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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 September 30, 2021

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 89,293,000 shares of the registrant’s common stock, par value $1 per share, outstanding as of October 31, 2021.

---

UNITED COMMUNITY BANKS, INC.

FORM 10-Q

INDEX

						Glossary of Defined Terms			3
						Forward Looking Statements			4
PART I - Financial Information
			Item 1.			Financial Statements.
						Consolidated Balance Sheets (unaudited) at September 30, 2021 and December 31, 2020			5
						Consolidated Statements of Income (unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020			6
						Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020			7
						Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020			8
						Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2021 and 2020			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.			58
			Item 4.			Controls and Procedures.			58
PART II - Other Information
			Item 1.			Legal Proceedings.			59
			Item 1A.			Risk Factors.			59
			Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds.			59
			Item 6.			Exhibits.			60

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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
2020 10-K						Annual Report on Form 10-K for the year ended December 31, 2020
ACL						Allowance for credit losses
AFS						Available-for-sale
ALCO						Asset/Liability Management Committee
AOCI						Accumulated other comprehensive income (loss)
Aquesta						Aquesta Financial Holdings, Inc. and its wholly-owned subsidiary, Aquesta Bank
ASU						Accounting standards update
Bank						United Community Bank
Board						United Community Banks Inc., Board of Directors
BOLI						Bank-owned life insurance
CARES Act						Coronavirus Aid, Relief, and Economic Security Act
CECL						Current expected credit loss model
CET1						Common equity tier 1
CME						Chicago Mercantile Exchange
Company						United Community Banks Inc. (interchangeable with "United" below)
CVA						Credit valuation adjustments
FASB						Financial Accounting Standards Board
FDIC						Federal Deposit Insurance Corporation
Federal Reserve						Federal Reserve System
FHLB						Federal Home Loan Bank
FinTrust						FinTrust Capital Partners, LLC, and its operating subsidiaries, FinTrust Capital Advisors, LLC, FinTrust Capital Benefits Group, LLC and FinTrust Brokerage Services, LLC
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
Holding Company						United Community Banks, Inc. on an unconsolidated basis
HTM						Held-to-maturity
LIBOR						London Interbank Offered Rate
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)
PCD						Purchased credit deteriorated
PPP						Paycheck Protection Program
Reliant						Reliant Bancorp, Inc. and its wholly-owned subsidiary, Reliant Bank
Report						Quarterly Report on Form 10-Q
SBA						United States Small Business Administration
Seaside						Seaside National Bank & Trust, subsidiary bank of Three Shores Bancorporation, Inc.
SEC						Securities and Exchange Commission
TDR						Troubled debt restructuring
Three Shores						Three Shores Bancorporation, Inc., parent company of Seaside National Bank & Trust
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

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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, 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, 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 non-performing assets, 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 COVID-19 pandemic and its continuing effects on the economic and business environments in which we operate;

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

•continuation of historically low interest rates coupled with other potential fluctuations or unanticipated changes in the interest rate environment, including interest rate changes made by the Federal Reserve, the discontinuation of LIBOR as an interest rate benchmark, and 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;

•our lack of geographic diversification and 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 anticipated adverse conditions greater 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 recent, pending or future mergers or acquisitions, including our ability to successfully complete acquisitions and therefore, to integrate or expand 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 of 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 (e.g., tax), 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 arising out of the COVID-19 pandemic;

•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 the ability to pay dividends to shareholders or undertake other capital initiatives, such as share repurchases; 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 2020 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 hereof, 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)

						September 30, 2021						December 31, 2020
ASSETS
Cash and due from banks						$	131,785					$	148,896
Interest-bearing deposits in banks						1,686,008						1,459,723
Cash and cash equivalents						1,817,793						1,608,619
Debt securities available-for-sale						4,251,436						3,224,721
Debt securities held-to-maturity (fair value $1,079,925 and $437,193, respectively)						1,083,324						420,361
Loans held for sale at fair value						68,424						105,433
Loans and leases held for investment						11,191,037						11,370,815
Less allowance for credit losses - loans and leases						(99,620)						(137,010)
Loans and leases, net						11,091,417						11,233,805
Premises and equipment, net						225,350						218,489
Bank owned life insurance						204,282						201,969
Accrued interest receivable						41,561						47,672
Net deferred tax asset						37,617						38,411
Derivative financial instruments						53,296						86,666
Goodwill and other intangible assets, net						400,994						381,823
Other assets						205,663						226,405
Total assets						$	19,481,157					$	17,794,374
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand						$	6,492,519					$	5,390,291
Interest-bearing deposits						10,372,898						9,842,067
Total deposits						16,865,417						15,232,358
Long-term debt						247,139						326,956
Derivative financial instruments						26,065						29,003
Accrued expenses and other liabilities						220,178						198,527
Total liabilities						17,358,799						15,786,844
Shareholders' equity:
Preferred stock, $1 par value: 10,000,000 shares authorized;   Series I, $25,000 per share liquidation preference; 4,000 shares issued and outstanding						96,422						96,422
Common stock, $1 par value: 200,000,000 and 150,000,000 shares authorized, respectively;   86,558,647 and 86,675,279 shares issued and outstanding, respectively						86,559						86,675
Common stock issuable: 588,258 and 600,834 shares, respectively						11,098						10,855
Capital surplus						1,631,709						1,638,999
Retained earnings						298,503						136,869
Accumulated other comprehensive (loss) income						(1,933)						37,710
Total shareholders' equity						2,122,358						2,007,530
Total liabilities and shareholders' equity						$	19,481,157					$	17,794,374

 

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 September 30,												Nine Months Ended September 30,
									2021						2020						2021						2020
			Interest revenue:
			Loans, including fees						$	128,477					$	126,936					$	382,261					$	352,861
			Investment securities, including tax exempt of $2,280 and $1,895 and $6,685 and   $4,988, respectively						18,540						14,558						51,530						47,567
			Deposits in banks and short-term investments						658						279						1,235						1,497
			Total interest revenue						147,675						141,773						435,026						401,925
			Interest expense:
			Deposits						3,142						8,998						11,981						35,344
			Short-term borrowings						—						29						2						31
			Long-term debt						3,494						4,292						11,564						10,186
			Total interest expense						6,636						13,319						23,547						45,561
			Net interest revenue						141,039						128,454						411,479						356,364
			(Release of) provision for credit losses						(11,034)						21,793						(36,903)						77,527
			Net interest revenue after provision for credit losses						152,073						106,661						448,382						278,837
			Noninterest income:
			Service charges and fees						9,350						8,260						25,255						23,893
			Mortgage loan gains and other related fees						13,828						25,144						47,536						57,113
			Wealth management fees						5,554						3,055						12,881						6,019
			Gains from sales of other loans, net						2,353						1,175						7,506						3,889
			Securities gains, net						—						746						41						746
			Other						9,010						10,302						27,422						23,074
			Total noninterest income						40,095						48,682						120,641						114,734
			Total revenue						192,168						155,343						569,023						393,571
			Noninterest expenses:
			Salaries and employee benefits						60,458						59,067						180,457						162,236
			Communications and equipment						7,368						6,960						21,979						19,462
			Occupancy						7,096						7,050						21,130						18,709
			Advertising and public relations						1,458						1,778						4,150						5,312
			Postage, printing and supplies						1,731						1,703						5,171						4,986
			Professional fees						5,347						5,083						14,509						14,003
			Lending and loan servicing expense						2,450						3,043						8,508						8,525
			Outside services - electronic banking						2,308						1,888						6,811						5,516
			FDIC assessments and other regulatory charges						1,723						1,346						5,520						4,388
			Amortization of intangibles						1,028						1,099						2,942						3,126
			Merger-related and other charges						1,437						3,361						4,058						4,566
			Other						4,345						3,603						12,248						10,670
			Total noninterest expenses						96,749						95,981						287,483						261,499
			Income before income taxes						95,419						59,362						281,540						132,072
			Income tax expense						21,603						11,755						63,758						27,485
			Net income						$	73,816					$	47,607					$	217,782					$	104,587
			Net income available to common shareholders						$	71,649					$	45,437					$	211,283					$	101,994
			Net income per common share:
			Basic						$	0.82					$	0.52					$	2.42					$	1.25
			Diluted						0.82						0.52						2.42						1.25
			Weighted average common shares outstanding:
			Basic						87,211						87,129						87,274						81,815
			Diluted						87,355						87,205						87,413						81,876

See accompanying notes to consolidated financial statements (unaudited). 

