 | | | 14 | % |
Occupancy | 36,247 | | | 28,619 | | | 25,791 | | | 27 | |
Communications and equipment | 38,234 | | | 29,829 | | | 27,149 | | | 28 | |
Professional fees | 20,166 | | | 20,589 | | | 18,032 | | | (2) | |
Lending and loan servicing expense | 9,350 | | | 10,859 | | | 10,993 | | | (14) | |
Outside services - electronic banking | 12,583 | | | 9,481 | | | 7,513 | | | 33 | |
Postage, printing and supplies | 8,749 | | | 7,110 | | | 6,779 | | | 23 | |
Advertising and public relations | 8,384 | | | 5,910 | | | 15,203 | | | 42 | |
FDIC assessments and other regulatory charges | 9,894 | | | 7,398 | | | 5,982 | | | 34 | |
Amortization of intangibles | 6,826 | | | 4,045 | | | 4,168 | | | 69 | |
Other | 24,136 | | | 17,386 | | | 15,301 | | | 39 | |
Total excluding merger-related and other charges | 450,774 | | | 382,669 | | | 360,971 | | | 18 | |
Merger-related and other charges | 19,375 | | | 13,970 | | | 7,018 | | | 39 | |
Total noninterest expenses | $ | 470,149 | | | $ | 396,639 | | | $ | 367,989 | | | 19 | |
Noninterest expenses for 2022 totaled $470 million, up 19% from 2021. The addition of Reliant, FinTrust and Aquesta’s operating expenses for the full year of 2022 contributed to the increase, particularly in salaries and benefits and occupancy costs.
Salaries and employee benefits for 2022 increased $34.8 million compared to 2021. In addition to the growth in our employee base from acquisitions, the increase was also attributable to merit increases awarded during the second quarter of 2022 and a mid-year inflation-related salary adjustment for certain employees. These increases were partially offset by higher deferred loan origination costs resulting from increased loan production and lower deferred compensation plan expense driven by an unrealized loss on the investments in the plan. Full time equivalent headcount totaled 2,843 at December 31, 2022, up from 2,553 at December 31, 2021.
Occupancy costs increased 27% in 2022 compared to 2021, primarily due to acquisitions. We operated 192 branches at December 31, 2022, compared to 171 branches at December 31, 2021. Communications and equipment expense increased primarily due to incremental software contract costs. The increase in outside services - electronic banking reflects higher volume-based ATM network and internet banking costs.
Advertising and public relations expense increased compared to 2021 as a result of charitable contributions made to the United Community Bank Foundation, new marketing campaigns, promotions and sponsorships. In 2022, we made a $650,000 contribution to the United Community Bank Foundation. FDIC assessments and other regulatory charges increased compared to 2021 as a result of the increase in our average total assets and an increase in our assessment rate. We expect FDIC assessment expense to continue to increase in 2023 as result of the FDIC’s announced assessment rate increase of 2 basis points. Amortization of intangibles increased with the additional customer deposit and customer relationship intangibles recorded as a result of the acquisitions since mid-2021.
The increase in other expense in 2022 was primarily due to an increase in travel and meals expense, as well as increases in fraud losses. Merger-related and other charges for 2022 were primarily related to the acquisition of Reliant, including its system conversion during the second quarter of 2022. Merger-related and other charges for 2021 primarily consisted of merger costs related to the acquisitions of FinTrust and Aquesta.
Balance Sheet Review
Total assets at December 31, 2022 were $24.0 billion, an increase of $3.06 billion, or 15%, from December 31, 2021. Total liabilities at December 31, 2022 were $21.3 billion, an increase of $2.58 billion, or 14% from December 31, 2021. Shareholders’ equity totaled $2.70 billion and $2.22 billion at December 31, 2022 and 2021, respectively. The following discussion of the major components of our balance sheet highlights significant activity resulting in the change in our financial condition between December 31, 2021 and December 31, 2022.
Loans
Our loan portfolio is our largest category of interest-earning assets. At December 31, 2022, total loans were $15.3 billion compared to $11.8 billion at December 31, 2021, an increase of 30%. The net increase in loans was primarily attributable to organic growth and loans acquired in the Reliant transaction of $2.32 billion. The following presents the composition of our loan portfolio as of the dates indicated.
Table 8 - Loan Portfolio Composition
As of December 31, 2022
The following table sets forth the maturity distribution of our loan portfolio, including the interest rate sensitivity for loans maturing after one year. Approximately 73% of all loans were secured by real estate at year-end 2022.
Table 9 - Loan Portfolio Maturity
As of December 31, 2022
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturity | | Rate Structure for Loans Maturing Over One Year |
| One Year or Less | | 2 - 5 Years | | 6 - 15 Years | | After 15 Years | | Total | | Fixed Rate | | Floating Rate |
Owner occupied commercial real estate | $ | 161,113 | | | $ | 996,796 | | | $ | 1,405,669 | | | $ | 171,088 | | | $ | 2,734,666 | | | $ | 1,896,491 | | | $ | 677,062 | |
Income producing commercial real estate | 463,284 | | | 1,741,211 | | | 849,880 | | | 207,251 | | | 3,261,626 | | | 1,626,047 | | | 1,172,295 | |
Commercial & industrial | 550,655 | | | 1,072,736 | | | 547,379 | | | 81,552 | | | 2,252,322 | | | 701,353 | | | 1,000,314 | |
Commercial construction | 469,042 | | | 736,889 | | | 308,522 | | | 83,395 | | | 1,597,848 | | | 340,957 | | | 787,849 | |
Equipment financing | 53,053 | | | 1,047,279 | | | 273,919 | | | — | | | 1,374,251 | | | 1,321,198 | | | — | |
Total commercial | 1,697,147 | | | 5,594,911 | | | 3,385,369 | | | 543,286 | | | 11,220,713 | | | 5,886,046 | | | 3,637,520 | |
Residential mortgage | 63,217 | | | 22,527 | | | 157,094 | | | 2,112,223 | | | 2,355,061 | | | 876,227 | | | 1,415,617 | |
HELOC | 18,130 | | | 45,654 | | | 111,683 | | | 674,802 | | | 850,269 | | | 266 | | | 831,873 | |
Residential construction | 396,420 | | | 5,485 | | | 39,628 | | | 1,020 | | | 442,553 | | | 7,649 | | | 38,484 | |
Manufactured housing | — | | | 388 | | | 44,627 | | | 271,726 | | | 316,741 | | | 316,741 | | | — | |
Consumer | 27,780 | | | 102,160 | | | 16,995 | | | 2,355 | | | 149,290 | | | 118,492 | | | 3,018 | |
Total loans | $ | 2,202,694 | | | $ | 5,771,125 | | | $ | 3,755,396 | | | $ | 3,605,412 | | | $ | 15,334,627 | | | $ | 7,205,421 | | | $ | 5,926,512 | |
As of December 31, 2022, our 25 largest credit relationships consisted of loans and loan commitments ranging from $35.5 million to $60.0 million, with an aggregate total credit exposure of $1.1 billion, including $324 million in unfunded commitments and $774 million in balances outstanding, excluding participations sold.
Asset Quality and Risk Elements
We manage asset quality and control credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices. Our credit administration function is responsible for monitoring asset quality and Board approved portfolio concentration limits, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures.
We conduct reviews of classified performing and non-performing loans, TDRs, past due loans and portfolio concentrations on a regular basis to identify risk migration and potential charges to the ACL. These items are discussed in a series of meetings attended by Credit Risk Management leadership and leadership from various lending groups. In addition to the reviews mentioned above, an independent loan review team reviews the portfolio to ensure consistent application of risk rating policies and procedures.
The ACL reflects management’s assessment of the life of loan expected credit losses in the loan portfolio and unfunded loan commitments. This assessment involves uncertainty and judgment and is subject to change in future periods. The amount of any changes could be significant if the assessment of loan quality or collateral values changes substantially with respect to one or more loan relationships or portfolios or if there is a significant change in the reasonable and supportable forecast used to model our expected credit losses. The allocation of the ACL is based on reasonable and supportable forecasts, historical data, subjective judgment and estimates and therefore, may not be predictive of the specific amounts or loan categories in which charge-offs may ultimately occur. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for credit losses in future periods if, in their opinion, the results of their review warrant such additions. See the Critical Accounting Estimates section for additional information on the ACL.
The ACL, which includes a portion related to unfunded commitments, totaled $181 million at December 31, 2022 compared with $114 million at December 31, 2021. At December 31, 2022, the ACL for loans was $159 million, or 1.04% of total loans, compared with $103 million, or 0.87%, of loans at December 31, 2021.
The increase in the ACL since December 31, 2021 reflects loan growth and a less favorable economic forecast as of December 31, 2022 compared to that of December 31, 2021. In addition, the acquisition of Reliant added $31.1 million to the ACL as of the acquisition date. Of this amount, $12.7 million was reclassified from the amortized cost basis of PCD loans with no impact to earnings, $15.2 million was recorded as provision for credit losses on acquired non-PCD loan balances and $3.12 million was recorded as provision for unfunded commitments on the acquired balance of unfunded commitments.
The following table summarizes the allocation of the ACL for each of the past three years.
Table 10 - Allocation of ACL
As of December 31,
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| ACL | | % of loans in each category to total loans | | ACL | | % of loans in each category to total loans | | ACL | | % of loans in each category to total loans |
Owner occupied commercial real estate | $ | 19,834 | | | 18 | | | $ | 14,282 | | | 20 | | | $ | 20,673 | | | 18 | |
Income producing commercial real estate | 32,082 | | | 21 | | | 24,156 | | | 22 | | | 41,737 | | | 22 | |
Commercial & industrial | 23,504 | | | 15 | | | 16,592 | | | 16 | | | 22,019 | | | 22 | |
Commercial construction | 20,120 | | | 10 | | | 9,956 | | | 9 | | | 10,952 | | | 9 | |
Equipment financing | 23,395 | | | 9 | | | 16,290 | | | 9 | | | 16,820 | | | 8 | |
Total commercial | 118,935 | | | 73 | | | 81,276 | | | 76 | | | 112,201 | | | 79 | |
Residential mortgage | 20,809 | | | 15 | | | 12,390 | | | 14 | | | 15,341 | | | 11 | |
HELOC | 8,707 | | | 6 | | | 6,568 | | | 6 | | | 8,417 | | | 6 | |
Residential construction | 2,049 | | | 3 | | | 1,847 | | | 3 | | | 764 | | | 3 | |
Manufactured housing | 8,098 | | | 2 | | | — | | | — | | | — | | | — | |
Consumer | 759 | | | 1 | | | 451 | | | 1 | | | 287 | | | 1 | |
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Total ACL - loans | 159,357 | | | 100 | | | 102,532 | | | 100 | | | 137,010 | | | 100 | |
ACL - unfunded commitments | 21,163 | | | | | 10,992 | | | | | 10,558 | | | |
Total ACL | $ | 180,520 | | | | | $ | 113,524 | | | | | $ | 147,568 | | | |
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ACL- loans as a percentage of total loans | 1.04 | % | | | | 0.87 | % | | | | 1.20 | % | | |
The following table summarizes net charge-offs to average loans for each of the past three years.
Table 11 - Net Charge-offs
Years Ended December 31,
(in thousands)
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| 2022 | | 2021 | | 2020 |
| Average Loans | | Net Charge-Offs (Recoveries) | | Net Charge-Offs to Average Loans | | Average Loans | | Net Charge-Offs (Recoveries) | | Net Charge-Offs to Average Loans | | Average Loans | | Net Charge-Offs (Recoveries) | | Net Charge-Offs to Average Loans |
Owner occupied commercial real estate | $ | 2,662,600 | | | $ | (1,761) | | | (0.07) | % | | $ | 2,159,153 | | | $ | 316 | | | 0.01 | % | | $ | 1,867,935 | | | $ | (2,495) | | | (0.13) | % |
Income producing commercial real estate | 3,283,107 | | | (343) | | | (0.01) | | | 2,571,923 | | | (229) | | | (0.01) | | | 2,283,157 | | | 4,884 | | | 0.21 | |
Commercial & industrial | 2,271,279 | | | 6,460 | | | 0.28 | | | 2,242,764 | | | (2,499) | | | (0.11) | | | 2,297,522 | | | 9,336 | | | 0.41 | |
Commercial construction | 1,502,093 | | | (584) | | | (0.04) | | | 958,791 | | | (747) | | | (0.08) | | | 967,030 | | | (319) | | | (0.03) | |
Equipment financing | 1,217,993 | | | 3,953 | | | 0.32 | | | 971,355 | | | 3,105 | | | 0.32 | | | 794,042 | | | 6,760 | | | 0.85 | |
Residential mortgage | 2,007,843 | | | (247) | | | (0.01) | | | 1,462,421 | | | (220) | | | (0.02) | | | 1,197,511 | | | (57) | | | — | |
HELOC | 802,674 | | | (618) | | | (0.08) | | | 675,873 | | | (405) | | | (0.06) | | | 680,775 | | | (456) | | | (0.07) | |
Residential construction | 394,413 | | | (231) | | | (0.06) | | | 301,591 | | | (147) | | | (0.05) | | | 243,133 | | | (63) | | | (0.03) | |
Manufactured housing | 285,556 | | | 765 | | | 0.27 | | | — | | | — | | | — | | | — | | | — | | | — | |
Consumer | 144,188 | | | 2,260 | | | 1.57 | | | 142,005 | | | 864 | | | 0.61 | | | 135,548 | | | 726 | | | 0.54 | |
| $ | 14,571,746 | | | $ | 9,654 | | | 0.07 | | | $ | 11,485,876 | | | $ | 38 | | | — | | | $ | 10,466,653 | | | $ | 18,316 | | | 0.17 | |
Nonperforming Assets
The following table presents NPAs, which consist of nonaccrual loans and OREO and repossessed assets, for the periods indicated.
Table 12 - NPAs
As of December 31,
(in thousands)
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| | 2022 | | 2021 | | 2020 | |
| Nonaccrual loans held for investment | $ | 44,232 | | | $ | 32,812 | | | $ | 61,599 | | |
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| OREO and repossessed assets | 49 | | | 43 | | | 647 | | |
| Total NPAs | $ | 44,281 | | | $ | 32,855 | | | $ | 62,246 | | |
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| Nonaccrual loans to total loans | 0.29 | % | | 0.28 | % | | 0.54 | % | |
| NPAs to total assets | 0.18 | | | 0.16 | | | 0.35 | | |
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| ACL - loans to nonaccrual loans coverage ratio | 3.60 | | 3.12 | | 2.22 | |
The increase in NPAs since December 31, 2021 was primarily due to the addition of the manufactured housing portfolio from Reliant, an overall increase in equipment financing nonaccrual loans and the migration of two large commercial and industrial relationships to nonaccrual status.
At December 31, 2022 and 2021, we had $41.2 million and $52.4 million, respectively, in loans with terms that have been modified in a TDR. Included therein were $14.5 million and $11.5 million, respectively, of TDRs that were nonaccrual loans. The remaining TDRs with aggregate balances of $26.7 million and $40.9 million, respectively, were performing according to their modified terms and were therefore not considered to be NPAs.
Investment Securities
The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk in other categories of the balance sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits and borrowings. During the first half of 2022, we continued to deploy liquidity generated through strong deposit growth by purchasing additional investment securities. However, in the second half of 2022, we slowed our securities purchases as we began to experience some deposit attrition, which absorbed much of our surplus liquidity. During 2022, United transferred AFS debt securities to HTM with a fair value on the transfer date of $1.29 billion, which included unrealized losses recorded in AOCI totaling $87.4 million. Transfer date unrealized losses are amortized and reclassified out of AOCI as a yield adjustment, which is offset by discount accretion of the transferred HTM securities. Amortization of transfer date unrealized losses and discount accretion are recognized over the remaining life of the securities. The table below presents a summary of our investment securities balances as of the dates indicated.
Table 13 - Investment Securities
As of December 31,
(in thousands)
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| | 2022 | | 2021 | | | |
| | Carrying Value | | % of portfolio | | Carrying Value | | % of portfolio | | 2022 - 2021 $ Change | |
| AFS | $ | 3,614,333 | | | 58 | % | | $ | 4,496,824 | | | 80 | % | | $ | (882,491) | | |
| HTM | 2,613,648 | | | 42 | | | 1,156,098 | | | 20 | | | 1,457,550 | | |
| Total investment securities | $ | 6,227,981 | | | | | $ | 5,652,922 | | | | | $ | 575,059 | | |
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| Investment securities as a % of total assets | 26 | % | | | | 27 | % | | | | | |
Table 14 - Investment Securities Portfolio Composition
As of December 31,
Mortgage-backed securities, which include both U.S. government sponsored agency and non-agency securities, make up the largest portion of our investment securities portfolio. As we have grown our portfolio, we have continued to purchase mortgage-backed securities in order to obtain a favorable yield with low risk. These securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest. The actual maturities of these securities will differ from the contractual maturities because the loans underlying the securities can prepay. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining or prolonged low interest rate environment, we may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields. In a rising rate environment, the opposite may occur. Prepayments tend to slow and the weighted average life extends. This is referred to as extension risk, which can lead to lower levels of liquidity due to the delay of cash receipts, and can result in the holding of a below market yielding asset for a longer period of time.
As shown in the chart above, 77% of our investment securities portfolio is comprised of U.S. government or government sponsored agency securities. In addition, as of December 31, 2022, our state and political subdivision securities were all rated A or better. As a reflection of the high credit quality of the portfolio, at December 31, 2022 and 2021, no ACL for HTM or AFS debt securities was recorded. See Note 5 to the consolidated financial statements for further discussion of the investment portfolio and related fair value and maturity information. Unrealized losses on fixed income securities at December 31, 2022 primarily reflected the effect of changes in interest rates.
Goodwill and Other Intangible Assets
Goodwill represents the premium paid for acquired companies above the fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets. Management evaluates goodwill for impairment annually, or more frequently if a triggering event indicates there may be impairment. Upon the occurrence of a triggering event, a qualitative assessment is performed to determine whether it is more likely than not that the fair value of the entity is less than its carrying amount. When it is more likely than not that impairment has occurred, management is required to perform a quantitative analysis and, if necessary, adjust the carrying amount of goodwill by recording a goodwill impairment loss. No such triggering events occurred during 2022 and our annual assessment provided no indication that a goodwill impairment was required.
We also have core deposit and customer relationship intangible assets, representing the value of acquired deposit and customer relationships, respectively, which are amortizing intangible assets. Amortizing intangible assets are required to be tested for impairment only when events or circumstances indicate that impairment may exist.
In connection with the acquisition of Reliant, we recorded goodwill and a core deposit intangible of $299 million and $14.5 million, respectively.
Deposits
Customer deposits are the primary source of funding for our earning assets. Our high level of service, as evidenced by our strong customer satisfaction scores, has been instrumental in attracting and retaining customer deposit accounts. The increase in deposits since December 31, 2021 was primarily driven by the deposits assumed in the Reliant transaction, which had a balance of $2.50 billion as of the acquisition date. More recently, we have experienced some deposit balance attrition, mostly in noninterest-bearing demand accounts, as rising interest rates have given customers more attractive returns for excess liquidity outside of standard deposit products. As of December 31, 2022 and 2021, we had $8.31 billion and $7.97 billion, respectively, in uninsured deposits. The following table sets forth the deposit composition for the periods indicated.
Table 15 - Deposits
As of December 31,
(in thousands)
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| | 2022 | | 2021 | |
| | Balance | | Customer Deposit Composition | | Balance | | Customer Deposit Composition | |
| Noninterest-bearing demand | $ | 7,643,081 | | | 39 | % | | $ | 6,956,981 | | | 38 | % | |
| NOW and interest-bearing demand | 4,350,878 | | | 22 | | | 4,252,209 | | | 24 | | |
| Money market and savings | 5,967,017 | | | 30 | | | 5,399,133 | | | 30 | | |
| Time | 1,781,482 | | | 9 | | | 1,442,498 | | | 8 | | |
| Total customer deposits | 19,742,458 | | | 100 | % | | 18,050,821 | | | 100 | % | |
| Brokered deposits | 134,049 | | | | | 190,358 | | | | |
| Total deposits | $ | 19,876,507 | | | | | $ | 18,241,179 | | | | |
The following table sets forth the scheduled maturities of time deposits greater than $250,000.
Table 16 - Maturities of Time Deposits Greater than $250,000
As of December 31, 2022
(in thousands)
| | | | | | | | | | | |
| | | |
| Three months or less | $ | 73,349 | | |
| Over three through six months | 43,905 | | |
| Over six months through twelve months | 154,620 | | |
| Over one year | 161,507 | | |
| Total | $ | 433,381 | | |
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Liquidity Management
Liquidity is defined as the ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the ability to meet the daily cash flow requirements of customers, both depositors and borrowers. The primary objective is to ensure that sufficient funding is available, at a reasonable cost, to meet ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, our primary goal is to maintain a sufficient level of liquidity in all expected economic environments. To assist in determining the adequacy of our liquidity, we perform a variety of liquidity stress tests. We maintain an unencumbered liquid asset reserve to help ensure our ability to meet our obligations under normal conditions for at least a 12-month period and under severely adverse liquidity conditions for a minimum of 30 days.
An important part of the Bank’s liquidity resides in the asset portion of the balance sheet, which provides liquidity primarily through loan interest and principal repayments and the maturities and sales of securities, as well as the ability to use these assets as collateral for borrowings on a secured basis.
The Bank’s main source of liquidity is customer interest-bearing and noninterest-bearing deposit accounts, which we are able to attract at any time by competing more aggressively on pricing. Liquidity is also available from wholesale funding sources consisting primarily of Federal funds purchased, securities sold under agreements to repurchase, FHLB advances and brokered deposits. These
sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs. At December 31, 2022, we had sufficient qualifying collateral to support additional FHLB advances of $999 million and Federal Reserve discount window borrowing capacity of $2.46 billion. We also had unpledged investment securities of $3.70 billion at December 31, 2022 that could be used as collateral for additional borrowings.
In the second half of 2022, we began to experience balance attrition in our deposit accounts as rising interest rates gave customers other alternatives for achieving higher returns on their cash deposits outside of the banking system. Our experience with deposit attrition was not unique to us but was part of a trend throughout the banking industry and was not unexpected as the entire banking industry had experienced abnormally high deposit growth over the past two years, partly resulting from the COVID-19 pandemic. As a result of the higher-than-normal deposit growth, there has been an expectation that some of the built-up balances would leave the banking system as conditions changed. Much of the surplus liquidity that built up in the two years leading up to mid-2022 was invested in our investment securities portfolio, which had grown significantly over that time period and created a large source of stored liquidity. In response to deposit balance attrition, we have suspended investment securities purchases and allowed cash flows from maturing securities to meet a portion of our funding needs. We also began using short-term borrowings to supplement our near-term funding requirements. Although it is difficult to predict the timing and extent of the deposit balance attrition, we have significant sources of liquidity through secured borrowings and other unsecured funding sources as noted above, and we have been adjusting our deposit pricing to remain competitive within our markets in an effort to slow the balance attrition.
In addition, because the Holding Company is a separate entity and apart from the Bank, it must provide for its own liquidity. The Holding Company is responsible for the payment of dividends declared for its common and preferred shareholders, and interest and principal on any outstanding debt or trust preferred securities. The Holding Company currently has internal capital resources to meet these obligations. While the Holding Company has access to the capital markets and maintains a line of credit as a contingent funding source, the ultimate sources of its liquidity are subsidiary service fees and dividends from the Bank, which are limited by applicable law and regulations. In 2022 and 2021, the Bank paid dividends of $133 million and $217 million, respectively, to the Holding Company. Holding Company liquidity is managed to a minimum of 15-months of positive cash flow after considering all of its liquidity needs over this period.
Significant uses and sources of cash during the year ended December 31, 2022 are summarized below. See the consolidated statement of cash flows in this Report for further detail.
•Net cash provided by operating activities of $607 million reflects net income of $277 million adjusted for non-cash transactions, gains on sales of securities and other loans and changes in other assets and liabilities. Significant non-cash transactions for the period included provision for credit losses of $63.9 million, depreciation, amortization and accretion of $46.7 million and deferred income tax expense of $10.9 million.
•Net cash used in investing activities of $2.02 billion consisted primarily of $1.99 billion of purchases of AFS and HTM debt securities and a $1.23 billion net increase in loans, offset by $1.23 billion proceeds from securities sales, maturities and calls.
•Net cash used in financing activities of $259 million consisted primarily of a net decrease in deposits of $867 million and $93.8 million in common and preferred stock dividends, partially offset by net proceeds from FHLB advances and other short-term borrowings of $709 million.
In the opinion of management, our liquidity position at December 31, 2022 was sufficient to meet our expected cash requirements.
The following table presents the amortized cost of securities by contractual maturity of investment securities and weighted average yields on a FTE basis. The composition and maturity / repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs. Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations.
