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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

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

For the Quarterly Period Ended March 31, 2023

OR

☐

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

For the Transition Period from ___________ to ___________

Commission file number 001-35095

UNITED COMMUNITY BANKS, INC.

(Exact name of registrant as specified in its charter)

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

125 Highway 515 East
Blairsville, Georgia						30512
(Address of principal executive offices)						(Zip code)

(706) 781-2265

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class			Trading Symbol(s)			Name of Each Exchange on Which Registered
Common stock, par value $1 per share			UCBI			Nasdaq Global Select Market
Depositary shares, each representing 1/1000th interest in a share of Series I Non-Cumulative Preferred Stock			UCBIO			Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

Yes ☐ No ☒

There were 115,154,699 shares of the registrant’s common stock, par value $1 per share, outstanding as of April 30, 2023.

---

UNITED COMMUNITY BANKS, INC.

FORM 10-Q

INDEX

						Glossary of Defined Terms			3
						Cautionary Note Regarding Forward-looking Statements			4
PART I - Financial Information
			Item 1.			Financial Statements
						Consolidated Balance Sheets (unaudited)			5
						Consolidated Statements of Income (unaudited)			6
						Consolidated Statements of Comprehensive Income (unaudited)			7
						Consolidated Statements of Changes in Shareholders’ Equity (unaudited)			8
						Consolidated Statements of Cash Flows (unaudited)			9
						Notes to Consolidated Financial Statements			10
			Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			37
			Item 3.			Quantitative and Qualitative Disclosures About Market Risk			54
			Item 4.			Controls and Procedures			54
PART II - Other Information
			Item 1.			Legal Proceedings			55
			Item 1A.			Risk Factors			55
			Item 6.			Exhibits			55

2

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Glossary of Defined Terms

The following terms may be used throughout this report, including the consolidated financial statements and related notes.

Term						Definition
2022 10-K						United’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 24, 2023
ACL						Allowance for credit losses
AFS						Available-for-sale
ALCO						Asset/Liability Management Committee
AOCI						Accumulated other comprehensive income (loss)
ASU						Accounting standards update
Bank						United Community Bank
Board						United Community Banks Inc., Board of Directors
BOLI						Bank-owned life insurance
CECL						Current expected credit loss
CET1						Common equity tier 1
CME						Chicago Mercantile Exchange
Company						United Community Banks Inc. (interchangeable with "United" below)
CVA						Credit valuation adjustment
FASB						Financial Accounting Standards Board
FDIC						Federal Deposit Insurance Corporation
FDM						Modification made to borrowers experiencing financial difficulty
Federal Reserve						Federal Reserve System
First Miami						First Miami Bancorp, Inc.
FHLB						Federal Home Loan Bank
FOMC						Federal Reserve’s Federal Open Markets Committee
FTE						Fully taxable equivalent
GAAP						Accounting principles generally accepted in the United States of America
GSE						U.S. government-sponsored enterprise
HELOC						Home equity lines of credit
HFI						Held for investment
Holding Company						United Community Banks, Inc. on an unconsolidated basis
HTM						Held-to-maturity
LIBOR						London Interbank Offered Rate
LIHTC						Low- income housing tax credit
MD&A						Management's Discussion and Analysis of Financial Condition and Results of Operations
MBS						Mortgage-backed securities
NOW						Negotiable order of withdrawal
NPA						Nonperforming asset
OCI						Other comprehensive income (loss)
OREO						Other real estate owned
PCD						Purchased credit deteriorated
Progress						Progress Financial Corporation and its wholly-owned subsidiary, Progress Bank & Trust
Reliant						Reliant Bancorp, Inc. and its wholly-owned subsidiary, Reliant Bank
Report						Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2023
SBA						United States Small Business Administration
SEC						Securities and Exchange Commission
TDR						Troubled debt restructuring
U.S. Treasury						United States Department of the Treasury
United						United Community Banks, Inc. and its direct and indirect subsidiaries
USDA						United States Department of Agriculture
VIE						Variable interest entity

3

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Cautionary Note Regarding Forward-looking Statements

 

This Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither statements of historical or current fact nor are they assurances of future performance and generally can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates”, or similar expressions. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events (including the expected completion date of the First Miami transaction), and statements about our future performance, operations, products and services, and should be viewed with caution.

Because forward-looking statements relate to the future, they are subject to known and unknown risks, uncertainties, assumptions, and changes in circumstances, many of which are beyond our control, and that are difficult to predict as to timing, extent, likelihood and degree of occurrence, and that could cause actual results to differ materially from the results implied or anticipated by the statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, but are not limited to the following:

•negative economic and political conditions that adversely affect the general economy, the banking sector, housing prices, the real estate market, the job market, consumer confidence, the financial condition of our borrowers and consumer spending habits, which may affect, among other things, the levels of NPAs, charge-offs and provision expense;

•changes in loan underwriting, credit review or loss policies associated with economic conditions, examination conclusions or regulatory developments, either as they currently exist or as they may be affected by conditions associated with the COVID-19 pandemic;

•the continuing effects of the COVID-19 pandemic and the potential effects of other pandemics or public health conditions on the economic and business environments in which we operate;

•strategic, market, operational, liquidity and interest rate risks associated with our business;

•potential fluctuations or unanticipated changes in the interest rate environment, including interest rate changes made by the Federal Reserve, replacements of LIBOR and replacement or reform of other interest rate benchmarks, as well as cash flow reassessments may reduce net interest margin and/or the volumes and values of loans made or held as well as the value of other financial assets;

•any unanticipated or greater than anticipated adverse conditions in the national or local economies in which we operate;

•our loan concentration in industries or sectors that may experience unanticipated or greater than anticipated adverse conditions than other industries or sectors in the national or local economies in which we operate;

•the risks of expansion into new geographic or product markets;

•risks with respect to our ability to identify and complete future mergers or acquisitions as well as our ability to successfully expand and integrate those businesses and operations that we acquire;

•our ability to attract and retain key employees;

•competition from financial institutions and other financial service providers including non-bank financial technology providers and our ability to attract customers from other financial institutions;

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

•cybersecurity risks and the vulnerability of our network and online banking portals, and the systems or parties with whom we contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches that could adversely affect our business and financial performance or reputation;

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

•the risk that we may be required to make substantial expenditures to keep pace with regulatory initiatives and the rapid technological changes in the financial services market;

•the availability of and access to capital;

•legislative, regulatory or accounting changes that may adversely affect us;

•volatility in the ACL resulting from the CECL methodology, either alone or as that may be affected by conditions affecting our business;

•adverse results (including judgments, costs, fines, reputational harm, inability to obtain necessary approvals and/or other negative effects) from current or future litigation, regulatory proceedings, examinations, investigations, or similar matters, or developments related thereto;

•any matter that would cause us to conclude that there was impairment of any asset, including intangible assets, such as goodwill;

•limitations on our ability to declare and pay dividends and other distributions from the Bank to the Holding Company, which could affect Holding Company liquidity, including its ability to pay dividends to shareholders or take other capital actions;

•the potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as war or terrorist activities, the Russian invasion of Ukraine, disruptions in our customers’ supply chains, disruptions in transportation, essential utility outages or trade disputes and related tariffs; and

•other risks and uncertainties disclosed in documents filed or furnished by us with or to the SEC, any of which could cause actual results to differ materially from future results expressed, implied or otherwise anticipated by such forward-looking statements.

We caution readers that the foregoing list of factors is not exclusive, is not necessarily in order of importance and readers should not place undue reliance on forward-looking statements. Additional factors that may cause actual results to differ materially from those contemplated by any forward-looking statements also may be found in our 2022 10-K (including the “Risk Factor” section of that report), Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K filed with the SEC and available at the SEC’s website at http://www.sec.gov. We do not intend to and, except as required by law, hereby disclaim any obligation to update or revise any forward-looking statement contained in this Report, which speaks only as of the date of its filing with the SEC, whether as a result of new information, future events, or otherwise. The financial statements and information contained herein have not been reviewed, or confirmed for accuracy or relevance, by the FDIC or any other regulator.

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheets (Unaudited)
(in thousands, except share data)

						March 31, 2023						December 31, 2022
ASSETS
Cash and due from banks						$	275,962					$	195,771
Interest-bearing deposits in banks						501,719						316,082
Federal funds and other short-term investments						—						135,000
Cash and cash equivalents						777,681						646,853
Debt securities available-for-sale						3,331,139						3,614,333
Debt securities held-to-maturity (fair value $2,206,874 and $2,191,073, respectively)						2,584,081						2,613,648
Loans held for sale						20,390						13,600
Loans and leases held for investment						17,124,703						15,334,627
Less allowance for credit losses - loans and leases						(176,534)						(159,357)
Loans and leases, net						16,948,169						15,175,270
Premises and equipment, net						336,617						298,456
Bank owned life insurance						341,285						299,297
Goodwill and other intangible assets, net						961,244						779,248
Other assets						571,244						568,179
Total assets						$	25,871,850					$	24,008,884
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand						$	7,540,265					$	7,643,081
Interest-bearing deposits						14,464,409						12,233,426
Total deposits						22,004,674						19,876,507
Short-term borrowings						7,219						158,933
Federal Home Loan Bank advances						30,000						550,000
Long-term debt						324,729						324,663
Accrued expenses and other liabilities						427,105						398,107
Total liabilities						22,793,727						21,308,210
Shareholders' equity:
Preferred stock, $1 par value: 10,000,000 shares authorized;   4,000 shares Series I issued and outstanding; $25,000 per share liquidation preference						96,422						96,422
Common stock, $1 par value: 200,000,000 shares authorized,   115,151,566 and 106,222,758 shares issued and outstanding, respectively						115,152						106,223
Common stock issuable: 579,835 and 607,128 shares, respectively						11,977						12,307
Capital surplus						2,606,403						2,306,366
Retained earnings						542,606						508,844
Accumulated other comprehensive loss						(294,437)						(329,488)
Total shareholders' equity						3,078,123						2,700,674
Total liabilities and shareholders' equity						$	25,871,850					$	24,008,884

 

See accompanying notes to consolidated financial statements (unaudited).

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UNITED COMMUNITY BANKS, INC.
Consolidated Statements of Income (Unaudited)
(in thousands, except per share data)

															Three Months Ended March 31,
																					2023						2022
			Interest revenue:
			Loans, including fees																		$	236,431					$	146,741
			Investment securities, including tax exempt of $2,110 and $2,655, respectively																		39,986						23,665
			Deposits in banks and short-term investments																		3,070						653
			Total interest revenue																		279,487						171,059
			Interest expense:
			Deposits																		57,861						3,131
			Short-term borrowings																		1,148						—
			Federal Home Loan Bank advances																		5,112						—
			Long-term debt																		3,896						4,136
			Total interest expense																		68,017						7,267
			Net interest revenue																		211,470						163,792
			Provision for credit losses																		21,783						23,086
			Net interest revenue after provision for credit losses																		189,687						140,706
			Noninterest income:
			Service charges and fees																		8,699						9,070
			Mortgage loan gains and other related fees																		4,521						16,152
			Wealth management fees																		5,724						5,895
			Gains from sales of other loans, net																		1,916						3,198
			Lending and loan servicing fees																		4,016						2,986
			Securities losses, net																		(1,644)						(3,734)
			Other																		6,977						5,406
			Total noninterest income																		30,209						38,973
			Total revenue																		219,896						179,679
			Noninterest expenses:
			Salaries and employee benefits																		78,698						71,006
			Communications and equipment																		10,008						9,248
			Occupancy																		9,889						9,378
			Advertising and public relations																		2,349						1,488
			Postage, printing and supplies																		2,537						2,119
			Professional fees																		6,072						4,447
			Lending and loan servicing expense																		2,319						2,366
			Outside services - electronic banking																		3,425						2,523
			FDIC assessments and other regulatory charges																		4,001						2,173
			Amortization of intangibles																		3,528						1,793
			Merger-related and other charges																		8,631						9,016
			Other																		8,348						3,718
			Total noninterest expenses																		139,805						119,275
			Income before income taxes																		80,091						60,404
			Income tax expense																		17,791						12,385
			Net income																		$	62,300					$	48,019
			Net income available to common shareholders																		$	60,242					$	46,062
			Net income per common share:
			Basic																		$	0.52					$	0.43
			Diluted																		0.52						0.43
			Weighted average common shares outstanding:
			Basic																		115,451						106,550
			Diluted																		115,715						106,677

See accompanying notes to consolidated financial statements (unaudited). 

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UNITED COMMUNITY BANKS, INC.
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in thousands)

												Three Months Ended March 31,
																								Before-tax Amount						Tax (Expense) Benefit						Net of Tax Amount
2023
Net income																								$	80,091					$	(17,791)					$	62,300
Other comprehensive income:
Unrealized gains on available-for-sale securities:
Unrealized holding gains																								43,279						(10,284)						32,995
Reclassification adjustment for losses included in net income																								1,644						(374)						1,270
Net unrealized gains																								44,923						(10,658)						34,265
Amortization of unrealized losses on held-to-maturity securities transferred from available-for-sale																								2,968						(720)						2,248
Derivative instruments designated as cash flow hedges:
Unrealized holding losses on derivatives																								(1,202)						307						(895)
Gains on derivative instruments realized in net income																								(822)						210						(612)
Net cash flow hedge activity																								(2,024)						517						(1,507)
Amortization of defined benefit pension plan net periodic pension cost components																								61						(16)						45
Total other comprehensive income																								45,928						(10,877)						35,051
Comprehensive income																								$	126,019					$	(28,668)					$	97,351
2022
Net income																								$	60,404					$	(12,385)					$	48,019
Other comprehensive loss:
Unrealized losses on available-for-sale securities:
Unrealized holding losses																								(203,885)						47,973						(155,912)
Reclassification of securities from available-for-sale to held-to-maturity																								57,403						(13,592)						43,811
Reclassification adjustment for losses included in net income																								3,734						(990)						2,744
Net unrealized losses																								(142,748)						33,391						(109,357)
Reclassification of securities from available-for-sale to held-to-maturity																								(57,403)						13,592						(43,811)
Derivative instruments designated as cash flow hedges:
Unrealized holding gains on derivatives																								5,468						(1,397)						4,071
Losses on derivative instruments realized in net income																								141						(36)						105
Net cash flow hedge activity																								5,609						(1,433)						4,176
Amortization of defined benefit pension plan net periodic pension cost components																								170						(43)						127
Total other comprehensive loss																								(194,372)						45,507						(148,865)
Comprehensive loss																								$	(133,968)					$	33,122					$	(100,846)

See accompanying notes to consolidated financial statements (unaudited).