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

						Three Months Ended September 30,																		Nine Months Ended September 30,
						Before-tax Amount						Tax (Expense) Benefit						Net of Tax Amount						Before-tax Amount						Tax (Expense) Benefit						Net of Tax Amount
2021
Net income						$	95,419					$	(21,603)					$	73,816					$	281,540					$	(63,758)					$	217,782
Other comprehensive income:
Unrealized losses on available-for-sale securities:
Unrealized holding losses						(18,915)						4,686						(14,229)						(58,882)						15,766						(43,116)
Reclassification adjustment for gains included in net income						—						—						—						(41)						14						(27)
Net unrealized losses						(18,915)						4,686						(14,229)						(58,923)						15,780						(43,143)
Derivative instruments designated as cash flow hedges:
Unrealized holding gains on derivatives						431						(111)						320						3,475						(888)						2,587
Reclassification of losses on derivative instruments realized in net income						153						(39)						114						444						(113)						331
Net cash flow hedge activity						584						(150)						434						3,919						(1,001)						2,918
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan						260						(66)						194						782						(200)						582
Total other comprehensive loss						(18,071)						4,470						(13,601)						(54,222)						14,579						(39,643)
Comprehensive income						$	77,348					$	(17,133)					$	60,215					$	227,318					$	(49,179)					$	178,139
2020
Net income						$	59,362					$	(11,755)					$	47,607					$	132,072					$	(27,485)					$	104,587
Other comprehensive income:
Unrealized gains on available-for-sale securities						941						(181)						760						43,611						(10,583)						33,028
Reclassification adjustment for gains included in net income						(746)						191						(555)						(746)						191						(555)
Net unrealized gains						195						10						205						42,865						(10,392)						32,473
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity						544						(130)						414						723						(173)						550
Derivative instruments designated as cash flow hedges:
Unrealized holding losses on derivatives						(324)						83						(241)						(1,152)						294						(858)
Reclassification of losses on derivative instruments realized in net income						130						(33)						97						197						(50)						147
Net cash flow hedge activity						(194)						50						(144)						(955)						244						(711)
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan						215						(55)						160						643						(164)						479
Total other comprehensive income						760						(125)						635						43,276						(10,485)						32,791
Comprehensive income						$	60,122					$	(11,880)					$	48,242					$	175,348					$	(37,970)					$	137,378

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
Balance at June 30, 2020			78,335,127						$	96,660					$	78,335					$	10,646					$	1,480,464					$	64,990					$	40,550					$	1,771,645
Net income																																	47,607												47,607
Other comprehensive income																																							635						635
Issuance of preferred stock									(238)																																				(238)
Preferred stock dividends																																	(1,814)												(1,814)
Common stock dividends ($0.18 per share)																																	(15,845)												(15,845)
Common stock issued for acquisitions			8,130,633												8,131												155,458																		163,589
Impact of equity-based compensation awards			89,095												89						332						619																		1,040
Impact of other United sponsored equity plans			56,259												56						(346)						926																		636
Balance at September 30, 2020			86,611,114						$	96,422					$	86,611					$	10,632					$	1,637,467					$	94,938					$	41,185					$	1,967,255
Balance at June 30, 2021			86,664,894						$	96,422					$	86,665					$	10,650					$	1,636,875					$	244,006					$	11,668					$	2,086,286
Net income																																	73,816												73,816
Other comprehensive loss																																							(13,601)						(13,601)
Common stock issued for acquisitions			132,299												133												4,268																		4,401
Preferred stock dividends																																	(1,719)												(1,719)
Common stock dividends ($0.20 per share)																																	(17,600)												(17,600)
Purchases of common stock			(342,744)												(343)												(9,657)																		(10,000)
Impact of equity-based compensation awards			101,093												101						345						136																		582
Impact of other United sponsored equity plans			3,105												3						103						87																		193
Balance at September 30, 2021			86,558,647						$	96,422					$	86,559					$	11,098					$	1,631,709					$	298,503					$	(1,933)					$	2,122,358
Balance at December 31, 2019			79,013,729						$	—					$	79,014					$	11,491					$	1,496,641					$	40,152					$	8,394					$	1,635,692
Net income																																	104,587												104,587
Other comprehensive income																																							32,791						32,791
Issuance of preferred stock									96,422																																				96,422
Common stock issued for acquisitions			8,130,633												8,131												155,458																		163,589
Purchases of common stock			(826,482)												(827)												(19,955)																		(20,782)
Preferred stock dividends																																	(1,814)												(1,814)
Common stock dividends ($0.54 per share)																																	(44,458)												(44,458)
Impact of equity-based compensation awards			151,347												151						1,008						3,458																		4,617
Impact of other United sponsored equity plans			141,887												142						(1,867)						1,865																		140
Adoption of new accounting standard																																	(3,529)												(3,529)
Balance at September 30, 2020			86,611,114						$	96,422					$	86,611					$	10,632					$	1,637,467					$	94,938					$	41,185					$	1,967,255
Balance at December 31, 2020			86,675,279						$	96,422					$	86,675					$	10,855					$	1,638,999					$	136,869					$	37,710					$	2,007,530
Net income																																	217,782												217,782
Other comprehensive loss																																							(39,643)						(39,643)
Common stock issued for acquisitions			132,299												133												4,268																		4,401
Purchases of common stock			(492,744)												(493)												(14,608)																		(15,101)
Preferred stock dividends																																	(5,157)												(5,157)
Common stock dividends ($0.58 per share)																																	(50,991)												(50,991)
Impact of equity-based compensation awards			171,938												172						992						1,706																		2,870
Impact of other United sponsored equity plans			71,875												72						(749)						1,344																		667
Balance at September 30, 2021			86,558,647						$	96,422					$	86,559					$	11,098					$	1,631,709					$	298,503					$	(1,933)					$	2,122,358

See accompanying notes to consolidated financial statements (unaudited).