Table 17 - Contractual Maturity of AFS and HTM Debt Securities
As of December 31, 2022
(in thousands)
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| Maturity By Years | | |
| 1 or Less | | 1 to 5 | | 6 to 10 | | Over 10 | | Total |
| Balance | | WA Yield | | Balance | | WA Yield | | Balance | | WA Yield | | Balance | | WA Yield | | Balance | | WA Yield |
AFS | | | | | | | | | | | | | | | | | | | |
U.S. Treasuries | $ | 49,983 | | 2.26 | % | | $ | 99,049 | | 0.86 | % | | $ | 14,940 | | 1.32 | % | | $ | — | | — | % | | $ | 163,972 | | 1.33 | % |
U.S. Government agencies & GSEs | 174 | | 1.45 | | | 38,495 | | 1.52 | | | 76,287 | | 2.20 | | | 151,391 | | 3.60 | | | 266,347 | | 2.90 | |
State and political subdivisions | — | | — | | | 45,271 | | 3.35 | | | 163,617 | | 2.89 | | | 120,835 | | 1.90 | | | 329,723 | | 2.59 | |
Residential MBS, Agency & GSE | — | | 4.13 | | | 6,605 | | 2.81 | | | 29,795 | | 2.63 | | | 1,573,042 | | 2.94 | | | 1,609,442 | | 2.93 | |
Residential MBS, Non-agency | — | | — | | | — | | — | | | — | | — | | | 374,535 | | 4.50 | | | 374,535 | | 4.50 | |
Commercial MBS, Agency & GSE | 29,988 | | 2.14 | | | 112,741 | | 2.60 | | | 250,609 | | 1.62 | | | 326,944 | | 2.81 | | | 720,282 | | 2.33 | |
Commercial MBS, Non-agency | 14,963 | | 7.23 | | | 1,500 | | 6.77 | | | — | | — | | | 15,161 | | 4.32 | | | 31,624 | | 5.81 | |
Corporate bonds | 2,583 | | 0.60 | | | 151,352 | | 1.66 | | | 81,450 | | 2.55 | | | 796 | | 8.70 | | | 236,181 | | 1.98 | |
Asset-backed securities | — | | — | | | 82,083 | | 0.60 | | | — | | — | | | 157,137 | | 5.83 | | | 239,220 | | 4.04 | |
Total AFS securities | $ | 97,691 | | 2.94 | | | $ | 537,096 | | 1.71 | | | $ | 616,698 | | 2.19 | | | $ | 2,719,841 | | 3.31 | | | $ | 3,971,326 | | 2.91 | |
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HTM | | | | | | | | | | | | | | | | | | | |
U.S. Treasuries | $ | — | | — | % | | $ | — | | — | % | | $ | 19,834 | | 1.40 | % | | $ | — | | — | % | | $ | 19,834 | | 1.40 | % |
U.S. Government agencies & GSEs | — | | — | | | — | | — | | | 73,246 | | 1.62 | | | 26,433 | | 2.79 | | | 99,679 | | 1.93 | |
State and political subdivisions | 1,200 | | 4.54 | | | 18,698 | | 3.44 | | | 26,024 | | 1.83 | | | 250,023 | | 2.55 | | | 295,945 | | 2.55 | |
Residential MBS, Agency & GSE | 10 | | 3.95 | | | 2,237 | | 3.06 | | | 16,338 | | 2.44 | | | 1,469,443 | | 1.92 | | | 1,488,028 | | 1.92 | |
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Commercial MBS, Agency & GSE | — | | — | | | 45,433 | | 2.25 | | | 168,058 | | 1.44 | | | 481,671 | | 2.24 | | | 695,162 | | 2.05 | |
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Supranational entities | — | | — | | | — | | — | | | 15,000 | | 1.80 | | | — | | — | | | 15,000 | | 1.80 | |
Total HTM securities | $ | 1,210 | | 4.54 | | | $ | 66,368 | | 2.61 | | | $ | 318,500 | | 1.58 | | | $ | 2,227,570 | | 2.07 | | | $ | 2,613,648 | | 2.02 | |
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At December 31, 2022, the effective duration of the investment portfolio was 4.7 years, compared to 4.0 years at December 31, 2021.
Contractual Obligations and Other Commitments
The following discussion provides an overview of United’s significant contractual obligations and other commitments.
Long-term Debt
At December 31, 2022 and 2021, we had long-term debt outstanding of $325 million and $247 million, respectively, which included senior debentures, subordinated debentures, and trust preferred securities. The following tables provides long-term debt outstanding by maturity in five year increments. During 2022, as part of the Reliant acquisition, we assumed subordinated debt and trust preferred securities with an acquisition date fair value totaling $76.7 million Additional information regarding these debt instruments is provided in Note 13 to the consolidated financial statements.
Table 18 - Long-term Debt by Maturity Category
As of December 31, 2022
(in thousands)
| | | | | | | | | | | |
|
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| Next 5 years | $ | 35,000 | | |
| 6 - 10 years | 263,093 | | |
| 11 - 15 years | 31,239 | | |
| | 329,332 | | |
| Less discount | (4,669) | | |
| Total long-term debt | $ | 324,663 | | |
Operating Lease Obligations
We are party to operating lease agreements for many of our branch locations, ATMs, loan production offices and operation centers. For qualifying leases with a term exceeding one year we record a lease liability and ROU asset on our balance sheet. As of December 31, 2022, the lease liability and ROU asset totaled $41.7 million and $40.0 million, respectively, compared to $31.1 million and $29.4 million, respectively, at December 31, 2021. During 2022, we obtained $23.9 million in ROU assets in exchange for operating lease liabilities of approximately the same amount, $14.3 million of which were acquired in the Reliant transaction. Leases assumed were for retail branch locations and office spaces.
As of December 31, 2022, the remaining terms of our leases ranged from a few months to 11 years. Certain of our leases contain options to renew the lease at the end of the current term. Unless we have determined we are reasonably likely to renew the lease, these options have been excluded from the calculation of our lease liability and ROU asset. Additional information regarding operating leases is provided in Note 14 to the consolidated financial statements.
Capital Expenditures
During 2022, we purchased $42.7 million of fixed assets, which excludes fixed assets acquired in the Reliant acquisition. As of December 31, 2022 and 2021, we had $34.7 million and $10.1 million in construction in progress. Most notably, construction in progress includes costs related to the construction of the Bank’s new Greenville, South Carolina headquarters building, which is expected to be completed in 2024. As of December 31, 2022, we estimate the total cost of the headquarters project will be approximately $73 million, $40 million of which has yet to be incurred.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments included commitments to extend credit and letters of credit, which totaled $4.73 billion at December 31, 2022.
A commitment to extend credit is an agreement to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Letters of credit and financial guarantees are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as extending loan facilities to customers. Those commitments are primarily issued to local businesses.
The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, letters of credit and financial guarantees is represented by the contractual amount of these instruments. We use the same credit underwriting procedures for making commitments, letters of credit and financial guarantees as we use for underwriting on-balance sheet instruments. Management evaluates each customer’s creditworthiness on a case-by-case basis and the amount of the collateral, if deemed necessary, is based on the credit evaluation. Collateral held varies, but may include unimproved and improved real estate, certificates of deposit, personal property or other acceptable collateral.
All of these instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The total amount of these instruments does not necessarily represent future cash requirements because a significant portion of these instruments expire without being used. We believe that we have adequate sources of liquidity to fund commitments that are drawn upon by borrowers.
In addition, we hold investments in certain limited partnerships for tax credit and CRA purposes. As of December 31, 2022, for certain of these investments, we had committed to fund an additional $6.29 million related to future capital calls that has not been reflected in the consolidated balance sheet. As of December 31, 2022, we also had $17.4 million in commitments for future capital calls to fintech fund limited partnerships that have not been reflected in the consolidated balance sheet.
We are not involved in off-balance sheet contractual relationships, other than those disclosed in this Report, that could result in liquidity needs or other commitments, or that could significantly affect earnings. See Note 23 to the consolidated financial statements for additional information on off-balance sheet arrangements.
Capital Resources and Dividends
The maintenance and management of capital levels is one of management’s significant priorities. Shareholders’ equity at December 31, 2022 was $2.70 billion, an increase of $478 million from December 31, 2021. The increase was primarily a result of net income of $277 million and the issuance of $596 million of common stock in connection with the Reliant acquisition. These increases were partially offset by dividends on common and preferred stock of $99.3 million and other comprehensive loss of $303 million mostly driven by unrealized holding losses on AFS debt securities resulting from rising interest rates.
Under the risk-based capital guidelines of Basel III, assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor, or, if relevant, the guarantor or the nature of the collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with the category. The resulting weighted values from each of the risk categories are added together, and generally this sum is our total RWAs. RWAs for purposes of our capital ratios are calculated under these guidelines.
CET1 capital consists of common shareholders’ equity, excluding AOCI, intangible assets (goodwill, deposit-based intangibles and certain other intangibles, including certain servicing assets), net of associated deferred tax liabilities, and disallowed deferred tax assets. Tier 1 capital consists of CET1 plus non-cumulative perpetual preferred stock. Tier 2 capital includes the allowable portion of the ACL up to 1.25% of RWA as well as qualifying subordinated debt and trust preferred securities. Tier 1 capital plus Tier 2 capital is referred to as Total risk-based capital.
We have outstanding junior subordinated debentures related to trust preferred securities totaling $34.3 million at December 31, 2022, of which $33.0 million (excluding common securities) qualified as Tier 2 capital. Further information on trust preferred securities is provided in Note 13 to the consolidated financial statements.
The following table outlines the minimum ratios required for capital adequacy purposes, as well as the thresholds for a categorization of “well-capitalized”.
Table 19 - Capital Ratios
As of December 31,
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | United Community Banks, Inc. (consolidated) | | United Community Bank |
| Minimum Capital | | Well-Capitalized | | Minimum Capital Plus Capital Conservation Buffer | | 2022 | | 2021 | | 2022 | | 2021 |
Risk-based ratios: | | | | | | | | | | | | | |
CET1 capital | 4.5 | % | | 6.5 | % | | 7.0 | % | | 12.26 | % | | 12.46 | % | | 12.83 | % | | 12.87 | % |
Tier 1 capital | 6.0 | | | 8.0 | | | 8.5 | | | 12.81 | | | 13.17 | | | 12.83 | | | 12.87 | |
Total capital | 8.0 | | | 10.0 | | | 10.5 | | | 14.79 | | | 14.65 | | | 13.70 | | | 13.46 | |
Leverage ratio | 4.0 | | | 5.0 | | | N/A | | 9.69 | | | 8.75 | | | 9.69 | | | 8.53 | |
Additional information related to capital ratios, as calculated under regulatory guidelines, is provided in Note 22 to the consolidated financial statements. As of December 31, 2022 and 2021, both United and the Bank were characterized as “well-capitalized”.
Effect of Inflation and Changing Prices
A bank’s asset and liability structure is substantially different from that of an industrial firm, because primarily all assets and liabilities of a bank are monetary in nature, with relatively little investment in fixed assets or inventories. Inflation has an important effect on the growth of total assets and the resulting need to increase equity capital at higher than nominal rates in order to maintain an appropriate equity to assets ratio.
Our management believes the effect of inflation on financial results depends on our ability to react to changes in interest rates and, by such reaction, reduce the inflationary effect on performance. We have an asset/liability management program to monitor and manage our interest rate sensitivity position. In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the registrant and report of independent registered public accounting firm are included herein on the pages that follow.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of United Community Banks, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and affected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of the internal control over financial reporting as of December 31, 2022. In making this assessment, we used the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management also conducted an assessment of requirements pertaining to Section 112 of the Federal Deposit Insurance Corporation Improvement Act. This section relates to management’s evaluation of internal control over financial reporting, including controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) and in compliance with laws and regulations. Our evaluation included a review of the documentation of controls, evaluations of the design of the internal control system and tests of the effectiveness of internal controls.
Based on our assessment, management concluded that as of December 31, 2022, United Community Banks, Inc.’s internal control over financial reporting is effective based on those criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
| | | | | | | | | | | | | | |
| /s/ H. Lynn Harton | | /s/ Jefferson L. Harralson | |
| H. Lynn Harton | | Jefferson L. Harralson | |
| President and Chief Executive Officer | | Executive Vice President and | |
| | | Chief Financial Officer | |

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of United Community Banks, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of United Community Banks, Inc, (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of income, of comprehensive income (loss), of changes in shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Intern Controls Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management's assessment and our audit of United Community Banks, Inc.’s internal control over financial reporting also included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses - Loans Qualitative Factors
As described in Notes 1 and 6 to the consolidated financial statements, the allowance for credit losses – loans and leases (collectively referred to as “loans”) represents management’s estimate of expected credit losses for the remaining estimated life of loans and leases. As of December 31, 2022, the allowance for credit losses - loans was $159 million. Management determines the allowance for credit losses - loans using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Expected credit losses were estimated using a regression model for each segment based on historical data from peer banks which incorporates a third party vendor’s economic forecast to predict the change in credit losses. The allowance for credit losses - loans is calculated using a discounted cash flow methodology at the loan level, with loss rates, prepayment assumptions, and curtailment assumptions driven by each loan’s collateral type. As of December 31, 2022, management applied qualitative factors to the model output for commercial construction, HELOC, residential mortgage and equipment finance portfolios to reflect management’s approximation of long-term loss rates.
The principal considerations for our determination that performing procedures relating to the allowance for credit losses - loans qualitative factors is a critical audit matter are (i) the significant judgment by management when estimating expected credit losses, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the qualitative factors applied to the model output for commercial construction, HELOC, residential mortgage and equipment finance portfolios and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s allowance for credit losses - loans qualitative factors estimation process, including controls over the qualitative factors applied to the model output for commercial construction, HELOC, residential mortgage and equipment finance portfolios. These procedures also included, among others, (i) testing management’s process for
determining the allowance for credit losses - loans qualitative factors, (ii) evaluating the appropriateness of management’s methodology, (iii) testing the completeness and accuracy of the data used by management, and (iv) evaluating the reasonableness of the qualitative factors applied to the model output for commercial construction, HELOC, residential mortgage and equipment finance portfolios. Professionals with specialized skill and knowledge were used to assist in testing management’s process for determining the allowance for credit losses - loans qualitative factors, evaluating the appropriateness of management’s methodology, and evaluating the reasonableness of the qualitative factors applied to the model output.
Initial Valuation of Acquired Loans – Reliant Bancorp, Inc.
As described in Notes 1 and 3 to the consolidated financial statements, during 2022 the Company completed the acquisition of Reliant Bancorp, Inc. The acquisition included a fair value of acquired loans balance of $2.321 billion. Purchased loans were recorded at fair value on the date of acquisition. Fair values for acquired loans are generally based on a discounted cash flow methodology that considers credit loss expectations, market interest rates and other market factors such as liquidity from the perspective of a market participant. The probability of default, loss given default and prepayment assumptions are the key factors driving credit losses which were embedded into the estimated cash flows. These assumptions are informed by internal data on loan characteristics, historical loss experience, and current and forecasted economic conditions. The interest and liquidity component of the estimate was determined by discounting interest and principal cash flows through the expected life of each loan. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity.
The principal considerations for our determination that performing procedures relating to the initial valuation of acquired loans in the acquisition of Reliant Bancorp, Inc. is a critical audit matter are (i) the significant judgment by management to estimate the fair value of the acquired loans, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the discount rate, probability of default, loss given default and prepayment significant assumptions used by management, and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s initial valuation of the acquired loans, including controls over the discount rate, probability of default, loss given default and prepayment significant assumptions used in the discounted cash flow methodology. These procedures also included, among others, (i) testing the completeness and accuracy of data provided by management and (ii) the involvement of professionals with specialized skill and knowledge to assist with (a) developing independent ranges of fair value for a sample of acquired loan portfolios and (b) comparing the independent ranges to management’s estimate to evaluate the reasonableness of management’s estimate. Developing the independent ranges of fair value involved independently developing the discount rate, probability of default and loss given default assumptions using contractual loan terms and external market data.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
February 24, 2023
We have served as the Company’s auditor since 2013.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2022 and 2021
(in thousands, except share data)
| | | | | | | | | | | |
| 2022 | | 2021 |
ASSETS | | | |
Cash and due from banks | $ | 195,771 | | | $ | 144,244 | |
Interest-bearing deposits in banks | 316,082 | | | 2,147,266 | |
Federal funds and other short-term investments | 135,000 | | | 27,000 | |
Cash and cash equivalents | 646,853 | | | 2,318,510 | |
Debt securities available-for-sale | 3,614,333 | | | 4,496,824 | |
Debt securities held-to-maturity (fair value $2,191,073 and $1,148,804, respectively) | 2,613,648 | | | 1,156,098 | |
Loans held for sale at fair value | 13,600 | | | 44,109 | |
Loans and leases held for investment | 15,334,627 | | | 11,760,346 | |
Less allowance for credit losses - loans and leases | (159,357) | | | (102,532) | |
Loans and leases, net | 15,175,270 | | | 11,657,814 | |
Premises and equipment, net | 298,456 | | | 245,296 | |
Bank owned life insurance | 299,297 | | | 217,713 | |
Accrued interest receivable | 72,807 | | | 42,999 | |
Net deferred tax asset | 129,313 | | | 41,322 | |
Derivative financial instruments | 50,636 | | | 42,480 | |
Goodwill and other intangible assets, net | 779,248 | | | 472,407 | |
Other assets | 315,423 | | | 211,199 | |
Total assets | $ | 24,008,884 | | | $ | 20,946,771 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Liabilities: | | | |
Deposits: | | | |
Noninterest-bearing demand | $ | 7,643,081 | | | $ | 6,956,981 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Interest-bearing deposits | 12,233,426 | | | 11,284,198 | |
Total deposits | 19,876,507 | | | 18,241,179 | |
Short-term borrowings | 158,933 | | | — | |
Federal Home Loan Bank advances | 550,000 | | | — | |
Long-term debt | 324,663 | | | 247,360 | |
Derivative financial instruments | 99,543 | | | 25,145 | |
Accrued expenses and other liabilities | 298,564 | | | 210,842 | |
Total liabilities | 21,308,210 | | | 18,724,526 | |
| | | |
Commitments and contingencies | | | |
| | | |
Shareholders' equity: | | | |
Preferred stock, $1 par value: 10,000,000 shares authorized; Series I, $25,000 per share liquidation preference; 4,000 shares issued and outstanding | 96,422 | | | 96,422 | |
Common stock, $1 par value; 200,000,000 shares authorized, respectively; 106,222,758 and 89,349,826 shares issued and outstanding, respectively | 106,223 | | | 89,350 | |
Common stock issuable; 607,128 and 595,705 shares, respectively | 12,307 | | | 11,288 | |
Capital surplus | 2,306,366 | | | 1,721,007 | |
Retained earnings | 508,844 | | | 330,654 | |
Accumulated other comprehensive loss | (329,488) | | | (26,476) | |
Total shareholders’ equity | 2,700,674 | | | 2,222,245 | |
Total liabilities and shareholders’ equity | $ | 24,008,884 | | | $ | 20,946,771 | |
See accompanying notes to consolidated financial statements.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31, 2022, 2021 and 2020
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Interest revenue: | | | | | |
Loans, including fees | $ | 673,402 | | | $ | 505,734 | | | $ | 494,212 | |
Investment securities: | | | | | |
Taxable | 121,501 | | | 61,994 | | | 55,031 | |
Tax exempt | 10,323 | | | 8,978 | | | 7,043 | |
Deposits in banks and short-term investments | 7,929 | | | 2,088 | | | 1,710 | |
Total interest revenue | 813,155 | | | 578,794 | | | 557,996 | |
Interest expense: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Deposits | 42,099 | | | 14,845 | | | 41,772 | |
Short-term borrowings | 507 | | | — | | | 3 | |
Federal Home Loan Bank advances | 1,424 | | | 3 | | | 28 | |
Long-term debt | 16,768 | | | 14,912 | | | 14,434 | |
Total interest expense | 60,798 | | | 29,760 | | | 56,237 | |
Net interest revenue | 752,357 | | | 549,034 | | | 501,759 | |
Provision for credit losses | 63,913 | | | (37,550) | | | 80,434 | |
Net interest revenue after provision for credit losses | 688,444 | | | 586,584 | | | 421,325 | |
Noninterest income: | | | | | |
Service charges and fees | 38,163 | | | 33,868 | | | 32,401 | |
Mortgage loan gains and related fees | 32,524 | | | 58,446 | | | 76,087 | |
Wealth management fees | 23,594 | | | 18,998 | | | 9,240 | |
Gains from other loan sales, net | 10,730 | | | 11,267 | | | 5,420 | |
Other lending and loan servicing fees | 10,005 | | | 9,427 | | | 8,028 | |
Securities (losses) gains, net | (3,872) | | | 83 | | | 748 | |
Other | 26,563 | | | 25,729 | | | 24,185 | |
Total noninterest income | 137,707 | | | 157,818 | | | 156,109 | |
Total revenue | 826,151 | | | 744,402 | | | 577,434 | |
Noninterest expenses: | | | | | |
Salaries and employee benefits | 276,205 | | | 241,443 | | | 224,060 | |
Occupancy | 36,247 | | | 28,619 | | | 25,791 | |
Communications and equipment | 38,234 | | | 29,829 | | | 27,149 | |
Professional fees | 20,166 | | | 20,589 | | | 18,032 | |
Lending and loan servicing expense | 9,350 | | | 10,859 | | | 10,993 | |
Outside services - electronic banking | 12,583 | | | 9,481 | | | 7,513 | |
Postage, printing and supplies | 8,749 | | | 7,110 | | | 6,779 | |
Advertising and public relations | 8,384 | | | 5,910 | | | 15,203 | |
FDIC assessments and other regulatory charges | 9,894 | | | 7,398 | | | 5,982 | |
Amortization of intangibles | 6,826 | | | 4,045 | | | 4,168 | |
Merger-related and other charges | 19,375 | | | 13,970 | | | 7,018 | |
Other | 24,136 | | | 17,386 | | | 15,301 | |
Total noninterest expenses | 470,149 | | | 396,639 | | | 367,989 | |
Income before income taxes | 356,002 | | | 347,763 | | | 209,445 | |
Income tax expense | 78,530 | | | 77,962 | | | 45,356 | |
Net income | $ | 277,472 | | | $ | 269,801 | | | $ | 164,089 | |
| | | | | |
Net income available to common shareholders | $ | 269,135 | | | $ | 261,269 | | | $ | 159,269 | |
| | | | | |
Income per common share: | | | | | |
Basic | $ | 2.52 | | | $ | 2.97 | | | $ | 1.91 | |
Diluted | 2.52 | | | 2.97 | | | 1.91 | |
Weighted average common shares outstanding: | | | | | |
Basic | 106,661 | | | 87,940 | | | 83,184 | |
Diluted | 106,778 | | | 88,097 | | | 83,248 | |
See accompanying notes to consolidated financial statements.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2022, 2021 and 2020
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Before-tax Amount | | Tax (Expense) Benefit | | Net of Tax Amount | | Before-tax Amount | | Tax (Expense) Benefit | | Net of Tax Amount | | Before-tax Amount | | Tax (Expense) Benefit | | Net of Tax Amount |
Net income | $ | 356,002 | | | $ | (78,530) | | | $ | 277,472 | | | $ | 347,763 | | | $ | (77,962) | | | $ | 269,801 | | | $ | 209,445 | | | $ | (45,356) | | | $ | 164,089 | |
Other comprehensive (loss) income: | | | | | | | | | | | | | | | | | |
Unrealized gains (losses) on available-for-sale securities: | | | | | | | | | | | | | | | | | |
Unrealized holding (losses) gains | (428,605) | | | 101,344 | | | (327,261) | | | (92,231) | | | 23,294 | | | (68,937) | | | 39,385 | | | (9,514) | | | 29,871 | |
Reclassification of securities from available-for-sale to held-to-maturity | 87,444 | | | (20,770) | | | 66,674 | | | — | | | — | | | — | | | — | | | — | | | — | |
Realized (gains) losses included in net income | 3,872 | | | (1,026) | | | 2,846 | | | (83) | | | (46) | | | (129) | | | (748) | | | 191 | | | (557) | |
Net unrealized (losses) gains | (337,289) | | | 79,548 | | | (257,741) | | | (92,314) | | | 23,248 | | | (69,066) | | | 38,637 | | | (9,323) | | | 29,314 | |
Unrealized losses on held-to-maturity securities transferred from available-for-sale: | | | | | | | | | | | | | | | | | |
Reclassification of unrealized losses | (87,444) | | | 20,770 | | | (66,674) | | | — | | | — | | | — | | | — | | | — | | | — | |
Amortization of unrealized losses | 9,049 | | | (2,167) | | | 6,882 | | | — | | | — | | | — | | | 723 | | | (173) | | | 550 | |
Net activity | (78,395) | | | 18,603 | | | (59,792) | | | — | | | — | | | — | | | 723 | | | (173) | | | 550 | |
Derivative instruments designated as cash flow hedges: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Unrealized holding gains (losses) on derivatives | 12,721 | | | (3,249) | | | 9,472 | | | 3,837 | | | (979) | | | 2,858 | | | (149) | | | 38 | | | (111) | |
Losses on derivative instruments realized in net income | 269 | | | (69) | | | 200 | | | 608 | | | (156) | | | 452 | | | 359 | | | (91) | | | 268 | |
Net cash flow hedge activity | 12,990 | | | (3,318) | | | 9,672 | | | 4,445 | | | (1,135) | | | 3,310 | | | 210 | | | (53) | | | 157 | |
Defined benefit pension plan activity: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net actuarial gain (loss) on defined benefit pension plans | 5,833 | | | (1,490) | | | 4,343 | | | 1,066 | | | (273) | | | 793 | | | (1,804) | | | 461 | | | (1,343) | |
Amortization of defined benefit pension plan net periodic pension cost components | 680 | | | (174) | | | 506 | | | 1,044 | | | (267) | | | 777 | | | 857 | | | (219) | | | 638 | |
Net defined benefit pension plan activity | 6,513 | | | (1,664) | | | 4,849 | | | 2,110 | | | (540) | | | 1,570 | | | (947) | | | 242 | | | (705) | |
Total other comprehensive (loss) income | (396,181) | | | 93,169 | | | (303,012) | | | (85,759) | | | 21,573 | | | (64,186) | | | 38,623 | | | (9,307) | | | 29,316 | |
Comprehensive (loss) income | $ | (40,179) | | | $ | 14,639 | | | $ | (25,540) | | | $ | 262,004 | | | $ | (56,389) | | | $ | 205,615 | | | $ | 248,068 | | | $ | (54,663) | | | $ | 193,405 | |
See accompanying notes to consolidated financial statements.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2022, 2021 and 2020
(in thousands except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Preferred Stock | | Common Stock | | Common Stock Issuable | | Capital Surplus | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
December 31, 2019 | 79,013,729 | | | $ | — | | | $ | 79,014 | | | $ | 11,491 | | | $ | 1,496,641 | | | $ | 40,152 | | | $ | 8,394 | | | $ | 1,635,692 | |
Net income | | | | | | | | | | | 164,089 | | | | | 164,089 | |
Other comprehensive income | | | | | | | | | | | | | 29,316 | | | 29,316 | |
Issuance of preferred stock | | | 96,422 | | | | | | | | | | | | | 96,422 | |
Common stock issued for acquisitions | 8,130,633 | | | | | 8,131 | | | | | 155,458 | | | | | | | 163,589 | |
Purchases of common stock | (826,482) | | | | | (827) | | | | | (19,955) | | | | | | | (20,782) | |
Preferred stock dividends | | | | | | | | | | | (3,533) | | | | | (3,533) | |
Common stock dividends ($0.72 per share) | | | | | | | | | | | (60,310) | | | | | (60,310) | |
Impact of equity-based compensation awards | 202,437 | | | | | 202 | | | 1,120 | | | 4,764 | | | | | | | 6,086 | |
Impact of other equity plans | 154,962 | | | | | 155 | | | (1,756) | | | 2,091 | | | | | | | 490 | |
Adoption of new accounting standard | | | | | | | | | | | (3,529) | | | | | (3,529) | |
December 31, 2020 | 86,675,279 | | | 96,422 | | | 86,675 | | | 10,855 | | | 1,638,999 | | | 136,869 | | | 37,710 | | | 2,007,530 | |
Net income | | | | | | | | | | | 269,801 | | | | | 269,801 | |
Other comprehensive loss | | | | | | | | | | | | | (64,186) | | | (64,186) | |
| | | | | | | | | | | | | | | |
Common stock issued for acquisitions | 2,863,734 | | | | | 2,864 | | | | | 92,661 | | | | | | | 95,525 | |
Purchases of common stock | (492,744) | | | | | (493) | | | | | (14,608) | | | | | | | (15,101) | |
Preferred stock dividends | | | | | | | | | | | (6,876) | | | | | (6,876) | |
Common stock dividends ($0.78 per share) | | | | | | | | | | | (69,140) | | | | | (69,140) | |
Impact of equity-based compensation awards | 224,706 | | | | | 225 | | | 1,061 | | | 2,406 | | | | | | | 3,692 | |
Impact of other equity plans | 78,851 | | | | | 79 | | | (628) | | | 1,549 | | | | | | | 1,000 | |
| | | | | | | | | | | | | | | |
December 31, 2021 | 89,349,826 | | | 96,422 | | | 89,350 | | | 11,288 | | | 1,721,007 | | | 330,654 | | | (26,476) | | | 2,222,245 | |
Net income | | | | | | | | | | | 277,472 | | | | | 277,472 | |
Other comprehensive loss | | | | | | | | | | | | | (303,012) | | | (303,012) | |
| | | | | | | | | | | | | | | |
Common stock issued for acquisitions | 16,571,545 | | | | | 16,571 | | | | | 579,805 | | | | | | | 596,376 | |
| | | | | | | | | | | | | | | |
Preferred stock dividends | | | | | | | | | | | (6,875) | | | | | (6,875) | |
Common stock dividends ($0.86 per share) | | | | | | | | | | | (92,407) | | | | | (92,407) | |
Impact of equity-based compensation awards | 233,489 | | | | | 234 | | | 2,046 | | | 4,661 | | | | | | | 6,941 | |
Impact of other equity plans | 67,898 | | | | | 68 | | | (1,027) | | | 893 | | | | | | | (66) | |
| | | | | | | | | | | | | | | |
December 31, 2022 | 106,222,758 | | | $ | 96,422 | | | $ | 106,223 | | | $ | 12,307 | | | $ | 2,306,366 | | | $ | 508,844 | | | $ | (329,488) | | | $ | 2,700,674 | |
See accompanying notes to consolidated financial statements
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2022, 2021 and 2020
(in thousands)
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Operating activities: | | | | | |
Net income | $ | 277,472 | | | $ | 269,801 | | | $ | 164,089 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation, amortization and accretion, net | 46,700 | | | (2,063) | | | (8,586) | |
Provision for credit losses | 63,913 | | | (37,550) | | | 80,434 | |
Stock-based compensation | 8,705 | | | 6,554 | | | 7,887 | |
Deferred income tax expense | 10,918 | | | 20,787 | | | 2,668 | |
Securities losses (gains), net | 3,872 | | | (83) | | | (748) | |
Gains from other loan sales, net | (10,730) | | | (11,267) | | | (5,420) | |
| | | | | |
| | | | | |
Changes in assets and liabilities: | | | | | |
(Increase) decrease in other assets | (14,694) | | | 53,416 | | | (20,139) | |
Increase (decrease) in other liabilities | 76,614 | | | (1,599) | | | (14,783) | |
Decrease (increase) in loans held for sale | 144,537 | | | 61,324 | | | (46,721) | |
Net cash provided by operating activities | 607,307 | | | 359,320 | | | 158,681 | |
| | | | | |
Investing activities: | | | | | |
Debt securities held-to-maturity: | | | | | |
Proceeds from maturities and calls | 205,140 | | | 68,319 | | | 57,981 | |
Purchases | (326,494) | | | (806,405) | | | (157,465) | |
Debt securities available-for-sale: | | | | | |
Proceeds from sales | 318,457 | | | 288,986 | | | 40,625 | |
Proceeds from maturities and calls | 706,285 | | | 974,721 | | | 834,725 | |
Purchases | (1,667,466) | | | (2,587,420) | | | (1,456,311) | |
Net (increase) decrease in loans | (1,228,675) | | | 178,234 | | | (1,069,089) | |
Equity investments, outflows | (68,185) | | | (15,595) | | | (15,885) | |
Equity investments, inflows | 31,535 | | | 8,481 | | | 401 | |
Net cash received in acquisitions | 35,243 | | | 103,065 | | | 195,699 | |
| | | | | |
Purchases of premises and equipment | (42,704) | | | (26,483) | | | (18,462) | |
Proceeds from sales of premises and equipment | 9,743 | | | 4,247 | | | 903 | |
Proceeds from sale of other real estate owned and repossessed assets | 3,751 | | | 3,290 | | | 1,074 | |
Other investing outflows | — | | | (610) | | | — | |
Other investing inflows | 3,189 | | | 767 | | | 5,241 | |
Net cash used in investing activities | (2,020,181) | | | (1,806,403) | | | (1,580,563) | |
| | | | | |
Financing activities: | | | | | |
Net (decrease) increase in deposits | (866,929) | | | 2,353,451 | | | 2,534,471 | |
Net increase in short-term borrowings | 158,933 | | | — | | | — | |
Proceeds from Federal Home Loan Bank advances | 790,000 | | | 10,000 | | | 5,000 | |
Repayment of Federal Home Loan Bank advances | (240,000) | | | (34,509) | | | (134,121) | |
Repayment of long-term debt | — | | | (80,632) | | | — | |
Proceeds from issuance of long-term debt, net of issuance costs | — | | | — | | | 98,552 | |
| | | | | |
| | | | | |
| | | | | |
Repurchase of common stock | — | | | (15,101) | | | (20,782) | |
Proceeds from issuance of Series I preferred stock, net of issuance costs | — | | | — | | | 96,422 | |
Cash dividends on common stock | (86,883) | | | (66,914) | | | (58,912) | |
Cash dividends on preferred stock | (6,875) | | | (6,876) | | | (3,533) | |
Other financing inflows | 1,125 | | | 737 | | | 1,317 | |
Other financing outflows | (8,154) | | | (3,182) | | | (3,119) | |
Net cash (used in) provided by financing activities | (258,783) | | | 2,156,974 | | | 2,515,295 | |
| | | | | |
Net change in cash and cash equivalents | (1,671,657) | | | 709,891 | | | 1,093,413 | |
Cash and cash equivalents at beginning of year | 2,318,510 | | | 1,608,619 | | | 515,206 | |
Cash and cash equivalents at end of year | $ | 646,853 | | | $ | 2,318,510 | | | $ | 1,608,619 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
See accompanying notes to consolidated financial statements.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
See the Glossary of Defined Terms at the beginning of this Report for terms used herein. The accounting principles followed by United and the methods of applying these principles conform with GAAP and with general practices within the banking industry. The following is a description of the significant policies.