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UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)
(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, 2022			106,222,758						96,422						106,223						12,307						2,306,366						508,844						(329,488)						2,700,674
Net income																																	62,300												62,300
Other comprehensive income																																							35,051						35,051
Impact of acquisitions			8,770,531												8,771												297,690																		306,461
Preferred stock dividends																																	(1,719)												(1,719)
Common stock dividends ($0.23 per share)																																	(26,819)												(26,819)
Impact of equity-based compensation awards			121,888												122						498						1,900																		2,520
Impact of other United sponsored equity plans			36,389												36						(828)						447																		(345)
March 31, 2023			115,151,566						$	96,422					$	115,152					$	11,977					$	2,606,403					$	542,606					$	(294,437)					$	3,078,123
December 31, 2021			89,349,826						96,422						89,350						11,288						1,721,007						330,654						(26,476)						2,222,245
Net income																																	48,019												48,019
Other comprehensive loss																																							(148,865)						(148,865)
Impact of acquisitions			16,571,545												16,571												579,805																		596,376
Preferred stock dividends																																	(1,719)												(1,719)
Common stock dividends ($0.21 per share)																																	(22,545)												(22,545)
Impact of equity-based compensation awards			42,923												43						1,444						706																		2,193
Impact of other United sponsored equity plans			60,916												61						(1,421)						671																		(689)
March 31, 2022			106,025,210						$	96,422					$	106,025					$	11,311					$	2,302,189					$	354,409					$	(175,341)					$	2,695,015

See accompanying notes to consolidated financial statements (unaudited).

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UNITED COMMUNITY BANKS, INC.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)

						Three Months Ended March 31,
						2023						2022
Operating activities:
Net income						$	62,300					$	48,019
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net						12,126						11,446
Provision for credit losses						21,783						23,086
Stock based compensation						2,482						2,488
Deferred income tax expense						8,103						2,309
Securities losses, net						1,644						3,734
Gains from sales of other loans						(1,916)						(3,198)
Changes in assets and liabilities:
Other assets						10,303						18,242
Accrued expenses and other liabilities						(22,029)						9,026
Loans held for sale						(4,703)						85,324
Net cash provided by operating activities						90,093						200,476
Investing activities:
Debt securities held-to-maturity:
Proceeds from maturities and calls						31,550						17,807
Purchases						—						(216,482)
Debt securities available-for-sale:
Proceeds from sales						380,661						208,409
Proceeds from maturities and calls						83,794						205,332
Purchases						(25,862)						(933,849)
Net increase in loans						(345,316)						(218,706)
Equity investments, outflows						(74,323)						(12,554)
Equity investments, inflows						93,687						16,091
Proceeds from sales of premises and equipment						2,169						2,978
Purchases of premises and equipment						(22,602)						(7,314)
Net cash received in acquisition						57,101						35,243
Proceeds from sale of other real estate and repossessed assets						98						680
Other investing inflows						338						—
Net cash provided by (used in) investing activities						181,295						(902,365)
Financing activities:
Net increase in deposits						793,162						311,040
Net decrease in short-term borrowings						(292,732)						—
Proceeds from FHLB advances						1,580,000						—
Repayment of FHLB advances						(2,195,000)						—
Cash dividends on common stock						(23,674)						(18,149)
Cash dividends on preferred stock						(1,719)						(1,719)
Other financing inflows						1,058						346
Other financing outflows						(1,655)						(1,475)
Net cash (used in) provided by financing activities						(140,560)						290,043
Net change in cash and cash equivalents						130,828						(411,846)
Cash and cash equivalents, beginning of period						646,853						2,318,510
Cash and cash equivalents, end of period						$	777,681					$	1,906,664

See accompanying notes to consolidated financial statements (unaudited). 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation and Updates to Significant Accounting Policies

Basis of Presentation 

United’s accounting and financial reporting policies conform to GAAP and reporting guidelines of banking regulatory authorities. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in its 2022 10-K.

 

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes appearing in United’s 2022 10-K.

Updates to Significant Accounting Policies

Effective January 1, 2023, United adopted ASU 2022-02, which updated the guidance on modifications to financing receivables by effectively replacing the concept of troubled debt restructurings with a new concept, loan modifications to borrowers experiencing financial difficulty. See Note 2 for further detail. Below summarizes the policy surrounding FDMs.

FDMs: A loan for which the terms have been modified as a result of the borrower experiencing financial difficulty is generally considered to be a FDM. Modified terms that result in a FDM include one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the term or amortization period, a more than insignificant payment delay or principal forgiveness. The ACL on FDMs is calculated using the same method as other loans held for investment.

Note 2 – Accounting Standards Updates and Recently Adopted Standards

Recently Adopted Standards

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. United adopted this update using a modified retrospective transition method as of January 1, 2023. The quantitative impact of adoption related to the CECL calculation for FDMs was not material; thus, no corresponding cumulative effect adjustment to retained earnings was recorded.

Recently Issued Standards

In March 2022, the FASB issued ASU No 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The update broadens the application of the proportional amortization method to tax equity investments other than LIHTC, providing certain conditions are met. The election to apply the proportional amortization method must be made on a tax-credit-program by tax-credit-program basis rather than at the reporting entity level or to individual investments. The update also requires certain disclosures related to those investments for which the proportional amortization method has been applied. 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.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 3 – Supplemental Cash Flow Information

The supplemental schedule of significant non-cash investing and financing activities for the three months ended March 31, 2023 and 2022 is as follows (in thousands).

						Three Months Ended March 31,
						2023						2022
Significant non-cash investing and financing transactions:
Commitments to fund equity investments						$	20,000					$	—
Transfers of AFS securities to HTM securities						—						1,105,194
Acquisitions:
Assets acquired						1,903,930						3,254,173
Liabilities assumed						1,597,022						2,657,173
Net assets acquired						306,908						597,000
Common stock issued and options converted						306,461						596,376

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 4 – Acquisitions

Acquisition of Progress

On January 3, 2023, United acquired all of the outstanding common stock of Progress in a stock transaction. Progress operated 13 offices primarily located in Alabama and the Florida Panhandle, which facilitated United’s growth into those markets. United’s operating results for the three months ended March 31, 2023 include the operating results of the acquired business for the period subsequent to the acquisition date of January 3, 2023.

 

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

Progress
			Fair Value Recorded by United (1)
									January 3, 2023
			Assets
			Cash and cash equivalents						$	57,548
			Debt securities						111,006
			Loans held for sale						2,087
			Loans held for investment						1,442,959
			Premises and equipment						21,118
			Bank-owned life insurance						40,723
			Core deposit intangible						39,980
			Other assets						42,965
			Total assets acquired						1,758,386
			Liabilities
			Deposits						1,334,476
			Short-term borrowings						141,017
			Federal Home Loan Bank advances						95,000
			Other liabilities						26,529
			Total liabilities assumed						1,597,022
			Total identifiable net assets						161,364
			Consideration transferred
			Cash						447
			Common stock issued (8,770,531 shares)						296,444
			Options converted						10,017
			Total fair value of consideration transferred						306,908
			Goodwill						$	145,544

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

Goodwill represents the intangible value of Progress’ business and reputation within the markets it served and is not expected to be deductible for income tax purposes. The Progress core deposit intangible will be amortized over its expected useful life of 10 years using the sum-of-the-years-digits method.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table presents additional information related to the acquired Progress loan portfolio at the acquisition date (in thousands).

						January 3, 2023
			PCD loans:
			Par value			$	64,913
			ACL at acquisition			(2,704)
			Non-credit discount			(150)
			Purchase price			$	62,059
			Non-PCD loans:
			Fair value			$	1,380,900
			Gross contractual amounts receivable			1,626,243
			Estimate of contractual cash flows not expected to be collected			9,287

Pro forma information

 

The following table discloses the impact of the Progress acquisition since the date of acquisition. The table also presents certain pro forma information as if Progress had been acquired on January 1, 2022 and Reliant had been acquired January 1, 2021. These results combine the historical results of the acquired entity with United’s consolidated statement of income. Adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity; however pro forma financial results presented are not necessarily indicative of what would have occurred had the acquisition taken place in earlier years.

 

Merger-related costs from the Progress acquisition of $7.49 million have been excluded from the three months ended March 31, 2023 pro forma information presented below and included in the three months ended March 31, 2022 pro forma information presented below. Merger-related costs from the Reliant acquisition of $8.54 million have been excluded from the three months ended March 31, 2022 pro forma information presented below. The actual results and pro forma information were as follows (in thousands):

												Three Months Ended March 31,
																		Revenue						Net Income
2023
Actual Progress results included in statement of income since acquisition date																		$	6,652					$	1,810
Supplemental consolidated pro forma as if Progress had been acquired January 1, 2022																		229,541						75,209
2022
Actual Reliant results included in statement of income since acquisition date																		$	13,914					$	598
Supplemental consolidated pro forma as if Progress had been acquired January 1, 2022 and Reliant had been acquired January 1, 2021																		$	204,869					$	57,382

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 5 – Investment Securities

The amortized 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 March 31, 2023
U.S. Treasuries			$	19,841					$	—					$	2,024					$	17,817
U.S. Government agencies & GSEs			99,718						—						15,696						84,022
State and political subdivisions			295,453						274						53,897						241,830
Residential MBS, Agency & GSEs			1,465,433						36						198,072						1,267,397
Commercial MBS, Agency & GSEs			688,636						—						105,665						582,971
Supranational entities			15,000						—						2,163						12,837
Total			$	2,584,081					$	310					$	377,517					$	2,206,874
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 & GSEs			1,488,028						35						223,566						1,264,497
Commercial MBS, Agency & GSEs			695,162						—						111,586						583,576
Supranational entities			$	15,000					$	—					$	2,588					$	12,412
Total			$	2,613,648					$	91					$	422,666					$	2,191,073

The amortized cost basis, unrealized gains and losses, and fair value of AFS debt securities as of the dates indicated are presented below (in thousands).

			Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value
As of March 31, 2023
U.S. Treasuries			$	188,580					$	51					$	12,372					$	176,259
U.S. Government agencies & GSEs			260,447						371						15,175						245,643
State and political subdivisions			183,908						—						20,955						162,953
Residential MBS, Agency & GSEs			1,483,641						9						138,784						1,344,866
Residential MBS, Non-agency			368,028						—						26,272						341,756
Commercial MBS, Agency & GSEs			691,880						—						71,720						620,160
Commercial MBS, Non-agency			31,452						—						924						30,528
Corporate bonds			219,692						37						19,662						200,067
Asset-backed securities			215,580						—						6,673						208,907
Total			$	3,643,208					$	468					$	312,537					$	3,331,139
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 & GSEs			1,609,442						13						160,636						1,448,819
Residential MBS, Non-agency			374,535						—						27,873						346,662
Commercial MBS, Agency & GSEs			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

 

14

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Securities with a carrying value of $4.39 billion and $2.53 billion were pledged, primarily to secure public deposits and provide contingent liquidity through the Bank Term Funding Program at the Federal Reserve Bank, at March 31, 2023 and December 31, 2022, respectively.

The following table 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 March 31, 2023
U.S. Treasuries			$	—					$	—					$	17,817					$	2,024					$	17,817					$	2,024
U.S. Government agencies & GSEs			—						—						84,022						15,696						84,022						15,696
State and political subdivisions			11,082						98						213,432						53,799						224,514						53,897
Residential MBS, Agency & GSEs			59,315						2,458						1,206,039						195,614						1,265,354						198,072
Commercial MBS, Agency & GSEs			40,149						3,937						542,821						101,728						582,970						105,665
Supranational entities			—						—						12,837						2,163						12,837						2,163
Total unrealized loss position			$	110,546					$	6,493					$	2,076,968					$	371,024					$	2,187,514					$	377,517
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 & GSEs			296,673						38,289						965,785						185,277						1,262,458						223,566
Commercial MBS, Agency & GSEs			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

 

The following table 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 March 31, 2023
U.S. Treasuries			$	49,418					$	429					$	102,350					$	11,943					$	151,768					$	12,372
U.S. Government agencies & GSEs			76,626						476						121,539						14,699						198,165						15,175
State and political subdivisions			7,856						350						155,098						20,605						162,954						20,955
Residential MBS, Agency & GSEs			368,872						16,135						970,538						122,649						1,339,410						138,784
Residential MBS, Non-agency			160,894						10,277						180,862						15,995						341,756						26,272
Commercial MBS, Agency & GSEs			160,918						4,592						459,242						67,128						620,160						71,720
Commercial MBS, Non-agency			14,514						634						16,015						290						30,529						924
Corporate bonds			9,344						528						187,129						19,134						196,473						19,662
Asset-backed securities			43,909						497						164,997						6,176						208,906						6,673
Total unrealized loss position			$	892,351					$	33,918					$	2,357,770					$	278,619					$	3,250,121					$	312,537
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 & GSEs			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 & GSEs			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

 

15

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

At March 31, 2023, there were 682 AFS debt securities and 312 HTM debt securities that were in an unrealized loss position. United does not intend to sell nor does it believe it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at March 31, 2023 were primarily attributable to changes in interest rates.