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

						Nine Months Ended September 30,
						2021						2020
Operating activities:
Net income						$	217,782					$	104,587
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net						(8,082)						5,332
(Release of) provision for credit losses						(36,903)						77,527
Stock based compensation						4,814						5,939
Deferred income tax expense						21,290						189
Securities gains, net						(41)						(746)
Gains from sales of other loans, net						(7,506)						(3,889)
Changes in assets and liabilities:
Other assets and accrued interest receivable						32,952						(44,570)
Accrued expenses and other liabilities						21,597						(20,869)
Loans held for sale						37,009						(69,875)
Net cash provided by operating activities						282,912						53,625
Investing activities:
Debt securities held-to-maturity:
Proceeds from maturities and calls						51,770						45,171
Purchases						(716,399)						(105,622)
Debt securities available-for-sale:
Proceeds from sales						103,012						40,365
Proceeds from maturities and calls						709,435						604,180
Purchases						(1,909,879)						(668,484)
Net decrease (increase) in loans						234,855						(1,523,516)
Equity investments, outflows						(12,664)						(13,071)
Equity investments, inflows						7,007						50
Proceeds from sales of premises and equipment						2,272						641
Purchases of premises and equipment						(19,733)						(5,991)
Net cash (paid for) received in acquisition						(9,484)						194,606
Proceeds from sale of other real estate						2,404						466
Other investing outflows						(210)						—
Other investing inflows						767						4,836
Net cash used in investing activities						(1,556,847)						(1,426,369)
Financing activities:
Net increase in deposits						1,634,947						1,904,549
Repayment of long-term debt						(80,632)						—
Proceeds from FHLB advances						10,000						5,000
Repayment of FHLB advances						(10,000)						(134,121)
Proceeds from issuance of senior debentures, net of issuance costs						—						98,552
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans						406						1,078
Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock units						(2,041)						(2,640)
Proceeds from issuance of Series I preferred stock, net of issuance costs						—						96,422
Repurchase of common stock						(15,101)						(20,782)
Cash dividends on common stock						(49,313)						(43,067)
Cash dividends on preferred stock						(5,157)						(1,814)
Net cash provided by financing activities						1,483,109						1,903,177
Net change in cash and cash equivalents						209,174						530,433
Cash and cash equivalents, beginning of period						1,608,619						515,206
Cash and cash equivalents, end of period						$	1,817,793					$	1,045,639

See accompanying notes to consolidated financial statements (unaudited). 

9

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – 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 2020 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 2020 10-K.

Effective July 1, 2021, the Bank moved its headquarters from Blairsville, Georgia to Greenville, South Carolina and became a South Carolina state-chartered bank subject to examination and reporting requirements of the South Carolina Board of Financial Institutions. Prior to that date, the Bank was a Georgia state-chartered bank subject to examination and reporting requirements of the Georgia Department of Banking and Finance. Also effective July 1, 2021, the Holding Company elected to become a financial holding company, which allows for engagement in a broader range of financial activities.

Note 2 –Accounting Standards Updates and Recently Adopted Standards

Recently Adopted Standards

In August 2021, the FASB issued ASU No. 2021-06, Presentation of Financial Statements (Topic 205), Financial Services - Depository and Lending (Topic 942) and Financial Services - Investment Companies (Topic 946): August 2021 Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. Among other things, this update eliminates redundancies for items covered elsewhere in GAAP, such as loan category presentation. United adopted this update immediately, with no material impact on the consolidated financial statements.

In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements. In addition to consolidating existing disclosure guidance into a single codification section to reduce the likelihood of a required disclosure being missed, this update clarifies the application of select guidance in cases where the original guidance may have been unclear. United adopted this update as of January 1, 2021, with no material impact on the consolidated financial statements.

In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs. This update clarifies that an entity should reevaluate whether a callable debt security meets the criteria to adjust the amortization period of any related premium at each reporting period. United adopted this update as of January 1, 2021, with no material impact on the consolidated financial statements.

In January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force). This update clarifies whether an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative and how to account for certain forward contracts and purchased options to purchase securities. United adopted this update as of January 1, 2021, with no material impact on the consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This update removes several exceptions related to intraperiod tax allocation when there is a loss from continuing operations and income from other items, foreign subsidiaries becoming equity method investments and vice versa, and calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The guidance also amends requirements related to franchise tax that is partially based on income, a step up in the tax basis of goodwill, allocation of consolidated tax expense to a legal entity not subject to tax in its separate financial statements, the effects of enacted changes in tax laws and other minor codification improvements regarding employee stock ownership plans and investments in qualified affordable housing projects. United adopted this update as of January 1, 2021, with no material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The update removes disclosures

10

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

that are no longer considered cost beneficial, clarifies specific requirements of disclosures, and adds disclosure requirements identified as relevant. United adopted this update as of January 1, 2021, with no material impact on the consolidated financial statements.

Recently Issued Standards

In July 2021, the FASB issued ASU No. 2021-05, Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments. The update amends the lease classification requirements for lessors to align them with practice under the former lease accounting standard. Specifically, lessors should classify a lease with variable lease payments that do not depend on a reference index or rate as an operating lease if certain criteria are met. Adoption of this update, which is effective for United as of January 1, 2022, is not expected to have a material impact on the consolidated financial statements.

Note 3 – Supplemental Cash Flow Information

The supplemental schedule of noncash investing and financing activities for the nine months ended September 30, 2021 and 2020 is as follows (in thousands).

						Nine Months Ended September 30,
						2021						2020
Significant non-cash investing and financing transactions:
Unsettled government guaranteed loan sales						$	—					$	328
Transfers of loans to foreclosed properties						1,712						586
Unsettled securities purchases						3,977						30,045
Acquisitions:
Assets acquired						22,823						2,174,723
Liabilities assumed						1,103						1,987,026
Net assets acquired						21,720						187,697
Common stock issued in acquisition						4,401						163,589
Accrued purchase price and contingent consideration						7,700						—

Note 4 – Acquisitions

Acquisition of FinTrust

On July 6, 2021, United completed the acquisition of FinTrust Capital Partners, LLC, and its operating subsidiaries, FinTrust Capital Advisors, LLC, FinTrust Capital Benefits Group, LLC and FinTrust Brokerage Services, LLC, collectively referred to as “FinTrust”, an investment advisory firm headquartered in Greenville, South Carolina, with additional locations in Anderson, South Carolina, and Athens and Macon, Georgia. The firm provides wealth and investment management services to individuals and institutions within its markets. As of September 30, 2021, FinTrust had assets under management of $2.10 billion across its advisory, retirement planning and brokerage businesses.

FinTrust shareholders received $21.7 million in total consideration, which consisted of $4.40 million (132,299 shares) of United common stock, $9.62 million cash paid at closing, a $4.40 million payable due on the first anniversary of the acquisition date and $3.30 million of contingent consideration. The contingent consideration represents an earn-out payment due to the sellers of FinTrust on the second anniversary of the acquisition date. The earn-out payment is subject to the achievement of defined target revenue ratios during the two-year period following the acquisition date, which are expected to be fully achieved.

The acquisition was accounted for as a business combination. Accordingly, the assets acquired and liabilities assumed are presented at their fair values as of the acquisition date. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. 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.

At acquisition, United recognized $22.8 million of assets and $1.10 million of liabilities. Assets acquired included goodwill of $14.2 million and a customer relationship intangible of $7.53 million. Goodwill reflects the value of FinTrust’s broad array of products and services, which enhances United’s existing wealth management business. Goodwill is expected to be deductible for tax purposes. United is amortizing the related customer relationship intangible using the straight-line method over 15 years, which represents the expected useful life of the asset. See Note 8 of this Report for additional disclosures related to goodwill and intangible assets. In addition, United recognized right-of-use assets and operating lease liabilities totaling $822,000 for FinTrust’s leased locations.

11

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Pro forma information

 

The following table discloses the impact of the acquisitions of FinTrust and Three Shores, which United acquired on July 1, 2020, since the respective acquisition dates through September 30 in the respective year of acquisition. The table also presents certain pro forma information as if FinTrust and Three Shores had been acquired on January 1, 2020 and January 1, 2019, respectively. 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 acquisitions taken place in earlier years.