Organization and Basis of Presentation
The Holding Company is a bank holding company under the BHC Act and, as of July 1, 2021, a financial holding company under the GLB Act. Financial holding company status allows for engagement in a broader range of financial activities. Prior to that the Holding Company was a bank holding company. The Holding Company’s principal business is conducted by its wholly-owned commercial bank subsidiary, United Community Bank. United is subject to regulation under the BHC Act. The consolidated financial statements include the accounts of the Holding Company, the Bank and other wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Effective July 1, 2021, the Bank moved its headquarters from Blairsville, Georgia to Greenville, South Carolina and became a South Carolina state-chartered bank subject to examination and reporting requirements of the SCBFI. Prior to that date, the Bank was a Georgia state-chartered bank subject to examination and reporting requirements of the GADBF. The Bank serves both rural and metropolitan markets in Georgia, South Carolina, North Carolina, Tennessee and Florida and provides a full range of banking services. The Bank is insured by and subject to the regulation of the FDIC.
Use of Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheet and revenue and expenses for the years then ended. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change are the determination of the ACL, the valuation of acquired loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, the valuation of goodwill and separately identifiable intangible assets associated with mergers and acquisitions, and the valuation of deferred tax assets.
Operating Segments
Operating segments are components of a business about which separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance. Public companies are required to report certain financial information about operating segments in interim and annual financial statements. United’s community banking operations are divided among geographic regions and local community banks within those regions. Those regions and banks have similar economic characteristics and products and are therefore considered to be one operating segment.
Cash and Cash Equivalents
Cash equivalents include amounts due from banks, interest-bearing deposits in banks, federal funds sold, commercial paper, reverse repurchase agreements and short-term investments and are carried at cost. Federal funds are generally sold for one-day periods, interest-bearing deposits in banks are available on demand and commercial paper investments and reverse repurchase agreements mature within a period of less than 90 days.
Investments
Debt Securities: Debt securities are classified as HTM and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as AFS when they may be sold before maturity. AFS securities are carried at fair value, with unrealized holding gains and losses reported in OCI, net of tax.
Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are generally amortized or accreted on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable debt securities are amortized to their earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains or losses associated with transfers of securities from AFS to HTM are included in the balance of AOCI in the consolidated balance sheets. These unrealized holding gains or losses are amortized/accreted into income over the remaining life of the security as an
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
adjustment to the yield in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security.
A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income.
The CECL framework requires an estimate of expected credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. The following discussion provides a description of the methodology applied to calculate the ACL under CECL.
ACL - HTM Debt Securities: Management measures current expected credit losses on HTM debt securities on a collective basis by major security type. The estimate of current expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management classifies the HTM portfolio into the following major security types: U.S. Treasuries, U.S. Government agencies and GSEs, state and political subdivisions, residential mortgage-backed, agency and GSEs, commercial mortgage-backed, agency and GSEs and supranational entities. Accrued interest receivable on HTM debt is excluded from the estimate of credit losses.
All of the residential and commercial mortgage-backed securities held by United as HTM are issued by U.S. Government agencies and GSEs. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The state and political subdivision securities are highly rated by major rating agencies.
ACL - AFS Debt Securities: For AFS debt securities in an unrealized loss position, United first assesses whether it intends to sell, or whether it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, United evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an ACL is recognized in other comprehensive income. Accrued interest receivable on AFS debt securities is excluded from the estimate of credit losses.
Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the ACL when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Equity investments: Equity investments are included in other assets on the consolidated balance sheets. Those with readily determinable fair values are carried at fair value with changes in fair value recognized in other noninterest income. Those without readily determinable fair values include, among others, FHLB stock, which is held to meet FHLB requirements related to outstanding advances and accounted for using the cost method of accounting. As conditions warrant, management reviews investments for impairment and adjusts the carrying value of the investment if it is deemed to be impaired.
Loans Held for Sale
United has elected the fair value option for the majority of newly originated mortgage loans held for sale in order to reduce certain timing differences and match changes in fair values of the loans with changes in the fair value of derivative instruments used to economically hedge them. In connection with the Reliant acquisition, United acquired certain mortgage loans held for sale for which the fair value option was not elected; these loans are carried at the lower of aggregate cost or fair value.
Loans and Leases
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the life of the loan.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
Equipment Financing Lease Receivables: Equipment financing lease receivables, which are classified as sales-type or direct financing leases, are recorded as the sum of the future minimum lease payments, initial deferred costs and, if applicable, estimated or contractual residual values less unearned income and security deposits. For lease receivables with a residual value, the determination of such 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, which is included in loan interest revenue in the consolidated statements of 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. These lease agreements may include options to renew and for the lessee to purchase the leased equipment at the end of the lease term. United excludes sales tax from consideration in these lease contracts.
PCD Loans: In acquisitions, United may acquire loans, some of which have experienced more than insignificant credit deterioration since origination. In those cases, United will consider internal loan grades, delinquency status and other relevant factors in assessing whether purchased loans are PCD. PCD loans are recorded at their fair value at the acquisition date. An initial ACL is determined using the same methodology as other loans held for investment and recognized as an adjustment to the acquisition price of the asset; thus, the sum of the loan's purchase price and ACL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent to initial recognition, PCD loans are subject to the same interest income recognition and impairment model as non-PCD loans, with changes to the ACL recorded through provision expense.
Nonaccrual Loans: The accrual of interest is generally discontinued when a loan becomes 90 days past due or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectable in the normal course of business. A loan may continue to accrue interest after 90 days if it is well collateralized and in the process of collection. Past due status is based on contractual terms of the loan.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest payments are reflected as a reduction of the carrying amount of the loan and interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance and future payments are reasonably assured.
TDRs: A loan for which the terms have been modified resulting in a more than insignificant concession, and for which the borrower is experiencing financial difficulties, is generally considered to be a TDR. Modified terms that result in a TDR include one or a combination of the following: a reduction of the stated interest rate of the loan, 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” in which 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.
Collateral dependent TDRs that subsequently default or are placed on nonaccrual are charged down to the fair value of the collateral consistent with United’s policy for nonaccrual loans.
Concentration of Credit Risk: Most of United’s business activity is with customers located within the markets where it has banking operations. Therefore, United’s exposure to credit risk is significantly affected by changes in the economy within its markets. Approximately 73% of United’s loan portfolio is secured by real estate and is therefore susceptible to changes in real estate valuations.
ACL- Loans
The CECL framework requires an estimate of expected credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. The following discussion provides a description of the methodology applied to calculate the ACL under CECL.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
The ACL is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed. Accrued interest receivable is excluded from the estimate of credit losses.
Management determines the ACL balance using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit behaviors along with model judgments provide the basis for the estimation of expected credit losses. Adjustments to modeled loss estimates may be made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in economic conditions, property values, or other relevant factors. For the majority of loans and leases the ACL is calculated using a discounted cash flow methodology applied at a loan level with a one-year reasonable and supportable forecast period and a two-year straight-line reversion period.
The ACL-loans is measured on a collective basis when similar risk characteristics exist. United has identified the following portfolio segments and calculates the ACL for each using a discounted cash flow methodology at the loan level, with loss rates, prepayment assumptions and curtailment assumptions driven by each loan’s collateral type:
Owner occupied commercial real estate - Loans in this category are susceptible to business failure and general economic conditions.
Income producing commercial real estate - Common risks for this loan category are declines in general economic conditions, declines in real estate value, declines in occupancy rates, and lack of suitable alternative use for the property.
Commercial & industrial - Risks to this loan category include the inability to monitor the condition of the collateral, which often consists of inventory, accounts receivable and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.
Commercial construction - Risks common to commercial construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements and declines in real estate values.
Equipment financing - Risks associated with equipment financing are similar to those described for commercial and industrial loans, including general economic conditions, as well as appropriate lien priority on equipment, equipment obsolescence and the general mobility of the collateral.
Residential mortgage - Residential mortgage loans are susceptible to weakening general economic conditions, increases in unemployment rates and declining real estate values.
HELOC - Risks common to home equity lines of credit are general economic conditions, including an increase in unemployment rates, and declining real estate values that reduce or eliminate the borrower’s home equity.
Residential construction - Residential construction loans are susceptible to the same risks as residential mortgage loans. Changes in market demand for property lead to longer marketing times resulting in higher carrying costs and declining values.
Manufactured housing - Risks associated with manufactured housing are similar to those described for residential mortgage loans, including general economic conditions and unemployment rates, as well as appropriate lien priority and the general mobility of the collateral.
Consumer - Risks common to consumer direct loans include unemployment and changes in local economic conditions as well as the inability to monitor collateral consisting of personal property.
When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
When the discounted cash flow method is used to determine the ACL, management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments. The ACL on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring.
Determining the Contractual Term: Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by United.
ACL - Off-Balance Sheet Credit Exposures
Management estimates expected credit losses on commitments to extend credit over the contractual period during which United is exposed to credit risk on the underlying commitments. The ACL on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The ACL is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to fund.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily using the straight line method over the estimated useful lives of the related assets. Costs incurred for maintenance and repairs are expensed as incurred. The range of estimated useful lives for buildings and improvements is 10 to 40 years, for land improvements, 10 years, and for furniture and equipment, 3 to 10 years. United periodically reviews the carrying value of premises and equipment for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable.
Foreclosed Properties (OREO)
Foreclosed property is initially recorded at fair value, less cost to sell. If the fair value, less cost to sell at the time of foreclosure is less than the loan balance, the deficiency is recorded as a loan charge-off against the ACL. If the fair value, less cost to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to operating expenses. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property.
Goodwill and Other Intangible Assets
Goodwill is an asset representing the future economic benefits from other assets acquired that are not individually identified and separately recognized. Goodwill is measured as the excess of the consideration transferred, net of the fair value of identifiable assets acquired and liabilities assumed at the acquisition date. Goodwill is not amortized, but instead is tested for impairment annually or more frequently if events or circumstances exist that indicate a goodwill impairment test should be performed.
Other intangible assets, which are initially recorded at fair value, consist of core deposit and customer list intangibles resulting from acquisitions. Core deposit intangible assets are amortized over their estimated useful lives using the sum-of-the-years-digits method. Customer list intangibles are amortized over their estimated useful lives using the straight-line method.
Management evaluates other intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from United, the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets and United does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.
Servicing Rights
United records a separate servicing asset for SBA loans, USDA loans, and residential mortgage loans when the loan is sold but servicing is retained. This asset represents the right to service the loans and receive a fee in compensation. Servicing assets are
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
initially recorded at their fair value as a component of the sale proceeds. The fair value of the servicing assets is based on an analysis of discounted cash flows that incorporates estimates of (1) market servicing costs, (2) market-based prepayment rates, and (3) market profit margins. Servicing assets are included in other assets.
United has elected to subsequently measure the servicing assets for government guaranteed loans and residential mortgage loans at fair value. The rate of prepayment of loans serviced is the most significant estimate involved in the measurement process. Estimates of prepayment rates are based on market expectations of future prepayment rates, industry trends, and other considerations. Actual prepayment rates will differ from those projected by management due to changes in a variety of economic factors, including prevailing interest rates and the availability of alternative financing sources to borrowers. If actual prepayments of the loans being serviced were to occur more quickly than projected, the carrying value of servicing assets might have to be written down through a charge to earnings in the current period. If actual prepayments of the loans being serviced were to occur more slowly than had been projected, the carrying value of servicing assets could increase, and servicing income would exceed previously projected amounts.
United accounts for the servicing liabilities associated with sold equipment financing loans using the amortization method. Servicing liabilities are included in accrued expenses and other liabilities.
BOLI
United has purchased life insurance policies on certain key executives and members of management. United has also received life insurance policies on members of acquired bank management teams and board members through acquisitions of other banks. BOLI is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other changes or other amounts due that are probable at settlement.
Operating Leases
United records a ROU asset, included in other assets, and a related lease liability, included in other liabilities, for eligible operating leases for which it is the lessee, which include leases for land, buildings, and equipment. At lease commencement, United records the ROU asset and related lease liability based on the present value of lease payments over the lease term. Absent a readily determinable interest rate in the lease agreement, United utilizes the Bank’s incremental borrowing rate for secured borrowings as the discount rate used in the present value calculation. Payments related to these leases consist primarily of base rent and, in the case of building leases, additional operating costs associated with the leased property such as common area maintenance and utilities. In most cases, these operating costs vary over the term of the lease, and therefore are classified as variable lease costs, which are recognized as incurred in the consolidated statement of income. In addition, certain operating leases include costs such as property taxes and insurance, which are recognized as incurred in the consolidated statement of income. Many of United’s operating leases contain renewal options, which are included in the measurement of the ROU asset and lease liability to the extent they are reasonably certain to be exercised. United also subleases and leases certain real estate properties to third parties under operating leases. United does not recognize a lease liability or ROU asset on the consolidated balance sheet related to short-term leases with a term of less than one year. Lease payments for short-term leases are recognized as expense over the lease term. Operating lease costs, variable lease costs and short-term lease costs are included in occupancy expense and communications and equipment expense in the consolidated statement of income.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The face amount for these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
VIEs
United holds investments in certain legal entities that are considered VIEs. VIEs are legal entities in which equity investors do not have sufficient equity at risk for the entity to independently finance its activities, or as a group, the holders of the equity investment at risk lack the power through voting or similar rights to direct the activities of the entity that most significantly impact its economic performance, or do not have the obligation to absorb the expected losses of the entity or the right to receive expected residual returns of the entity. Consolidation of a VIE is required if a reporting entity is the primary beneficiary of the VIE.
Investments in VIEs are evaluated to determine if United is the primary beneficiary. This evaluation gives appropriate consideration to the design of the entity and the variability that the entity was designed to create and pass along, the relative power of each party, and to United’s obligation to absorb losses or receive residual returns of the entity. United has variable interests in certain entities that are not required to be consolidated, including LIHTC, renewable energy and other partnership interests. Refer to Note 23, Commitments and Contingencies, for additional disclosures regarding United’s VIEs.
With the exception of LIHTC partnerships, investments in entities for which United has the ability to exercise significant influence, but not control, over operating and financing decisions are accounted for using the equity method of accounting. Equity method investments are included in other assets in the consolidated balance sheets at cost, adjusted to reflect United’s portion of income, loss, or dividends of the investee. United records its portion of income or loss in other noninterest income in the consolidated statements of income. These investments are periodically evaluated for impairment.
LIHTC investments are accounted for using the proportional amortization method of accounting for qualified affordable housing investments, which results in the amortization being reported as a component of income tax expense. Obligations related to unfunded commitments for LIHTC and renewable energy investments are reported in other liabilities. Investment tax credits related to renewable energy are accounted for using the deferral method.
Revenue from Contracts with Customers
In addition to lending and related activities, United offers various services to customers that generate revenue, certain of which are governed by ASC Topic 606 Revenue from Contracts with Customers. United’s services that fall within the scope of this topic are presented within noninterest income and include service charges and fees, wealth management fees, and other transaction-based fees. Revenue is recognized when the transactions occur or as services are performed over primarily monthly or quarterly periods. Payment is typically received in the period the transactions occur. Fees may be fixed or, where applicable, based on a percentage of transaction size.
Income Taxes
DTAs and DTLs are recorded for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. DTAs and DTLs are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect of a change in tax rates on DTAs and DTLs is recognized in income tax expense during the period that includes the enactment date.
In the event the future tax consequences of differences between the financial reporting bases and the tax bases of assets and liabilities results in DTAs, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the DTA when it is more likely than not that some or all of the DTA will not be realized. In assessing the realizability of the DTAs, management considers the scheduled reversals of DTLs, projected future taxable earnings and prudent and feasible tax planning strategies. Management weighs both the positive and negative evidence, giving more weight to evidence that can be objectively verified.
The income tax benefit or expense is the total of the current year income tax due or refundable and the change in DTAs and DTLs.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
United recognizes interest and / or penalties related to income tax matters in income tax expense.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
Derivative Instruments and Hedging Activities
United’s interest rate risk management strategy incorporates the use of derivative instruments to minimize fluctuations in net income that are caused by interest rate volatility. The objective is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that net interest revenue and certain interest sensitive components of noninterest revenue are not, on a material basis, adversely affected by movements in interest rates. United views this strategy as a prudent management of interest rate risk, such that net income is not exposed to undue risk presented by changes in interest rates. In carrying out this part of its interest rate risk management strategy, management uses derivatives, primarily interest rate swaps and caps. Interest rate swaps generally involve the exchange of fixed- and variable-rate interest payments between two parties, based on a common notional principal amount and maturity date.
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, the Company 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. The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding derivative instruments which are entered into as part of an economic hedging strategy to manage exposure related to mortgage loans held for sale.
To accommodate customers, United enters into interest rate swaps, caps or collars with certain commercial loan customers, with offsetting positions to dealers under a back-to-back swap/cap/collar program. In addition, 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.
United classifies its derivative financial instruments as either (1) a hedge of an exposure to changes in the fair value of a recorded asset or liability (“fair value hedge”), (2) a hedge of an exposure to changes in the cash flows of a recognized asset, liability or forecasted transaction (“cash flow hedge”), or (3) derivatives not designated as accounting hedges. Changes in the fair value of derivatives not designated as hedges are recognized in current period earnings. United has master netting agreements with the derivatives dealers with which it does business, but reflects gross assets and liabilities at fair value on the consolidated balance sheets.
United assesses hedge effectiveness at inception and over the life of the hedge. Management documents, at inception, its analysis of actual and expected hedge effectiveness. This analysis includes techniques such as regression analysis and hypothetical derivatives to demonstrate that the hedge is expected to be highly effective in offsetting corresponding changes in the fair value or cash flows of the hedged item. At least quarterly thereafter, the terms of the hedging instrument and the hedged item are assessed to determine whether a material change has occurred relating to the hedge relationship. If it is determined that a change has occurred, a quantitative analysis as described will occur to determine whether the hedge is expected to be highly effective in offsetting future corresponding changes in the fair value or cash flows of the hedged item. For a qualifying fair value hedge, the changes in the value of derivatives are recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged. For a qualifying cash flow hedge, the changes in the fair value of the derivatives that have been highly effective are recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings.
For fair value hedges and cash flow hedges, ineffectiveness is recognized in the same income statement line as interest accruals on the hedged item to the extent that changes in the value of the derivative instruments do not perfectly offset changes in the value of the hedged items. If the hedge ceases to be highly effective, United discontinues hedge accounting and recognizes the changes in fair value in current period earnings. If a derivative that qualifies as a fair value or cash flow hedge is terminated or the designation removed, the realized or then unrealized gain or loss is recognized into income over the life of the hedged item (fair value hedge) or over the time when the hedged item was forecasted to impact earnings (cash flow hedge). Immediate recognition in earnings is required upon sale or extinguishment of the hedged item (fair value hedge) or if it is probable that the hedged cash flows will not occur (cash flow hedge).
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
By using derivative instruments, United is exposed to credit and market risk. If the counterparty fails to perform, credit risk is represented by the fair value gain in a derivative. When the fair value of a derivative contract is positive, this situation generally indicates that the counterparty is obligated to pay United, and, therefore, creates a repayment risk for United. When the fair value of a derivative contract is negative, United is obligated to pay the counterparty and, therefore, has no repayment risk. United minimizes the credit risk in non-customer derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by management. United also requires non-customer counterparties to pledge cash as collateral to cover the net exposure. All new non-customer derivatives that can be cleared are cleared through a central clearinghouse, which reduces counterparty exposure.