At March 31, 2023 and December 31, 2022, estimated 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 U.S. Government agencies, GSEs, high credit quality municipalities and supranational entities. As a result, no ACL was recorded on the HTM portfolio at March 31, 2023 or December 31, 2022. In addition, based on the assessments performed at March 31, 2023 and December 31, 2022, there was no ACL required related to the AFS 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
						March 31, 2023						December 31, 2022
			HTM			$	5,918					$	7,234
			AFS			11,136						15,281

The amortized cost and fair value of AFS and HTM debt securities at March 31, 2023, 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			$	74,537					$	74,153					$	—					$	—
U.S. Government agencies & GSEs			339						329						—						—
State and political subdivisions			—						—						1,200						1,195
Corporate bonds			5,192						5,006						—						—
			80,068						79,488						1,200						1,195
1 to 5 years:
U.S. Treasuries			99,100						88,768						19,841						17,817
U.S. Government agencies & GSEs			39,608						36,460						—						—
State and political subdivisions			16,353						15,542						28,634						26,902
Corporate bonds			153,336						140,441						—						—
			308,397						281,211						48,475						44,719
5 to 10 years:
U.S. Treasuries			14,943						13,338						—						—
U.S. Government agencies & GSEs			72,813						65,089						73,288						62,808
State and political subdivisions			61,364						51,670						27,810						24,931
Corporate bonds			60,365						53,795						—						—
Supranational entities			—						—						15,000						12,837
			209,485						183,892						116,098						100,576
More than 10 years:
U.S. Government agencies & GSEs			147,687						143,765						26,430						21,214
State and political subdivisions			106,191						95,741						237,809						188,802
Corporate bonds			799						825						—						—
			254,677						240,331						264,239						210,016
Debt securities not due at a single maturity date:
Asset-backed securities			215,580						208,907						—						—
Residential MBS			1,851,669						1,686,622						1,465,433						1,267,397
Commercial MBS			723,332						650,688						688,636						582,971
			2,790,581						2,546,217						2,154,069						1,850,368
Total			$	3,643,208					$	3,331,139					$	2,584,081					$	2,206,874

16

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes AFS securities sales activity for the three months ended March 31, 2023 and 2022 (in thousands).

												Three Months Ended March 31,
																		2023						2022
			Proceeds from sales															$	380,661					$	208,409
			Gross realized gains															$	1,373					$	963
			Gross realized losses															(3,017)						(4,697)
			Securities gains (losses), net															$	(1,644)					$	(3,734)
			Income tax expense (benefit) attributable to sales															$	(374)					$	(990)

Note 6 – Loans and Leases and Allowance for Credit Losses

 

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

						March 31, 2023						December 31, 2022
			Owner occupied commercial real estate			$	3,141,198					$	2,734,666
			Income producing commercial real estate			3,611,376						3,261,626
			Commercial & industrial			2,441,721						2,252,322
			Commercial construction			1,805,995						1,597,848
			Equipment financing			1,446,766						1,374,251
			Total commercial			12,447,056						11,220,713
			Residential mortgage			2,755,380						2,355,061
			HELOC			930,097						850,269
			Residential construction			492,356						442,553
			Manufactured housing			326,311						316,741
			Consumer			173,503						149,290
			Total loans			17,124,703						15,334,627
			Less allowance for credit losses - loans			(176,534)						(159,357)
			Loans, net			$	16,948,169					$	15,175,270

Accrued interest receivable related to loans totaled $56.1 million and $52.0 million at March 31, 2023 and December 31, 2022, respectively, and was reported in other assets on the consolidated balance sheets. Accrued interest receivable was excluded from the estimate of credit losses.

At March 31, 2023 and December 31, 2022, the loan portfolio was subject to blanket pledges on certain qualifying loan types with the FHLB and FRB to secure contingent funding sources.

The following table presents the amortized cost of loans held for investment that were sold in the periods indicated (in thousands). The gains on these loan sales were included in noninterest income on the consolidated statements of income.

												Three Months Ended March 31,
																		2023						2022
			Guaranteed portion of SBA/USDA loans															$	21,770					$	28,343
			Equipment financing receivables															18,703						23,436
			Total															$	40,473					$	51,779

  

17

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

At March 31, 2023 and December 31, 2022, equipment financing receivables included leases of $54.1 million and $46.0 million, respectively. The components of the net investment in leases, which included both sales-type and direct financing, are presented below (in thousands).

						March 31, 2023						December 31, 2022
			Minimum future lease payments receivable			$	58,978					$	49,723
			Estimated residual value of leased equipment			3,167						2,804
			Initial direct costs			989						767
			Security deposits			(408)						(429)
			Unearned income			(8,596)						(6,877)
			Net investment in leases			$	54,130					$	45,988

Minimum future lease payments expected to be received from equipment financing lease contracts as of March 31, 2023 were as follows (in thousands): 

			Year
			Remainder of 2023			$	15,286
			2024			16,672
			2025			12,986
			2026			8,716
			2027			4,722
			Thereafter			596
			Total			$	58,978

18

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Nonaccrual and Past Due Loans

The following table presents the aging of the amortized cost basis in loans by aging category and accrual status as of the dates indicated (in thousands). Past due status is based on contractual terms of the loan. The accrual of interest is generally discontinued when a loan becomes 90 days past due.

						Accruing
						Current Loans						Loans Past Due
												30 - 59 Days						60 - 89 Days						> 90 Days																		Nonaccrual Loans						Total Loans
As of March 31, 2023
Owner occupied commercial real estate						$	3,136,902					$	3,296					$	—					$	—																	$	1,000					$	3,141,198
Income producing commercial real estate						3,576,513						936						23,324																								10,603						3,611,376
Commercial & industrial						2,405,781						2,406						249						9																		33,276						2,441,721
Commercial construction						1,804,958						525						37						—																		475						1,805,995
Equipment financing						1,434,193						5,029						2,500						—																		5,044						1,446,766
Total commercial						12,358,347						12,192						26,110						9																		50,398						12,447,056
Residential mortgage						2,740,975						2,976						149						—																		11,280						2,755,380
HELOC						924,436						2,871						413						—																		2,377						930,097
Residential construction						492,138						75						—						—																		143						492,356
Manufactured housing						309,871						6,221						1,677						—																		8,542						326,311
Consumer						172,643						486						317						2																		55						173,503
Total loans						$	16,998,410					$	24,821					$	28,666					$	11																	$	72,795					$	17,124,703
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

19

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table presents nonaccrual loans held for investment by loan class for the periods indicated (in thousands). 

									Nonaccrual Loans
									March 31, 2023																		December 31, 2022
									With no allowance						With an allowance						Total						With no allowance						With an allowance						Total
			Owner occupied commercial real estate						$	68					$	932					$	1,000					$	276					$	247					$	523
			Income producing commercial real estate						10,512						91						10,603						3,798						87						3,885
			Commercial & industrial						32,161						1,115						33,276						13,917						553						14,470
			Commercial construction						—						475						475						69						64						133
			Equipment financing						39						5,005						5,044						85						5,353						5,438
			Total commercial						42,780						7,618						50,398						18,145						6,304						24,449
			Residential mortgage						1,040						10,240						11,280						2,159						8,760						10,919
			HELOC						252						2,125						2,377						430						1,458						1,888
			Residential construction						59						84						143						311						94						405
			Manufactured housing						—						8,542						8,542						—						6,518						6,518
			Consumer						3						52						55						3						50						53
			Total						$	44,134					$	28,661					$	72,795					$	21,048					$	23,184					$	44,232

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, 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 and 30 or more days past due are classified as “fail” and all other loans are classified as “pass”. For reporting purposes, loans in these categories that are classified as “fail” are reported as substandard and all other loans are reported as pass.

20

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following tables present the risk category of term loans and, for 2023, gross charge-offs by vintage year, which is the year of origination or most recent renewal, as of the date indicated (in thousands).

						Term Loans by Origination Year																																				Revolvers						Revolvers converted to term loans						Total
As of March 31, 2023						2023						2022						2021						2020						2019						Prior
Owner occupied commercial real estate:
Pass						$	181,897					$	689,185					$	711,249					$	624,718					$	233,961					$	408,712					$	185,380					$	15,329					$	3,050,431
Special Mention						1,575						6,059						4,294						7,797						10,188						7,311						6,910						277						44,411
Substandard						2,510						9,804						12,504						6,360						3,060						9,139						210						2,769						46,356
Total owner occupied commercial real estate						$	185,982					$	705,048					$	728,047					$	638,875					$	247,209					$	425,162					$	192,500					$	18,375					$	3,141,198
Current period gross charge-offs						$	—					$	—					$	—					$	—					$	—					$	207					$	—					$	—					$	207
Income producing commercial real estate:
Pass						$	156,012					$	861,022					$	785,978					$	759,153					$	266,389					$	450,664					$	62,077					$	6,697					$	3,347,992
Special Mention						10,992						41,994						21,382						25,837						18,019						27,425						359						160						146,168
Substandard						26,051						33,928						1,026						17,187						17,782						21,183						—						59						117,216
Total income producing commercial real estate						$	193,055					$	936,944					$	808,386					$	802,177					$	302,190					$	499,272					$	62,436					$	6,916					$	3,611,376
Current period gross charge-offs						$	—					$	2,781					$	—					$	—					$	—					$	—					$	—					$	—					$	2,781
Commercial & industrial
Pass						$	145,494					$	579,840					$	383,076					$	178,455					$	137,606					$	207,290					$	610,517					$	21,871					$	2,264,149
Special Mention						59						2,054						23,456						917						964						875						6,406						295						35,026
Substandard						4,187						11,286						40,400						14,873						4,315						10,292						51,657						5,535						142,545
Doubtful/Loss						—						—						—						—						—						1						—						—						1
Total commercial & industrial						$	149,740					$	593,180					$	446,932					$	194,245					$	142,885					$	218,458					$	668,580					$	27,701					$	2,441,721
Current period gross charge-offs						$	—					$	639					$	—					$	2					$	99					$	41					$	—					$	117					$	898
Commercial construction
Pass						$	215,382					$	743,077					$	392,462					$	253,806					$	81,157					$	33,032					$	59,994					$	1,336					$	1,780,246
Special Mention						29						394						31						55						13,157						—						—						—						13,666
Substandard						390						264						36						1,563						1						9,586						—						243						12,083
Total commercial construction						$	215,801					$	743,735					$	392,529					$	255,424					$	94,315					$	42,618					$	59,994					$	1,579					$	1,805,995
Current period gross charge-offs						$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	—
Equipment financing:
Pass						$	226,702					$	643,405					$	335,672					$	139,705					$	79,143					$	16,118					$	—					$	—					$	1,440,745
Substandard						—						1,999						2,404						1,100						386						132						—						—						6,021
Total equipment financing						$	226,702					$	645,404					$	338,076					$	140,805					$	79,529					$	16,250					$	—					$	—					$	1,446,766
Current period gross charge-offs						$	—					$	1,222					$	1,754					$	534					$	321					$	196					$	—					$	—					$	4,027
Residential mortgage:
Pass						$	229,475					$	1,011,313					$	775,540					$	344,462					$	93,823					$	283,417					$	284					$	3,515					$	2,741,829
Substandard						188						1,351						1,238						1,203						1,496						7,778						—						297						13,551
Total residential mortgage						$	229,663					$	1,012,664					$	776,778					$	345,665					$	95,319					$	291,195					$	284					$	3,812					$	2,755,380
Current period gross charge-offs						$	—					$	—					$	—					$	—					$	—					$	19					$	—					$	—					$	19
Home equity lines of credit
Pass						$	—					$	—					$	—					$	—					$	—					$	—					$	901,330					$	25,958					$	927,288
Substandard						—						—						—						—						—						—						168						2,641						2,809
Total home equity lines of credit						$	—					$	—					$	—					$	—					$	—					$	—					$	901,498					$	28,599					$	930,097
Current period gross charge-offs						$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	121					$	121
Residential construction
Pass						$	85,484					$	322,159					$	65,242					$	8,692					$	1,577					$	8,119					$	—					$	31					$	491,304
Substandard						454						—						435						—						19						144						—						—						1,052
Total residential construction						$	85,938					$	322,159					$	65,677					$	8,692					$	1,596					$	8,263					$	—					$	31					$	492,356
Current period gross charge-offs						$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	—
Manufactured housing
Pass						$	15,660					$	76,558					$	53,747					$	47,617					$	34,198					$	88,903					$	—					$	—					$	316,683
Substandard						152						1,582						1,634						1,828						849						3,583						—						—						9,628
Total consumer						$	15,812					$	78,140					$	55,381					$	49,445					$	35,047					$	92,486					$	—					$	—					$	326,311
Current period gross charge-offs						$	3					$	266					$	95					$	99					$	65					$	126					$	—					$	—					$	654
Consumer
Pass						$	31,666					$	62,905					$	29,042					$	14,025					$	3,215					$	2,642					$	29,723					$	127					$	173,345
Substandard						—						16						82						30						1						24						5						—						158
Total consumer						$	31,666					$	62,921					$	29,124					$	14,055					$	3,216					$	2,666					$	29,728					$	127					$	173,503
Current period gross charge-offs						$	659					$	44					$	41					$	16					$	13					$	—					$	1					$	43					$	817

21

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

						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

22

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Modifications to Borrowers Experiencing Financial Difficulty

Loans modified under the terms of a FDM during the three months ended March 31, 2023 are presented in the following table (in thousands).

						New FDMs
						Post-Modification Amortized Cost by Type of Modification
						Extension						Payment Delay												Rate Reduction & Extension												Total						% of Total Class of Receivable
Three Months Ended March 31, 2023
Commercial & industrial						$	—					$	6,170											$	—											$	6,170					0.3		%
Equipment financing						5,211						—												—												5,211						0.4
Residential mortgage						—						—												57												57						—
Manufactured housing						—						—												152												152						—
Total loans						$	5,211					$	6,170											$	209											$	11,590					0.1

Equipment financing FDMs typically consist of one or more three-month extensions beyond the original maturity date.