 

Merger-related costs from the FinTrust acquisition of $262,000 and $515,000, respectively, have been excluded from the three and nine months ended September 30, 2021 pro forma information presented below and included in the three and nine months ended September 30, 2020 pro forma information presented below. Merger-related costs from the Three Shores acquisition of $3.36 million and $3.86 million, respectively, have been excluded from the three and nine months ended September 30, 2020 pro forma information presented below. The actual results and pro forma information were as follows (in thousands):

						Three Months Ended September 30,												Nine Months Ended September 30,
						Revenue						Net Income (Loss)						Revenue						Net Income (Loss)
2021
Actual FinTrust results included in statement of income since acquisition date						$	2,017					$	(49)					$	2,017					$	(49)
Supplemental consolidated pro forma as if FinTrust had been acquired January 1, 2020						192,168						74,011						572,903						217,827
2020
Actual Three Shores results included in statement of income since acquisition date						$	7,486					$	(129)					$	7,486					$	(129)
Supplemental consolidated pro forma as if FinTrust had been acquired January 1, 2020 and Three Shores had been acquired January 1, 2019						153,991						47,396						424,186						110,879

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 September 30, 2021
U.S. Treasuries			$	19,796					$	174					$	—					$	19,970
U.S. Government agencies & GSEs			70,191						265						833						69,623
State and political subdivisions			259,842						4,274						4,646						259,470
Residential MBS, Agency & GSEs			304,558						3,267						2,873						304,952
Commercial MBS, Agency & GSEs			413,937						3,518						6,565						410,890
Supranational entities			15,000						20						—						15,020
Total			$	1,083,324					$	11,518					$	14,917					$	1,079,925
As of December 31, 2020
U.S. Government agencies & GSEs			$	10,575					$	26					$	11					$	10,590
State and political subdivisions			197,723						7,658						242						205,139
Residential MBS, Agency & GSEs			113,400						4,774						1						118,173
Commercial MBS, Agency & GSEs			98,663						4,874						246						103,291
Total			$	420,361					$	17,332					$	500					$	437,193

12

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 September 30, 2021
U.S. Treasuries			$	237,824					$	2,572					$	1,191					$	239,205
U.S. Government agencies & GSEs			152,675						764						2,721						150,718
State and political subdivisions			264,371						15,638						1,755						278,254
Residential MBS, Agency & GSEs			1,954,880						17,777						17,953						1,954,704
Residential MBS, Non-agency			99,637						3,445						—						103,082
Commercial MBS, Agency & GSEs			706,146						4,411						11,772						698,785
Commercial MBS, Non-agency			15,211						1,502						—						16,713
Corporate bonds			145,161						1,166						355						145,972
Asset-backed securities			661,844						2,689						530						664,003
Total			$	4,237,749					$	49,964					$	36,277					$	4,251,436
As of December 31, 2020
U.S. Treasuries			$	123,677					$	4,395					$	—					$	128,072
U.S. Government agencies & GSEs			152,596						701						325						152,972
State and political subdivisions			253,630						20,891						49						274,472
Residential MBS, Agency & GSEs			1,275,551						29,107						766						1,303,892
Residential MBS, Non-agency			174,322						7,499						128						181,693
Commercial MBS, Agency & GSEs			524,852						8,013						597						532,268
Commercial MBS, Non-agency			15,350						1,513						—						16,863
Corporate bonds			70,057						1,711						1						71,767
Asset-backed securities			562,076						1,278						632						562,722
Total			$	3,152,111					$	75,108					$	2,498					$	3,224,721

 

Securities with a carrying value of $1.22 billion and $1.11 billion were pledged, primarily to secure public deposits, at September 30, 2021 and December 31, 2020, 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 September 30, 2021
U.S. Government agencies & GSEs			$	30,983					$	595					$	4,409					$	238					$	35,392					$	833
State and political subdivisions			162,901						4,088						8,937						558						171,838						4,646
Residential MBS, Agency & GSEs			211,328						2,872						118						1						211,446						2,873
Commercial MBS, Agency & GSEs			297,991						6,104						14,302						461						312,293						6,565
Total unrealized loss position			$	703,203					$	13,659					$	27,766					$	1,258					$	730,969					$	14,917
As of December 31, 2020
U.S. Government agencies & GSEs			$	4,677					$	11					$	—					$	—					$	4,677					$	11
State and political subdivisions			14,870						242						—						—						14,870						242
Residential MBS, Agency & GSEs			999						1						—						—						999						1
Commercial MBS, Agency & GSEs			24,956						236						1,352						10						26,308						246
Total unrealized loss position			$	45,502					$	490					$	1,352					$	10					$	46,854					$	500

 

13

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 September 30, 2021
U.S. Treasuries			$	97,602					$	1,191					$	—					$	—					$	97,602					$	1,191
U.S. Government agencies & GSEs			83,931						2,125						15,335						596						99,266						2,721
State and political subdivisions			66,052						1,707						3,189						48						69,241						1,755
Residential MBS, Agency & GSEs			1,178,295						16,930						40,452						1,023						1,218,747						17,953
Commercial MBS, Agency & GSEs			453,563						10,645						32,113						1,127						485,676						11,772
Corporate bonds			65,278						350						330						5						65,608						355
Asset-backed securities			191,637						529						682						1						192,319						530
Total unrealized loss position			$	2,136,358					$	33,477					$	92,101					$	2,800					$	2,228,459					$	36,277
As of December 31, 2020
U.S. Government agencies & GSEs			$	27,952					$	324					$	607					$	1					$	28,559					$	325
State and political subdivisions			9,402						49						—						—						9,402						49
Residential MBS, Agency & GSEs			232,199						766						—						—						232,199						766
Residential MBS, Non-agency			2,331						128						—						—						2,331						128
Commercial MBS, Agency & GSEs			89,918						597						—						—						89,918						597
Corporate bonds			1,410						1						—						—						1,410						1
Asset-backed securities			87,305						28						53,587						604						140,892						632
Total unrealized loss position			$	450,517					$	1,893					$	54,194					$	605					$	504,711					$	2,498

 

At September 30, 2021, there were 283 AFS debt securities and 88 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 September 30, 2021 were primarily attributable to changes in interest rates.

At September 30, 2021 and December 31, 2020, calculated credit losses and, thus, the related ACL on HTM debt securities were de minimis due to the high credit quality of the portfolio, which included securities issued or guaranteed by U.S. Government agencies, GSEs, high credit quality municipalities and supranational entities. As a result, no ACL was recorded on the HTM portfolio at September 30, 2021 or December 31, 2020. In addition, based on the assessments performed at September 30, 2021 and December 31, 2020, 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
						September 30, 2021						December 31, 2020
			HTM			$	3,259					$	1,784
			AFS			9,498						9,114

14

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The amortized cost and fair value of AFS and HTM debt securities at September 30, 2021, 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			$	44,958					$	45,154					$	—					$	—
U.S. Government agencies & GSEs			87						87						—						—
State and political subdivisions			—						—						1,700						1,713
Corporate bonds			2,656						2,662						—						—
			47,701						47,903						1,700						1,713
1 to 5 years:
U.S. Treasuries			103,959						106,054						—						—
U.S. Government agencies & GSEs			11,517						11,548						—						—
State and political subdivisions			45,305						47,437						13,765						14,884
Corporate bonds			72,687						73,161						—						—
			233,468						238,200						13,765						14,884
5 to 10 years:
U.S. Treasuries			88,907						87,997						19,796						19,970
U.S. Government agencies & GSEs			80,370						78,591						28,910						29,113
State and political subdivisions			117,318						121,642						38,277						38,946
Corporate bonds			68,536						68,752						—						—
Supranational entities			—						—						15,000						15,020
			355,131						356,982						101,983						103,049
More than 10 years:
U.S. Government agencies & GSEs			60,701						60,492						41,281						40,510
State and political subdivisions			101,748						109,175						206,100						203,927
Corporate bonds			1,282						1,397						—						—
			163,731						171,064						247,381						244,437
Debt securities not due at a single maturity date:
Asset-backed securities			661,844						664,003						—						—
Residential MBS			2,054,517						2,057,786						304,558						304,952
Commercial MBS			721,357						715,498						413,937						410,890
Total			$	4,237,749					$	4,251,436					$	1,083,324					$	1,079,925

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 and nine months ended September 30, 2021 and 2020 (in thousands).