Derivative activities are monitored by the ALCO as part its oversight of asset/liability and treasury functions. The ALCO is responsible for implementing various hedging strategies that are developed through its analysis of data from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into the overall interest-rate risk management process.
Acquisition Activities
United accounts for business combinations under the acquisition method of accounting. Assets acquired and liabilities assumed are measured and recorded at fair value at the date of acquisition, including identifiable intangible assets. If the fair value of net assets purchased exceeds the fair value of consideration paid, a bargain purchase gain is recognized at the date of acquisition. Conversely, if the consideration paid exceeds the fair value of the net assets acquired, goodwill is recognized at the acquisition date. Fair values 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.
Fair values for acquired loans are generally based on a discounted cash flow methodology that considers credit loss expectations, market interest rates and other market factors such as liquidity from the perspective of a market participant. Loans are grouped together according to similar characteristics and are generally treated in the aggregate when applying various valuation techniques. The probability of default, loss given default and prepayment assumptions are the key factors driving credit losses which are embedded into the estimated cash flows. These assumptions are informed by internal data on loan characteristics, historical loss experience, and current and forecasted economic conditions. The interest and liquidity component of the estimate is determined by discounting interest and principal cash flows through the expected life of each loan. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity. The discount rate does not include a factor for credit losses as that has been included as a reduction to the estimated cash flows. For additional information about the accounting for purchased loans see PCD Loans under the Loans and Leases section of this footnote.
All identifiable intangible assets that are acquired in a business combination are recognized at fair value on the acquisition date. Identifiable intangible assets are recognized separately if they arise from contractual or other legal rights or if they are separable (i.e., capable of being sold, transferred, licensed, rented, or exchanged separately from the entity). Deposit liabilities and the related depositor relationship intangible assets may be exchanged in observable exchange transactions. As a result, the depositor relationship intangible asset is considered identifiable, because the separability criterion has been met.
Earnings Per Common Share
Basic earnings per common share is net income available to common shareholders divided by the weighted average number of shares of common stock outstanding during the period. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Additionally, shares issuable to participants in United’s deferred compensation plan are considered to be participating securities for purposes of calculating basic earnings per share. Accordingly, net income available to common shareholders is calculated pursuant to the two-class method, whereby net income after subtracting preferred stock dividends is allocated between common shareholders and participating securities. Diluted earnings per common share includes the dilutive effect of additional potential shares of common stock issuable under stock options, unvested restricted stock units without nonforfeitable rights to dividends, warrants and securities convertible into common stock.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
Dividend Restrictions
Banking regulations require maintaining certain capital levels and may limit dividends paid by the Bank to the Holding Company or by the Holding Company to shareholders. As a South Carolina state-chartered bank, the Bank is permitted to pay a dividend of up to 100% of its current year earnings without requesting approval of the SCBFI, provided certain conditions are met. Prior to July 1, 2021, as a Georgia state-chartered bank, the Board could declare dividends from the Bank to the Holding Company out of retained earnings of up to fifty percent of the Bank’s net income from the previous year without notifying or seeking approval from the GADBF, provided certain conditions were met.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions as more fully disclosed in Note 15. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Stock-Based Compensation
United uses the fair value method of recognizing expense for stock-based compensation based on the fair value of option and restricted stock unit awards at the date of grant. United accounts for forfeitures as they occur.
(2) Accounting Standards Updates and Recently Adopted Standards
Recently Adopted Standards
In July 2021, the FASB issued ASU No. 2021-05, Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments. The update amends the lease classification requirements for lessors to align them with practice under the former lease accounting standard. Specifically, lessors should classify a lease with variable lease payments that do not depend on a reference index or rate as an operating lease if certain criteria are met. United adopted this update as of January 1, 2022, with no material impact on the consolidated financial statements.
In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. Topic 848, which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting, originally included a sunset date of December 31, 2022. This update defers the sunset date to December 31, 2024, to better align with the revised LIBOR cessation date of June 30, 2023. After the sunset date, entities will no longer be permitted to apply the relief in Topic 848. United adopted this update immediately, with no material impact on the consolidated financial statements.
Accounting Standards Updates Not Yet Adopted as of December 31, 2022
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from contracts with Customers. The update requires that an acquiring entity apply the guidance from Revenue from Contracts with Customers (Topic 606) to recognize and measure contract assets and contract liabilities in a business combination, rather than fair value. Adoption of this update as of January 1, 2023 did not have a material impact on the consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method. The update expands the current last-of-layer method to a portfolio layer method which allows multiple hedged layers of a single closed portfolio and non-prepayable financial assets. In addition, the update specifies that eligible hedging instruments may include spot-starting or forward-starting swaps and that the number of hedged layers corresponds with the number of hedges designated. Finally, the update provides additional guidance on the accounting for and disclosure of hedge basis adjustments. Adoption of this update as of January 1, 2023 did not have a material impact on the consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The update eliminates the previous accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. The update also requires that an entity disclose current-period gross charge-offs by year of origination. Adoption of this update as of January 1, 2023 did not have a material impact on the consolidated financial statements. The disclosure provisions of this update will be reflected in United’s first quarter 2023 Form 10Q.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Accounting Standards Updates and Recently Adopted Standards, continued
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820) - Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The update clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account and, therefore, is not considered in measuring fair value. For public entities, this guidance is effective for fiscal years beginning after December 15, 2023. United does not expect the new guidance to have a material impact on the consolidated financial statements.
(3) Acquisitions
The following note details acquisitions accounted for as business combinations during the periods covered by this Report. Accordingly, assets acquired and liabilities assumed are presented at fair value as of the acquisition date. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. Goodwill is established when the fair value of consideration paid exceeds the fair value of the identifiable assets acquired and liabilities assumed. Fair values are considered preliminary for a period not to exceed one year after the acquisition date and are subject to refinement as information relative to closing date fair values becomes available.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Acquisitions, continued
Reliant
On January 1, 2022, United acquired all of the outstanding common stock of Reliant in a stock transaction. Reliant operated a 25-branch network primarily located in Middle Tennessee, which facilitated United’s growth into those markets. United’s operating results for the year ended December 31, 2022 include the operating results of the acquired business for the period subsequent to the acquisition date of January 1, 2022. The following table presents purchased assets and assumed liabilities recorded at their acquisition date fair values and consideration transferred as well as supplementary information related to the acquired loan portfolio at the acquisition date (in thousands).
| | | | | | | | | | | |
| Reliant | |
| | | |
| Fair Value Recorded by United | |
| | January 1, 2022 | |
| Assets | | |
| Cash and cash equivalents | $ | 62,867 | | |
| Debt securities | 249,107 | | |
| Loans held for sale | 116,406 | | |
| Loans held for investment | 2,320,737 | | |
| | | |
| Premises and equipment | 35,631 | | |
| BOLI | 78,170 | | |
| Accrued interest receivable | 12,027 | | |
| | | |
| Net deferred tax asset | 5,793 | | |
| Core deposit intangible | 14,500 | | |
| Other assets | 59,768 | | |
| Total assets acquired | 2,955,006 | | |
| Liabilities | | |
| Deposits | 2,504,823 | | |
| Short-term borrowings | 27,000 | | |
| Long-term debt | 76,730 | | |
| Other liabilities | 48,620 | | |
| Total liabilities assumed | 2,657,173 | | |
| Total identifiable net assets | 297,833 | | |
| Consideration transferred | | |
| Cash | 624 | | |
| Common stock issued (16,571,545 shares) | 595,581 | | |
| Options converted | 795 | | |
| Total fair value of consideration transferred | 597,000 | | |
| Goodwill | $ | 299,167 | | |
| | | |
| Supplementary Information on Acquired Loans | |
| | January 1, 2022 | |
| PCD loans: | | |
| Par value | $ | 258,462 | | |
| ACL at acquisition | (12,737) | | |
| Non-credit discount | (3,294) | | |
| Purchase price | $ | 242,431 | | |
| | | |
| Non-PCD loans: | | |
| Fair value | $ | 2,078,306 | | |
| Gross contractual amounts receivable | 2,355,205 | | |
| Estimate of contractual cash flows not expected to be collected | 25,990 | | |
Goodwill represents the intangible value of Reliant’s business and reputation within the markets it served and is not expected to be deductible for income tax purposes. The Reliant core deposit intangible will be amortized over its expected useful life of 10 years using the sum-of-the-years-digits method.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Acquisitions, continued
Aquesta
On October 1, 2021, United completed the acquisition of Aquesta, a bank headquartered in Cornelius, North Carolina, which operated a network of branches primarily located in the Charlotte metropolitan area. United’s operating results for the year ended December 31, 2021 include the operating results of the acquired business for the period subsequent to the acquisition date.
The following table presents purchased assets and assumed liabilities recorded at their acquisition date fair values and consideration transferred as well as supplementary information related to the acquired loan portfolio at the acquisition date (in thousands).
| | | | | | | | | | | |
| Aquesta | |
| | | |
| Fair Value Recorded by United | |
| | October 1, 2021 | |
| Assets | | |
| Cash and cash equivalents | $ | 153,091 | | |
| Debt securities | 60,762 | | |
| Loans | 498,312 | | |
| Premises and equipment | 18,112 | | |
| BOLI | 12,540 | | |
| Accrued interest receivable | 1,419 | | |
| Net deferred tax asset | 2,129 | | |
| Core deposit intangible | 2,030 | | |
| Other assets | 7,553 | | |
| Total assets acquired | 755,948 | | |
| Liabilities | | |
| Deposits | 657,724 | | |
| FHLB advances | 24,509 | | |
| Other liabilities | 12,084 | | |
| Total liabilities assumed | 694,317 | | |
| Total identifiable net assets | 61,631 | | |
| Consideration transferred | | |
| Cash | 40,542 | | |
| Common stock issued (2,731,435 shares) | 89,646 | | |
| Option and warrant equity instruments converted | 1,478 | | |
| Total fair value of consideration transferred | 131,666 | | |
| Goodwill | $ | 70,035 | | |
| | | |
| Supplementary Information on Acquired Loans | |
| | October 1, 2021 | |
| PCD loans: | | |
| Par value | $ | 75,579 | | |
| ACL at acquisition | (3,544) | | |
| Non-credit discount | (692) | | |
| Purchase price | $ | 71,343 | | |
| | | |
| Non-PCD loans: | | |
| Fair value | $ | 426,969 | | |
| Gross contractual amounts receivable | 482,737 | | |
| Estimate of contractual cash flows not expected to be collected | 3,399 | | |
Goodwill represents the intangible value of Aquesta’s business and reputation within the markets it served and is not expected to be deductible for income tax purposes. The Aquesta core deposit intangible will be amortized over its expected useful life of 10 years using the sum-of-the-years-digits method.
FinTrust
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Acquisitions, continued
On July 6, 2021, United completed the acquisition of FinTrust, an investment advisory firm headquartered in Greenville, South Carolina, with additional locations in Anderson, South Carolina, and Athens and Macon, Georgia. The firm provides wealth and investment management services to individuals and institutions within its markets. United’s operating results for the year ended December 31, 2021 include FinTrust’s operating results for the period subsequent to the acquisition date.
FinTrust shareholders received $21.7 million in total consideration, which consisted of $4.40 million (132,299 shares) of United common stock, $9.62 million in cash paid at closing, $4.40 million in cash payable due on the first anniversary of the acquisition date and $3.30 million of contingent consideration. The first anniversary payment of $4.40 million was paid in 2022. The contingent consideration represents an earn-out payment due to the sellers of FinTrust on the second anniversary of the acquisition date. The earn-out payment is subject to the achievement of defined target revenue ratios during the two-year period following the acquisition date, which are expected to be fully achieved.
At acquisition, United recognized $22.8 million of assets and $1.10 million of liabilities. Assets recorded as a result of the acquisition included goodwill of $14.2 million and a customer relationship intangible of $7.53 million. Goodwill reflects the value of FinTrust’s broad array of products and services, which enhances United’s existing wealth management business. Goodwill is expected to be deductible for tax purposes. United is amortizing the related customer relationship intangible using the straight-line method over 15 years, which represents the expected useful life of the asset. In addition, United recognized right-of-use assets and operating lease liabilities totaling $822,000 for FinTrust’s leased locations.
Pro forma information - unaudited
The following table discloses the impact of the mergers with Reliant in 2022 and Aquesta and FinTrust in 2021 since the respective acquisition dates through December 31 of the year of acquisition. The table also presents certain pro forma information as if Reliant had been acquired on January 1, 2021, Aquesta and FinTrust had been acquired on January 1, 2020 and Three Shores had been acquired January 1, 2019. These results combine the historical results of the acquired entities with United’s consolidated statements 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 acquisitions taken place in earlier years.
For purposes of pro forma information, merger-related costs incurred in the year of acquisition are excluded from the actual acquisition year results and included in the pro forma acquisition year results. As a result, merger-related costs related to the acquisition of Reliant of $15.7 million are reflected in 2021 pro forma information and merger related costs related to the acquisitions of Aquesta and FinTrust of $9.00 million and $518,000, respectively, are reflected in 2020 pro forma information. Merger-related costs related to the acquisition of Three Shores of $5.04 million were previously reported in 2019 pro forma information, which is not presented in the following table.
The following table presents the actual results and pro forma information for the periods indicated (in thousands).
| | | | | | | | | | | |
| (Unaudited) Year Ended December 31, |
| Revenue | | Net Income |
2022 | | | |
Actual Reliant results included in statement of income since acquisition date | $ | 100,529 | | | $ | 48,926 | |
| | | |
Supplemental consolidated pro forma as if Reliant had been acquired January 1, 2021 | 842,182 | | | 301,308 | |
| | | |
2021 | | | |
Actual Aquesta results included in statement of income since acquisition date | $ | 2,122 | | | $ | (282) | |
Actual FinTrust results included in statement of income since acquisition date | 4,326 | | | (26) | |
Supplemental consolidated pro forma as if Reliant had been acquired January 1, 2021 and Aquesta and FinTrust had been acquired January 1, 2020 | 909,353 | | | 295,864 | |
2020 | | | |
Actual Three Shores results included in statement of income since acquisition date | $ | 24,541 | | | $ | 6,800 | |
Supplemental consolidated pro forma as if Aquesta and FinTrust had been acquired January 1, 2020 and Three Shores had been acquired January 1, 2019 | 622,848 | | | 164,284 | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Supplemental Cash Flow Information
The supplemental schedule of cash and noncash activities for the periods indicated is as follows (in thousands). See Note 14, Operating Leases, for information regarding noncash transactions related to ROU assets and lease liabilities.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Cash paid during the period for: | | | | | |
Interest | $ | 58,713 | | | $ | 32,000 | | | $ | 59,967 | |
Income taxes | 50,499 | | | 55,754 | | | 36,536 | |
| | | | | |
Significant non-cash investing and financing transactions: | | | | | |
Transfers of AFS securities to HTM securities | 1,288,982 | | | — | | | — | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Acquisitions: | | | | | |
Assets acquired | 3,254,173 | | | 848,806 | | | 2,174,723 | |
Liabilities assumed | 2,657,173 | | | 695,420 | | | 1,987,026 | |
Net assets acquired | 597,000 | | | 153,386 | | | 187,697 | |
Value of common stock issued | 595,581 | | | 94,046 | | | 163,589 | |
Other non-cash consideration (1) | 795 | | | 9,178 | | | — | |
| | | | | |
| | | | | |
| | | | | |
(1) See Note 3, Acquisitions, for further detail.
(5) Investments
During 2022, United transferred AFS debt securities to HTM with a fair value on the transfer date of $1.29 billion, which included unrealized losses recorded in AOCI totaling $87.4 million. Transfer date unrealized losses are amortized and reclassified out of AOCI as a yield adjustment, which is offset by discount accretion of the transferred HTM securities. Amortization of transfer date unrealized losses and discount accretion are recognized over the remaining life of the securities.
The cost basis, unrealized gains and losses, and fair value of HTM debt securities as of the dates indicated are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
As of December 31, 2022 | | | | | | | |
U.S. Treasuries | $ | 19,834 | | | $ | — | | | $ | 2,417 | | | $ | 17,417 | |
U.S. Government agencies & GSEs | 99,679 | | | — | | | 18,169 | | | 81,510 | |
State and political subdivisions | 295,945 | | | 56 | | | 64,340 | | | 231,661 | |
Residential MBS, Agency & GSE | 1,488,028 | | | 35 | | | 223,566 | | | 1,264,497 | |
| | | | | | | |
Commercial MBS, Agency & GSE | 695,162 | | | — | | | 111,586 | | | 583,576 | |
| | | | | | | |
Supranational entities | 15,000 | | | — | | | 2,588 | | | 12,412 | |
Total | $ | 2,613,648 | | | $ | 91 | | | $ | 422,666 | | | $ | 2,191,073 | |
| | | | | | | |
As of December 31, 2021 | | | | | | | |
U.S. Treasuries | $ | 19,803 | | | $ | 20 | | | $ | — | | | $ | 19,823 | |
U.S. Government agencies & GSEs | 70,180 | | | — | | | 1,121 | | | 69,059 | |
State and political subdivisions | 257,688 | | | 4,341 | | | 4,080 | | | 257,949 | |
Residential MBS, Agency & GSE | 381,641 | | | 2,021 | | | 3,687 | | | 379,975 | |
| | | | | | | |
Commercial MBS, Agency & GSE | 411,786 | | | 4,106 | | | 8,915 | | | 406,977 | |
| | | | | | | |
Supranational entities | 15,000 | | | 21 | | | — | | | 15,021 | |
Total | $ | 1,156,098 | | | $ | 10,509 | | | $ | 17,803 | | | $ | 1,148,804 | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Investments, continued
The cost basis, unrealized gains and losses, and fair value of AFS debt securities as of the dates indicated are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
As of December 31, 2022 | | | | | | | |
U.S. Treasuries | $ | 163,972 | | | $ | — | | | $ | 14,620 | | | $ | 149,352 | |
U.S. Government agencies & GSEs | 266,347 | | | 463 | | | 16,694 | | | 250,116 | |
State and political subdivisions | 329,723 | | | 151 | | | 26,126 | | | 303,748 | |
Residential MBS, Agency & GSE | 1,609,442 | | | 13 | | | 160,636 | | | 1,448,819 | |
Residential MBS, Non-agency | 374,535 | | | — | | | 27,873 | | | 346,662 | |
Commercial MBS, Agency & GSE | 720,282 | | | 471 | | | 79,407 | | | 641,346 | |
Commercial MBS, Non-agency | 31,624 | | | — | | | 1,058 | | | 30,566 | |
| | | | | | | |
Corporate bonds | 236,181 | | | 34 | | | 23,763 | | | 212,452 | |
Asset-backed securities | 239,220 | | | — | | | 7,948 | | | 231,272 | |
| | | | | | | |
Total | $ | 3,971,326 | | | $ | 1,132 | | | $ | 358,125 | | | $ | 3,614,333 | |
| | | | | | | |
As of December 31, 2021 | | | | | | | |
U.S. Treasuries | $ | 218,027 | | | $ | 1,661 | | | $ | 2,168 | | | $ | 217,520 | |
U.S. Government agencies & GSEs | 189,855 | | | 605 | | | 3,428 | | | 187,032 | |
State and political subdivisions | 263,269 | | | 15,237 | | | 2,662 | | | 275,844 | |
Residential MBS, Agency & GSE | 2,079,700 | | | 9,785 | | | 28,521 | | | 2,060,964 | |
Residential MBS, Non-agency | 81,925 | | | 2,249 | | | 4 | | | 84,170 | |
Commercial MBS, Agency & GSE | 870,563 | | | 2,974 | | | 16,156 | | | 857,381 | |
Commercial MBS, Non-agency | 15,202 | | | 1,268 | | | — | | | 16,470 | |
| | | | | | | |
Corporate bonds | 194,164 | | | 814 | | | 1,812 | | | 193,166 | |
Asset-backed securities | 603,824 | | | 2,000 | | | 1,547 | | | 604,277 | |
Total | $ | 4,516,529 | | | $ | 36,593 | | | $ | 56,298 | | | $ | 4,496,824 | |
At December 31, 2022 and 2021, securities with a carrying value of $2.53 billion and $1.46 billion, respectively, were pledged primarily to secure deposits. At year-end 2022 and 2021, there were no holdings of debt obligations of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.
The following summarizes HTM debt 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 December 31, 2022 | | | | | | | | | | | |
U.S. Treasuries | $ | 17,417 | | | $ | 2,417 | | | $ | — | | | $ | — | | | $ | 17,417 | | | $ | 2,417 | |
U.S. Government agencies & GSEs | 10,687 | | | 1,813 | | | 70,823 | | | 16,356 | | | 81,510 | | | 18,169 | |
State and political subdivisions | 104,243 | | | 20,639 | | | 117,115 | | | 43,701 | | | 221,358 | | | 64,340 | |
Residential MBS, Agency & GSE | 296,673 | | | 38,289 | | | 965,785 | | | 185,277 | | | 1,262,458 | | | 223,566 | |
| | | | | | | | | | | |
Commercial MBS, Agency & GSE | 176,848 | | | 24,497 | | | 406,728 | | | 87,089 | | | 583,576 | | | 111,586 | |
| | | | | | | | | | | |
Supranational entities | 12,412 | | | 2,588 | | | — | | | — | | | 12,412 | | | 2,588 | |
Total unrealized loss position | $ | 618,280 | | | $ | 90,243 | | | $ | 1,560,451 | | | $ | 332,423 | | | $ | 2,178,731 | | | $ | 422,666 | |
| | | | | | | | | | | |
As of December 31, 2021 | | | | | | | | | | | |
| | | | | | | | | | | |
U.S. Government agencies & GSEs | $ | 64,658 | | | $ | 888 | | | $ | 4,401 | | | $ | 233 | | | $ | 69,059 | | | $ | 1,121 | |
State and political subdivisions | 131,128 | | | 3,590 | | | 9,006 | | | 490 | | | 140,134 | | | 4,080 | |
Residential MBS, Agency & GSE | 289,132 | | | 3,687 | | | — | | | — | | | 289,132 | | | 3,687 | |
| | | | | | | | | | | |
Commercial MBS, Agency & GSE | 314,049 | | | 8,540 | | | 10,384 | | | 375 | | | 324,433 | | | 8,915 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total unrealized loss position | $ | 798,967 | | | $ | 16,705 | | | $ | 23,791 | | | $ | 1,098 | | | $ | 822,758 | | | $ | 17,803 | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Investments, continued
The following summarizes AFS debt 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 December 31, 2022 | | | | | | | | | | | |
U.S. Treasuries | $ | 49,259 | | | $ | 724 | | | $ | 100,093 | | | $ | 13,896 | | | $ | 149,352 | | | $ | 14,620 | |
U.S. Government agencies & GSEs | 93,015 | | | 2,124 | | | 108,093 | | | 14,570 | | | 201,108 | | | 16,694 | |
State and political subdivisions | 207,749 | | | 9,906 | | | 62,606 | | | 16,220 | | | 270,355 | | | 26,126 | |
Residential MBS, Agency & GSE | 1,049,648 | | | 102,852 | | | 392,288 | | | 57,784 | | | 1,441,936 | | | 160,636 | |
Residential MBS, Non-agency | 338,399 | | | 27,095 | | | 8,263 | | | 778 | | | 346,662 | | | 27,873 | |
Commercial MBS, Agency & GSE | 288,787 | | | 17,304 | | | 332,088 | | | 62,103 | | | 620,875 | | | 79,407 | |
Commercial MBS, Non-agency | 30,566 | | | 1,058 | | | — | | | — | | | 30,566 | | | 1,058 | |
Corporate bonds | 83,010 | | | 7,776 | | | 127,603 | | | 15,987 | | | 210,613 | | | 23,763 | |
Asset-backed securities | 97,705 | | | 2,664 | | | 133,567 | | | 5,284 | | | 231,272 | | | 7,948 | |
Total unrealized loss position | $ | 2,238,138 | | | $ | 171,503 | | | $ | 1,264,601 | | | $ | 186,622 | | | $ | 3,502,739 | | | $ | 358,125 | |
| | | | | | | | | | | |
As of December 31, 2021 | | | | | | | | | | | |
U.S. Treasuries | $ | 111,606 | | | $ | 2,168 | | | $ | — | | | $ | — | | | $ | 111,606 | | | $ | 2,168 | |
U.S. Government agencies & GSEs | 132,893 | | | 2,591 | | | 20,093 | | | 837 | | | 152,986 | | | 3,428 | |
State and political subdivisions | 69,302 | | | 2,581 | | | 3,148 | | | 81 | | | 72,450 | | | 2,662 | |
Residential MBS, Agency & GSE | 1,534,744 | | | 25,799 | | | 74,481 | | | 2,722 | | | 1,609,225 | | | 28,521 | |
Residential MBS, Non-agency | 12,608 | | | 4 | | | — | | | — | | | 12,608 | | | 4 | |
Commercial MBS, Agency & GSE | 582,235 | | | 13,098 | | | 66,014 | | | 3,058 | | | 648,249 | | | 16,156 | |
| | | | | | | | | | | |
Corporate bonds | 149,246 | | | 1,811 | | | 16 | | | 1 | | | 149,262 | | | 1,812 | |
Asset-backed securities | 195,164 | | | 1,546 | | | 571 | | | 1 | | | 195,735 | | | 1,547 | |
Total unrealized loss position | $ | 2,787,798 | | | $ | 49,598 | | | $ | 164,323 | | | $ | 6,700 | | | $ | 2,952,121 | | | $ | 56,298 | |
At December 31, 2022, there were 740 AFS debt securities and 315 HTM debt securities that were in an unrealized loss position. Management does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of its amortized cost basis. Unrealized losses at December 31, 2022 and 2021 were primarily attributable to changes in interest rates.
At December 31, 2022 and 2021, calculated credit losses and, thus, the related ACL on HTM debt securities were de minimis due to the high credit quality of the portfolio, which included securities issued or guaranteed by the U.S. Treasury, U.S. Government agencies, GSEs, high credit quality municipalities and supranational entities. As a result, no ACL was recorded on the HTM portfolio at December 31, 2022 and 2021. In addition, based on the assessment performed as of December 31, 2022 and 2021, there was no ACL required related to the AFS portfolio. See Note 1 for additional details on the ACL as it relates to the securities portfolio.