For the three months ended March 31, 2023, commercial and industrial payment delay modifications consisted of one or more three-month periods during which principal payments were deferred but interest payments continued to be paid.

During the three months ended March 31, 2023, FDMs categorized as rate reduction and extensions in the residential mortgage and manufactured housing categories resulted in a decrease in the weighted average interest rate on these FDMs of 621 bps and extended the weighted average maturity by 6.5 years.

There have been no FDMs modified during 2023 that have subsequently defaulted under modified loan terms.

Allowance for Credit Losses

The ACL for loans represents management’s estimate of life of loan credit losses in the portfolio as of the end of the period. The ACL related to unfunded commitments is included in other liabilities in the consolidated balance sheet.

At both March 31, 2023 and December 31, 2022, 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 baseline 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 and multifamily loans (included in income producing commercial real estate), the expected default rate was adjusted by a model overlay based on expectations of future performance. For the first quarter of 2023, management applied qualitative factors to the model output for the equipment finance portfolio to account for current economic trends not fully captured in the model.

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 2008 mortgage crisis.

23

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

						Three Months Ended March 31, 2023
						Beginning Balance						Initial ACL - PCD loans (1)						Charge-Offs						Recoveries						Provision						Ending Balance
Owner occupied commercial real estate						$	19,834					$	181					$	(207)					$	117					$	906					$	20,831
Income producing commercial real estate						32,082						307						(2,781)						475						3,524						33,607
Commercial & industrial						23,504						1,358						(898)						673						3,675						28,312
Commercial construction						20,120						39						—						37						1,877						22,073
Equipment financing						23,395						—						(4,027)						652						6,175						26,195
Residential mortgage						20,809						157						(19)						106						3,029						24,082
HELOC						8,707						534						(121)						88						1,129						10,337
Residential construction						2,049						124						—						15						(145)						2,043
Manufactured housing						8,098						—						(654)						26						954						8,424
Consumer						759						4						(817)						251						433						630
ACL - loans						159,357						2,704						(9,524)						2,440						21,557						176,534
ACL - unfunded commitments						21,163						—						—						—						226						21,389
Total ACL						$	180,520					$	2,704					$	(9,524)					$	2,440					$	21,783					$	197,923

(1) Represents the initial ACL related to PCD loans acquired in the Progress transaction.

						Three Months Ended March 31, 2022
						Beginning Balance						Initial ACL - PCD loans (1)						Charge-Offs						Recoveries						Provision						Ending Balance
Owner occupied commercial real estate						$	14,282					$	266					$	—					$	45					$	1,352					$	15,945
Income producing commercial real estate						24,156						4,366						—						290						4,727						33,539
Commercial & industrial						16,592						2,337						(3,594)						665						2,386						18,386
Commercial construction						9,956						2,857						(41)						414						596						13,782
Equipment financing						16,290						—						(948)						681						3,241						19,264
Residential mortgage						12,390						385						(53)						150						2,092						14,964
HELOC						6,568						60						(9)						90						419						7,128
Residential construction						1,847						1						—						23						58						1,929
Manufactured housing						—						2,438						(173)						9						4,809						7,083
Consumer						451						27						(806)						279						834						785
ACL - loans						102,532						12,737						(5,624)						2,646						20,514						132,805
ACL - unfunded commitments						10,992						—						—						—						2,572						13,564
Total ACL						$	113,524					$	12,737					$	(5,624)					$	2,646					$	23,086					$	146,369

(1) Represents the initial ACL related to PCD loans acquired in the Reliant transaction.

24

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 7 – Derivatives and Hedging Activities

The table below presents the fair value of derivative financial instruments, which are included in other assets and other liabilities on the consolidated balance sheet, as of the dates indicated (in thousands):

			March 31, 2023																		December 31, 2022
			Notional Amount						Fair Value												Notional Amount						Fair Value
									Derivative Asset						Derivative Liability												Derivative Asset						Derivative Liability
Derivatives designated as hedging instruments:
Cash flow hedge of subordinated debt			$	100,000					$	14,503					$	—					$	100,000					$	16,191					$	—
Cash flow hedge of trust preferred securities			20,000						—						—						20,000						—						—
Fair value hedge of brokered time deposits			—						—						—						—						—						—
Total			120,000						14,503						—						120,000						16,191						—
Derivatives not designated as hedging instruments:
Customer derivative positions			1,165,444						2,407						76,901						1,097,578						341						86,358
Dealer offsets to customer derivative positions			1,165,444						23,756						2,303						1,097,578						22,393						274
Risk participations			78,463						4						1						88,586						15						1
Mortgage banking - loan commitment			74,898						1,884						3						19,685						394						—
Mortgage banking - forward sales commitment			140,471						97						684						49,750						198						71
Bifurcated embedded derivatives			51,935						9,460						—						51,935						11,104						—
Dealer offsets to bifurcated embedded derivatives			51,935						—						11,191						51,935						—						12,839
Total			2,728,590						37,608						91,083						2,457,047						34,445						99,543
Total derivatives			$	2,848,590					$	52,111					$	91,083					$	2,577,047					$	50,636					$	99,543
Total gross derivative instruments									$	52,111					$	91,083											$	50,636					$	99,543
Less: Amounts subject to master netting agreements									(2,401)						(2,401)												(346)						(346)
Less: Cash collateral received/pledged									(38,427)						(11,645)												(38,386)						(13,089)
Net amount									$	11,283					$	77,037											$	11,904					$	86,108

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. As of March 31, 2023 and December 31, 2022, 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 caption as the hedged item over the term of the hedge. Over the next twelve months, United expects to reclassify $4.82 million of gains from AOCI into earnings related to these agreements.

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 derivatives 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.

25

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The table below presents the effect of derivatives in hedging relationships, all of which are interest rate contracts, on the consolidated statement of income for the periods indicated (in thousands). 

												Three Months Ended March 31,
																		2023						2022
Total interest expense presented in the consolidated statements of income																		$	(68,017)					$	(7,267)
Effect of hedging relationships on interest expense:
Net income recognized on fair value hedges																		—						28
Net expense recognized on cash flow hedges (1)																		822						(141)

 (1) Includes premium amortization expense excluded from the assessment of hedge effectiveness of $116,000 for both the three months ended March 31, 2023 and 2022.

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 not designated as hedging instruments but are economic hedges of market-linked brokered certificates of deposit. The market-linked brokered certificates of deposit contain embedded derivatives that are bifurcated from the host instruments and are marked to market through earnings. The fair value marks on the market-linked swaps and the bifurcated embedded derivatives tend to move in opposite directions with changes in 90-day LIBOR 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 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 other related fee income in the consolidated statements of income. 

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

						Location of Gain (Loss) Recognized in Income on Derivatives																		Amount of Gain (Loss) Recognized in Income on Derivatives
																		Three Months Ended March 31,
																								2023						2022
Customer derivatives and dealer offsets						Other noninterest income																		$	367					$	769
Bifurcated embedded derivatives and dealer offsets						Other noninterest income																		(533)						113
Mortgage banking derivatives						Mortgage loan revenue																		1,227						4,634
Risk participations						Other noninterest income																		(12)						1
																								$	1,049					$	5,517

 

Credit-Risk-Related Contingent Features 

United manages its credit exposure on derivatives 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 provide that 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.

26

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Derivatives that are centrally cleared do not have credit-risk-related features that would require additional collateral if United’s credit rating were downgraded.

 

Note 8 – Goodwill and Other Intangible Assets

 

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

						March 31, 2023						December 31, 2022
			Core deposit intangible			$	86,880					$	46,900
			Less: accumulated amortization			(29,442)						(26,112)
			Net core deposit intangible			57,438						20,788
			Customer relationship intangible			8,400						8,400
			Less: accumulated amortization			(1,312)						(1,114)
			Net customer relationship intangible			7,088						7,286
			Total intangibles subject to amortization, net (1)			64,526						28,074
			Goodwill			896,718						751,174
			Total goodwill and other intangible assets, net			$	961,244					$	779,248

(1) As intangible assets become fully amortized, they are excluded from balances presented.

During the first quarter of 2023, as a result of the Progress acquisition, United recorded a core deposit intangible of $40.0 million. See Note 4 for further detail.

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

															Three Months Ended March 31,
																					2023						2022
			Balance, beginning of period (1)																		$	751,174					$	452,007
			Acquisitions																		145,544						299,167
			Balance, end of period (1)																		$	896,718					$	751,174

(1) Goodwill balances are shown net of accumulated impairment losses of $306 million incurred prior to 2022.

The estimated aggregate amortization expense for future periods for finite lived intangibles is as follows (in thousands):

			Remainder of 2023			$	9,942
			2024			11,791
			2025			10,031
			2026			8,491
			2027			6,950
			Thereafter			17,321
			Total			$	64,526

Note 9 – Short-term Borrowings and FHLB Advances

At March 31, 2023 and 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
						Overnight and Continuous						Up to 30 Days						30-90 Days						Greater than 90 days						Total
March 31, 2023
State and political subdivisions						7,219						—						—						—						7,219
Total						$	7,219					$	—					$	—					$	—					$	7,219
December 31, 2022
U.S. Treasuries						$	158,933					$	—					$	—					$	—					$	158,933
Total						$	158,933					$	—					$	—					$	—					$	158,933

27

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

United is obligated to promptly transfer additional securities if the market value of the pledged securities falls below the repurchase agreement price. United manages this risk by maintaining a portfolio of unpledged securities that it believes is sufficient to cover a decline in the market value of the securities sold under agreements to repurchase. At March 31, 2023, repurchase agreements were collateralized by securities with a carrying amount of $9.97 million. At December 31, 2022, repurchase agreements were collateralized by securities with a carrying amount of $163 million.

At March 31, 2023 and December 31, 2022, United had FHLB advances totaling $30.0 million and $550 million, respectively. The balance outstanding at March 31, 2023 matures in 2023 and has an interest rate of 4.52%. United’s FHLB advances are collateralized by a blanket lien on owner occupied and income producing commercial real estate and residential mortgage loans.

Note 10 – Assets and Liabilities Measured at Fair Value

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

Fair Value Hierarchy

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

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

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

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

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

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 MBS issued by GSEs, municipal bonds, corporate debt securities, asset-backed securities and supranational entity 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 or models which incorporate unobservable inputs.

 

Deferred Compensation Plan Assets and Liabilities

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

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Mortgage Loans Held for Sale

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

 

Servicing Rights for Residential and SBA/USDA Loans

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

29

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

March 31, 2023						Level 1						Level 2						Level 3						Total
Assets:
AFS debt securities:
U.S. Treasuries						$	176,259					$	—					$	—					$	176,259
U.S. Government agencies & GSEs						—						245,643						—						245,643
State and political subdivisions						—						162,953						—						162,953
Residential MBS						—						1,686,622						—						1,686,622
Commercial MBS						—						650,688						—						650,688
Corporate bonds						—						197,840						2,227						200,067
Asset-backed securities						—						208,907						—						208,907
Equity securities with readily determinable fair values						12,403						1,819						—						14,222
Mortgage loans held for sale						—						18,960						—						18,960
Deferred compensation plan assets						11,244						—						—						11,244
Servicing rights for SBA/USDA loans						—						—						6,289						6,289
Residential mortgage servicing rights						—						—						36,081						36,081
Derivative financial instruments						—						40,763						11,348						52,111
Total assets						$	199,906					$	3,214,195					$	55,945					$	3,470,046
Liabilities:
Deferred compensation plan liability						$	11,280					$	—					$	—					$	11,280
Derivative financial instruments						—						79,888						11,195						91,083
Total liabilities						$	11,280					$	79,888					$	11,195					$	102,363

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

 

30

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

			2023																																				2022
			Derivative Assets						Derivative Liabilities						SBA/USDA loan servicing rights						Residential mortgage servicing rights						Corporate Bonds												Derivative Assets						Derivative Liabilities						SBA/USDA loan servicing rights						Residential mortgage servicing rights						Corporate Bonds
Three Months Ended March 31,
Beginning balance			$	11,513					$	12,840					$	5,188					$	36,559					$	2,212											$	6,758					$	5,048					$	6,513					$	25,161					$	2,395
Business combinations			—						—						95						—						—												—						—						—						—						—
Additions			—						3						460						632						—												—						—						588						2,167						—
Transfers from Level 3			—						—						—						—						—												(290)						—						—						—						—
Sales and settlements			(11)						—						(220)						(452)						—												—						—						(229)						(676)						—
Fair value adjustments included in OCI			—						—						—						—						15												—						—						—						—						(63)
Fair value adjustments included in earnings			(154)						(1,648)						766						(658)						—												1,434						3,483						90						5,989						—
Ending balance			$	11,348					$	11,195					$	6,289					$	36,081					$	2,227											$	7,902					$	8,531					$	6,962					$	32,641					$	2,332

The following table presents quantitative information about significant Level 3 inputs for fair value on a recurring basis as of the dates indicated. 