						Three Months Ended September 30,												Nine Months Ended September 30,
						2021						2020						2021						2020
			Proceeds from sales			$	24,901					$	39,365					$	103,012					$	40,365
			Gross realized gains			$	—					$	746					$	641					$	746
			Gross realized losses			—						—						(600)						—
			Securities gains, net			$	—					$	746					$	41					$	746
			Income tax expense attributable to sales			$	—					$	191					$	14					$	191

15

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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).

						September 30, 2021						December 31, 2020
			Owner occupied commercial real estate			$	2,148,946					$	2,090,443
			Income producing commercial real estate			2,542,106						2,540,750
			Commercial & industrial (1)			1,879,466						2,498,560
			Commercial construction			947,023						967,305
			Equipment financing			1,016,903						863,830
			Total commercial			8,534,444						8,960,888
			Residential mortgage			1,532,625						1,284,920
			HELOC			661,352						697,117
			Residential construction			320,880						281,430
			Consumer			141,736						146,460
			Total loans			11,191,037						11,370,815
			Less allowance for credit losses - loans			(99,620)						(137,010)
			Loans, net			$	11,091,417					$	11,233,805

(1) Commercial and industrial loans as of September 30, 2021 and December 31, 2020 included $150 million and $646 million of PPP loans, respectively.

Accrued interest receivable related to loans totaled $27.7 million and $35.5 million at September 30, 2021 and December 31, 2020, respectively, and was reported in accrued interest receivable on the consolidated balance sheets. Accrued interest receivable was excluded from the estimate of credit losses.

At September 30, 2021 and December 31, 2020, 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 loans held for investment that were sold in the periods indicated (in thousands). The gains and losses on these loan sales were included in noninterest income on the consolidated statements of income.

						Three Months Ended September 30,												Nine Months Ended September 30,
						2021						2020						2021						2020
			Guaranteed portion of SBA/USDA loans			$	13,484					$	13,464					$	57,132					$	31,533
			Equipment financing receivables			19,273						950						39,240						24,871
			Total			$	32,757					$	14,414					$	96,372					$	56,404

  

At September 30, 2021 and December 31, 2020, equipment financing assets included leases of $38.5 million and $36.8 million, respectively. The components of the net investment in leases, which included both sales-type and direct financing, are presented below (in thousands).

						September 30, 2021						December 31, 2020
			Minimum future lease payments receivable			$	40,670					$	38,934
			Estimated residual value of leased equipment			3,319						3,263
			Initial direct costs			675						672
			Security deposits			(735)						(727)
			Purchase accounting premium			51						117
			Unearned income			(5,506)						(5,457)
			Net investment in leases			$	38,474					$	36,802

16

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Minimum future lease payments expected to be received from equipment financing lease contracts as of September 30, 2021 were as follows (in thousands): 

			Year
			Remainder of 2021			$	4,192
			2022			15,123
			2023			10,863
			2024			6,237
			2025			3,420
			Thereafter			835
			Total			$	40,670

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. Loans with active COVID-19 deferrals are not reported as past due to the extent they are in compliance with the deferral terms.

						Accruing
						Current Loans						Loans Past Due
												30 - 59 Days						60 - 89 Days						> 90 Days																		Nonaccrual Loans						Total Loans
As of September 30, 2021
Owner occupied commercial real estate						$	2,143,540					$	461					$	—					$	—																	$	4,945					$	2,148,946
Income producing commercial real estate						2,528,145						210						289						—																		13,462						2,542,106
Commercial & industrial						1,870,088						828						43						—																		8,507						1,879,466
Commercial construction						945,509						278						34						—																		1,202						947,023
Equipment financing						1,013,468						1,227						363						—																		1,845						1,016,903
Total commercial						8,500,750						3,004						729						—																		29,961						8,534,444
Residential mortgage						1,517,708						1,237						458						—																		13,222						1,532,625
HELOC						658,629						1,132						227						—																		1,364						661,352
Residential construction						320,190						430						—						—																		260						320,880
Consumer						141,248						331						41						—																		116						141,736
Total loans						$	11,138,525					$	6,134					$	1,455					$	—																	$	44,923					$	11,191,037
As of December 31, 2020
Owner occupied commercial real estate						$	2,079,845					$	2,013					$	3					$	—																	$	8,582					$	2,090,443
Income producing commercial real estate						2,522,743						1,608						1,250						—																		15,149						2,540,750
Commercial & industrial						2,480,483						1,176						267						—																		16,634						2,498,560
Commercial construction						964,947						231						382						—																		1,745						967,305
Equipment financing						856,985						2,431						1,009						—																		3,405						863,830
Total commercial						8,905,003						7,459						2,911						—																		45,515						8,960,888
Residential mortgage						1,265,019						5,549						1,494						—																		12,858						1,284,920
HELOC						692,504						1,942						184						—																		2,487						697,117
Residential construction						280,551						365						—						—																		514						281,430
Consumer						145,770						429						36						—																		225						146,460
Total loans						$	11,288,847					$	15,744					$	4,625					$	—																	$	61,599					$	11,370,815

17

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

									Nonaccrual Loans
									September 30, 2021																		December 31, 2020
									With no allowance						With an allowance						Total						With no allowance						With an allowance						Total
			Owner occupied commercial real estate						$	3,726					$	1,219					$	4,945					$	6,614					$	1,968					$	8,582
			Income producing commercial real estate						12,827						635						13,462						10,008						5,141						15,149
			Commercial & industrial						7,164						1,343						8,507						2,004						14,630						16,634
			Commercial construction						750						452						1,202						1,339						406						1,745
			Equipment financing						—						1,845						1,845						156						3,249						3,405
			Total commercial						24,467						5,494						29,961						20,121						25,394						45,515
			Residential mortgage						3,191						10,031						13,222						1,855						11,003						12,858
			HELOC						116						1,248						1,364						1,329						1,158						2,487
			Residential construction						—						260						260						274						240						514
			Consumer						1						115						116						181						44						225
			Total						$	27,775					$	17,148					$	44,923					$	23,760					$	37,839					$	61,599

The majority of nonaccrual loans with no related allowance consists of collateral dependent loans that have been individually evaluated by management with the determination that the repayment of the loan is expected to be provided substantially through the operation or sale of the underlying collateral.

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 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.

18

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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 by vintage year, which is the year of origination or most recent renewal, as of the date indicated (in thousands).