The following table presents accrued interest receivable for the periods indicated on HTM and AFS debt securities (in thousands), which was excluded from the estimate of credit losses.
| | | | | | | | | | | | | | | | | |
| | Accrued Interest Receivable | |
| | December 31, | |
| | 2022 | | 2021 | |
| HTM | $ | 7,234 | | | $ | 3,596 | | |
| AFS | 15,281 | | | 9,868 | | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Investments, continued
The amortized cost and fair value of AFS and HTM debt securities at December 31, 2022, by contractual maturity, are presented in the following table (in thousands). Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations.
| | | | | | | | | | | | | | | | | | | | | | | |
| AFS | | HTM |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Within 1 year: | | | | | | | |
U.S. Treasuries | $ | 49,983 | | | $ | 49,259 | | | $ | — | | | $ | — | |
U.S. Government agencies & GSEs | 174 | | | 173 | | | — | | | — | |
State and political subdivisions | — | | | — | | | 1,200 | | | 1,197 | |
Corporate bonds | 2,583 | | | 2,532 | | | — | | | — | |
| 52,740 | | | 51,964 | | | 1,200 | | | 1,197 | |
1 to 5 years: | | | | | | | |
U.S. Treasuries | 99,049 | | | 87,052 | | | — | | | — | |
U.S. Government agencies & GSEs | 38,495 | | | 34,603 | | | — | | | — | |
State and political subdivisions | 45,271 | | | 43,744 | | | 18,698 | | | 17,914 | |
Corporate bonds | 151,352 | | | 138,056 | | | — | | | — | |
| 334,167 | | | 303,455 | | | 18,698 | | | 17,914 | |
5 to 10 years: | | | | | | | |
U.S. Treasuries | 14,940 | | | $ | 13,041 | | | $ | 19,834 | | | $ | 17,417 | |
U.S. Government agencies & GSEs | 76,287 | | | 67,958 | | | 73,246 | | | 60,665 | |
State and political subdivisions | 163,617 | | | 151,845 | | | 26,024 | | | 22,028 | |
Corporate bonds | 81,450 | | | 71,043 | | | — | | | — | |
Supranational entities | — | | | — | | | 15,000 | | | 12,412 | |
| 336,294 | | | 303,887 | | | 134,104 | | | 112,522 | |
More than 10 years: | | | | | | | |
| | | | | | | |
U.S. Government agencies & GSEs | 151,391 | | | 147,382 | | | 26,433 | | | 20,845 | |
State and political subdivisions | 120,835 | | | 108,159 | | | 250,023 | | | 190,522 | |
Corporate bonds | 796 | | | 821 | | | — | | | — | |
| 273,022 | | | 256,362 | | | 276,456 | | | 211,367 | |
Debt securities not due at a single maturity: | | | | | | | |
Asset-backed securities | 239,220 | | | 231,272 | | | — | | | — | |
Residential MBS | 1,983,977 | | | 1,795,481 | | | 1,488,028 | | | 1,264,497 | |
Commercial MBS | 751,906 | | | 671,912 | | | 695,162 | | | 583,576 | |
| | | | | | | |
| | | | | | | |
Total | $ | 3,971,326 | | | $ | 3,614,333 | | | $ | 2,613,648 | | | $ | 2,191,073 | |
Realized gains and losses are derived using the specific identification method for determining the cost of the securities sold. The following summarizes securities sales activities for the years ended December 31 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 | |
| Proceeds from sales | $ | 318,457 | | | $ | 288,986 | | | $ | 40,625 | | |
| | | | | | | |
| Gross gains on sales | $ | 1,009 | | | $ | 2,346 | | | $ | 748 | | |
| Gross losses on sales | (4,881) | | | (2,263) | | | — | | |
| Net gains (losses) on sales of securities | $ | (3,872) | | | $ | 83 | | | $ | 748 | | |
| | | | | | | |
| Income tax expense (benefit) attributable to sales | $ | (1,026) | | | $ | (46) | | | $ | 191 | | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Investments, continued
Equity Investments
The table below reflects the carrying value of certain equity investments, which are included in other assets on the consolidated balance sheet, as of December 31 (in thousands).
| | | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2022 | | 2021 | |
| | | | | |
| FHLB Stock | $ | 33,828 | | | $ | 9,225 | | |
| Equity securities with readily determinable fair values | 13,637 | | | 1,302 | | |
| | | | | |
| | | | | |
| | | | | |
(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):
| | | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2022 | | 2021 | |
| Owner occupied commercial real estate | $ | 2,734,666 | | | $ | 2,321,685 | | |
| Income producing commercial real estate | 3,261,626 | | | 2,600,858 | | |
| Commercial & industrial | 2,252,322 | | | 1,910,162 | | |
| Commercial construction | 1,597,848 | | | 1,014,830 | | |
| Equipment financing | 1,374,251 | | | 1,083,021 | | |
| Total commercial | 11,220,713 | | | 8,930,556 | | |
| Residential mortgage | 2,355,061 | | | 1,637,885 | | |
| HELOC | 850,269 | | | 694,034 | | |
| Residential construction | 442,553 | | | 359,815 | | |
| Manufactured housing | 316,741 | | | — | | |
| Consumer | 149,290 | | | 138,056 | | |
| Total loans | 15,334,627 | | | 11,760,346 | | |
| Less ACL - loans | (159,357) | | | (102,532) | | |
| Loans, net | $ | 15,175,270 | | | $ | 11,657,814 | | |
At December 31, 2022 and 2021, $2.04 million and $1.01 million, respectively, in overdrawn deposit accounts were reclassified as consumer loans.
Accrued interest receivable related to loans totaled $52.0 million and $28.5 million at December 31, 2022 and 2021, respectively, and was reported in accrued interest receivable on the consolidated balance sheets.
At December 31, 2022, the loan portfolio was subject to blanket pledges on certain qualifying loan types with the FHLB to secure advances outstanding and contingent funding sources.
The following table presents loans held for investment that were sold in the periods presented (in thousands). The gains and losses on these loan sales were included in noninterest income on the consolidated statements of income.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Loans Sold | |
| | 2022 | | 2021 | | 2020 | |
| Guaranteed portion of SBA/USDA loans | $ | 104,813 | | | $ | 90,903 | | | $ | 48,385 | | |
| Equipment financing receivables | 89,850 | | | 59,097 | | | 27,018 | | |
| Total | $ | 194,663 | | | $ | 150,000 | | | $ | 75,403 | | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans and Leases and Allowance for Credit Losses, continued
At December 31, 2022 and 2021, equipment financing assets included leases of $46.0 million and $37.7 million, respectively. The components of the net investment in leases, which included both sales-type and direct financing, are presented below (in thousands).
| | | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2022 | | 2021 | |
| Minimum future lease payments receivable | $ | 49,723 | | | $ | 39,962 | | |
| Estimated residual value of leased equipment | 2,804 | | | 3,216 | | |
| Initial direct costs | 767 | | | 669 | | |
| Security deposits | (429) | | | (687) | | |
| | | | | |
| Unearned income | (6,877) | | | (5,432) | | |
| Net investment in leases | $ | 45,988 | | | $ | 37,728 | | |
Minimum future lease payments expected to be received from equipment financing lease contracts as of December 31, 2022 were as follows (in thousands):
| | | | | | | | | | | |
| Year | | |
| 2023 | $ | 17,531 | | |
| 2024 | 13,356 | | |
| 2025 | 9,882 | | |
| 2026 | 6,184 | | |
| 2027 | 2,636 | | |
| Thereafter | 134 | | |
| Total | $ | 49,723 | | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans and Leases and Allowance for Credit Losses, continued
Nonaccrual and Past Due Loans
The following table presents the amortized cost basis in loans by aging category and accrual status as of December 31, 2022 and 2021 (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accruing | | | | | | |
| | | Loans Past Due | | | | |
| Current Loans | | 30 - 59 Days | | 60 - 89 Days | | > 90 Days | | | | Nonaccrual Loans | | Total Loans |
As of December 31, 2022 | | | | | | | | | | | | | |
Owner occupied commercial real estate | $ | 2,731,574 | | | $ | 1,522 | | | $ | 1,047 | | | $ | — | | | | | $ | 523 | | | $ | 2,734,666 | |
Income producing commercial real estate | 3,257,232 | | | 468 | | | 41 | | | — | | | | | 3,885 | | | 3,261,626 | |
Commercial & industrial | 2,234,284 | | | 3,288 | | | 274 | | | 6 | | | | | 14,470 | | | 2,252,322 | |
Commercial construction | 1,597,268 | | | 447 | | | — | | | — | | | | | 133 | | | 1,597,848 | |
Equipment financing | 1,362,622 | | | 4,285 | | | 1,906 | | | — | | | | | 5,438 | | | 1,374,251 | |
Total commercial | 11,182,980 | | | 10,010 | | | 3,268 | | | 6 | | | | | 24,449 | | | 11,220,713 | |
Residential mortgage | 2,342,196 | | | 1,939 | | | 7 | | | — | | | | | 10,919 | | | 2,355,061 | |
HELOC | 844,888 | | | 2,709 | | | 784 | | | — | | | | | 1,888 | | | 850,269 | |
Residential construction | 441,673 | | | 20 | | | 455 | | | — | | | | | 405 | | | 442,553 | |
Manufactured housing | 302,386 | | | 6,913 | | | 924 | | | — | | | | | 6,518 | | | 316,741 | |
Consumer | 148,943 | | | 237 | | | 48 | | | 9 | | | | | 53 | | | 149,290 | |
Total loans | $ | 15,263,066 | | | $ | 21,828 | | | $ | 5,486 | | | $ | 15 | | | | | $ | 44,232 | | | $ | 15,334,627 | |
| | | | | | | | | | | | | |
As of December 31, 2021 | | | | | | | | | | | | | |
Owner occupied commercial real estate | $ | 2,318,944 | | | $ | 27 | | | $ | — | | | $ | — | | | | | $ | 2,714 | | | $ | 2,321,685 | |
Income producing commercial real estate | 2,593,124 | | | 146 | | | — | | | — | | | | | 7,588 | | | 2,600,858 | |
Commercial & industrial | 1,903,730 | | | 584 | | | 419 | | | — | | | | | 5,429 | | | 1,910,162 | |
Commercial construction | 1,014,211 | | | — | | | 276 | | | — | | | | | 343 | | | 1,014,830 | |
Equipment financing | 1,079,180 | | | 1,415 | | | 685 | | | — | | | | | 1,741 | | | 1,083,021 | |
Total commercial | 8,909,189 | | | 2,172 | | | 1,380 | | | — | | | | | 17,815 | | | 8,930,556 | |
Residential mortgage | 1,622,754 | | | 1,583 | | | 235 | | | — | | | | | 13,313 | | | 1,637,885 | |
HELOC | 691,814 | | | 920 | | | 88 | | | — | | | | | 1,212 | | | 694,034 | |
Residential construction | 358,741 | | | 654 | | | — | | | — | | | | | 420 | | | 359,815 | |
Consumer | 137,564 | | | 421 | | | 19 | | | — | | | | | 52 | | | 138,056 | |
Total loans | $ | 11,720,062 | | | $ | 5,750 | | | $ | 1,722 | | | $ | — | | | | | $ | 32,812 | | | $ | 11,760,346 | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans and Leases and Allowance for Credit Losses, continued
The following table presents nonaccrual loans by loan class for the periods indicated (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nonaccrual loans |
| December 31, 2022 | | December 31, 2021 |
| With no allowance | | With an allowance | | Total | | With no allowance | | With an allowance | | Total |
Owner occupied commercial real estate | $ | 276 | | | $ | 247 | | | $ | 523 | | | $ | 2,141 | | | $ | 573 | | | $ | 2,714 | |
Income producing commercial real estate | 3,798 | | | 87 | | | 3,885 | | | 6,873 | | | 715 | | | 7,588 | |
Commercial & industrial | 13,917 | | | 553 | | | 14,470 | | | 3,715 | | | 1,714 | | | 5,429 | |
Commercial construction | 69 | | | 64 | | | 133 | | | — | | | 343 | | | 343 | |
Equipment financing | 85 | | | 5,353 | | | 5,438 | | | — | | | 1,741 | | | 1,741 | |
Total commercial | 18,145 | | | 6,304 | | | 24,449 | | | 12,729 | | | 5,086 | | | 17,815 | |
Residential mortgage | 2,159 | | | 8,760 | | | 10,919 | | | 3,126 | | | 10,187 | | | 13,313 | |
HELOC | 430 | | | 1,458 | | | 1,888 | | | 219 | | | 993 | | | 1,212 | |
Residential construction | 311 | | | 94 | | | 405 | | | 280 | | | 140 | | | 420 | |
Manufactured housing | — | | | 6,518 | | | 6,518 | | | — | | | — | | | — | |
Consumer | 3 | | | 50 | | | 53 | | | 6 | | | 46 | | | 52 | |
Total | $ | 21,048 | | | $ | 23,184 | | | $ | 44,232 | | | $ | 16,360 | | | $ | 16,452 | | | $ | 32,812 | |
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:
Pass. Loans in this category are considered to have a low probability of default and do not meet the criteria of the risk categories below.
Special Mention. 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 this system, loans that are on nonaccrual status, 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 classified as “fail” are reported as “substandard” and all other loans are reported as “pass”.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans and Leases and Allowance for Credit Losses, continued
The following tables present the risk category of term loans by vintage year, which is the year of origination or most recent renewal, as of the date indicated (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term Loans | | Revolvers | | Revolvers converted to term loans | | Total |
As of December 31, 2022 | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | | |
Pass | | | | | | | | | | | | | | | | | |
Owner occupied commercial real estate | $ | 669,451 | | | $ | 671,395 | | | $ | 611,900 | | | $ | 204,990 | | | $ | 127,738 | | | $ | 253,890 | | | $ | 114,975 | | | $ | 5,779 | | | $ | 2,660,118 | |
Income producing commercial real estate | 812,804 | | | 753,936 | | | 733,946 | | | 248,259 | | | 171,108 | | | 255,485 | | | 50,026 | | | 9,953 | | | 3,035,517 | |
Commercial & industrial | 535,594 | | | 388,851 | | | 186,292 | | | 134,789 | | | 119,547 | | | 71,503 | | | 670,161 | | | 15,880 | | | 2,122,617 | |
Commercial construction | 732,147 | | | 391,963 | | | 256,087 | | | 78,778 | | | 11,977 | | | 19,973 | | | 70,819 | | | 1,433 | | | 1,563,177 | |
Equipment financing | 714,044 | | | 374,030 | | | 162,463 | | | 93,690 | | | 22,753 | | | 1,214 | | | — | | | — | | | 1,368,194 | |
Total commercial | 3,464,040 | | | 2,580,175 | | | 1,950,688 | | | 760,506 | | | 453,123 | | | 602,065 | | | 905,981 | | | 33,045 | | | 10,749,623 | |
Residential mortgage | 894,960 | | | 742,821 | | | 329,762 | | | 91,300 | | | 55,785 | | | 223,846 | | | 8 | | | 3,133 | | | 2,341,615 | |
HELOC | — | | | — | | | — | | | — | | | — | | | — | | | 824,153 | | | 23,948 | | | 848,101 | |
Residential construction | 344,443 | | | 82,289 | | | 4,478 | | | 1,742 | | | 1,545 | | | 7,549 | | | — | | | 31 | | | 442,077 | |
Manufactured housing | 78,097 | | | 54,976 | | | 48,908 | | | 34,836 | | | 31,060 | | | 61,148 | | | — | | | — | | | 309,025 | |
Consumer | 71,899 | | | 29,322 | | | 15,406 | | | 3,987 | | | 1,837 | | | 588 | | | 25,963 | | | 126 | | | 149,128 | |
| 4,853,439 | | | 3,489,583 | | | 2,349,242 | | | 892,371 | | | 543,350 | | | 895,196 | | | 1,756,105 | | | 60,283 | | | 14,839,569 | |
Special Mention | | | | | | | | | | | | | | | | | |
Owner occupied commercial real estate | 4,236 | | | 8,036 | | | 4,641 | | | 10,299 | | | 1,232 | | | 11,596 | | | 3,875 | | | 279 | | | 44,194 | |
Income producing commercial real estate | 41,423 | | | 1,137 | | | 44,802 | | | 32,821 | | | 21,647 | | | 50 | | | 805 | | | — | | | 142,685 | |
Commercial & industrial | 1,695 | | | 21,745 | | | 2,686 | | | 1,047 | | | 1,244 | | | 167 | | | 10,449 | | | 309 | | | 39,342 | |
Commercial construction | 850 | | | 33 | | | 1,640 | | | 13,237 | | | 4,891 | | | 28 | | | — | | | — | | | 20,679 | |
Equipment financing | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial | 48,204 | | | 30,951 | | | 53,769 | | | 57,404 | | | 29,014 | | | 11,841 | | | 15,129 | | | 588 | | | 246,900 | |
Residential mortgage | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
HELOC | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Residential construction | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Manufactured housing | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Consumer | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 48,204 | | | 30,951 | | | 53,769 | | | 57,404 | | | 29,014 | | | 11,841 | | | 15,129 | | | 588 | | | 246,900 | |
Substandard | | | | | | | | | | | | | | | | | |
Owner occupied commercial real estate | 9,835 | | | 77 | | | 2,873 | | | 4,490 | | | 1,204 | | | 8,055 | | | 209 | | | 3,611 | | | 30,354 | |
Income producing commercial real estate | 52,384 | | | 1,357 | | | 1,867 | | | 4,180 | | | 13,209 | | | 10,365 | | | — | | | 62 | | | 83,424 | |
Commercial & industrial | 10,431 | | | 19,477 | | | 3,880 | | | 4,557 | | | 11,019 | | | 1,189 | | | 39,333 | | | 477 | | | 90,363 | |
Commercial construction | 133 | | | — | | | 45 | | | 2 | | | 3,876 | | | 9,693 | | | — | | | 243 | | | 13,992 | |
Equipment financing | 1,625 | | | 2,160 | | | 1,303 | | | 705 | | | 236 | | | 28 | | | — | | | — | | | 6,057 | |
Total commercial | 74,408 | | | 23,071 | | | 9,968 | | | 13,934 | | | 29,544 | | | 29,330 | | | 39,542 | | | 4,393 | | | 224,190 | |
Residential mortgage | 1,195 | | | 964 | | | 1,364 | | | 1,836 | | | 2,589 | | | 5,296 | | | — | | | 202 | | | 13,446 | |
HELOC | — | | | — | | | — | | | — | | | — | | | — | | | 93 | | | 2,075 | | | 2,168 | |
Residential construction | 32 | | | 268 | | | — | | | 20 | | | 3 | | | 153 | | | — | | | — | | | 476 | |
Manufactured housing | 1,130 | | | 1,267 | | | 1,427 | | | 990 | | | 1,188 | | | 1,714 | | | — | | | — | | | 7,716 | |
Consumer | 20 | | | 77 | | | 34 | | | 1 | | | 25 | | | 4 | | | 1 | | | — | | | 162 | |
| 76,785 | | | 25,647 | | | 12,793 | | | 16,781 | | | 33,349 | | | 36,497 | | | 39,636 | | | 6,670 | | | 248,158 | |
| | | | | | | | | | | | | | | | | |
Total | $ | 4,978,428 | | | $ | 3,546,181 | | | $ | 2,415,804 | | | $ | 966,556 | | | $ | 605,713 | | | $ | 943,534 | | | $ | 1,810,870 | | | $ | 67,541 | | | $ | 15,334,627 | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans and Leases and Allowance for Credit Losses, continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans | | Revolvers | | Revolvers converted to term loans | | Total |
As of December 31, 2021 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | | |
Pass | | | | | | | | | | | | | | | | | | |
Owner occupied commercial real estate | | $ | 643,151 | | | $ | 674,124 | | | $ | 278,702 | | | $ | 153,233 | | | $ | 139,584 | | | $ | 267,460 | | | $ | 68,354 | | | $ | 17,150 | | | $ | 2,241,758 | |
Income producing commercial real estate | | 668,322 | | | 678,487 | | | 333,911 | | | 221,218 | | | 165,563 | | | 219,459 | | | 41,157 | | | 11,830 | | | 2,339,947 | |
Commercial & industrial | | 638,567 | | | 270,150 | | | 178,944 | | | 136,281 | | | 50,567 | | | 72,904 | | | 514,750 | | | 4,361 | | | 1,866,524 | |
Commercial construction | | 378,695 | | | 303,154 | | | 149,740 | | | 40,625 | | | 22,983 | | | 13,206 | | | 12,628 | | | 1,673 | | | 922,704 | |
Equipment financing | | 563,618 | | | 271,913 | | | 167,904 | | | 63,254 | | | 13,145 | | | 903 | | | — | | | — | | | 1,080,737 | |
Total commercial | | 2,892,353 | | | 2,197,828 | | | 1,109,201 | | | 614,611 | | | 391,842 | | | 573,932 | | | 636,889 | | | 35,014 | | | 8,451,670 | |
Residential mortgage | | 781,007 | | | 370,092 | | | 108,091 | | | 64,346 | | | 71,552 | | | 221,131 | | | 9 | | | 3,915 | | | 1,620,143 | |
HELOC | | — | | | — | | | — | | | — | | | — | | | — | | | 676,545 | | | 14,994 | | | 691,539 | |
Residential construction | | 325,111 | | | 16,301 | | | 2,802 | | | 2,278 | | | 3,144 | | | 9,352 | | | — | | | 33 | | | 359,021 | |
Consumer | | 57,530 | | | 29,218 | | | 10,757 | | | 5,137 | | | 1,439 | | | 1,355 | | | 32,312 | | | 111 | | | 137,859 | |
| | 4,056,001 | | | 2,613,439 | | | 1,230,851 | | | 686,372 | | | 467,977 | | | 805,770 | | | 1,345,755 | | | 54,067 | | | 11,260,232 | |
Special Mention | | | | | | | | | | | | | | | | | | |
Owner occupied commercial real estate | | 7,772 | | | 2,979 | | | 16,639 | | | 4,374 | | | 6,007 | | | 2,641 | | | 248 | | | 286 | | | 40,946 | |
Income producing commercial real estate | | 64,139 | | | 27,875 | | | 21,875 | | | 22,292 | | | 18,415 | | | 21,880 | | | — | | | — | | | 176,476 | |
Commercial & industrial | | 1,037 | | | 1,831 | | | 2,740 | | | 597 | | | 273 | | | 303 | | | 2,242 | | | — | | | 9,023 | |
Commercial construction | | 14,283 | | | 16,237 | | | 13,149 | | | 22,479 | | | 11,766 | | | 52 | | | — | | | — | | | 77,966 | |
Equipment financing | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total commercial | | 87,231 | | | 48,922 | | | 54,403 | | | 49,742 | | | 36,461 | | | 24,876 | | | 2,490 | | | 286 | | | 304,411 | |
Residential mortgage | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
HELOC | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Residential construction | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Consumer | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 87,231 | | | 48,922 | | | 54,403 | | | 49,742 | | | 36,461 | | | 24,876 | | | 2,490 | | | 286 | | | 304,411 | |
Substandard | | | | | | | | | | | | | | | | | | |
Owner occupied commercial real estate | | 11,987 | | | 1,049 | | | 4,216 | | | 3,712 | | | 5,829 | | | 11,088 | | | — | | | 1,100 | | | 38,981 | |
Income producing commercial real estate | | 15,485 | | | 12,618 | | | 3,779 | | | 29,212 | | | 6,726 | | | 16,531 | | | — | | | 84 | | | 84,435 | |
Commercial & industrial | | 2,741 | | | 1,615 | | | 5,284 | | | 12,685 | | | 1,232 | | | 5,863 | | | 4,326 | | | 869 | | | 34,615 | |
Commercial construction | | 3,464 | | | 157 | | | 272 | | | 11 | | | 9,750 | | | 255 | | | — | | | 251 | | | 14,160 | |
Equipment financing | | 428 | | | 590 | | | 676 | | | 503 | | | 84 | | | 3 | | | — | | | — | | | 2,284 | |
Total commercial | | 34,105 | | | 16,029 | | | 14,227 | | | 46,123 | | | 23,621 | | | 33,740 | | | 4,326 | | | 2,304 | | | 174,475 | |
Residential mortgage | | 3,339 | | | 1,585 | | | 2,813 | | | 3,229 | | | 1,205 | | | 4,744 | | | — | | | 827 | | | 17,742 | |
HELOC | | — | | | — | | | — | | | — | | | — | | | — | | | 329 | | | 2,166 | | | 2,495 | |
Residential construction | | 407 | | | — | | | 30 | | | 51 | | | — | | | 306 | | | — | | | — | | | 794 | |
Consumer | | 37 | | | 16 | | | 22 | | | 26 | | | 22 | | | 50 | | | 3 | | | 21 | | | 197 | |
| | 37,888 | | | 17,630 | | | 17,092 | | | 49,429 | | | 24,848 | | | 38,840 | | | 4,658 | | | 5,318 | | | 195,703 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 4,181,120 | | | $ | 2,679,991 | | | $ | 1,302,346 | | | $ | 785,543 | | | $ | 529,286 | | | $ | 869,486 | | | $ | 1,352,903 | | | $ | 59,671 | | | $ | 11,760,346 | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans and Leases and Allowance for Credit Losses, continued
Troubled Debt Restructurings and Other Modifications
As of December 31, 2022 and 2021, United had TDRs totaling $41.2 million and $52.4 million, respectively. Loans modified under the terms of a TDR during the years ended December 31 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 years ended December 31 that were initially restructured within one year prior to default (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | New TDRs |
| | Number of Contracts | | | | Post-Modification Outstanding Recorded Investment by Type of Modification | | TDRs Modified Within the Year That Have Subsequently Defaulted |
Year Ended December 31, 2022 | | | | Rate Reduction | | Structure | | Other | | Total | | Number of Contracts | | Recorded Investment |
Owner occupied commercial real estate | | 1 | | | | | $ | — | | | $ | 112 | | | $ | — | | | $ | 112 | | | — | | | $ | — | |
Income producing commercial real estate | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial & industrial | | 6 | | | | | — | | | 1,118 | | | 9,400 | | | 10,518 | | | 1 | | | 394 | |
Commercial construction | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Equipment financing | | 60 | | | | | — | | | 8,165 | | | — | | | 8,165 | | | 13 | | | 735 | |
Total commercial | | 67 | | | | | — | | | 9,395 | | | 9,400 | | | 18,795 | | | 14 | | | 1,129 | |
Residential mortgage | | 9 | | | | | — | | | 982 | | | — | | | 982 | | | 4 | | | 509 | |
HELOC | | 7 | | | | | — | | | 1,242 | | | 6 | | | 1,248 | | | — | | | — | |
Residential construction | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Manufactured housing | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Consumer | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | 83 | | | | | $ | — | | | $ | 11,619 | | | $ | 9,406 | | | $ | 21,025 | | | 18 | | | $ | 1,638 | |
Year Ended December 31, 2021 | | | | | | | | | | | | | | | | |
Owner occupied commercial real estate | | 2 | | | | | $ | — | | | $ | 731 | | | $ | — | | | $ | 731 | | | 1 | | | $ | 99 | |
Income producing commercial real estate | | 3 | | | | | — | | | — | | | 1,697 | | | 1,697 | | | — | | | — | |
Commercial & industrial | | 8 | | | | | — | | | 597 | | | 103 | | | 700 | | | 2 | | | 76 | |
Commercial construction | | 1 | | | | | — | | | 309 | | | — | | | 309 | | | — | | | — | |
Equipment financing | | 62 | | | | | — | | | 4,689 | | | — | | | 4,689 | | | 15 | | | 375 | |
Total commercial | | 76 | | | | | — | | | 6,326 | | | 1,800 | | | 8,126 | | | 18 | | | 550 | |
Residential mortgage | | 16 | | | | | — | | | 1,528 | | | 57 | | | 1,585 | | | 4 | | | 593 | |
HELOC | | — | | | | | — | | | — | | | — | | | — | | | 2 | | | 92 | |
Residential construction | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
Consumer | | — | | | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | |
Total | | 92 | | | | | $ | — | | | $ | 7,854 | | | $ | 1,857 | | | $ | 9,711 | | | 24 | | | $ | 1,235 | |