Level 3 Assets and Liabilities						Valuation Technique						Significant Unobservable Inputs						March 31, 2023												December 31, 2022
																		Range						Weighted Average						Range						Weighted Average
SBA/USDA loan servicing rights						Discounted cash flow						Discount rate						3.1% - 25.0%						12.1		%				11.9% - 25.0%						17.5		%
												Prepayment rate						0.0 - 36.2						16.7						0.0 - 35.4						16.4
Residential mortgage servicing rights						Discounted cash flow						Discount rate						9.5 - 11.5						9.5						9.5 - 11.5						9.5
												Prepayment rate						7.0 - 27.8						7.6						7.0 - 31.2						7.5
Corporate bonds						Discounted cash flow						Discount rate						5.7 - 6.1						5.9						6.1 - 6.4						6.3
Derivative assets - mortgage						Internal model						Pull through rate						64.7 - 100						89.2						26.5 - 100						90.7
Derivative assets and liabilities - other						Dealer priced						Dealer priced						N/A						N/A						N/A						N/A

 

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
						March 31, 2023						December 31, 2022
			Outstanding principal balance			$	18,408					$	11,473
			Fair value			18,960						11,794

			Gain (Loss) from Change in Fair Value on Mortgage Loans Held for Sale
			Location									Three Months Ended March 31,
																		2023						2022
			Mortgage loan gains and other related fees															$	231					$	(1,174)

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.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of the lower of the amortized cost or fair value accounting or write-downs of individual assets due to impairment. The following table presents the fair value hierarchy and carrying value of assets that were still held as of March 31, 2023 and December 31, 2022, for which a nonrecurring fair value adjustment was recorded during the year-to-date periods presented (in thousands).

									Level 1						Level 2						Level 3						Total
			March 31, 2023
			Loans held for investment						$	—					$	—					$	11,582					$	11,582
			Mortgage loans held for sale						—						—						1,430						1,430
			December 31, 2022
			Loans held for investment						$	—					$	—					$	7,808					$	7,808
			Mortgage loans held for sale						—						—						1,806						1,806

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 March 31, 2023, 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 specific reserves assigned to them. Nonaccrual loans that are collateral dependent are generally written down to net realizable value, which reflects fair value 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 of the collateral is further impaired below the appraised value and there is no observable market price, United records the impaired loan as nonrecurring Level 3.

Assets and Liabilities Not Measured at Fair Value  

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

 

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

 

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

 

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

 

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

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

												Fair Value Level
						Carrying Amount						Level 1						Level 2						Level 3						Total
March 31, 2023
Assets:
HTM debt securities						$	2,584,081					$	17,817					$	2,189,057					$	—					$	2,206,874
Loans and leases, net						16,948,169						—						—						16,291,834						16,291,834
Liabilities:
Deposits						22,004,674						—						22,010,264						—						22,010,264
FHLB advances						30,000						—						29,998						—						29,998
Long-term debt						324,729						—						—						315,202						315,202
December 31, 2022
Assets:
HTM debt securities						$	2,613,648					$	17,417					$	2,173,656					$	—					$	2,191,073
Loans and leases, net						15,175,270						—						—						14,609,239						14,609,239
Liabilities:
Deposits						19,876,507						—						19,863,380						—						19,863,380
FHLB advances						550,000						—						—						549,913						549,913
Long-term debt						324,663						—						—						313,380						313,380

 

Note 11 – Stock-Based Compensation

 

United has an equity compensation plan that allows for grants of various share-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 (as defined in the plan document). As of March 31, 2023, 2.57 million additional awards could be granted under the plan.

 

The table below presents restricted stock unit and option activity for the three months ended March 31, 2023.

						Restricted Stock Unit Awards																		Options
						Shares						Weighted- Average Grant- Date Fair Value												Aggregate Intrinsic Value ($000)						Shares						Weighted- Average Exercise Price						Weighted- Average Remaining Contractual Term (Years)						Aggregate Intrinsic Value ($000)
Outstanding at December 31, 2022						778,686						$	28.28																	40,338						$	11.88
Granted						229,226						32.61																		643,298						20.91
Released / Exercised						(104,300)						26.00												$	3,487					(64,956)						15.12												$	966
Cancelled						(10,633)						27.41																		—						—
Outstanding at March 31, 2023						892,979						29.67												25,111						618,680						20.93						5.7						4,452
Vested / Exercisable at March 31, 2023						—						—																		618,680						20.93						5.7						4,452

Options granted in 2023 reflect fully vested options assumed in the Progress acquisition, with the weighted average exercise price of Progress’ fully vested converted options determined pursuant to the purchase agreement. The value of the Progress options was determined using a Black-Scholes model and was included in the purchase price for the acquisition. No compensation expense relating to options was included in earnings for the three months ended March 31, 2023 and 2022.

 

Compensation expense for restricted stock units and performance stock units without market conditions is based on the market value of United’s common stock on the date of grant. Compensation expense for performance stock units with market conditions is based on

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

the grant date per share fair value, which was estimated using the Monte Carlo Simulation valuation model. United recognizes the impact of forfeitures as they occur. The value of restricted stock unit and performance stock unit awards is amortized into expense over the service period.

For the three months ended March 31, 2023 and 2022, expense of $2.36 million and $2.39 million, respectively, was recognized related to restricted stock unit and performance stock unit awards granted to United employees, which was included in salaries and employee benefits expense. In addition, for the three months ended March 31, 2023 and 2022, $122,000 and $100,000, respectively, was recognized in other expense for restricted stock unit awards granted to members of United’s Board of Directors.

A deferred income tax benefit related to stock-based compensation expense of $634,000 and $636,000 was included in the determination of income tax expense for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, there was $21.6 million of unrecognized expense related to non-vested restricted stock unit and performance stock unit awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.6 years.

Note 12 – Reclassifications Out of AOCI

The following table presents the details regarding amounts reclassified out of AOCI for the periods indicated (in thousands). Amounts shown in parentheses reduce earnings.

			Details about AOCI Components												Three Months Ended March 31,												Affected Line Item in the Statement Where Net Income is Presented
																					2023									2022
			Realized losses on AFS securities:
																					$	(1,644)					$	(3,734)					Securities losses, net
																					374						990						Income tax (expense) benefit
																					$	(1,270)					$	(2,744)					Net of tax
			Amortization of unrealized losses on HTM securities transferred from AFS:
																					$	(2,968)					$	—					Investment securities interest revenue
																					720						—						Income tax benefit
																					$	(2,248)					$	—					Net of tax
			Reclassifications related to derivative instruments accounted for as cash flow hedges:
			Interest rate contracts																		$	822					$	(141)					Long-term debt interest expense
																					(210)						36						Income tax benefit
																					$	612					$	(105)					Net of tax
			Amortization of defined benefit pension plan net periodic pension cost components:
			Prior service cost																		$	(61)					$	(78)					Salaries and employee benefits expense
			Actuarial losses																		—						(92)						Other expense
																					(61)						(170)						Total before tax
																					16						43						Income tax benefit
																					$	(45)					$	(127)					Net of tax
			Total reclassifications for the period																		$	(2,951)					$	(2,976)					Net of tax

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 13 – Earnings Per Share

 

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

												Three Months Ended March 31,
																		2023						2022
			Net income															$	62,300					$	48,019
			Dividends on preferred stock															(1,719)						(1,719)
			Earnings allocated to participating securities															(339)						(238)
			Net income available to common shareholders															$	60,242					$	46,062
			Weighted average shares outstanding:
			Basic															115,451						106,550
			Effect of dilutive securities:
			Stock options															233						46
			Restricted stock units															31						81
			Diluted															115,715						106,677
			Net income per common share:
			Basic															$	0.52					$	0.43
			Diluted															$	0.52					$	0.43

 

At March 31, 2023 and 2022, United had no potentially dilutive instruments outstanding that were not included in the above analysis.

Note 14 – Regulatory Matters

As of March 31, 2023, United and the Bank were categorized as well-capitalized under the regulatory requirements in effect at that time. To be categorized as well-capitalized, United and the Bank must have exceeded the well-capitalized guideline ratios in effect at the 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 March 31, 2023, and there have been no conditions or events since quarter-end that would change the status of well-capitalized.

Regulatory capital ratios at March 31, 2023 and December 31, 2022, along with the minimum amounts required for capital adequacy purposes and to be well-capitalized under regulatory requirements in effect at such times, are presented below for United and the Bank (dollars in thousands):

																		United Community Banks, Inc. (Consolidated)												United Community Bank
						Minimum (1)						Well- Capitalized						March 31, 2023						December 31, 2022						March 31, 2023						December 31, 2022
Risk-based ratios:
CET1 capital						4.5		%				6.5		%				12.08		%				12.26		%				12.43		%				12.83		%
Tier 1 capital						6.0						8.0						12.58						12.81						12.43						12.83
Total capital						8.0						10.0						14.40						14.79						13.34						13.70
Leverage ratio						4.0						5.0						9.65						9.69						9.54						9.69
CET1 capital																		$	2,323,412					$	2,164,211					$	2,380,709					$	2,255,337
Tier 1 capital																		2,419,834						2,260,633						2,380,709						2,255,337
Total capital																		2,768,855						2,610,216						2,553,799						2,408,895
Risk-weighted assets																		19,231,410						17,648,573						19,148,302						17,583,347
Average total assets for the leverage ratio																		25,086,615						23,322,018						24,946,089						23,285,253

(1) As of March 31, 2023 and December 31, 2022 the additional capital conservation buffer in effect was 2.50%

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 15 – Commitments and Contingencies

 

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

 

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

			March 31, 2023						December 31, 2022
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit			$	4,881,934					$	4,683,790
Letters of credit			58,947						46,896

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

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 investment balance, any future funding commitments and the balance of 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 invested by United and any future funding commitments.

The following table summarizes, as of the dates indicated, tax credit and certain equity method investments (in thousands):

			Balance Sheet Location						March 31, 2023						December 31, 2022
Investments in LIHTC:
Carrying amount			Other assets						$	53,867					$	50,054
Amount of future funding commitments included in carrying amount			Other liabilities						17,366						18,090
Renewable energy investments:
Carrying amount			Other assets						39,221						19,617
Amount of future funding commitments included in carrying amount			Other liabilities						37,406						18,781
Fintech funds and certain other equity method investments:
Carrying amount			Other assets						30,184						27,569
Amount of future funding commitments included in carrying amount			Other liabilities						470						470
Amount of future funding commitments not included in carrying amount			N/A						22,811						23,690

 

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

The following is a discussion of our financial condition at March 31, 2023 and December 31, 2022 and our results of operations for the three months ended March 31, 2023 and 2022. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements and is intended to provide insight into our results of operations and financial condition. The following discussion and analysis should be read along with our consolidated financial statements and related notes included in Part I - Item 1 of this Report, “Cautionary Note Regarding Forward-Looking Statements” and the risk factors discussed in our 2022 10-K, and the other reports we have filed with the SEC after we filed the 2022 10-K.

Unless the context otherwise requires, the terms “we,” “our,” “us” refer to United on a consolidated basis.

 

Overview

 

We offer a wide array of commercial and consumer banking services and investment advisory services through a 207 branch network throughout Georgia, South Carolina, North Carolina, Tennessee, Florida and Alabama. We have grown organically as well as through strategic acquisitions. At March 31, 2023, we had consolidated total assets of $25.9 billion and 3,052 full-time equivalent employees.

Recent Developments

Mergers and Acquisitions

On January 3, 2023, we completed the acquisition of Progress, which operated 13 offices primarily located in Alabama and the Florida Panhandle. We acquired $1.90 billion of assets and assumed $1.60 billion of liabilities in the acquisition, which included $1.44 billion in loans and $1.33 billion in deposits.

On February 13, 2023, we announced an agreement to acquire First Miami, which we plan to complete in the third quarter of 2023. First Miami is headquartered in South Miami, Florida, and operates 3 offices in the Miami metropolitan area. As of March 31, 2023, First Miami had total assets of $986 million, total loans of $606 million, and total deposits of $822 million. In addition to traditional banking products, First Miami offers private banking, trust and wealth management with approximately $320 million in assets under administration.

Results of Operations

We reported net income and diluted earnings per common share of $62.3 million and $0.52, respectively, for the first quarter of 2023. This compared to net income and diluted earnings per common share of $48.0 million and $0.43, respectively, for the same period in 2022.

We reported net income - operating (non-GAAP) of $69.0 million for the first quarter of 2023, compared to $55.1 million for the same period in 2022. For the first quarters of 2023 and 2022, net income - operating (non-GAAP) excludes merger-related and other charges, which net of tax, totaled $6.68 million and $7.05 million, respectively.

Net interest revenue increased to $211 million for the first quarter of 2023, compared to $164 million for the first quarter of 2022. The increase was due to several factors including loan growth, both organic and from the acquisition of Progress, and higher interest rates earned on our average loan and securities portfolios. The increase in interest revenue was partially offset by higher rates paid on deposits, a less favorable deposit mix and utilization of wholesale borrowings, which are more costly than customer deposits. The net interest margin increased to 3.61% for the three months ended March 31, 2023 from 2.97% for the same period in 2022 primarily due to the effect of the rising interest rate environment on our asset sensitive balance sheet.

 

We recorded a provision for credit losses of $21.8 million and $23.1 million for the first quarters of 2023 and 2022, respectively. Provision expense for the first quarters of 2023 and 2022 included initial provisions for credit losses on non-PCD loans and unfunded commitments acquired from Progress and Reliant of $10.4 million and $18.3 million, respectively. We recognized higher net charge-offs for the first quarter of 2023 of $7.08 million compared to $2.98 million for the same period in 2022, which partially offset the decrease in acquisition-related provision for credit losses for the first quarter of 2023.

Noninterest income of $30.2 million for the first quarter of 2023 was down $8.76 million, or 22%, from the first quarter of 2022, primarily driven by the $11.6 million decrease in mortgage loan gains and related fees due to lower mortgage production in the current rising interest rate environment. The decrease in mortgage income was partially offset by an increase in lending and loan servicing fees, lower securities losses and gains on other investments compared to losses in the same period of 2022.

37

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For the first quarter of 2023, noninterest expenses of $140 million increased $20.5 million, or 17%, compared to the same period of 2022. The increase was primarily attributable to a $7.69 million increase in salaries and employee benefits, mostly driven by the addition of Progress employees. Other contributors to the increase included increases in FDIC assessment expense and amortization of intangibles, which was driven by the addition of the Progress core deposit intangible.