						Term Loans																																				Revolvers						Revolvers converted to term loans						Total
As of September 30, 2021						2021						2020						2019						2018						2017						Prior
Pass
Owner occupied commercial real estate						$	457,049					$	687,751					$	279,335					$	155,588					$	141,134					$	281,579					$	50,826					$	10,292					$	2,063,554
Income producing commercial real estate						495,915						727,229						338,421						247,281						203,169						253,392						37,558						11,979						2,314,944
Commercial & industrial						539,998						316,964						181,794						145,429						56,218						87,910						489,216						3,679						1,821,208
Commercial construction						265,356						296,474						156,794						69,948						25,638						11,421						13,078						2,044						840,753
Equipment financing						420,826						301,214						195,840						76,074						18,892						1,788						—						—						1,014,634
Total commercial						2,179,144						2,329,632						1,152,184						694,320						445,051						636,090						590,678						27,994						8,055,093
Residential mortgage						606,382						388,637						119,664						77,039						79,357						239,943						12						4,422						1,515,456
HELOC						—						—						—						—						—						—						643,483						15,364						658,847
Residential construction						213,830						85,662						4,102						2,415						3,240						10,937						131						48						320,365
Consumer						49,880						31,768						13,707						6,646						1,933						2,028						35,377						134						141,473
						3,049,236						2,835,699						1,289,657						780,420						529,581						888,998						1,269,681						47,962						10,691,234
Special Mention
Owner occupied commercial real estate						8,618						2,530						14,528						881						6,054						3,606						249						286						36,752
Income producing commercial real estate						17,914						9,929						22,778						39,140						28,466						16,042						—						—						134,269
Commercial & industrial						14,785						1,398						3,092						220						1,032						487						5,867						691						27,572
Commercial construction						14,297						16,505						13,148						29,898						5,206						61						—						—						79,115
Equipment financing						—						—						—						—						—						—						—						—						—
Total commercial						55,614						30,362						53,546						70,139						40,758						20,196						6,116						977						277,708
Residential mortgage						—						—						—						—						—						—						—						—						—
HELOC						—						—						—						—						—						—						—						—						—
Residential construction						—						—						—						—						—						—						—						—						—
Consumer						—						—						—						—						—						—						—						—						—
						55,614						30,362						53,546						70,139						40,758						20,196						6,116						977						277,708
Substandard
Owner occupied commercial real estate						10,581						1,093						10,629						7,023						6,324						11,461						1,250						279						48,640
Income producing commercial real estate						15,684						33,518						2,608						17,559						6,783						16,656						—						85						92,893
Commercial & industrial						1,310						1,628						3,924						6,819						1,799						6,259						8,187						760						30,686
Commercial construction						1,047						178						700						12,437						9,794						1,995						—						1,004						27,155
Equipment financing						52						786						920						352						127						32						—						—						2,269
Total commercial						28,674						37,203						18,781						44,190						24,827						36,403						9,437						2,128						201,643
Residential mortgage						1,275						1,927						2,856						3,427						1,305						5,601						—						778						17,169
HELOC						—						—						—						—						—						—						276						2,229						2,505
Residential construction						—						66						30						52						2						365						—						—						515
Consumer						—						12						64						34						31						100						—						22						263
						29,949						39,208						21,731						47,703						26,165						42,469						9,713						5,157						222,095
Total						$	3,134,799					$	2,905,269					$	1,364,934					$	898,262					$	596,504					$	951,663					$	1,285,510					$	54,096					$	11,191,037

19

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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, 2020						2020						2019						2018						2017						2016						Prior
Pass
Owner occupied commercial real estate						$	707,501					$	368,615					$	231,316					$	197,778					$	201,362					$	229,667					$	56,273					$	9,072					$	2,001,584
Income producing commercial real estate						815,799						376,911						361,539						277,769						206,068						198,080						28,542						12,128						2,276,836
Commercial & industrial						1,092,767						287,857						263,439						115,790						92,968						58,359						515,593						3,777						2,430,550
Commercial construction						314,154						217,643						226,308						53,708						30,812						21,985						20,278						3,947						888,835
Equipment financing						413,653						270,664						125,869						39,982						9,404						445						—						—						860,017
Total commercial						3,343,874						1,521,690						1,208,471						685,027						540,614						508,536						620,686						28,924						8,457,822
Residential mortgage						468,945						195,213						125,492						120,944						122,013						230,771						18						5,393						1,268,789
HELOC						—						—						—						—						—						—						675,878						17,581						693,459
Residential construction						225,727						30,646						4,026						4,544						3,172						12,546						—						64						280,725
Consumer						54,997						25,528						14,206						4,531						3,595						1,677						41,445						76						146,055
						4,093,543						1,773,077						1,352,195						815,046						669,394						753,530						1,338,027						52,038						10,846,850
Special Mention
Owner occupied commercial real estate						8,759						4,088						4,221						10,025						11,138						4,728						100						—						43,059
Income producing commercial real estate						35,471						42,831						39,954						13,238						24,164						11,337						—						1,681						168,676
Commercial & industrial						1,451						16,315						2,176						630						459						17						6,464						—						27,512
Commercial construction						21,366						272						816						23,292						11,775						477						—						—						57,998
Equipment financing						—						—						—						—						—						—						—						—						—
Total commercial						67,047						63,506						47,167						47,185						47,536						16,559						6,564						1,681						297,245
Residential mortgage						—						—						—						—						—						—						—						—						—
HELOC						—						—						—						—						—						—						—						—						—
Residential construction						—						—						—						—						—						—						—						—						—
Consumer						—						—						—						—						—						—						—						—						—
						67,047						63,506						47,167						47,185						47,536						16,559						6,564						1,681						297,245
Substandard
Owner occupied commercial real estate						6,586						10,473						7,596						3,717						6,753						8,473						1,528						674						45,800
Income producing commercial real estate						45,125						8,940						2,179						5,034						31,211						2,652						—						97						95,238
Commercial & industrial						1,545						5,536						6,193						1,684						1,292						1,485						22,170						593						40,498
Commercial construction						2,466						735						13,741						340						1,931						250						—						1,009						20,472
Equipment financing						631						1,392						1,371						306						96						17						—						—						3,813
Total commercial						56,353						27,076						31,080						11,081						41,283						12,877						23,698						2,373						205,821
Residential mortgage						2,049						2,106						3,174						1,369						679						5,860						—						894						16,131
HELOC						—						—						—						—						—						—						265						3,393						3,658
Residential construction						106						37						54						4						124						380						—						—						705
Consumer						—						97						49						60						78						98						—						23						405
						58,508						29,316						34,357						12,514						42,164						19,215						23,963						6,683						226,720
Total						$	4,219,098					$	1,865,899					$	1,433,719					$	874,745					$	759,094					$	789,304					$	1,368,554					$	60,402					$	11,370,815

Troubled Debt Restructurings and Other Modifications

As of September 30, 2021 and December 31, 2020, United had TDRs totaling $53.0 million and $61.6 million, respectively. As of September 30, 2021 and December 31, 2020, United had remaining deferrals related to the COVID-19 pandemic of approximately $8.87 million and $70.7 million, respectively, which generally represented payment deferrals for up to 90 days. To the extent that these deferrals qualified under either the CARES Act or interagency guidance, they were not considered new TDRs.

20

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Loans modified under the terms of a TDR during the three and nine months ended September 30, 2021 and 2020 are presented in the following table. In addition, the table presents loans modified under the terms of a TDR that defaulted (became 90 days or more delinquent or otherwise in default of modified terms) during the periods presented and were initially restructured within one year prior to default (dollars in thousands).