Year Ended December 31, 2020 | | | | | | | | | | | | | | | | |
Owner occupied commercial real estate | | 8 | | | | | $ | — | | | $ | 833 | | | $ | 1,536 | | | $ | 2,369 | | | — | | | $ | — | |
Income producing commercial real estate | | 7 | | | | | — | | | 4,856 | | | 6,699 | | | 11,555 | | | 1 | | | 5,998 | |
Commercial & industrial | | 4 | | | | | — | | | 586 | | | 15 | | | 601 | | | 3 | | | 819 | |
Commercial construction | | 7 | | | | | — | | | 832 | | | 70 | | | 902 | | | — | | | — | |
Equipment financing | | 172 | | | | | — | | | 5,821 | | | — | | | 5,821 | | | 22 | | | 944 | |
Total commercial | | 198 | | | | | — | | | 12,928 | | | 8,320 | | | 21,248 | | | 26 | | | 7,761 | |
Residential mortgage | | 40 | | | | | — | | | 4,359 | | | 3 | | | 4,362 | | | 2 | | | 145 | |
HELOC | | 4 | | | | | — | | | 164 | | | — | | | 164 | | | 1 | | | 60 | |
Residential construction | | 3 | | | | | — | | | 123 | | | — | | | 123 | | | — | | | — | |
Consumer | | 7 | | | | | — | | | 11 | | | 24 | | | 35 | | | 1 | | | 3 | |
| | | | | | | | | | | | | | | | |
Total | | 252 | | | | | $ | — | | | $ | 17,585 | | | $ | 8,347 | | | $ | 25,932 | | | 30 | | | $ | 7,969 | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans and Leases and Allowance for Credit Losses, continued
Allowance for Credit Losses
The following table presents the balance and activity in the ACL by portfolio segment for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2022 | | Beginning Balance | | Initial ACL- PCD loans(1) | | Charge-Offs | | Recoveries | | Provision | | Ending Balance |
Owner occupied commercial real estate | | $ | 14,282 | | | $ | 266 | | | $ | (6) | | | $ | 1,767 | | | $ | 3,525 | | | $ | 19,834 | |
Income producing commercial real estate | | 24,156 | | | 4,366 | | | (606) | | | 949 | | | 3,217 | | | 32,082 | |
Commercial & industrial | | 16,592 | | | 2,337 | | | (10,284) | | | 3,824 | | | 11,035 | | | 23,504 | |
Commercial construction | | 9,956 | | | 2,857 | | | (41) | | | 625 | | | 6,723 | | | 20,120 | |
Equipment financing | | 16,290 | | | — | | | (6,980) | | | 3,027 | | | 11,058 | | | 23,395 | |
Residential mortgage | | 12,390 | | | 385 | | | (55) | | | 302 | | | 7,787 | | | 20,809 | |
HELOC | | 6,568 | | | 60 | | | (69) | | | 687 | | | 1,461 | | | 8,707 | |
Residential construction | | 1,847 | | | 1 | | | — | | | 231 | | | (30) | | | 2,049 | |
Manufactured housing | | — | | | 2,438 | | | (794) | | | 29 | | | 6,425 | | | 8,098 | |
Consumer | | 451 | | | 27 | | | (3,460) | | | 1,200 | | | 2,541 | | | 759 | |
ACL - loans | | 102,532 | | | 12,737 | | | (22,295) | | | 12,641 | | | 53,742 | | | 159,357 | |
ACL - unfunded commitments | | 10,992 | | | — | | | — | | | — | | | 10,171 | | | 21,163 | |
Total ACL | | $ | 113,524 | | | $ | 12,737 | | | $ | (22,295) | | | $ | 12,641 | | | $ | 63,913 | | | $ | 180,520 | |
(1) Represents the initial ACL related to PCD loans acquired in the Reliant transaction.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2021 | | Beginning Balance | | Initial ACL- PCD loans(1) | | Charge-Offs | | Recoveries | | Provision | | Ending Balance |
Owner occupied commercial real estate | | $ | 20,673 | | | $ | 280 | | | $ | (1,640) | | | $ | 1,324 | | | $ | (6,355) | | | $ | 14,282 | |
Income producing commercial real estate | | 41,737 | | | 982 | | | (267) | | | 496 | | | (18,792) | | | 24,156 | |
Commercial & industrial | | 22,019 | | | 312 | | | (4,776) | | | 7,275 | | | (8,238) | | | 16,592 | |
Commercial construction | | 10,952 | | | 1,969 | | | (334) | | | 1,081 | | | (3,712) | | | 9,956 | |
Equipment financing | | 16,820 | | | — | | | (5,724) | | | 2,619 | | | 2,575 | | | 16,290 | |
Residential mortgage | | 15,341 | | | — | | | (344) | | | 564 | | | (3,171) | | | 12,390 | |
HELOC | | 8,417 | | | 1 | | | (112) | | | 517 | | | (2,255) | | | 6,568 | |
Residential construction | | 764 | | | — | | | (10) | | | 157 | | | 936 | | | 1,847 | |
Consumer | | 287 | | | — | | | (2,066) | | | 1,202 | | | 1,028 | | | 451 | |
| | | | | | | | | | | | |
ACL - loans | | 137,010 | | | 3,544 | | | (15,273) | | | 15,235 | | | (37,984) | | | 102,532 | |
ACL - unfunded commitments | | 10,558 | | | — | | | — | | | — | | | 434 | | | 10,992 | |
Total ACL | | $ | 147,568 | | | $ | 3,544 | | | $ | (15,273) | | | $ | 15,235 | | | $ | (37,550) | | | $ | 113,524 | |
(1) Represents the initial ACL related to PCD loans acquired in the Aquesta transaction.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Year Ended December 31, 2020 | | Dec. 31, 2019 | | Adoption of CECL | | Jan. 1, 2020 | | Initial ACL- PCD loans(1) | | Charge-Offs | | Recoveries | | Provision | | Ending Balance |
Owner occupied commercial real estate | | $ | 11,404 | | | $ | (1,616) | | | $ | 9,788 | | | $ | 1,779 | | | $ | (70) | | | $ | 2,565 | | | $ | 6,611 | | | $ | 20,673 | |
Income producing commercial real estate | | 12,306 | | | (30) | | | 12,276 | | | 1,208 | | | (8,430) | | | 3,546 | | | 33,137 | | | 41,737 | |
Commercial & industrial | | 5,266 | | | 4,012 | | | 9,278 | | | 7,680 | | | (10,707) | | | 1,371 | | | 14,397 | | | 22,019 | |
Commercial construction | | 9,668 | | | (2,583) | | | 7,085 | | | 74 | | | (726) | | | 1,045 | | | 3,474 | | | 10,952 | |
Equipment financing | | 7,384 | | | 5,871 | | | 13,255 | | | — | | | (8,764) | | | 2,004 | | | 10,325 | | | 16,820 | |
Residential mortgage | | 8,081 | | | 1,569 | | | 9,650 | | | 195 | | | (398) | | | 455 | | | 5,439 | | | 15,341 | |
HELOC | | 4,575 | | | 1,919 | | | 6,494 | | | 209 | | | (221) | | | 677 | | | 1,258 | | | 8,417 | |
Residential construction | | 2,504 | | | (1,771) | | | 733 | | | — | | | (93) | | | 156 | | | (32) | | | 764 | |
Consumer | | 901 | | | (491) | | | 410 | | | 7 | | | (2,985) | | | 2,259 | | | 596 | | | 287 | |
| | | | | | | | | | | | | | | | |
ACL - loans | | 62,089 | | | 6,880 | | | 68,969 | | | 11,152 | | | (32,394) | | | 14,078 | | | 75,205 | | | 137,010 | |
ACL - unfunded commitments | | 3,458 | | | 1,871 | | | 5,329 | | | — | | | — | | | — | | | 5,229 | | | 10,558 | |
Total ACL | | $ | 65,547 | | | $ | 8,751 | | | $ | 74,298 | | | $ | 11,152 | | | $ | (32,394) | | | $ | 14,078 | | | $ | 80,434 | | | $ | 147,568 | |
(1) Represents the initial ACL related to PCD loans acquired in the Three Shores transaction.
At December 31, 2022, 2021 and 2020, United used a one-year reasonable and supportable forecast period. Expected credit losses were estimated using a regression model for each segment based on historical data from peer banks combined with a third party vendor’s economic forecast to predict the change in credit losses. These estimates were then combined with a starting value that was based on United’s recent default experience to produce an expected default rate, with the results subject to a floor. In the case of residential construction, at December 31, 2022, the expected default rate was adjusted by a model overlay based on expectations of future performance. At December 31, 2022, the third party vendor’s forecast, which was representative of a baseline scenario, worsened compared to December 31, 2021, including the unemployment rate which has a significant impact on our models and contributed to increased provision expense in 2022. At December 31, 2022, United applied qualitative factors to
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans and Leases and Allowance for Credit Losses, continued
the model output for commercial construction, HELOC, residential mortgage and equipment finance portfolios to reflect management’s approximation of long-term losses.
For periods beyond the reasonable and supportable forecast period of one year, United reverted to historical credit loss information on a straight line basis over two years. For most collateral types, United reverted to through-the-cycle average default rates using peer data from 2000 to 2017. For loans secured by residential mortgages and manufactured housing, the peer data was adjusted for changes in lending practices designed to mitigate the magnitude of losses observed during the mortgage crisis.
(7) Premises and Equipment
Premises and equipment are summarized as follows as of the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2022 | | 2021 | |
| Land and land improvements | $ | 101,187 | | | $ | 95,029 | | |
| Buildings and improvements | 210,018 | | | 189,339 | | |
| Furniture and equipment | 115,569 | | | 100,205 | | |
| Construction in progress | 34,669 | | | 10,088 | | |
| | 461,443 | | | 394,661 | | |
| Less accumulated depreciation | (162,987) | | | (149,365) | | |
| Premises and equipment, net | $ | 298,456 | | | $ | 245,296 | | |
Depreciation expense was $17.0 million, $15.7 million and $15.6 million for 2022, 2021 and 2020, respectively.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Derivatives and Hedging Activities
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 sheets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | | Derivative Assets | | Derivative Liabilities | | | Derivative Assets | | Derivative Liabilities |
Derivatives designated as hedging instruments: | | | | | | | | | | | | |
Cash flow hedge of subordinated debt | | $ | 100,000 | | | $ | 16,191 | | | $ | — | | | $ | 100,000 | | | $ | 6,389 | | | $ | — | |
Cash flow hedge of trust preferred securities | | 20,000 | | | — | | | — | | | 20,000 | | | — | | | — | |
Fair value hedge of brokered CDs | | — | | | — | | | — | | | 10,000 | | | — | | | — | |
Total | | 120,000 | | | 16,191 | | | — | | | 130,000 | | | 6,389 | | | — | |
| | | | | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
Customer derivative positions | | 1,097,578 | | | 341 | | | 86,358 | | | 1,206,145 | | | 28,656 | | | 10,663 | |
Dealer offsets to customer derivative positions | | 1,097,578 | | | 22,393 | | | 274 | | | 1,230,885 | | | 974 | | | 9,232 | |
Risk participations | | 88,586 | | | 15 | | | 1 | | | 69,385 | | | 16 | | | 7 | |
Mortgage banking - loan commitment | | 19,685 | | | 394 | | | — | | | 110,897 | | | 3,450 | | | — | |
Mortgage banking - forward sales commitment | | 49,750 | | | 198 | | | 71 | | | 201,419 | | | 67 | | | 202 | |
Bifurcated embedded derivatives | | 51,935 | | | 11,104 | | | — | | | 51,935 | | | 2,928 | | | — | |
Dealer offsets to bifurcated embedded derivatives | | 51,935 | | | — | | | 12,839 | | | 51,935 | | | — | | | 5,041 | |
Total | | 2,457,047 | | | 34,445 | | | 99,543 | | | 2,922,601 | | | 36,091 | | | 25,145 | |
| | | | | | | | | | | | |
Total derivatives | | $ | 2,577,047 | | | $ | 50,636 | | | $ | 99,543 | | | $ | 3,052,601 | | | $ | 42,480 | | | $ | 25,145 | |
| | | | | | | | | | | | |
Total gross derivative instruments | | | | $ | 50,636 | | | $ | 99,543 | | | | | $ | 42,480 | | | $ | 25,145 | |
Less: Amounts subject to master netting agreements | | | | (346) | | | (346) | | | | | (694) | | | (694) | |
Less: Cash collateral received/pledged | | | | (38,386) | | | (13,089) | | | | | (6,620) | | | (14,148) | |
Net amount | | | | $ | 11,904 | | | $ | 86,108 | | | | | $ | 35,166 | | | $ | 10,303 | |
United clears certain derivatives centrally through the CME. CME rules legally characterize variation margin payments for centrally cleared derivatives as settlements of the derivatives’ exposure rather than as collateral. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting purposes. Variation margin, as determined by the CME, is settled daily. As a result, derivative contracts that clear through the CME have an estimated fair value of zero.
Hedging Derivatives
Cash Flow Hedges of Interest Rate Risk
United enters into cash flow hedges to mitigate exposure to the variability of future cash flows or other forecasted transactions. At December 31, 2022 and 2021, United utilized interest rate caps and swaps to hedge the variability of cash flows due to changes in interest rates on certain of its variable-rate subordinated debt and trust preferred securities. United considers these derivatives to be highly effective at achieving offsetting changes in cash flows attributable to changes in interest rates. Therefore, changes in the fair value of these derivative instruments are recognized in OCI. Gains and losses related to changes in fair value are reclassified into earnings in the periods the hedged forecasted transactions occur. Losses representing amortization of the premium recorded on cash flow hedges, which is a component excluded from the assessment of effectiveness, are recognized in earnings on a straight-line basis in the same financial statement line as the hedged item over the term of the hedge. Over the next twelve months, United expects to reclassify $4.51 million of gains from AOCI into earnings related to these agreements.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Derivatives and Hedging Activities, continued
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. 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.
At December 31, 2021, United had an interest rate swap that was designated as a fair value hedge of fixed-rate brokered time deposits. During the first quarter of 2022, the hedged brokered deposit and the associated swap matured. The swap involved the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreement. As of December 31, 2021, the carrying amount of the hedged fixed-rate brokered time deposit and the positive cumulative fair value hedging adjustment included in the carrying amount of the hedged liability were $10.0 million and $28,000, respectively.
The table below presents the effect of derivatives in hedging relationships on the consolidated statements of income (in thousands).
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Total interest expense presented in the consolidated statements of income | $ | (60,798) | | | $ | (29,760) | | | $ | (56,237) | |
| | | | | |
Effect of hedging relationships on interest expense: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net income recognized on fair value hedges | 28 | | | 210 | | | 281 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Net expense recognized on cash flow hedges (1) | (269) | | | (608) | | | (359) | |
(1) Includes $472,000, $472,000 and $329,000 of premium amortization expense excluded from the assessment of hedge effectiveness for the years ended December 31, 2022, 2021 and 2020, respectively.
Derivatives Not Designated as Hedging Instruments
Customer derivative positions include swaps, caps, and collars between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back program. In addition, United occasionally enters into credit risk participation agreements with counterparty banks to accept or transfer a portion of the credit risk related to interest rate swaps. The agreements, which are typically executed in conjunction with a participation in a loan with the same customer, allow customers to execute an interest rate swap with one bank while allowing for the distribution of the credit risk among participating members.
United also has three interest rate swap contracts that are economic hedges of market-linked brokered certificates of deposit, but are not designated as hedging instruments. The market-linked brokered certificates of deposit contain embedded derivatives that are bifurcated from the host instruments and 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 and therefore provide an economic hedge.
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 also enters into forward sale agreements to mitigate risk and to protect the expected gain on the eventual loan sale. The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding derivative instruments. Fair value adjustments on these derivative instruments are recorded within mortgage loan gains and related fees in the consolidated statements of income.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Derivatives and Hedging Activities, continued
The table below presents the gains and losses recognized in income on derivatives not designated as hedging instruments for the periods indicated (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| Income Statement Location | | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Customer derivatives and dealer offsets | Other noninterest income | | $ | 2,063 | | | $ | 3,302 | | | $ | 6,732 | |
Bifurcated embedded derivatives and dealer offsets | Other noninterest income | | 90 | | | 433 | | | (63) | |
| | | | | | | |
| | | | | | | |
Mortgage banking derivatives | Mortgage loan revenue | | 8,144 | | | (1,805) | | | (7,873) | |
Risk participations | Other noninterest income | | 104 | | | (90) | | | (340) | |
Total gains and losses | | | $ | 10,401 | | | $ | 1,840 | | | $ | (1,544) | |
Credit-risk-related Contingent Features
United manages its credit exposure on derivative transactions by entering into a bilateral credit support agreement with each non-customer 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.
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 derivative 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 provide that 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. Derivatives that are centrally cleared do not have credit-risk-related features that require additional collateral if United’s credit rating were downgraded.
(9) Goodwill and Other Intangible Assets
The carrying amount of goodwill and other intangible assets is summarized below as of the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2022 | | 2021 | |
| Core deposit intangible | $ | 46,900 | | | $ | 38,192 | | |
| Less: accumulated amortization | (26,112) | | | (25,870) | | |
| Net core deposit intangible | 20,788 | | | 12,322 | | |
| Customer relationship intangible | 8,400 | | | 8,400 | | |
| Less: accumulated amortization | (1,114) | | | (322) | | |
| Net customer relationship intangible | 7,286 | | | 8,078 | | |
| Total intangibles subject to amortization, net | 28,074 | | | 20,400 | | |
| Goodwill | 751,174 | | | 452,007 | | |
| Total goodwill and other intangible assets, net | $ | 779,248 | | | $ | 472,407 | | |
In addition to the FinTrust customer relationship intangible discussed in Note 3, during 2021 United purchased the customer lists of two financial advisory firms for an aggregate purchase price of $870,000. All consideration paid was allocated to a customer relationship intangible.
The following is a summary of changes in the carrying amounts of goodwill for the years indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | | | Goodwill (1) | |
| December 31, 2020 | | | | | $ | 367,809 | | |
| Acquisition of FinTrust | | | | | 14,163 | | |
| Acquisition of Aquesta | | | | | 70,035 | | |
| December 31, 2021 | | | | | 452,007 | | |
| Acquisition of Reliant | | | | | 299,167 | | |
| | | | | | | |
| December 31, 2022 | | | | | $ | 751,174 | | |
(1) Goodwill balances presented are shown net of accumulated impairment losses of $306 million incurred prior to 2020.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Goodwill and Other Intangible Assets, continued
The estimated aggregate amortization expense for future periods for finite lived intangibles is as follows (in thousands):
| | | | | | | | | | | |
| Year | | |
| 2023 | $ | 5,903 | | |
| 2024 | 5,018 | | |
| 2025 | 4,051 | | |
| 2026 | 3,303 | | |
| 2027 | 2,555 | | |
| Thereafter | 7,244 | | |
| Total | $ | 28,074 | | |
(10) Servicing Assets and Liabilities
Servicing Rights for SBA/USDA Loans
United accounts for servicing rights for SBA/USDA loans at fair value. The following table summarizes the changes in SBA/USDA servicing rights for the years indicated (in thousands).
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Beginning of period | $ | 6,513 | | | $ | 6,462 | | | $ | 6,794 | |
Acquired servicing rights | — | | | 581 | | | — | |
Originated servicing rights capitalized upon sale of loans | 2,114 | | | 2,005 | | | 1,114 | |
Disposals | (2,062) | | | (1,430) | | | (624) | |
Changes in fair value due to change in inputs or assumptions used in the valuation | (1,377) | | | (1,105) | | | (822) | |
End of period | $ | 5,188 | | | $ | 6,513 | | | $ | 6,462 | |
The portfolio of SBA/USDA loans serviced for others, which is not included in the accompanying balance sheets, was $426 million and $428 million, respectively, at December 31, 2022 and 2021. The amount of contractually specified servicing fees earned by United on these servicing rights during the years ended December 31, 2022, 2021 and 2020 was $4.05 million, $3.90 million and $3.77 million, respectively.
A summary of the key characteristics, inputs, and economic assumptions used in the discounted cash flow method utilized to estimate the fair value of the servicing asset for SBA/USDA loans and the sensitivity of the fair values to immediate adverse changes in those assumptions are shown in the table below as of the dates indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2022 | | 2021 | |
| Fair value of retained servicing assets | $ | 5,188 | | | $ | 6,513 | | |
| Prepayment rate assumption: | | | | |
| Weighted average | 16.4 | % | | 16.3 | % | |
| Range | 0.0% - 35.4% | | 3.2% - 31.3% | |
| 10% adverse change | $ | (201) | | | $ | (309) | | |
| 20% adverse change | (387) | | | (591) | | |
| Discount rate: | | | | |
| Weighted average | 17.5 | % | | 10.3 | % | |
| Range | 11.9% - 25.0% | | 0.0% - 45.4% | |
| 100 bps adverse change | $ | (107) | | | $ | (166) | | |
| 200 bps adverse change | (210) | | | (323) | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
The above sensitivities are hypothetical and changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Servicing Assets and Liabilities, continued
Residential Mortgage Servicing Rights
United accounts for residential mortgage servicing rights at fair value. The following table summarizes the changes in residential mortgage servicing rights for the years indicated (in thousands).
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Beginning of period | $ | 25,161 | | | $ | 16,216 | | | $ | 13,565 | |
| | | | | |
| | | | | |
Originated servicing rights capitalized upon sale of loans | 5,051 | | | 12,510 | | | 11,911 | |
| | | | | |
Disposals | (2,360) | | | (4,275) | | | (2,868) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Changes in fair value due to change in inputs or assumptions used in the valuation | 8,707 | | | 710 | | | (6,392) | |
End of period | $ | 36,559 | | | $ | 25,161 | | | $ | 16,216 | |
The portfolio of residential mortgage loans serviced for others, which is not included in the consolidated balance sheets, was $2.88 billion and $2.82 billion, respectively, at December 31, 2022 and 2021. The amount of contractually specified servicing fees earned by United on these servicing rights during the years ended December 31, 2022, 2021 and 2020 was $7.24 million, $6.48 million and $4.82 million, respectively.
A summary of the key characteristics, inputs, and economic assumptions used to estimate the fair value of the servicing asset for residential mortgage loans and the sensitivity of the fair values to immediate adverse changes in those assumptions are shown in the table below as of the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| | December 31, | |
| | 2022 | | 2021 | |
| Fair value of retained servicing assets | $ | 36,559 | | | $ | 25,161 | | |
| Prepayment rate assumption: | | | | |
| Weighted average | 7.5 | % | | 12.6 | % | |
| Range | 7.0% - 31.2% | | 7.0% - 77.6% | |
| 10% adverse change | $ | (1,236) | | | $ | (1,229) | | |
| 20% adverse change | (2,404) | | | (2,367) | | |
| Discount rate: | | | | |
| Weighted average | 9.5 | % | | 9.5 | % | |
| Range | 9.5% - 11.5% | | 9.5% - 10.5% | |
| 100 bps adverse change | $ | (1,488) | | | $ | (877) | | |
| 200 bps adverse change | (2,865) | | | (1,693) | | |
The above sensitivities are hypothetical and changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.
Servicing Liabilities for Equipment Financing Loans
United accounts for servicing liabilities associated with sold equipment finance loans using the amortization method. The portfolio of equipment financing loans serviced for others, which is not included in the accompanying balance sheets, was $125.3 million and $78.8 million at December 31, 2022 and 2021, respectively. The servicing liabilities related to these loans totaled $1.12 million and $675,000 at December 31, 2022 and 2021, respectively.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Time Deposits
At December 31, 2022, the contractual maturities of time deposits, including brokered time deposits, are summarized as follows (in thousands):
| | | | | | | | | | | |
| 2023 | $ | 1,251,483 | | |
| 2024 | 460,975 | | |
| 2025 | 36,811 | | |
| 2026 | 18,301 | | |
| 2027 | 14,364 | | |
| Thereafter | 50,630 | | |
| Total time deposits | $ | 1,832,564 | | |
At December 31, 2022 and 2021, time deposits, excluding brokered time deposits, that met or exceeded the FDIC insurance limit of $250,000 totaled $454 million and $269 million, respectively.