Critical Accounting 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 date of the balance sheet and revenues and expenses for the period. Our accounting and reporting estimates are in accordance with GAAP and conform to general practices within the banking industry. Estimates that are susceptible to significant changes include accounting for the ACL and fair value measurements, both of which require significant judgments by management. Actual results could differ significantly from those estimates. Also, different assumptions in the application of these accounting estimates could result in material changes in our consolidated financial position or consolidated results of operations. Our critical accounting estimates are discussed in MD&A in our 2022 10-K.

Non-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 ongoing business operations. Operating performance measures include “expenses – operating,” “net income – operating,” “diluted income per common share – operating,” “return on common equity – operating,” “return on tangible common equity – operating,” “return on assets – operating” and “efficiency ratio – operating.” We have developed internal policies and procedures to accurately capture and account for merger-related and other charges and those charges are reviewed with the Audit Committee of our Board each quarter. We use these non-GAAP measures because we believe they 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. We believe 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. Nevertheless, non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. 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. In addition, because non-GAAP measures are not standardized, it may not be possible to compare our non-GAAP measures to 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.

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UNITED COMMUNITY BANKS, INC.
Table 1 - Financial Highlights
(in thousands, except per share data)
						2023						2022																								First Quarter 2023 - 2022 Change
						First Quarter						Fourth Quarter						Third Quarter						Second Quarter						First Quarter
INCOME SUMMARY
Interest revenue						$	279,487					$	240,831					$	213,887					$	187,378					$	171,059
Interest expense						68,017						30,943						14,113						8,475						7,267
Net interest revenue						211,470						209,888						199,774						178,903						163,792						29		%
Provision for credit losses						21,783						19,831						15,392						5,604						23,086
Noninterest income						30,209						33,354						31,922						33,458						38,973						(22)
Total revenue						219,896						223,411						216,304						206,757						179,679						22
Noninterest expenses						139,805						117,329						112,755						120,790						119,275						17
Income before income tax expense						80,091						106,082						103,549						85,967						60,404						33
Income tax expense						17,791						24,632						22,388						19,125						12,385						44
Net income						62,300						81,450						81,161						66,842						48,019						30
Merger-related and other charges						8,631						1,470						1,746						7,143						9,016
Income tax benefit of merger-related and other charges						(1,955)						(323)						(385)						(1,575)						(1,963)
Net income - operating (1)						$	68,976					$	82,597					$	82,522					$	72,410					$	55,072					25
PERFORMANCE MEASURES
Per common share:
Diluted net income - GAAP						$	0.52					$	0.74					$	0.74					$	0.61					$	0.43					21
Diluted net income - operating (1)						0.58						0.75						0.75						0.66						0.50						16
Cash dividends declared						0.23						0.22						0.22						0.21						0.21						10
Book value						25.76						24.38						23.78						23.96						24.38						6
Tangible book value (3)						17.59						17.13						16.52						16.68						17.08						3
Key performance ratios:
Return on common equity - GAAP (2)(4)						7.34		%				10.86		%				11.02		%				9.31		%				6.80		%
Return on common equity - operating (1)(2)(4)						8.15						11.01						11.21						10.10						7.83
Return on tangible common equity - operating (1)(2)(3)(4)						11.63						15.20						15.60						14.20						11.00
Return on assets - GAAP (4)						0.95						1.33						1.32						1.08						0.78
Return on assets - operating (1)(4)						1.06						1.35						1.34						1.17						0.89
Net interest margin (FTE) (4)						3.61						3.76						3.57						3.19						2.97
Efficiency ratio - GAAP						57.20						47.95						48.41						56.58						57.43
Efficiency ratio - operating (1)						53.67						47.35						47.66						53.23						53.09
Equity to total assets						11.90						11.25						11.12						10.95						11.06
Tangible common equity to tangible assets (3)						8.17						7.88						7.70						7.59						7.72
ASSET QUALITY
NPAs						$	73,403					$	44,281					$	35,511					$	34,428					$	40,816					80
ACL - loans						176,534						159,357						148,502						136,925						132,805						33
Net charge-offs (recoveries)						7,084						6,611						1,134						(1,069)						2,978
ACL - loans to loans						1.03		%				1.04		%				1.00		%				0.94		%				0.93		%
Net charge-offs to average loans (4)						0.17						0.17						0.03						(0.03)						0.08
NPAs to total assets						0.28						0.18						0.15						0.14						0.17
AT PERIOD END ($ in millions)
Loans						$	17,125					$	15,335					$	14,882					$	14,541					$	14,316					20
Investment securities						5,915						6,228						6,539						6,683						6,410						(8)
Total assets						25,872						24,009						23,688						24,213						24,374						6
Deposits						22,005						19,877						20,321						20,873						21,056						5
Shareholders’ equity						3,078						2,701						2,635						2,651						2,695						14
Common shares outstanding (thousands)						115,152						106,223						106,163						106,034						106,025						9

(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. (4) Annualized.

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			UNITED COMMUNITY BANKS, INC.
			Table 1 (Continued) - Financial Highlights
			Non-GAAP Performance Measures Reconciliation
			(in thousands, except per share data)
									2023						2022
									First Quarter						Fourth Quarter						Third Quarter						Second Quarter						First Quarter
			Noninterest expense reconciliation
			Noninterest expenses (GAAP)						$	139,805					$	117,329					$	112,755					$	120,790					$	119,275
			Merger-related and other charges						(8,631)						(1,470)						(1,746)						(7,143)						(9,016)
			Noninterest expenses - operating						$	131,174					$	115,859					$	111,009					$	113,647					$	110,259
			Net income reconciliation
			Net income (GAAP)						$	62,300					$	81,450					$	81,161					$	66,842					$	48,019
			Merger-related and other charges						8,631						1,470						1,746						7,143						9,016
			Income tax benefit of merger-related and other charges						(1,955)						(323)						(385)						(1,575)						(1,963)
			Net income - operating						$	68,976					$	82,597					$	82,522					$	72,410					$	55,072
			Diluted income per common share reconciliation
			Diluted income per common share (GAAP)						$	0.52					$	0.74					$	0.74					$	0.61					$	0.43
			Merger-related and other charges, net of tax						0.06						0.01						0.01						0.05						0.07
			Diluted income per common share - operating						$	0.58					$	0.75					$	0.75					$	0.66					$	0.50
			Book value per common share reconciliation
			Book value per common share (GAAP)						$	25.76					$	24.38					$	23.78					$	23.96					$	24.38
			Effect of goodwill and other intangibles						(8.17)						(7.25)						(7.26)						(7.28)						(7.30)
			Tangible book value per common share						$	17.59					$	17.13					$	16.52					$	16.68					$	17.08
			Return on tangible common equity reconciliation
			Return on common equity (GAAP)						7.34		%				10.86		%				11.02		%				9.31		%				6.80		%
			Merger-related and other charges, net of tax						0.81						0.15						0.19						0.79						1.03
			Return on common equity - operating						8.15						11.01						11.21						10.10						7.83
			Effect of goodwill and other intangibles						3.48						4.19						4.39						4.10						3.17
			Return on tangible common equity - operating						11.63		%				15.20		%				15.60		%				14.20		%				11.00		%
			Return on assets reconciliation
			Return on assets (GAAP)						0.95		%				1.33		%				1.32		%				1.08		%				0.78		%
			Merger-related and other charges, net of tax						0.11						0.02						0.02						0.09						0.11
			Return on assets - operating						1.06		%				1.35		%				1.34		%				1.17		%				0.89		%
			Efficiency ratio reconciliation
			Efficiency ratio (GAAP)						57.20		%				47.95		%				48.41		%				56.58		%				57.43		%
			Merger-related and other charges						(3.53)						(0.60)						(0.75)						(3.35)						(4.34)
			Efficiency ratio - operating						53.67		%				47.35		%				47.66		%				53.23		%				53.09		%
			Tangible common equity to tangible assets reconciliation
			Equity to total assets (GAAP)						11.90		%				11.25		%				11.12		%				10.95		%				11.06		%
			Effect of goodwill and other intangibles						(3.36)						(2.97)						(3.01)						(2.96)						(2.94)
			Effect of preferred equity						(0.37)						(0.40)						(0.41)						(0.40)						(0.40)
			Tangible common equity to tangible assets						8.17		%				7.88		%				7.70		%				7.59		%				7.72		%

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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 total revenue. Management seeks to optimize this revenue while balancing interest rate, credit and liquidity risks.

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

Net interest revenue for the first quarters of 2023 and 2022 was $211 million and $164 million, respectively. FTE net interest revenue for the first quarter of 2023 was $213 million, representing an increase of $47.6 million, or 29%, from the same period in 2022. The net interest spreads for the first quarters of 2023 and 2022 were 2.87% and 2.88%, respectively. The net interest margins for the first quarters of 2023 and 2022 were 3.61% and 2.97%, respectively. Table 2 shows the relationship between interest revenue and expense and the average amounts of assets and liabilities, which provides 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 first quarters of 2023 and 2022.

The increase in FTE net interest revenue was primarily driven by the $2.66 billion increase in average loans provided by the addition of the Progress loan portfolio as well as organic growth since the first quarter of 2022. As a result, loan interest revenue increased $89.9 million compared to the first quarter of 2022, which included a $1.75 million increase in purchased loan accretion. The increase in loan interest reflects interest revenue on approximately $1.44 billion in loans from the Progress acquisition and higher interest rates. The FOMC raised the targeted federal funds rate a total of 475 basis points beginning March 17, 2022 through the first quarter of 2023. Rising interest rates lifted the yield on the loan portfolio by 150 basis points to 5.68% in the first quarter of 2023 compared with the same period a year ago. Additionally, the $122 million increase in the daily average balance of securities and the 97 basis point increase in the average portfolio yield provided $16.1 million more in FTE interest revenue compared to the same period of last year.

The daily average balance of interest-bearing deposits increased by $644 million, which includes approximately $907 million of interest-bearing deposits received in the acquisition of Progress, partially offset by attrition of excess customer deposit balances that had built up during the COVID 19 pandemic. This decline in the daily average balance of deposits led us to use wholesale funding sources to fund loan growth. In the first quarter of 2023, we had FHLB advances and repurchase agreements outstanding with a total daily average balance of $561 million resulting in additional interest expense of $6.26 million compared with $611,000 of daily average balances outstanding in the first quarter of 2022. This change in funding mix toward more costly wholesale borrowings, combined with higher rates offered on customer deposits, led to a $60.8 million increase in interest expense from the first quarter of 2022. We also saw attrition in our noninterest-bearing deposit balances as rising interest rates offered customers more attractive alternatives. Although the daily average balance of our noninterest-bearing deposits was up $31.2 million from the first quarter of 2022, the acquisition of Progress added approximately $427 million in noninterest-bearing deposits. The attrition of deposit balances, which began soon after the the FOMC began increasing the targeted Federal Funds rate at the end of the first quarter of 2022, appears to have ceased in the first quarter of 2023 with March 31, 2023 customer deposit balances up at an annualized rate of 10% from December 31, 2022, excluding Progress.

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Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended March 31,
(dollars in thousands, FTE)

						2023																		2022
						Average Balance						Interest						Average Rate						Average Balance						Interest						Average Rate
Assets:
Interest-earning assets:
Loans, net of unearned income (FTE) (1)(2)						$	16,897,372					$	236,530					5.68		%				$	14,234,026					$	146,637					4.18		%
Taxable securities (3)						6,059,323						37,876						2.50						5,848,976						21,010						1.44
Tax-exempt securities (FTE) (1)(3)						422,583						2,834						2.68						510,954						3,566						2.79
Federal funds sold and other interest-earning assets						472,325						3,352						2.88						1,910,411						1,020						0.22
Total interest-earning assets (FTE)						23,851,603						280,592						4.76						22,504,367						172,233						3.10
Noninterest-earning assets:
Allowance for credit losses						(167,584)																		(113,254)
Cash and due from banks						271,210																		166,005
Premises and equipment						329,135																		277,216
Other assets (3)						1,484,936																		1,369,301
Total assets						$	25,769,300																	$	24,203,635
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and interest-bearing demand						$	4,499,907					17,599						1.59						$	4,667,098					1,469						0.13
Money market						5,223,267						25,066						1.95						5,110,817						1,012						0.08
Savings						1,416,931						538						0.15						1,436,881						72						0.02
Time						2,348,588						12,313						2.13						1,758,895						534						0.12
Brokered time deposits						208,215						2,345						4.57						79,092						44						0.23
Total interest-bearing deposits						13,696,908						57,861						1.71						13,052,783						3,131						0.10
Federal funds purchased and other borrowings						107,955						1,148						4.31						611						—						—
Federal Home Loan Bank advances						453,056						5,112						4.58						—						—						—
Long-term debt						324,701						3,896						4.87						318,995						4,136						5.26
Total borrowed funds						885,712						10,156						4.65						319,606						4,136						5.25
Total interest-bearing liabilities						14,582,620						68,017						1.89						13,372,389						7,267						0.22
Noninterest-bearing liabilities:
Noninterest-bearing deposits						7,697,844																		7,666,635
Other liabilities						357,367																		378,327
Total liabilities						22,637,831																		21,417,351
Shareholders' equity						3,131,469																		2,786,284
Total liabilities and shareholders' equity						$	25,769,300																	$	24,203,635
Net interest revenue (FTE)												$	212,575																	$	164,966
Net interest-rate spread (FTE)																		2.87		%																2.88		%
Net interest margin (FTE) (4)																		3.61		%																2.97		%

 

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

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

(3)Unrealized losses on securities, including those related to the transfer from AFS to HTM, have been reclassified to other assets. Pretax unrealized losses of $419 million and $81.2 million in 2023 and 2022, 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.