						New TDRs
																		Post-Modification Amortized Cost by Type of Modification																								TDRs Modified Within the Previous Twelve Months That Have Subsequently Defaulted
						Number of  Contracts									Rate   Reduction						Structure						Other						Total						Number of   Contracts						Amortized Cost
Three Months Ended September 30, 2021
Owner occupied commercial real estate						—												$	—					$	—					$	—					$	—					—						$	—
Income producing commercial real estate						—												—						—						—						—						—						—
Commercial & industrial						3												—						166						—						166						—						—
Commercial construction						—												—						—						—						—						—						—
Equipment financing						11												—						399						—						399						3						96
Total commercial						14												—						565						—						565						3						96
Residential mortgage						6												—						649						—						649						1						180
HELOC						—												—						—						—						—						1						43
Residential construction						—												—						—						—						—						—						—
Consumer						—												—						—						—						—						—						—
Total loans						20												$	—					$	1,214					$	—					$	1,214					5						$	319
Nine Months Ended September 30, 2021
Owner occupied commercial real estate						1												$	—					$	543					$	—					$	543					—						$	—
Income producing commercial real estate						3												—						—						1,697						1,697						—						—
Commercial & industrial						7												—						531						103						634						1						11
Commercial construction						1												—						309						—						309						—						—
Equipment financing						47												—						2,861						—						2,861						11						296
Total commercial						59												—						4,244						1,800						6,044						12						307
Residential mortgage						12												—						1,040						—						1,040						4						593
HELOC						—												—						—						—						—						2						92
Residential construction						—												—						—						—						—						—						—
Consumer						—												—						—						—						—						—						—
Total loans						71												$	—					$	5,284					$	1,800					$	7,084					18						$	992
Three Months Ended September 30, 2020
Owner occupied commercial real estate						4												$	—					$	375					$	—					$	375					—						$	—
Income producing commercial real estate						2												—						—						1,617						1,617						—						—
Commercial & industrial						2												—						193						—						193						—						—
Commercial construction						6												—						577						70						647						—						—
Equipment financing						7												—						247						—						247						9						290
Total commercial						21												—						1,392						1,687						3,079						9						290
Residential mortgage						25												—						3,200						—						3,200						—						—
HELOC						4												—						164						—						164						—						—
Residential construction						3												—						123						—						123						—						—
Consumer						3												—						11						—						11						—						—
Total loans						56												$	—					$	4,890					$	1,687					$	6,577					9						$	290
Nine Months Ended September 30, 2020
Owner occupied commercial real estate						7												$	—					$	375					$	1,536					$	1,911					—						$	—
Income producing commercial real estate						5												—						67						1,782						1,849						1						5,998
Commercial & industrial						3												—						193						15						208						2						633
Commercial construction						7												—						832						70						902						—						—
Equipment financing						143												—						4,152						—						4,152						15						600
Total commercial						165												—						5,619						3,403						9,022						18						7,231
Residential mortgage						36												—						4,122						—						4,122						—						—
HELOC						4												—						164						—						164						—						—
Residential construction						3												—						123						—						123						—						—
Consumer						6												—						11						18						29						1						3
Total loans						214												$	—					$	10,039					$	3,421					$	13,460					19						$	7,234

21

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 September 30, 2021 and December 31, 2020, United used a one-year reasonable and supportable forecast period. Expected credit losses were estimated using a regression model for each segment based on historical data from peer banks combined with a third party vendor’s economic forecast to predict the change in credit losses. These results were then combined with a starting value that was based on United’s recent default experience, which was adjusted for select portfolios based on expectations of future performance. At September 30, 2021, the third party vendor’s forecast, which was representative of a baseline scenario, improved significantly from December 31, 2020, including the unemployment rate which has a significant impact on our models and led to the negative provision for loan losses in the third quarter and year-to-date. Since the COVID-19 pandemic began, United has adjusted the economic forecast by eliminating the initial spike in unemployment to account for the impact of government stimulus programs, which mitigated some of the negative impact on forecasted losses as the unemployment rate was rising and had the opposite effect as the unemployment rate was improving. In addition, at September 30, 2021, United applied qualitative factors to income producing commercial real estate, owner occupied commercial real estate, equipment finance and commercial construction portfolios to reflect elevated special mention and substandard loan levels.

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 all collateral types excluding residential mortgage, United reverted to through-the-cycle average default rates using peer data from 2000 to 2017. For loans secured by residential mortgages, the peer data was adjusted for changes in lending practices designed to prevent the magnitude of losses observed during the mortgage crisis.

PPP loans were considered low risk assets due to the related 100% guarantee by the SBA and were therefore excluded from the calculation.

22

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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 September 30,
						2021																																										2020
						Beginning Balance												Charge-Offs						Recoveries						(Release) Provision						Ending Balance																		Beginning Balance						Initial ACL - PCD loans (1)						Charge-Offs						Recoveries						(Release) Provision						Ending Balance
Owner occupied commercial real estate						$	17,292											$	(443)					$	536					$	(3,241)					$	14,144																	$	14,592					$	1,779					$	—					$	725					$	2,278					$	19,374
Income producing commercial real estate						30,967												(120)						75						(7,531)						23,391																		21,699						1,208						(3,033)						1,248						13,916						35,038
Commercial & industrial						16,414												(320)						411						(262)						16,243																		8,589						7,680						(303)						408						5,150						21,524
Commercial construction						9,180												—						123						(1,131)						8,172																		14,514						74						(487)						658						92						14,851
Equipment financing						18,100												(1,165)						653						(288)						17,300																		20,305						—						(2,418)						425						(3,136)						15,176
Residential mortgage						10,965												(127)						76						559						11,473																		12,826						195						(13)						48						4,506						17,562
HELOC						6,357												(65)						167						(40)						6,419																		8,687						209						(44)						169						(300)						8,721
Residential construction						1,918												—						37						(19)						1,936																		1,997						—						(26)						26						(229)						1,768
Consumer						423												(611)						222						508						542																		460						7						(432)						511						(304)						242
ACL - loans						111,616												(2,851)						2,300						(11,445)						99,620																		103,669						11,152						(6,756)						4,218						21,973						134,256
ACL - unfunded commitments						10,844												—						—						411						11,255																		12,100						—						—						—						(180)						11,920
Total ACL						$	122,460											$	(2,851)					$	2,300					$	(11,034)					$	110,875																	$	115,769					$	11,152					$	(6,756)					$	4,218					$	21,793					$	146,176

						Nine Months Ended September 30,
						2021																														2020
						Beginning Balance												Charge-Offs						Recoveries						(Release) Provision						Ending Balance						Dec. 31, 2019 Balance						Adoption of CECL						Beginning Balance						Initial ACL - PCD loans (1)						Charge- Offs						Recoveries						(Release) Provision						Ending Balance
Owner occupied commercial real estate						$	20,673											$	(1,503)					$	932					$	(5,958)					$	14,144					$	11,404					$	(1,616)					$	9,788					$	1,779					$	(6)					$	2,225					$	5,588					$	19,374
Income producing commercial real estate						41,737												(174)						304						(18,476)						23,391						12,306						(30)						12,276						1,208						(8,033)						1,430						28,157						35,038
Commercial & industrial						22,019												(4,017)						6,855						(8,614)						16,243						5,266						4,012						9,278						7,680						(8,118)						1,075						11,609						21,524
Commercial construction						10,952												(224)						618						(3,174)						8,172						9,668						(2,583)						7,085						74						(726)						916						7,502						14,851
Equipment financing						16,820												(4,411)						2,087						2,804						17,300						7,384						5,871						13,255						—						(6,366)						1,201						7,086						15,176
Residential mortgage						15,341												(342)						393						(3,919)						11,473						8,081						1,569						9,650						195						(347)						379						7,685						17,562
HELOC						8,417												(99)						386						(2,285)						6,419						4,575						1,919						6,494						209						(162)						468						1,712						8,721
Residential construction						764												(10)						140						1,042						1,936						2,504						(1,771)						733						—						(80)						97						1,018						1,768
Consumer						287												(1,435)						710						980						542						901						(491)						410						7						(1,782)						1,028						579						242
ACL - loans						137,010												(12,215)						12,425						(37,600)						99,620						62,089						6,880						68,969						11,152						(25,620)						8,819						70,936						134,256
ACL - unfunded commitments						10,558												—						—						697						11,255						3,458						1,871						5,329						—						—						—						6,591						11,920
Total ACL						$	147,568											$	(12,215)					$	12,425					$	(36,903)					$	110,875					$	65,547					$	8,751					$	74,298					$	11,152					$	(25,620)					$	8,819					$	77,527					$	146,176

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

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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 as of the dates indicated as well as their classification on the consolidated balance sheets (in thousands):