(12) Short-term Borrowings and Federal Home Loan Bank Advances
At December 31, 2022, short-term borrowings consisted of repurchase agreements, which are borrowings secured by investment securities. The following table presents the remaining contractual maturity of repurchase agreements by collateral pledged as of the date indicated (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Remaining Contractual Maturity of the Agreements | | |
December 31, 2022 | | Overnight and Continuous | | Up to 30 Days | | 30-90 Days | | Greater than 90 days | | Total |
U.S. Treasuries | | $ | 158,933 | | | $ | — | | | $ | — | | | $ | — | | | $ | 158,933 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total | | $ | 158,933 | | | $ | — | | | $ | — | | | $ | — | | | $ | 158,933 | |
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. At December 31, 2022, repurchase agreements were collateralized by securities with a carrying amount of $163 million.
At December 31, 2022, United had FHLB advances totaling $550 million with maturities in 2023 and interest rates ranging from 4.11% to 4.17%. The FHLB advances are collateralized by a blanket lien on owner occupied and income producing commercial real estate and residential mortgage loans.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Long-term Debt
Long-term debt consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | Issue Date | | Stated Maturity Date | | Earliest Call Date | | |
| 2022 | | 2021 | | | | | Interest Rate |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
2027 senior debentures | 35,000 | | | 35,000 | | | 2015 | | 2027 | | 2025 | | 5.500% through August 2025, 3-month LIBOR plus 3.71% thereafter (1) |
2030 senior debentures | 100,000 | | | 100,000 | | | 2020 | | 2030 | | 2025 | | 5.00% through June 2025, 3-month SOFR plus 4.87% thereafter |
Total senior debentures | 135,000 | | | 135,000 | | | | | | | | | |
| | | | | | | | | | | |
2028 subordinated debentures | 100,000 | | | 100,000 | | | 2018 | | 2028 | | 2023 | | 4.500% through January 2023, 3-month LIBOR plus 2.12% thereafter (1) |
2029 subordinated debentures | 60,000 | | | — | | | 2019 | | 2029 | | 2024 | | 5.125% until December 2024, then 3-month SOFR + 3.765% thereafter |
Total subordinated debentures | 160,000 | | | 100,000 | | | | | | | | | |
| | | | | | | | | | | |
Tidelands Statutory Trust I | 8,248 | | | 8,248 | | | 2006 | | 2036 | | * | | 3-month LIBOR plus 1.38% (1) |
Four Oaks Statutory Trust I | 12,372 | | | 12,372 | | | 2006 | | 2036 | | * | | 3-month LIBOR plus 1.35% (1) |
Community First Capital Trust I | 3,093 | | | — | | | 2002 | | 2032 | | * | | Prime + 0.50% |
Community First Capital Trust II | 5,155 | | | — | | | 2005 | | 2035 | | * | | 3-month LIBOR +1.50% (1) |
Community First Capital Trust III | 5,464 | | | — | | | 2007 | | 2037 | | * | | 3-month LIBOR plus 3.00% (1) |
Total trust preferred securities | 34,332 | | | 20,620 | | | | | | | | | |
Less net discount | (4,669) | | | (8,260) | | | | | | | | | |
Total long-term debt | $ | 324,663 | | | $ | 247,360 | | | | | | | | | |
* Indicates currently redeemable
(1) Transitions to an alternative benchmark rate plus a comparable spread adjustment in the event that 3-month LIBOR is no longer published on a future adjustment date.
Interest is currently paid at least semiannually for all senior and subordinated debentures and trust preferred securities. All debt instruments reported above are obligations of the Holding Company.
During the first quarter of 2022, United assumed subordinated debentures and trust preferred securities with an acquisition date fair value totaling $76.7 million as part of the Reliant acquisition. See Note 3 for further detail.
(14) Operating Leases
The following table presents the balances of the ROU asset and corresponding operating lease liability and supplemental lease information as of the dates indicated (in thousands).
| | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, | |
| | | | 2022 | | 2021 | |
| ROU asset | | | $ | 40,003 | | | $ | 29,421 | | |
| Operating lease liability | | | 41,688 | | | 31,072 | | |
| | | | | | | |
| Weighted average remaining lease term | | | 5.1 years | | 5.4 years | |
| Weighted average discount rate | | | 1.8 | % | | 1.6 | % | |
During 2022, ROU assets obtained in exchange for an increase in the lease liability totaled $23.9 million, including leases assumed as part of the Reliant transaction of $14.3 million. During 2022, cash payments for amounts related to the lease liability totaled $13.2 million. During 2021, ROU assets obtained in exchange for an increase in the lease liability totaled $4.49 million, including leases assumed as part of the FinTrust and Aquesta transactions of $2.87 million. During 2020, ROU assets obtained in exchange for an increase in the lease liability totaled $17.4 million, including leases assumed as part of the Three Shores transaction of $15.1 million.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Operating Leases, continued
The table below presents the operating lease income and expense recognized for the periods indicated (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2022 | | 2021 | | 2020 | |
| Operating lease cost | | | $ | 12,161 | | | $ | 8,186 | | | $ | 6,449 | | |
| Variable lease cost | | | 1,583 | | | 1,066 | | | 757 | | |
| Short-term lease cost | | | 169 | | | 85 | | | 100 | | |
| Total lease cost | | | $ | 13,913 | | | $ | 9,337 | | | $ | 7,306 | | |
| | | | | | | | | |
| Sublease income and rental income from owned properties under operating leases | | | $ | 1,372 | | | $ | 976 | | | $ | 1,022 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
As of December 31, 2022, future minimum lease payments under operating leases were as follows (in thousands):
| | | | | | | | | | | |
| Year | | |
| 2023 | $ | 11,716 | | |
| 2024 | 8,660 | | |
| 2025 | 6,490 | | |
| 2026 | 5,665 | | |
| 2027 | 4,791 | | |
| Thereafter | 6,397 | | |
| Total | 43,719 | | |
| Less discount | (2,031) | | |
| Present value of lease liability | $ | 41,688 | | |
(15) Fair Value Measurements
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, United uses a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). United has processes in place to review the significant valuation inputs and to reassess how the instruments are classified in the valuation framework.
Fair Value Hierarchy
Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that United has the ability to access.
Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
Level 3 Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. 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.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Fair Value Measurements, continued
The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.
Investment Securities
AFS debt securities and equity securities with readily determinable fair values 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, U.S. 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 those traded in less liquid markets and are valued based on estimates obtained from broker-dealers that are not directly observable.
Deferred Compensation Plan Assets and Liabilities
Included in other assets in the consolidated balance sheets 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 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 and are classified as Level 2. In connection with the Reliant acquisition, United acquired certain mortgage loans held for sale for which the fair value option was not elected; these loans are carried at the lower of aggregate cost or fair value.
Derivative Financial Instruments
United uses derivatives to manage 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.
United incorporates CVAs as necessary to appropriately reflect 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 and guarantees.
Management has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. However, the CVAs associated with these derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. Generally, management’s assessment of the significance of the CVAs has indicated that they are not a significant input to the overall valuation of the derivatives. In cases where management’s assessment indicates that the CVA is a significant input, the related derivative is disclosed as a Level 3 value.
Other derivatives classified as Level 3 include structured derivatives for which broker quotes, used as a key valuation input, were not observable. Risk participation agreements are classified as Level 3 instruments due to the incorporation of significant Level 3 inputs used to evaluate the probability of funding and the likelihood of customer default. Interest rate lock commitments, which relate to mortgage loan commitments, are categorized as Level 3 instruments as the fair value of these instruments is based on unobservable inputs for commitments that United does not expect to fund.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Fair Value Measurements, continued
Servicing Rights for Residential Mortgage and SBA/USDA Loans
United recognizes servicing rights upon the sale of residential mortgage and SBA/USDA loans sold with servicing retained. Management has elected to carry these assets at fair value. Given the nature of the assets, the key valuation inputs are unobservable and management considers these Level 3 assets. For disclosure regarding the fair value of servicing rights, see Note 10.
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, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
AFS debt securities: | | | | | | | | |
U.S. Treasuries | | $ | 149,352 | | | $ | — | | | $ | — | | | $ | 149,352 | |
U.S. Government agencies & GSEs | | — | | | 250,116 | | | — | | | 250,116 | |
State and political subdivisions | | — | | | 303,748 | | | — | | | 303,748 | |
Residential MBS | | — | | | 1,795,481 | | | — | | | 1,795,481 | |
Commercial MBS | | — | | | 671,912 | | | — | | | 671,912 | |
Corporate bonds | | — | | | 210,240 | | | 2,212 | | | 212,452 | |
Asset-backed securities | | — | | | 231,272 | | | — | | | 231,272 | |
Equity securities with readily determinable fair values | | 12,278 | | | 1,359 | | | — | | | 13,637 | |
Mortgage loans held for sale | | — | | | 11,794 | | | — | | | 11,794 | |
Deferred compensation plan assets | | 11,436 | | | — | | | — | | | 11,436 | |
Servicing rights for SBA/USDA loans | | — | | | — | | | 5,188 | | | 5,188 | |
Residential mortgage servicing rights | | — | | | — | | | 36,559 | | | 36,559 | |
Derivative financial instruments | | — | | | 39,123 | | | 11,513 | | | 50,636 | |
Total assets | | $ | 173,066 | | | $ | 3,515,045 | | | $ | 55,472 | | | $ | 3,743,583 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Deferred compensation plan liability | | $ | 11,460 | | | $ | — | | | $ | — | | | $ | 11,460 | |
Derivative financial instruments | | — | | | 86,703 | | | 12,840 | | | 99,543 | |
Total liabilities | | $ | 11,460 | | | $ | 86,703 | | | $ | 12,840 | | | $ | 111,003 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
AFS debt securities: | | | | | | | | |
U.S. Treasuries | | $ | 217,520 | | | $ | — | | | $ | — | | | $ | 217,520 | |
U.S. Government agencies & GSEs | | — | | | 187,032 | | | — | | | 187,032 | |
State and political subdivisions | | — | | | 275,844 | | | — | | | 275,844 | |
Residential MBS | | — | | | 2,145,134 | | | — | | | 2,145,134 | |
Commercial MBS | | — | | | 873,851 | | | — | | | 873,851 | |
Corporate bonds | | — | | | 190,771 | | | 2,395 | | | 193,166 | |
Asset-backed securities | | — | | | 604,277 | | | — | | | 604,277 | |
Equity securities with readily determinable fair values | | — | | | 1,302 | | | — | | | 1,302 | |
Mortgage loans held for sale | | — | | | 44,109 | | | — | | | 44,109 | |
Deferred compensation plan assets | | 11,769 | | | — | | | — | | | 11,769 | |
Servicing rights for SBA/USDA loans | | — | | | — | | | 6,513 | | | 6,513 | |
Residential mortgage servicing rights | | — | | | — | | | 25,161 | | | 25,161 | |
Derivative financial instruments | | — | | | 35,722 | | | 6,758 | | | 42,480 | |
Total assets | | $ | 229,289 | | | $ | 4,358,042 | | | $ | 40,827 | | | $ | 4,628,158 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Deferred compensation plan liability | | $ | 11,795 | | | $ | — | | | $ | — | | | $ | 11,795 | |
Derivative financial instruments | | — | | | 20,097 | | | 5,048 | | | 25,145 | |
Total liabilities | | $ | 11,795 | | | $ | 20,097 | | | $ | 5,048 | | | $ | 36,940 | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Fair Value Measurements, continued
For disclosure regarding the fair value of servicing rights, see Note 10. The following table shows a reconciliation of the beginning and ending balances for all other assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Derivative Asset | | Derivative Liability | | Corporate Bonds | |
| December 31, 2019 | $ | 7,238 | | | $ | 8,559 | | | $ | 998 | | |
| | | | | | | |
| Transfers into Level 3 (1) | 583 | | | — | | | — | | |
| Additions | 368 | | | — | | | 1,750 | | |
| Sales and settlements | — | | | — | | | (1,000) | | |
| Fair value adjustments included in OCI | — | | | — | | | 2 | | |
| Fair value adjustments included in earnings | 2,590 | | | (6,151) | | | — | | |
| December 31, 2020 | 10,779 | | | 2,408 | | | 1,750 | | |
| Transfers into Level 3 (1) | 74 | | | — | | | — | | |
| Additions | 261 | | | 170 | | | 500 | | |
| | | | | | | |
| Fair value adjustments included in OCI | — | | | — | | | 145 | | |
| Fair value adjustments included in earnings | (4,356) | | | 2,470 | | | — | | |
| December 31, 2021 | 6,758 | | | 5,048 | | | 2,395 | | |
| | | | | | | |
| Transfers from Level 3 (1) | (290) | | | — | | | — | | |
| Additions | 12 | | | 99 | | | — | | |
| Sales and settlements | — | | | (1) | | | — | | |
| Fair value adjustments included in OCI | — | | | — | | | (183) | | |
| Fair value adjustments included in earnings | 5,033 | | | 7,694 | | | — | | |
| December 31, 2022 | $ | 11,513 | | | $ | 12,840 | | | $ | 2,212 | | |
(1) Certain derivative assets were transferred between Level 2 and Level 3 of the fair value hierarchy due to a change in the assessment of significance of the CVA. The following table presents quantitative information about recurring Level 3 fair value measurements, excluding servicing rights which are detailed in Note 10:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
Level 3 Assets and Liabilities | | Valuation Technique | | | | December 31, |
| | Significant Unobservable Inputs | | 2022 | | | | 2021 |
| | | | | | Range | | Weighted Average | | | | Range | | Weighted Average |
Derivative assets - mortgage | | Internal model | | Pull through rate | | 26.5% - 100% | | 90.7% | | | | 45.9% - 100% | | 87.2% |
Derivative assets - customer derivative positions | | Internal model | | Estimated loss rate | | N/A | | N/A | | | | 33.4 - 44 | | 36 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Derivative assets & liabilities - other | | Dealer priced | | Dealer priced | | N/A | | N/A | | | | N/A | | N/A |
Corporate bonds | | Discounted cash flow | | Discount rate | | 6.1 - 6.4 | | 6.3 | | | | | 3.6 - 3.8 | | 3.6 | |
Fair Value Option
United generally records mortgage loans held for sale at fair value under the fair value option. Interest income on these loans is calculated based on the note rate of the loan and is recorded in interest revenue. In connection with the Reliant acquisition, United acquired mortgage loans held for sale accounted for under the lower of cost or fair value method. These loans are separately disclosed under the heading “Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis” within this footnote. The following tables present the fair value and outstanding principal balance of loans accounted for under the fair value option, as well as the gain or loss recognized from the change in fair value for the periods indicated (in thousands).
| | | | | | | | | | | | | | | | | |
| | Mortgage Loans Held for Sale | |
| | December 31, | |
| | 2022 | | 2021 | |
| Outstanding principal balance | $ | 11,473 | | | $ | 42,581 | | |
| Fair value | 11,794 | | | 44,109 | | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Fair Value Measurements, continued
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Gain (Loss) Recognized on Mortgage Loans Held for Sale | |
| Location | 2022 | | 2021 | | 2020 | | |
| Mortgage loan gains and other related fees | $ | (1,207) | | | $ | (4,159) | | | $ | 3,815 | | | |
Changes in fair value were mostly offset by hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment.
The following table presents the fair value hierarchy and carrying value of all assets that were still held as of December 31, 2022 and 2021, for which a nonrecurring fair value adjustment was recorded during the periods presented (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | Level 1 | | Level 2 | | Level 3 | | Total | |
| Loans held for investment | | $ | — | | | $ | — | | | $ | 7,808 | | | $ | 7,808 | | |
| Mortgage loans held for sale | | — | | | — | | | 1,806 | | | 1,806 | | |
| | | | | | | | | | |
| December 31, 2021 | | | | | | | | | |
| Loans held for investment | | $ | — | | | $ | — | | | $ | 2,536 | | | $ | 2,536 | | |
Mortgage loans held for sale that were acquired from Reliant were subject to a nonrecurring fair value adjustment resulting from the application of the lower of the amortized cost or fair value accounting. As of December 31, 2022, these loans were classified as nonrecurring Level 3 because the valuation of these loans was based on indicative bids provided by a broker, not corroborated by market transactions.
Loans held for investment that are reported above as being measured at fair value on a nonrecurring basis are generally impaired loans that have either been partially charged off or have been assigned a specific reserve. Nonaccrual loans that are collateral dependent are generally written down to net realizable value, which reflects fair values less the estimated costs to sell. Specific reserves that are established based on appraised value of collateral are considered nonrecurring fair value adjustments as well. 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 is further impaired below the appraised value and there is no observable market price, United records the impaired loan as nonrecurring Level 3.
Assets and Liabilities Not Measured at Fair Value
For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.
Cash and cash equivalents and repurchase agreements have short maturities and therefore the carrying value approximates fair value. Due to the short-term settlement of accrued interest receivable and payable, the carrying amount closely approximates fair value.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings. All estimates are inherently subjective in nature. Changes in assumptions could significantly affect the estimates.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Fair Value Measurements, continued
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, wealth management network, deferred income taxes, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
Off-balance sheet instruments (commitments to extend credit and standby letters of credit) for which draws can be reasonably predicted are generally short-term and at variable rates. Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.
The carrying amount and fair values for other financial instruments that are not measured at fair value on a recurring basis in United’s consolidated balance sheets are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying Amount | | Fair Value Level |
December 31, 2022 | | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | |
HTM debt securities | | $ | 2,613,648 | | | $ | 17,417 | | | $ | 2,173,656 | | | $ | — | | | $ | 2,191,073 | |
Loans, net | | 15,175,270 | | | — | | | — | | | 14,609,239 | | | 14,609,239 | |
| | | | | | | | | | |
Liabilities: | | | | | | | | | | |
Deposits | | 19,876,507 | | | — | | | 19,863,380 | | | — | | | 19,863,380 | |
Federal Home Loan Bank advances | | 550,000 | | | — | | | — | | | 549,913 | | | 549,913 | |
Long-term debt | | 324,663 | | | — | | | — | | | 313,380 | | | 313,380 | |
| | | | | | | | | | |
December 31, 2021 | | | | | | | | | | |
Assets: | | | | | | | | | | |
HTM debt securities | | $ | 1,156,098 | | | $ | — | | | $ | 1,148,804 | | | $ | — | | | $ | 1,148,804 | |
Loans, net | | 11,657,814 | | | — | | | — | | | 11,607,821 | | | 11,607,821 | |
| | | | | | | | | | |
Liabilities: | | | | | | | | | | |
Deposits | | 18,241,179 | | | — | | | 18,239,934 | | | — | | | 18,239,934 | |
| | | | | | | | | | |
Long-term debt | | 247,360 | | | — | | | — | | | 267,064 | | | 267,064 | |
(16) Common and Preferred Stock
Common Stock
In November of 2022, United’s Board re-authorized its common stock repurchase program to permit the repurchase of up to $50 million of its common stock. The program is scheduled to expire on the earlier of United’s repurchase of its common stock having an aggregate purchase price of $50 million or December 31, 2023. Under the program, shares may be repurchased in open market transactions or in privately negotiated transactions, from time to time, subject to market conditions. During 2022, no shares were repurchased under the program. During 2021 and 2020, 492,744 and 826,482 shares were repurchased under the program, respectively. As of December 31, 2022, United had remaining authorization to repurchase up to $50.0 million of outstanding common stock under the program.
United sponsors a DRIP that allows participants who already own United’s common stock to purchase additional shares directly from the Company. The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission. In 2022, 2021 and 2020, 8,941, 10,081 and 38,107 shares, respectively, were issued under the DRIP.
Preferred Stock
During 2020, United issued $100 million, or 4,000 shares, of Series I perpetual non-cumulative preferred stock (“Preferred Stock”) with a dividend rate of 6.875% per annum for net proceeds of $96.4 million and corresponding depositary shares each representing a 1/1,000th interest in one share of Preferred Stock. If declared, dividends are payable quarterly in arrears. The Preferred Stock has no stated maturity and redemption is solely at the option of United in whole, but not in part, upon the occurrence of a regulatory capital treatment event, as defined. In addition, the Preferred Stock may be redeemed on or after
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Common and Preferred Stock, continued
September 15, 2025 at a cash redemption price equal to $25,000 per share (equivalent to $25 per depositary share) plus any declared and unpaid dividends. As of December 31, 2022 and 2021, the Preferred Stock had a carrying amount of $96.4 million.
(17) Equity Compensation Plans
United has an equity compensation plan that allows for grants of various stock-based compensation. The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years. Certain options and restricted stock unit awards provide for accelerated vesting if there is a change in control of United or certain other conditions are met (as defined in the plan document). As of December 31, 2022, 2.79 million additional awards could be granted under the plan.
Restricted stock units and options outstanding and activity for the years ended December 31 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Stock Units | | Options |
| Shares | | Weighted Average Grant Date Fair Value | | Aggregate Intrinsic Value (000’s) | | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Term (Yrs.) | | Aggregate Intrinsic Value (000’s) |
December 31, 2019 | 808,424 | | | $ | 27.94 | | | | | 1,500 | | | $ | 27.95 | | | | | |
Granted | 446,512 | | | 19.15 | | | | | — | | | — | | | | | |
Vested / Exercised | (324,697) | | | 26.42 | | | | | — | | | — | | | | | |
Expired | — | | | | | | | (1,500) | | | 27.95 | | | | | |
Cancelled | (36,808) | | | 25.73 | | | | | — | | | — | | | | | |
December 31, 2020 | 893,431 | | | 23.75 | | | | | — | | | — | | | | | |
Granted | 302,701 | | | 30.34 | | | | | 62,743 | | | 8.30 | | | | | |
Vested / Exercised | (330,598) | | | 26.13 | | | | | (27,283) | | | 8.20 | | | | | |
| | | | | | | | | | | | | |
Cancelled | (57,060) | | | 25.15 | | | | | — | | | — | | | | | |
December 31, 2021 | 808,474 | | | 25.15 | | | | | 35,460 | | | 8.38 | | | | | |
Granted | 343,526 | | | 32.92 | | | | | 48,239 | | | 20.88 | | | | | |
Vested / Exercised | (340,691) | | | 25.74 | | | $ | 12,169 | | | (43,361) | | | 19.02 | | | | | $ | 743 | |
| | | | | | | | | | | | | |
Cancelled | (32,623) | | | 26.12 | | | | | — | | | — | | | | | |
December 31, 2022 | 778,686 | | | 28.28 | | | 26,320 | | | 40,338 | | | 11.88 | | | 2.11 | | 884 | |
Vested / Exercisable | | | | | | | | | | | | | |
at December 31, 2022 | — | | | — | | | | | 40,338 | | | 11.88 | | | 2.11 | | 884 | |
Options granted in 2022 and 2021 were related to the Reliant and Aquesta acquisitions, respectively, with the weighted average exercise price of the acquired institution’s fully vested converted options determined pursuant to the purchase agreement. The value of the options was determined using a Black-Scholes model and was included in each acquisition’s purchase price. No compensation expense relating to options was included in earnings for 2022, 2021 or 2020.
Compensation expense for restricted stock units without market conditions is based on the market value of United’s common stock on the date of grant. United recognizes the impact of forfeitures as they occur. The value of restricted stock unit awards is amortized into expense over the service period.
In addition to time-based restricted stock unit awards, the Board has also approved PSUs, which vest based on achieving certain performance and market targets relative to a bank peer group. Achievement of the base-level performance and market targets for all applicable periods will result in the issuance of 133,716 shares, which are included in the outstanding balance as of December 31, 2022 in the table above. Additional shares may be issued if more stringent performance and market hurdles are met. The grant date per share fair market value of PSUs is estimated using the Monte Carlo Simulation valuation model.
Compensation expense recognized in the consolidated statements of income for employee restricted stock unit awards in 2022, 2021 and 2020 was $8.17 million, $6.07 million and $7.40 million, respectively, which was recognized in salaries and employee benefits expense. In addition, in 2022, 2021 and 2020, $540,000, $489,000 and $484,000, respectively, was recognized in other operating expenses for restricted stock unit awards granted to members of the Board. Deferred income tax benefits related to stock-based compensation expense of $2.22 million, $1.67 million and $2.01 million were included in the determination of income tax expense in 2022, 2021 and 2020, respectively. As of December 31, 2022, there was $17.2 million of unrecognized
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) Equity Compensation Plans, continued
compensation cost related to restricted stock units granted under the plan. The cost is expected to be recognized over a weighted-average period of 2.7 years.
(18) Reclassifications Out of AOCI
The following presents the details regarding amounts reclassified out of AOCI (in thousands). Amounts shown above in parentheses reduce earnings.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amounts Reclassified from AOCI For the Years Ended December 31, | | | |
| Details about AOCI Components | | | Affected Line Item in the Statement Where Net Income is Presented | |
| | 2022 | | 2021 | | 2020 | | |
| | | | | | | | | | |
| Realized gains (losses) on AFS securities: | | | | | |
| | | $ | (3,872) | | | $ | 83 | | | $ | 748 | | | Securities gains (losses), net | |
| | | 1,026 | | | 46 | | | (191) | | | Income tax (expense) benefit | |
| | | $ | (2,846) | | | $ | 129 | | | $ | 557 | | | Net of tax | |
| | | | | | | | | | |
| Amortization of unrealized losses on HTM securities transferred from AFS: | |
| | | $ | (9,049) | | | $ | — | | | $ | (723) | | | Investment securities interest revenue | |
| | | 2,167 | | | — | | | 173 | | | Income tax benefit | |
| | | $ | (6,882) | | | $ | — | | | $ | (550) | | | Net of tax | |
| | | | | | | | | | |
| Losses on derivative instruments accounted for as cash flow hedges: | | | |
| | | | | | | | | | |
| Interest rate contracts | | $ | (269) | | | $ | (608) | | | $ | (359) | | | Long-term debt interest expense | |
| | | 69 | | | 156 | | | 91 | | | Income tax benefit | |
| | | $ | (200) | | | $ | (452) | | | $ | (268) | | | Net of tax | |
| | | | | | | | | | |
| | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Amortization of defined benefit pension plan net periodic pension cost components: | | | |
| Prior service cost | | $ | (313) | | | $ | (469) | | | $ | (531) | | | Salaries and employee benefits expense | |
| Actuarial losses | | (367) | | | (575) | | | (326) | | | Other expense | |
| | | | | | | | | | |
| | | (680) | | | (1,044) | | | (857) | | | Total before tax | |
| | | 174 | | | 267 | | | 219 | | | Income tax benefit | |
| | | $ | (506) | | | $ | (777) | | | $ | (638) | | | Net of tax | |
| | | | | | | | | | |
| Total reclassifications for the period | | $ | (10,434) | | | $ | (1,100) | | | $ | (899) | | | Net of tax | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) Earnings Per Share
The following table sets forth the computation of basic and diluted net income per common share for the years indicated (in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Net income | $ | 277,472 | | | $ | 269,801 | | | $ | 164,089 | |
Earnings allocated to participating securities | (1,462) | | | (1,657) | | | (1,287) | |
Dividends on preferred stock | (6,875) | | | (6,875) | | | (3,533) | |
Net income available to common stockholders | $ | 269,135 | | | $ | 261,269 | | | $ | 159,269 | |
Net income per common share: | | | | | |
Basic | $ | 2.52 | | | $ | 2.97 | | | $ | 1.91 | |
Diluted | 2.52 | | | 2.97 | | | 1.91 | |
Weighted average common shares: | | | | | |
Basic | 106,661 | | | 87,940 | | | 83,184 | |
Effect of dilutive securities: | | | | | |
Stock options | 39 | | | 9 | | | — | |
Restricted stock units | 78 | | | 148 | | | 64 | |
Diluted | 106,778 | | | 88,097 | | | 83,248 | |
At December 31, 2022, 2021 and 2020, United had no potentially dilutive instruments outstanding that were not included in the above analysis.