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

 

Table 3 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis
(in thousands)

												Three Months Ended March 31, 2023
												Compared to 2022 Increase (Decrease) Due to Changes in
												Volume						Rate						Total
						Interest-earning assets:
						Loans (FTE)						$	30,812					$	59,081					$	89,893
						Taxable securities						781						16,085						16,866
						Tax-exempt securities (FTE)						(597)						(135)						(732)
						Federal funds sold and other interest-earning assets						(1,333)						3,665						2,332
						Total interest-earning assets (FTE)						29,663						78,696						108,359
						Interest-bearing liabilities:
						NOW and interest-bearing demand accounts						(55)						16,185						16,130
						Money market accounts						23						24,031						24,054
						Savings deposits						(1)						467						466
						Time deposits						238						11,541						11,779
						Brokered deposits						180						2,121						2,301
						Total interest-bearing deposits						385						54,345						54,730
						Federal funds purchased & other borrowings						1,148						—						1,148
						FHLB advances						5,112						—						5,112
						Long-term debt						73						(313)						(240)
						Total borrowed funds						6,333						(313)						6,020
						Total interest-bearing liabilities						6,718						54,032						60,750
						Increase in net interest revenue (FTE)						$	22,945					$	24,664					$	47,609

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 $21.8 million for the three months ended March 31, 2023, compared to $23.1 million for the same period of 2022. 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 recorded for the first quarter of 2023 included the initial provision for credit losses on Progress non-PCD loans and unfunded commitments of $8.80 million and $1.65 million, respectively. The provision for credit losses for the first quarter of 2022 included the initial provision for credit losses on Reliant non-PCD loans and unfunded commitments of $15.2 million and $3.12 million, respectively. The decrease in acquisition-related provision in the first quarter of 2023 was partially offset by provision expense related to organic loan growth and higher net charge-offs relative to the first quarter of 2022.

Additional discussion on credit quality and the ACL is included in the “Asset Quality and Risk Elements” section of MD&A in this Report.

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Noninterest Income

 

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

Table 4 - Noninterest Income
(in thousands)

																					Three Months Ended March 31,												Change
																																	2023						2022						Amount						Percent
						Service charges and fees:
						Overdraft fees																											$	2,492					$	2,416					$	76					3		%
						ATM and debit card fees																											3,775						3,991						(216)						(5)
						Other service charges and fees																											2,432						2,663						(231)						(9)
						Total service charges and fees																											8,699						9,070						(371)						(4)
						Mortgage loan gains and related fees																											4,521						16,152						(11,631)						(72)
						Wealth management fees																											5,724						5,895						(171)						(3)
						Gains on sales of other loans																											1,916						3,198						(1,282)						(40)
						Lending and loan servicing fees																											4,016						2,986						1,030						34
						Securities gains (losses), net																											(1,644)						(3,734)						2,090
						Other noninterest income:
						Customer derivatives																											355						786						(431)						(55)
						Other investment gains (losses)																											1,064						(499)						1,563
						BOLI																											1,615						1,337						278						21
						Treasury management income																											1,104						818						286						35
						Other																											2,839						2,964						(125)						(4)
						Total other noninterest income																											6,977						5,406						1,571						29
						Total noninterest income																											$	30,209					$	38,973					$	(8,764)					(22)

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 servicing asset. The change in mortgage income is strongly tied to the interest rate environment and industry conditions. We recognize the majority of fees 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 the decrease in mortgage refinance and mortgage rate lock demand compared to the first quarter of 2022, as shown in the following table. In addition, during the first quarter of 2023, we recorded a $1.10 million negative fair value adjustment, including decay, to the mortgage servicing rights asset, compared to a $5.31 million positive fair value adjustment, including decay, during the first quarter of 2022.

Table 5 - Mortgage Loan Metrics (1)
(dollars in thousands)
						Three Months Ended March 31,
						2023						2022						% Change
			Mortgage rate locks			$	334,697					$	757,348					(56)		%
			# of mortgage rate locks			923						1,923						(52)
			Mortgage loans sold			$	79,279					$	207,152					(62)
			# of mortgage loans sold			295						788						(63)
			Mortgage loans originated:
			Purchases			$	192,693					$	313,512					(39)
			Refinances			31,852						148,445						(79)
			Total			$	224,545					$	461,957					(51)
			# of mortgage loans originated			617						1,202						(49)

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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, balance sheet management activities and market pricing. From time to time, we also sell certain equipment financing receivables. The following table presents loans sold and the corresponding gains recognized on the sales for the periods indicated.

Table 6 - Other Loan Sales
(in thousands)
						Three Months Ended March 31,
						2023												2022
						Loans Sold						Gain						Loans Sold						Gain
			Guaranteed portion of SBA/USDA loans			$	21,770					$	1,523					$	28,343					$	2,466
			Equipment financing receivables			18,703						393						23,436						732
			Total			$	40,473					$	1,916					$	51,779					$	3,198

Lending and loan servicing fees increased mostly due to a positive fair value adjustment on our SBA loan servicing asset and volume-driven fee income from our equipment finance business.

During the first quarters of 2023 and 2022, we sold certain securities, which resulted in net securities losses. During 2023, proceeds from sales were used to fund loan growth and repay FHLB advances. During 2022, we strategically reinvested in higher-yielding securities.

Our other investments include deferred compensation plan assets, CRA investments, other equity securities and limited partnership investments. During the first quarter of 2023,we recorded net unrealized gains on these investments, primarily driven by unrealized gains on equity securities compared to net losses during the first quarter of 2022 and equity method income from limited partnership investments.

Noninterest Expenses 

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

Table 7 - Noninterest Expenses
(in thousands)

																		Three Months Ended March 31,												Change
																														2023						2022						Amount						Percent
			Salaries and employee benefits																											$	78,698					$	71,006					$	7,692					11		%
			Communications and equipment																											10,008						9,248						760						8
			Occupancy																											9,889						9,378						511						5
			Advertising and public relations																											2,349						1,488						861						58
			Postage, printing and supplies																											2,537						2,119						418						20
			Professional fees																											6,072						4,447						1,625						37
			Lending and loan servicing expense																											2,319						2,366						(47)						(2)
			Outside services - electronic banking																											3,425						2,523						902						36
			FDIC assessments and other regulatory charges																											4,001						2,173						1,828						84
			Amortization of intangibles																											3,528						1,793						1,735						97
			Other																											8,348						3,718						4,630						125
			Total excluding merger-related and other charges																											131,174						110,259						20,915						19
			Merger-related and other charges																											8,631						9,016						(385)
			Total noninterest expenses																											$	139,805					$	119,275					$	20,530					17

Approximately half of the year over year increase in operating expenses is due to the acquisition of Progress on January 3, 2023.

The increase in salaries and employee benefits for the first quarter of 2023 compared to the same period of 2022 was primarily driven by the addition of Progress employees. Merit increases, which included annual increases that went into effect for all employees on April 1, 2022 as well as a targeted mid-year 2022 increase in the third quarter, also contributed to the rise in salaries and employee

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benefits expense. Although mortgage commissions were down from a year ago, the decrease was mostly offset by lower deferred direct loan origination costs and higher production incentives in other lending areas. Full time equivalent headcount totaled 3,052 at March 31, 2023, up from 2,893 at March 31, 2022.

Communications and equipment expense increased primarily driven by incremental software contract costs and the growth in our network with the addition of recent acquisitions. The increase in occupancy costs for the first quarter of 2023 compared to the same period of 2022 was mostly attributable to the additional operating lease costs associated with the acquisition of Progress. The decrease in lending and loan servicing expense was driven by lower mortgage loan production compared to that of the first quarter of 2022. The increase in FDIC assessments and other regulatory charges was primarily attributable to the 2 basis point assessment rate increase that went into effect for all banks on January 1, 2023, as well as an increased assessment base driven by higher average total assets partly resulting from the Progress acquisition. Amortization of intangibles increased with the additional customer deposit intangibles recorded as a result of the Progress acquisition. Merger-related charges for the first quarter of 2023 were primarily related to the acquisition of Progress.

Balance Sheet Review

 

Total assets at March 31, 2023 and December 31, 2022 were $25.9 billion and $24.0 billion, respectively. Total liabilities at March 31, 2023 and December 31, 2022 were $22.8 billion and $21.3 billion, respectively. Shareholders’ equity totaled $3.08 billion and $2.70 billion at March 31, 2023 and December 31, 2022, respectively.

Loans

Our loan portfolio is our largest category of interest-earning assets. The following table presents a summary of the loan portfolio by loan type as of March 31, 2023, of which approximately 74% was secured by real estate.

Table 8 - Loan Portfolio Composition

As of March 31, 2023

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 risk management 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 special mention and substandard performing and non-performing loans, 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

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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 our 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 our assessment of loan quality or collateral values changes substantially with respect to one or more loan relationships or portfolios. The allocation of the ACL is based on reasonable and supportable forecasts, historical data, subjective judgment and estimates and therefore, is not necessarily indicative of the specific amounts or loan categories in which charge-offs may ultimately occur. See the Critical Accounting Estimates section of MD&A in our 2022 10-K for additional information on the allowance for credit losses.

Table 9 - Allocation of ACL

(in thousands)

			March 31, 2023												December 31, 2022
			ACL						% of loans in each category to total loans						ACL						% of loans in each category to total loans
Owner occupied commercial real estate			$	20,831					18						$	19,834					18
Income producing commercial real estate			33,607						21						32,082						21
Commercial & industrial			28,312						14						23,504						15
Commercial construction			22,073						11						20,120						10
Equipment financing			26,195						9						23,395						9
Total commercial			131,018						73						118,935						73
Residential mortgage			24,082						16						20,809						15
HELOC			10,337						5						8,707						6
Residential construction			2,043						3						2,049						3
Manufactured housing			8,424						2						8,098						2
Consumer			630						1						759						1
Total ACL - loans			176,534						100						159,357						100
ACL - unfunded commitments			21,389												21,163
Total ACL			$	197,923											$	180,520
ACL - loans as a percentage of total loans			1.03		%										1.04		%
ACL - loans as a percentage of nonaccrual loans			243												360

The increase in the ACL since December 31, 2022 was primarily driven by the acquisition of Progress, which added $13.2 million to the ACL as of the acquisition date. Of this amount, $2.70 million was reclassified from the amortized cost basis of PCD loans, $8.80 million was recorded as provision for loan losses on acquired non-PCD loan balances and $1.65 million was recorded as provision for unfunded commitments on the acquired balance of unfunded commitments. See Provision for Credit Losses discussion within this MD&A for further information.

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The following table presents a summary of net charge-offs to average loans for the periods indicated.

Table 10 - Net Charge-offs to Average Loans
(in thousands)

												Three Months Ended March 31,
																		2023						2022
			Net charge-offs (recoveries)
			Owner occupied commercial real estate															$	90					$	(45)
			Income producing commercial real estate															2,306						(290)
			Commercial & industrial															225						2,929
			Commercial construction															(37)						(373)
			Equipment financing															3,375						267
			Residential mortgage															(87)						(97)
			HELOC															33						(81)
			Residential construction															(15)						(23)
			Manufactured housing															628						164
			Consumer															566						527
			Total net charge-offs (recoveries)															$	7,084					$	2,978
			Average loans
			Owner occupied commercial real estate															$	3,058,802					$	2,618,981
			Income producing commercial real estate															3,577,883						3,311,373
			Commercial & industrial															2,443,581						2,333,079
			Commercial construction															1,771,940						1,460,433
			Equipment financing															1,468,538						1,134,584
			Residential mortgage															2,660,345						1,818,838
			HELOC															926,806						774,081
			Residential construction															486,686						372,930
			Manufactured housing															334,754						265,481
			Consumer															168,037						144,246
			Total average loans															$	16,897,372					$	14,234,026
			Net charge-offs to average loans (1)
			Owner occupied commercial real estate															0.01		%				(0.01)		%
			Income producing commercial real estate															0.26						(0.04)
			Commercial & industrial															0.04						0.51
			Commercial construction															(0.01)						(0.10)
			Equipment financing															0.93						0.10
			Residential mortgage															(0.01)						(0.02)
			HELOC															0.01						(0.04)
			Residential construction															(0.01)						(0.03)
			Manufactured housing															0.76						0.25
			Consumer															1.37						1.48
			Total															0.17						0.08

(1) Annualized.

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Nonperforming Assets

The table below summarizes NPAs for the periods indicated. NPAs include nonaccrual loans, OREO and repossessed assets. The increase in nonaccrual loans since December 31, 2022 is primarily driven by a small number of large loans that moved to nonaccrual status during the first quarter of 2023.

Table 11 - NPAs
(in thousands)

						March 31, 2023						December 31, 2022
			Nonaccrual loans			72,795						44,232
			OREO and repossessed assets			608						49
			Total NPAs			$	73,403					$	44,281
			Nonaccrual loans as a percentage of total loans			0.43		%				0.29		%
			NPAs as a percentage of total assets			0.28						0.18

Our policy is to place loans on nonaccrual status when, in the opinion of management, the full principal and interest on a loan is not likely to be collected or when the loan becomes 90 days past due. A loan may continue on accrual after 90 days, however, if it is well collateralized and in the process of collection. When a loan is placed on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Interest payments received on nonaccrual loans are applied to reduce the loan’s amortized cost. Loans are generally 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.

 

Generally, we do not commit to lend additional funds to customers whose loans are on nonaccrual status, although in certain isolated cases, we execute forbearance agreements whereby we agree to continue to fund construction loans to completion or other lines of credit as long as the borrower meets the conditions of the forbearance agreement. We may also fund other amounts necessary to protect collateral such as amounts to pay past due property taxes and insurance coverage.

Investment Securities

The composition of the 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 and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits and borrowings.

At March 31, 2023 and December 31, 2022, we had HTM debt securities with a carrying amount of $2.58 billion and $2.61 billion, respectively, and AFS debt securities totaling $3.33 billion and $3.61 billion, respectively. In the first quarter of 2023, we sold $381 million in AFS securities, including approximately $111 million in securities received through the Progress acquisition, primarily for the purpose of providing liquidity to fund loan growth. At March 31, 2023 and December 31, 2022, the securities portfolio represented approximately 23% and 26%, respectively, of total assets.

At March 31, 2023, HTM debt securities had a fair value of $2.21 billion, indicating net unrealized losses of $377 million. Additional unrealized losses on HTM debt securities of $75.4 million (pre-tax) were included in AOCI as a result of the transfer of AFS debt securities to HTM in 2022. Unrealized losses were primarily attributable to changes in interest rates.

In accordance with CECL, our HTM debt securities portfolio is evaluated quarterly to assess whether an ACL is required. We measure expected credit losses on HTM debt securities on a collective basis by major security type. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At March 31, 2023 and December 31, 2022, calculated credit losses on HTM debt securities were de minimis due to the high credit quality of the portfolio, which included securities issued or guaranteed by U.S. Government agencies, GSEs, high credit quality municipalities and supranational entities. As a result, no ACL for HTM debt securities was recorded.

For AFS debt securities in an unrealized loss position, if we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, the security's amortized cost basis is written down to fair value through income. Absent circumstances when an AFS security would be sold, we evaluate whether the decline in fair value has resulted from credit losses or other factors. The evaluation considers factors such as the extent to which fair value is less than amortized cost, changes to the security’s rating, and adverse conditions specific to the security. If the evaluation indicates a credit loss exists, an ACL

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may be recorded, with such allowance limited to the amount by which fair value is below amortized cost. Any impairment unrelated to credit factors is recognized in OCI. At March 31, 2023 and December 31, 2022, there was no ACL related to the AFS debt securities portfolio. Unrealized losses at March 31, 2023 and 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 net fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets. Management evaluates goodwill annually, or more frequently if necessary, to determine if any impairment exists. At March 31, 2023 and December 31, 2022, the net carrying amount of goodwill was $897 million and $751 million, respectively.

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 Progress in the first quarter of 2023, we recorded goodwill and a core deposit intangible of $146 million and $40.0 million, respectively.

Deposits

Customer deposits are the primary source of funds for the continued growth of 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, 2022 was mostly driven by the deposits assumed in the Progress transaction, although we also generated organic growth by increasing the rates offered on deposits. As of March 31, 2023, we had approximately $8.00 billion of uninsured deposits, of which $2.39 billion was collateralized by investment securities.

Table 12 - Deposits
(in thousands)

						March 31, 2023						December 31, 2022
			Noninterest-bearing demand			$	7,540,265					$	7,643,081
			NOW and interest-bearing demand			4,769,663						4,350,878
			Money market and savings			6,503,422						5,967,017
			Time			2,703,568						1,781,482
			Total customer deposits			21,516,918						19,742,458
			Brokered deposits			487,756						134,049
			Total deposits			$	22,004,674					$	19,876,507

Borrowing Activities

At both March 31, 2023 and December 31, 2022, we had long-term debt outstanding of $325 million, which includes senior debentures, subordinated debentures, and trust preferred securities. Also at March 31, 2023 and December 31, 2022, we had short-term borrowings outstanding of $7.22 million and $159 million, respectively, which was mostly comprised of repurchase agreements, and we had $30.0 million and $550 million, respectively, of FHLB advances outstanding. We began using these short-term funding sources in mid 2022 due to balance attrition in our deposit accounts and our need to fund loan growth. The decrease since December 31, 2022 is a result of the sale of investment securities noted above and growth in customer and brokered deposits which allowed us to fund first quarter loan growth and repay short-term borrowings.

Contractual Obligations

 

There have not been any material changes to our contractual obligations since December 31, 2022.

 

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 include commitments to extend credit, letters of credit and financial guarantees.

 

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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 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 included in our 2022 10-K and Note 15 to the consolidated financial statements in this Report for additional information on off-balance sheet arrangements.

Interest Rate Sensitivity Management

The absolute level and volatility of interest rates can have a significant effect on profitability. The objective of interest rate risk management is to identify and manage the sensitivity of net interest revenue to changing interest rates, consistent with our overall financial goals. Based on economic conditions, asset quality and various other considerations, management establishes tolerance ranges for interest rate sensitivity and manages within these ranges. 

Net interest revenue and the fair value of financial instruments are influenced by changes in the level of interest rates. We limit our exposure to fluctuations in interest rates through policies established by our ALCO and approved by the Board. The ALCO meets periodically and has responsibility for formulating and recommending asset/liability management policies to the Board, formulating and implementing strategies to improve balance sheet positioning and/or earnings, and reviewing interest rate sensitivity. 

One of the tools management uses to estimate and manage the sensitivity of net interest revenue to changes in interest rates is an asset/liability simulation model. Resulting estimates are based upon multiple assumptions for each scenario, including loan and deposit re-pricing characteristics and the rate of prepayments. The ALCO periodically reviews the assumptions for reasonableness based on historical data and future expectations; however, actual net interest revenue may differ from model results. The primary objective of the simulation model is to measure the potential change in net interest revenue over time using multiple interest rate scenarios. The base scenario assumes rates remain flat and is the scenario to which all others are compared, in order to measure the change in net interest revenue. Policy limits are based on immediate rate shock scenarios, as well as gradually rising and falling rate scenarios, which are all compared to the base scenario. Our assumptions include floors such that market rates and discount rates do not go below zero. Other scenarios analyzed may include delayed rate shocks, yield curve steepening or flattening, or other variations in rate movements. While the primary policy scenarios focus on a 12-month time frame, longer time horizons are also modeled. 

Our policy is based on the 12-month impact on net interest revenue of interest rate shocks and ramps that increase from 100 to 400 basis points or decrease 100 to 200 basis points from the base scenario. In the shock scenarios, rates immediately change the full amount at the scenario onset. In the ramp scenarios, rates change by 25 basis points per month. Our policy limits the projected change in net interest revenue over the first 12 months to an 8% decrease for each 100 basis point change in the increasing and decreasing rate ramp and shock scenarios. The following table presents our interest sensitivity position at the dates indicated.

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Table 13 - Interest Sensitivity
(in thousands)

									Increase (Decrease) in Net Interest Revenue from Base Scenario at
									March 31, 2023												December 31, 2022
			Change in Rates						Shock						Ramp						Shock						Ramp
			200 basis point increase						5.69		%				3.19		%				6.97		%				4.33		%
			100 basis point increase						2.90						2.25						3.53						2.85
			100 basis point decrease						(2.98)						(2.38)						(3.78)						(3.12)
			200 basis point decrease						(7.02)						(3.88)						(8.39)						(5.07)

 

Our interest sensitivity model includes significant key assumptions, including an assumption of no change in deposit portfolio size or composition. Additionally, in rising rate environments, we use a deposit beta assumption that is consistent with our experience in the last upward rate cycle from November 2015 to July 2019. The modeled deposit beta, which is measured as the change in our overall non-maturity deposit rate as a percentage of the change in the targeted federal funds rate, was 19%. A higher deposit beta assumption would indicate a less asset sensitive balance sheet and would lower the expected increase in net interest revenue in the increasing rate scenarios.

The current environment is marked by the most rapid rate increases in decades, which, in part, is making non-bank products, such as U.S. Treasuries and institutional money market funds, more attractive to our deposit customers. For this and other reasons, the banking industry’s deposit base has been shrinking since the first half of 2022. This industry-wide outflow of deposits has increased price competition for bank deposits. As such, industry deposit betas, including ours, have been increasing at a faster pace relative to the last rising rate cycle. Our cumulative deposit beta for the current rising rate cycle, while favorable to peer averages, increased to 22% in the first quarter.

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. Liquidity is also available from wholesale funding sources consisting primarily of repurchase agreements, Federal funds purchased, 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 March 31, 2023, we had sufficient qualifying collateral to provide borrowing capacity for FHLB advances of $1.53 billion, Federal Reserve discount window borrowing capacity of $2.54 billion and Federal Reserve bank term funding program capacity of $1.88 billion. We also had unpledged investment securities of $1.52 billion that could be used as collateral for additional borrowings. In addition, we have the ability to attract retail deposits by competing more aggressively on pricing.

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. A South Carolina state-chartered bank is permitted to pay a dividend of up to 100% of its current year earnings without requesting approval of the South Carolina Board of Financial Institutions, provided certain conditions are met. Holding

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Company liquidity is managed to a minimum of 15-months of anticipated cash expenditures after considering all of its liquidity needs over this period.

Significant uses and sources of cash during the three months ended March 31, 2023 are as follows. See the consolidated statement of cash flows for further detail.

•Net cash provided by operating activities of $90.1 million reflects net income of $62.3 million adjusted for non-cash transactions, gains and losses on sales of securities and other loans, an increase in loans held for sale of $4.70 million and changes in other assets and liabilities. Significant non-cash transactions for the period included a $21.8 million provision for credit losses and net depreciation, amortization, and accretion of $12.1 million.

•Net cash provided by investing activities of $181 million primarily consisted of proceeds from securities sales, maturities and calls of $496 million partially offset by a net increase in loans of $345 million.

•Net cash used in financing activities of $141 million was driven by net repayments of FHLB advances of $615 million and a net decrease in short-term borrowings of $293 million, combined with dividends on common and preferred stock of $25.4 million, partially offset by an increase in deposits of $793 million.

In the opinion of management, our liquidity position at March 31, 2023 was sufficient to meet our expected cash flow requirements for the foreseeable future.

Capital Resources and Dividends

 

Shareholders’ equity at March 31, 2023 was $3.08 billion, an increase of $377 million from December 31, 2022 primarily due to equity issued in the Progress acquisition, year-to-date earnings and unrealized gains on AFS securities, partially offset by dividends declared on common and preferred stock.

The following table shows capital ratios, as calculated under applicable regulatory guidelines, at March 31, 2023 and December 31, 2022. As of March 31, 2023, capital levels remained characterized as “well-capitalized” under regulatory requirements in effect at the time. Additional information related to capital ratios is provided in Note 14 to the consolidated financial statements.

Table 14 - Capital Ratios

																								United Community Banks, Inc. (Consolidated)												United Community Bank
						Minimum						Well- Capitalized						Minimum Capital Plus Capital Conservation Buffer						March 31, 2023						December 31, 2022						March 31, 2023						December 31, 2022
Risk-based ratios:
CET1 capital						4.5		%				6.5		%				7.0		%				12.08		%				12.26		%				12.43		%				12.83		%
Tier 1 capital						6.0						8.0						8.5						12.58						12.81						12.43						12.83
Total capital						8.0						10.0						10.5						14.40						14.79						13.34						13.70
Leverage ratio						4.0						5.0						N/A						9.65						9.69						9.54						9.69

Effect of Inflation and Changing Prices

 

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

 

Management believes the effect of inflation on financial results depends on 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 manage interest rate sensitivity. In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.

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Item 3.    Quantitative and Qualitative Disclosure About Market Risk

 

There have been no material changes in our market risk as of March 31, 2023 from that presented in our 2022 10-K. Our interest rate sensitivity position at March 31, 2023 is set forth in Table 13 in MD&A of this Report and incorporated herein by this reference.

 

Item 4.    Controls and Procedures

    (a) Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e)) as of March 31, 2023. Based on that evaluation, our principal executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

    (b) Changes in Internal Control Over Financial Reporting. No change in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended March 31, 2023 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION 

Item 1. Legal Proceedings

 

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

Items 1A. Risk Factors

Except with respect to the additional risk factors related to the proposed First Miami acquisition, which are set forth on pages 20 through 26 of the prospectus filed with the SEC on April 24, 2023 pursuant to Securities Act Rule 424(b)(3) (and incorporated herein by this reference), there have been no material changes to the risk factors previously disclosed in the 2022 10-K.

Item 6. Exhibits

(d)     Exhibits. See Exhibit Index below.

EXHIBIT INDEX
Exhibit No.						Description
2.1						Agreement and Plan of Merger by and between United Community Banks, Inc. and First Miami Bancorp, Inc. dated as of February 13, 2023 (incorporated herein by reference from Exhibit 2.1 to the Current Report on Form 8-K of United Community Banks, Inc. filed with the SEC on February 15, 2023).
3.1						Restated Articles of Incorporation of United Community Banks, Inc. as amended through August 13, 2021 (incorporated herein by reference to Exhibit 3.1 to United Community Bank Inc.'s Quarterly Report on Form 10-Q for the period ended September 30, 2021, filed on November 5, 2021).
3.2						Amended and Restated Bylaws of United Community Banks, Inc., as amended (incorporated herein by reference to Exhibit 3.2 to United Community Banks, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2015, filed with the SEC on May 11, 2015).
31.1						Certification by H. Lynn Harton, President and Chief Executive Officer of United Community Banks, Inc., pursuant to Exchange Act Rule 13a-14(a).
31.2						Certification by Jefferson L. Harralson, Executive Vice President and Chief Financial Officer of United Community Banks, Inc., pursuant to Exchange Act Rule 13a-14(a).
32						Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350.
101						Interactive data files for United Community Bank, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL: (i) the Consolidated Balance Sheets (unaudited); (ii) the Consolidated Statements of Income (unaudited); (iii) the Consolidated Statements of Comprehensive Income (unaudited); (iv) the Consolidated Statements in Shareholders’ Equity (unaudited); (v) the Consolidated Statements of Cash Flows (unaudited); and (vi) the Notes to Consolidated Financial Statements (unaudited).
104						The cover page from United Community Bank’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (formatted in Inline XBRL and included in Exhibit 101)

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Signatures

 

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

 

			UNITED COMMUNITY BANKS, INC.
			/s/ H. Lynn Harton
			H. Lynn Harton
			President and Chief Executive Officer
			(Principal Executive Officer)
			/s/ Jefferson L. Harralson
			Jefferson L. Harralson
			Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)
			/s/ Alan H. Kumler
			Alan H. Kumler
			Senior Vice President and Chief Accounting Officer
			(Principal Accounting Officer)
			Date: May 5, 2023

 

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