(20) Income Taxes
Income tax expense is as follows for the years indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Current | $ | 67,612 | | | $ | 57,175 | | | $ | 42,688 | |
Deferred | 10,918 | | | 20,787 | | | 2,668 | |
| | | | | |
| | | | | |
Total income tax expense | $ | 78,530 | | | $ | 77,962 | | | $ | 45,356 | |
The differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate of 21% in 2022, 2021 and 2020 to income before income taxes are as follows for the years indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Income tax expense on pretax income at statutory rates | $ | 74,760 | | | $ | 73,030 | | | $ | 43,983 | |
Add (deduct): | | | | | |
State taxes, net of federal benefit | 7,096 | | | 9,188 | | | 5,928 | |
BOLI earnings | (1,379) | | | (745) | | | (1,052) | |
Adjustment to reserve for uncertain tax positions | 430 | | | 153 | | | (1,212) | |
Tax-exempt interest revenue | (3,015) | | | (2,520) | | | (2,169) | |
Equity compensation | (1,313) | | | (891) | | | (174) | |
Transaction costs | 296 | | | 117 | | | 217 | |
Tax credit investments | (694) | | | (598) | | | (930) | |
BOLI surrender | 1,746 | | | — | | | — | |
| | | | | |
| | | | | |
| | | | | |
Other | 603 | | | 228 | | | 765 | |
Total income tax expense | $ | 78,530 | | | $ | 77,962 | | | $ | 45,356 | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) Income Taxes, continued
The following summarizes the sources and expected tax consequences of future taxable deductions (revenue) which comprise the net DTA as of the dates indicated (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
DTAs: | | | |
ACL | $ | 38,409 | | | $ | 24,349 | |
Net operating loss carryforwards | 15,170 | | | 16,656 | |
Deferred compensation | 11,181 | | | 11,011 | |
Loan purchase accounting adjustments | 5,223 | | | 4,227 | |
| | | |
Nonqualified share based compensation | 1,253 | | | 1,374 | |
Accrued expenses | 10,369 | | | 7,936 | |
| | | |
Unamortized pension actuarial losses and prior service cost | — | | | 1,442 | |
Unrealized losses on AFS securities | 103,960 | | | 5,808 | |
| | | |
Derivatives | 86 | | | — | |
Deferred gains on SBA/USDA loan sales | 1,683 | | | 2,217 | |
Lease liability | 10,105 | | | 7,501 | |
Other | 2,884 | | | 2,780 | |
Total DTAs | 200,323 | | | 85,301 | |
DTLs: | | | |
| | | |
Unrealized gains on cash flow hedges | 4,507 | | | 1,189 | |
Acquired intangible assets | 4,707 | | | 2,412 | |
Premises and equipment | 9,314 | | | 5,179 | |
Loan origination costs | 8,855 | | | 6,466 | |
True tax leases | 8,748 | | | 5,984 | |
Servicing assets | 9,243 | | | 6,779 | |
Derivatives | — | | | 1,309 | |
ROU asset | 9,807 | | | 7,102 | |
Securities purchase accounting adjustments | 4,150 | | | 2,644 | |
BOLI surrender | 1,746 | | | — | |
Trust preferred securities debt issuance | 1,606 | | | 1,673 | |
Uncertain tax positions | 1,891 | | | 1,945 | |
Other | 5,514 | | | 386 | |
Total DTLs | 70,088 | | | 43,068 | |
Less valuation allowance | 922 | | | 911 | |
Net DTA | $ | 129,313 | | | $ | 41,322 | |
The change in the net DTA in 2022 includes an increase of $5.74 million due to current year merger and acquisition activity.
At December 31, 2022, United had:
•$19.1 million of state net operating loss carryforwards subject to annual limitation under IRC Section 382 that begin to expire in 2026, if not previously utilized.
•$24.4 million of state net operating loss carryforwards that begin to expire in 2025, if not previously utilized.
•$52.4 million in federal net operating loss carryforwards subject to annual limitation under IRC Section 382 that begin to expire in 2027, if not previously utilized.
•$3.24 million of state tax credits that begin to expire in 2023, if not previously utilized.
Management assesses the valuation allowance recorded against DTAs at each reporting period. The determination of whether a valuation allowance for DTAs is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence. ASC 740 requires that companies assess whether a valuation allowance should be established against their DTAs based on the consideration of all available evidence using a “more likely than not” standard.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) Income Taxes, continued
At December 31, 2022 and 2021, based on the assessment of all the positive and negative evidence, management concluded that it is more likely than not that nearly all of the net DTA will be realized based upon future taxable income. The valuation allowance of $922,000 and $911,000, respectively, was related to specific state income tax credits that have short carryforward periods and certain acquired state net operating losses, both of which 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 December 31, 2022 that it was more likely than not that the net DTA of $129.3 million will be realized is based on management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts which 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 the net DTA.
A reconciliation of the beginning and ending unrecognized tax benefit related to uncertain tax positions is as follows for the years indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Balance at beginning of year | $ | 2,356 | | | $ | 2,163 | | | $ | 3,370 | |
Additions based on tax positions related to the current year | 962 | | | 634 | | | 421 | |
Decreases resulting from a lapse in the applicable statute of limitations | (470) | | | (441) | | | (1,628) | |
| | | | | |
Balance at end of year | $ | 2,848 | | | $ | 2,356 | | | $ | 2,163 | |
Approximately $2.25 million of the unrecognized tax benefit at December 31, 2022 would increase income from continuing operations, and thus affect United’s effective tax rate, if ultimately recognized into income.
It is United’s policy to recognize interest and penalties accrued relative to unrecognized tax benefits in their respective federal or state income taxes accounts. There were no penalties and interest related to income taxes recorded in the income statement in 2022, 2021 or 2020. No amounts were accrued for interest and penalties on the balance sheet at December 31, 2022 or 2021.
United and its subsidiaries file a consolidated U.S. federal income tax return, as well as various state returns in the states where it operates. United’s federal and state income tax returns are no longer subject to examination by taxing authorities for years before 2019.
(21) Benefit Plans
Defined Contribution Benefit Plans
401(k) Plan
United offers a defined contribution safe harbor 401(k) plan (the “401(k) Plan”) that covers substantially all employees meeting certain minimum service requirements. The 401(k) Plan allows employees to make pre-tax contributions to the 401(k) Plan and United matches 100% of employee contributions up to 5% of eligible compensation. Employees begin to receive matching contributions after completing 90 days of service. Under safe harbor provisions, United is required to provide a matching contribution and participants are immediately 100% vested in safe harbor matching contributions.
United’s 401(k) Plan is administered in accordance with applicable laws and regulations. Compensation expense related to the 401(k) Plan totaled $9.60 million, $7.31 million and $6.16 million in 2022, 2021 and 2020, respectively.
Deferred Compensation Plan
United also sponsors a non-qualified deferred compensation plan for its executive officers, certain other key employees and members of the Board and its community banks’ advisory boards of directors. The deferred compensation plan provides for the pre-tax deferral of compensation, fees and other specified benefits. Specifically, the deferred compensation plan permits each employee participant to elect to defer a portion of base salary, bonus or vested restricted stock units and permits each eligible director participant to elect to defer all or a portion of director’s fees. Further, the deferred compensation plan allows for additional contributions by an employee, with matching contributions by United, for amounts that exceed the allowable amounts under the 401(k) Plan.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(21) Benefit Plans, continued
During 2022, 2021 and 2020, United recognized $104,000, $73,000 and $49,000, respectively, in matching contributions for this provision of the deferred compensation plan. The Board may also elect to make a discretionary contribution to any or all participants. No discretionary contributions were made in 2022, 2021 or 2020.
In addition to common stock related to elected deferrals of vested restricted stock units, United offers its common stock as an investment option for cash contributions to the deferred compensation plan. The common stock component is accounted for as an equity instrument and is reflected in the consolidated balance sheets as common stock issuable. The deferred compensation plan does not allow for diversification once an election is made to invest in United stock and settlement must be accomplished in shares at the time the deferral period is completed. At December 31, 2022 and 2021, United had 607,128 shares and 595,705 shares, respectively, of its common stock that were issuable under the deferred compensation plan.
Defined Benefit Pension Plan
United has an unfunded noncontributory defined benefit pension plan, or the Modified Retirement Plan, that covers certain executive officers and other key employees. The Modified Retirement Plan provides a fixed annual retirement benefit to plan participants.
Weighted-average assumptions used to determine the pension benefit obligation of the Modified Retirement Plan at year end and net periodic pension cost are shown in the table below:
| | | | | | | | | | | | | | | | | | | |
| | | |
| | 2022 | | | | 2021 | |
| Discount rate for disclosures | 5.15 | % | | | | 2.90 | % | |
| Discount rate for net periodic benefit cost | 2.90 | % | | | | 2.55 | % | |
| Measurement date | 12/31/2022 | | | | 12/31/2021 | |
Discount rates are determined in consultation with the third-party actuary and are set by matching the projected benefit cash flow to a notional yield curve developed by reference to high-quality fixed income investments. The discount rates are determined as the rate which would provide the same present value as the plan cash flows discounted to the measurement date using the full series of spot rates along the notional yield curve as of the measurement date.
United recognizes the unfunded status of the Modified Retirement Plan as a liability in the consolidated balance sheets. Information about changes in obligations and plan assets follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | |
| | 2022 | | 2021 | |
| Accumulated benefit obligation: | | | | |
| Accumulated benefit obligation - beginning of year | $ | 26,261 | | | $ | 27,099 | | |
| Service cost | 626 | | | 659 | | |
| Interest cost | 744 | | | 676 | | |
| | | | | |
| Actuarial gains | (5,833) | | | (1,066) | | |
| Benefits paid | (1,124) | | | (1,107) | | |
| Accumulated benefit obligation - end of year | 20,674 | | | 26,261 | | |
| Change in plan assets, at fair value: | | | | |
| Beginning plan assets | — | | | — | | |
| Actual return | — | | | — | | |
| Employer contribution | 1,124 | | | 1,107 | | |
| Benefits paid | (1,124) | | | (1,107) | | |
| Plan assets - end of year | — | | | — | | |
| Funded status - end of year (plan assets less benefit obligations) | $ | (20,674) | | | $ | (26,261) | | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(21) Benefit Plans, continued
Components of net periodic benefit cost and other amounts recognized in other comprehensive income related to the Modified Retirement Plan are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | 2022 | 2021 | 2020 | |
| Service cost | $ | 626 | | | $ | 659 | | | $ | 588 | | |
| Interest cost | 744 | | | 676 | | | 795 | | |
| | | | | | | |
| Amortization of prior service cost | 313 | | | 469 | | | 531 | | |
| Amortization of net actuarial losses | 367 | | | 576 | | | 326 | | |
| Net periodic benefit cost | $ | 2,050 | | | $ | 2,380 | | | $ | 2,240 | | |
The following table summarizes the estimated future benefit payments expected to be paid from the Modified Retirement Plan for the periods indicated (in thousands).
| | | | | | | | | | | |
| 2023 | $ | 1,192 | | |
| 2024 | 1,186 | | |
| 2025 | 1,199 | | |
| 2026 | 1,220 | | |
| 2027 | 1,510 | | |
| 2028-2032 | 8,644 | | |
| | | |
Other United sponsored benefit plans
United's Employee Stock Purchase Program (“ESPP”), which was terminated during 2021, allowed eligible employees to purchase shares of common stock at a discount (10%), with no commission charges. During 2021 and 2020, United issued 6,676 shares and 34,423 shares, respectively, through the ESPP.
(22) Regulatory Matters
Capital Requirements
United and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on United. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, United and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures (as defined) established by regulation to ensure capital adequacy require United and the Bank to maintain minimum amounts and ratios of total capital, Tier 1 capital, and CET1 to RWAs, and of Tier 1 capital to average assets.
United and the Bank are also subject to a “capital conservation buffer,” which is designed to absorb losses during periods of economic stress. Banking organizations with a ratio of CET1 to RWAs above the minimum but below the conservation buffer (or below the combined capital conservation buffer and counter-cyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and discretionary bonus compensation based on the amount of the shortfall.
As of December 31, 2022, United and the Bank were categorized as well-capitalized under the regulatory framework for prompt corrective action in effect at such time. To be categorized as well-capitalized, United and the Bank must have exceeded the well-capitalized guideline ratios in effect at such time, as set forth in the table below, and have met certain other requirements. Management believes that United and the Bank exceeded all well-capitalized requirements at December 31, 2022, and there have been no conditions or events since year-end that would change the status of well-capitalized.
United has adopted relief provided by federal banking regulatory agencies for the delay of the adverse capital impact of CECL. This optional two-year delay, which ended December 31, 2021, is followed by an optional three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. Under the transition provision, the amount of aggregate capital benefit is phased out by 25% each year with the full impact of adoption completely recognized by 2025.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(22) Regulatory Matters, continued
Regulatory capital ratios at December 31, 2022 and 2021, along with the minimum amounts required for capital adequacy purposes and to be well-capitalized under prompt corrective action provisions in effect at such times are presented below for United and the Bank (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basel III Guidelines | | United Community Banks, Inc. (consolidated) | | United Community Bank |
| Minimum (1) | | Well Capitalized | | 2022 | | 2021 | | 2022 | | 2021 |
Risk-based ratios: | | | | | | | | | | | |
CET1 capital | 4.5 | % | | 6.5 | % | | 12.26 | % | | 12.46 | % | | 12.83 | % | | 12.87 | % |
Tier 1 capital | 6.0 | | | 8.0 | | | 12.81 | | | 13.17 | | | 12.83 | | | 12.87 | |
Total capital | 8.0 | | | 10.0 | | | 14.79 | | | 14.65 | | | 13.70 | | | 13.46 | |
Tier 1 leverage ratio | 4.0 | | | 5.0 | | | 9.69 | | | 8.75 | | | 9.69 | | | 8.53 | |
CET1 capital | | | | | $ | 2,164,211 | | | $ | 1,688,176 | | | $ | 2,255,337 | | | $ | 1,738,557 | |
Tier 1 capital | | | | | 2,260,633 | | | 1,784,598 | | | 2,255,337 | | | 1,738,557 | |
Total capital | | | | | 2,610,216 | | | 1,984,376 | | | 2,408,895 | | | 1,818,335 | |
RWAs | | | | | 17,648,573 | | | 13,548,534 | | | 17,583,347 | | | 13,512,405 | |
Average total assets | | | | | 23,322,018 | | | 20,402,842 | | | 23,285,253 | | | 20,377,319 | |
(1) As of December 31, 2022 and 2021, the additional capital conservation buffer in effect was 2.50%.
Cash, Dividend, Loan and Other Restrictions
Federal and state banking regulations place certain restrictions on dividends paid by the Bank to the Holding Company. During 2022 and 2021, the Bank paid dividends to the Holding Company of $133 million and $217 million, respectively.
The Federal Reserve Act requires that extensions of credit by the Bank to certain affiliates, including the Holding Company, be secured by specific collateral, that the extension of credit to any one affiliate be limited to 10% of capital and surplus (as defined), and that extensions of credit to all such affiliates be limited to 20% of capital and surplus.
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. United uses the same credit policies in making commitments and conditional obligations as it uses for underwriting on-balance sheet instruments. In most cases, collateral or other security is required to support financial instruments with credit risk.
(23) Commitments and Contingencies
The following table summarizes, as of the dates indicated, the contract amount of certain off-balance sheet instruments (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Financial instruments whose contract amounts represent credit risk: | | | |
Commitments to extend credit | $ | 4,683,790 | | | $ | 3,591,975 | |
Letters of credit | 46,896 | | | 29,312 | |
| | | |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn on, the total commitment amounts do not necessarily represent future cash requirements.
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(23) Commitments and Contingencies, continued
Letters of credit are conditional commitments issued by United and could result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party or upon the non-performance of the customer. Those guarantees are primarily issued to local businesses and government agencies. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In most cases, the Bank holds real estate, certificates of deposit, and other acceptable collateral as security supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments varies.
United maintains an ACL for these unfunded commitments, which is included in other liabilities in the consolidated balance sheets. The ACL for unfunded loan commitments is determined as part of the quarterly ACL analysis. See Note 1 for further detail.
United, in the normal course of business, is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Although it is not possible to predict the outcome of these lawsuits, or the range of any possible loss, management, after consultation with legal counsel, does not anticipate that the ultimate aggregate liability, if any, arising from these lawsuits will have a material adverse effect on financial position or results of operations.
Tax Credit and Certain Equity Investments
United invests in certain LIHTC partnerships throughout its market area as a means of supporting local communities, as well as in entities that promote renewable energy sources. United receives tax credits related to these investments. For certain of the investments, United provides financing during the construction and development phase of the related projects and/or permanent financing upon completion of the project. United has concluded that these partnerships are VIEs of which it is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs' financial performance and, therefore, is not required to consolidate these VIEs. United's maximum potential exposure to losses relative to investments in these VIEs is generally limited to the sum of the outstanding balance, future funding commitments and any related loans to the entity. Loans to these entities are underwritten in substantially the same manner as other loans and are generally secured.
United also has investments in and future funding commitments related to fintech fund limited partnerships, other community development entities and certain other equity method investments. United has concluded that these partnerships are VIEs of which it is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs' financial performance and, therefore, is not required to consolidate these VIEs. The risk exposure relating to such commitments is generally limited to the amount of investments and future funding commitments made.
The following table summarizes, as of the dates indicated, tax credit and certain equity method investments (in thousands):
| | | | | | | | | | | | | | | | | |
| | | December 31, |
| Balance Sheet Location | | 2022 | | 2021 |
Investments in LIHTC: | | | | | |
Carrying amount | Other assets | | $ | 50,054 | | | $ | 40,243 | |
Amount of future funding commitments included in carrying amount | Other liabilities | | 18,090 | | | 14,846 | |
Renewable energy investments: | | | | | |
Carrying amount | Other assets | | 19,617 | | | — | |
Amount of future funding commitments included in carrying amount | Other liabilities | | 18,781 | | | — | |
Fintech funds and certain other equity method investments: | | | | | |
Carrying amount | Other assets | | 27,569 | | | 12,439 | |
Amount of future funding commitments included in carrying amount | Other liabilities | | 470 | | | 1,410 | |
Amount of future funding commitments not included in carrying amount | N/A | | 23,690 | | | 15,831 | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(24) Condensed Financial Statements of United Community Banks, Inc. (Holding Company Only)
Balance Sheets
As of December 31, 2022 and 2021
(in thousands)
| | | | | | | | | | | |
| 2022 | | 2021 |
Assets | | | |
Cash and cash equivalents | $ | 322,353 | | | $ | 298,316 | |
Investment in Bank | 2,661,884 | | | 2,150,683 | |
Investment in other subsidiaries | 37,325 | | | 23,194 | |
Other assets | 76,898 | | | 46,432 | |
Total assets | $ | 3,098,460 | | | $ | 2,518,625 | |
Liabilities and Shareholders’ Equity | | | |
Long-term debt | $ | 334,663 | | | $ | 247,360 | |
Other liabilities | 63,123 | | | 49,020 | |
Total liabilities | 397,786 | | | 296,380 | |
Shareholders’ equity | 2,700,674 | | | 2,222,245 | |
Total liabilities and shareholders’ equity | $ | 3,098,460 | | | $ | 2,518,625 | |
Statements of Income
For the Years Ended December 31, 2022, 2021 and 2020
(in thousands)
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Dividends from Bank | $ | 132,688 | | | $ | 217,000 | | | $ | 150,000 | |
Dividends from other subsidiaries | 2,788 | | | — | | | — | |
Shared service fees from subsidiaries | 16,335 | | | 12,402 | | | 13,020 | |
Other | 566 | | | 3,167 | | | 1,436 | |
Total income | 152,377 | | | 232,569 | | | 164,456 | |
Interest expense | 17,250 | | | 14,324 | | | 13,994 | |
Other expense | 18,058 | | | 16,417 | | | 16,473 | |
Total expenses | 35,308 | | | 30,741 | | | 30,467 | |
Income tax benefit | 3,251 | | | 6,908 | | | 2,681 | |
Income before equity in undistributed earnings of subsidiaries | 120,320 | | | 208,736 | | | 136,670 | |
Equity in undistributed earnings of subsidiaries | 157,152 | | | 61,065 | | | 27,419 | |
Net income | $ | 277,472 | | | $ | 269,801 | | | $ | 164,089 | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(24) Condensed Financial Statements of United Community Banks, Inc. (Holding Company Only), continued
Statements of Cash Flows
For the Years Ended December 31, 2022, 2021 and 2020
(in thousands)
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Operating activities: | | | | | |
Net income | $ | 277,472 | | | $ | 269,801 | | | $ | 164,089 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Equity in undistributed earnings of the subsidiaries | (157,152) | | | (61,065) | | | (27,419) | |
| | | | | |
| | | | | |
Stock-based compensation | 8,705 | | | 6,554 | | | 7,887 | |
Change in assets and liabilities: | | | | | |
Other assets | 6,094 | | | (7,800) | | | (3,662) | |
Other liabilities | 7,736 | | | 6,353 | | | 5,261 | |
Net cash provided by operating activities | 142,855 | | | 213,843 | | | 146,156 | |
Investing activities: | | | | | |
Net cash (paid) received for acquisition | (47) | | | (47,785) | | | 3,397 | |
| | | | | |
Purchases of debt securities available-for-sale and equity securities with readily determinable fair values | (19,060) | | | (1,500) | | | (2,750) | |
| | | | | |
Proceeds from sales and maturities of debt securities available-for-sale and equity securities with readily determinable fair values | 4,473 | | | 1,253 | | | — | |
| | | | | |
Other investing inflows | 19 | | | 860 | | | — | |
Other investing outflows | (3,676) | | | (630) | | | — | |
| | | | | |
Net cash (used in) provided by investing activities | (18,291) | | | (47,802) | | | 647 | |
Financing activities: | | | | | |
Repayment of long-term debt | — | | | (65,632) | | | — | |
Proceeds from issuance of long-term debt, net of issuance costs | — | | | — | | | 98,552 | |
Proceeds from issuance of preferred stock, net of issuance costs | — | | | — | | | 96,422 | |
Cash paid for shares withheld to cover payroll taxes related to equity instruments | (3,494) | | | (3,182) | | | (3,119) | |
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans | 301 | | | 506 | | | 1,317 | |
Proceeds from exercise of stock options and warrants | 824 | | | 231 | | | — | |
| | | | | |
Repurchase of common stock | — | | | (15,101) | | | (20,782) | |
Cash dividends on preferred stock | (6,875) | | | (6,876) | | | (3,533) | |
Cash dividends on common stock | (86,883) | | | (66,914) | | | (58,912) | |
Other financing outflows | (4,400) | | | — | | | — | |
Net cash (used in) provided by financing activities | (100,527) | | | (156,968) | | | 109,945 | |
Net change in cash | 24,037 | | | 9,073 | | | 256,748 | |
Cash at beginning of year | 298,316 | | | 289,243 | | | 32,495 | |
Cash at end of year | $ | 322,353 | | | $ | 298,316 | | | $ | 289,243 | |
UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(25) Subsequent Events
Acquisition of Progress
Subsequent to year-end, on January 3, 2023, United completed the acquisition of Progress Financial Corporation and its wholly-owned subsidiary, Progress Bank & Trust, collectively referred to as “Progress”. Progress is headquartered in Huntsville, Alabama and operates 13 branches in Alabama and the Florida Panhandle, which facilitates United’s growth into those markets. As of December 31, 2022, Progress reported total assets of $1.76 billion, total loans of $1.48 billion and total deposits of $1.34 billion.
Progress shareholders received $307 million in total consideration, of which $296 million was United common stock (8.77 million shares), $447,000 was cash and $10.0 million was converted stock options. The acquisition will be accounted for as a business combination. Due to the timing of the acquisition, United is currently in the process of completing the purchase accounting and has not made all of the remaining required disclosures, such as the fair value of assets acquired and supplemental pro forma information, which will be disclosed in subsequent filings.
Announced Acquisition of First Miami
On February 13, 2023, United announced an agreement to acquire First Miami Bancorp, Inc. and its wholly-owned subsidiary, First National Bank of South Miami, collectively referred to as “First Miami”. First Miami is headquartered in South Miami, Florida, and operates 3 offices in the Miami metropolitan area. As of December 31, 2022, First Miami had total assets of $1.0 billion, total loans of $594 million, and total deposits of $867 million. In addition to traditional banking products, First Miami offers private banking, trust and wealth management with approximately $312 million in assets under administration. The merger, which is subject to regulatory approval, the approval of First Miami shareholders, and other customary conditions, is expected to close in the third quarter of 2023.
Dividends Declared
On February 22, 2023, the Board approved a regular quarterly cash dividend of $0.23 per common share and a preferred stock dividend of $429.6875 per preferred share (equivalent to $0.4296875 per depositary share, or 1/1000 interest per share). The common stock dividend is payable April 5, 2023, to common shareholders of record on March 15, 2023. The preferred stock dividend is payable March 15, 2023, to preferred shareholders of record on February 28, 2023.