			September 30, 2021																		December 31, 2020
			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					$	5,998					$	—					$	100,000					$	3,378					$	—
Cash flow hedge of trust preferred securities			20,000						—						—						20,000						—						—
Fair value hedge of brokered time deposits			10,000						—						—						20,000						—						—
Total			130,000						5,998						—						140,000						3,378						—
Derivatives not designated as hedging instruments:
Customer derivative positions			1,283,735						38,906						8,614						1,329,271						72,508						17
Dealer offsets to customer derivative positions			1,283,735						582						13,000						1,329,271						1						24,614
Risk participations			69,142						23						5						48,843						28						12
Mortgage banking - loan commitment			163,577						4,727						—						253,243						10,751						—
Mortgage banking - forward sales commitment			185,616						793						2						325,145						—						1,964
Bifurcated embedded derivatives			51,935						2,267						—						51,935						—						1,449
Dealer offsets to bifurcated embedded derivatives			51,935						—						4,444						51,935						—						947
Total			3,089,675						47,298						26,065						3,389,643						83,288						29,003
Total derivatives			$	3,219,675					$	53,296					$	26,065					$	3,529,643					$	86,666					$	29,003
Total gross derivative instruments									$	53,296					$	26,065											$	86,666					$	29,003
Less: Amounts subject to master netting agreements									(409)						(409)												(114)						(114)
Less: Cash collateral received/pledged									(6,976)						(17,615)												(3,200)						(27,092)
Net amount									$	45,911					$	8,041											$	83,352					$	1,797

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 September 30, 2021 and December 31, 2020, 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 $584,000 of losses 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.

24

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

At September 30, 2021 and December 31, 2020, United had interest rate swaps that were designated as fair value hedges of fixed-rate brokered time deposits. The swaps involved the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements.

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

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 September 30,												Nine Months Ended September 30,
						2021						2020						2021						2020
Total interest expense presented in the consolidated statements of income						$	(6,636)					$	(13,319)					$	(23,547)					$	(45,561)
Effect of hedging relationships on interest expense:
Net income (expense) recognized on fair value hedges						43						(95)						167						123
Net expense recognized on cash flow hedges (1)						(153)						(130)						(444)						(197)

 (1) Includes premium amortization expense excluded from the assessment of hedge effectiveness of $119,000 and $119,000 for three months ended September 30, 2021 and 2020, respectively, and $353,000 and $211,000 for the nine months ended September 30, 2021 and 2020, respectively.

The table below presents the carrying amount of hedged fixed-rate brokered time deposits and cumulative fair value hedging adjustments included in the carrying amount of the hedged liability for the periods presented (in thousands).

									September 30, 2021												December 31, 2020
			Balance Sheet Location						Carrying amount of Assets (Liabilities)						Hedge Accounting Basis Adjustment						Carrying amount of Assets (Liabilities)						Hedge Accounting Basis Adjustment
			Deposits						$	(10,065)					$	(71)					$	(20,216)					$	(235)

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. 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 September 30,												Nine Months Ended September 30,
												2021						2020						2021						2020
Customer derivatives and dealer offsets						Other noninterest income						$	599					$	2,258					$	2,551					$	4,846
Bifurcated embedded derivatives and dealer offsets						Other noninterest income						—						65						417						(158)
Mortgage banking derivatives						Mortgage loan revenue						(1,407)						(2,554)						(1,065)						(2,454)
												$	(808)					$	(231)					$	1,903					$	2,234

 

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. 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): 

						September 30, 2021						December 31, 2020
			Core deposit intangible			$	36,162					$	36,162
			Less: accumulated amortization			(24,941)						(22,148)
			Net core deposit intangible			11,221						14,014
			Customer relationship intangible			7,950						—
			Less: accumulated amortization			(149)						—
			Net customer relationship intangible			7,801						—
			Total intangibles subject to amortization, net			19,022						14,014
			Goodwill			381,972						367,809
			Total goodwill and other intangible assets, net			$	400,994					$	381,823

In addition to the FinTrust customer relationship intangible discussed in Note 4, during the third quarter of 2021, United purchased the customer list of another financial advisory firm for $420,000. All consideration paid was allocated to a customer relationship intangible.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

																		Goodwill (1)
																		Three Months Ended September 30,																		Nine Months Ended September 30,
			2021
			Balance, beginning of period															$	367,809																	$	367,809
			Acquisition of FinTrust															14,163																		14,163
			Balance, end of period															$	381,972																	$	381,972
			2020
			Balance, beginning of period															$	327,425																	$	327,425
			Acquisition of Three Shores															41,593																		41,593
			Balance, end of period															$	369,018																	$	369,018

(1) Goodwill balances presented are shown net of accumulated impairment losses of $306 million incurred prior to 2020. Gross goodwill for September 30, 2021 and December 31, 2020 totaled $688 million and $673 million, respectively.

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

			Year
			Remainder of 2021			$	990
			2022			3,557
			2023			2,963
			2024			2,418
			2025			1,916
			Thereafter			7,178
			Total			$	19,022

Note 9 – 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.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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.

 

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.

 

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.

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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).

September 30, 2021						Level 1						Level 2						Level 3						Total
Assets:
AFS debt securities:
U.S. Treasuries						$	239,205					$	—					$	—					$	239,205
U.S. Government agencies & GSEs						—						150,718						—						150,718
State and political subdivisions						—						278,254						—						278,254
Residential MBS						—						2,057,786						—						2,057,786
Commercial MBS						—						715,498						—						715,498
Corporate bonds						—						143,600						2,372						145,972
Asset-backed securities						—						664,003						—						664,003
Equity securities with readily available fair values						—						1,283						—						1,283
Mortgage loans held for sale						—						68,424						—						68,424
Deferred compensation plan assets						11,646						—						—						11,646
Servicing rights for SBA/USDA loans						—						—						6,161						6,161
Residential mortgage servicing rights						—						—						23,062						23,062
Derivative financial instruments						—						46,279						7,017						53,296
Total assets						$	250,851					$	4,125,845					$	38,612					$	4,415,308
Liabilities:
Deferred compensation plan liability						$	11,672					$	—					$	—					$	11,672
Derivative financial instruments						—						21,616						4,449						26,065
Total liabilities						$	11,672					$	21,616					$	4,449					$	37,737

December 31, 2020						Level 1						Level 2						Level 3						Total
Assets:
AFS debt securities:
U.S. Treasuries						$	128,072					$	—					$	—					$	128,072
U.S. Government agencies & GSEs						—						152,972						—						152,972
State and political subdivisions						—						274,472						—						274,472
Residential MBS						—						1,485,585						—						1,485,585
Commercial MBS						—						549,131						—						549,131
Corporate bonds						—						70,017						1,750						71,767
Asset-backed securities						—						562,722						—						562,722
Equity securities with readily available fair values						774						913						—						1,687
Mortgage loans held for sale						—						105,433						—						105,433
Deferred compensation plan assets						9,584						—						—						9,584
Servicing rights for SBA/USDA loans						—						—						6,462						6,462
Residential mortgage servicing rights						—						—						16,216						16,216
Derivative financial instruments						—						75,887						10,779						86,666
Total assets						$	138,430					$	3,277,132					$	35,207					$	3,450,769
Liabilities:
Deferred compensation plan liability						$	9,590					$	—					$	—					$	9,590
Derivative financial instruments						—						26,595						2,408						29,003
Total liabilities						$	9,590					$	26,595					$	2,408					$	38,593

 

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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).

			2021																																				2020
			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 September 30,
Beginning balance			$	6,889					$	3,944					$	6,115					$	21,568					$	1,707											$	12,107					$	2,569					$	6,034					$	12,492					$	1,000
Additions			86						—						354						2,813						500												99						—						296						3,055						750
Sales and settlements			—						—						(357)						(875)						—												—						—						(100)						(723)						—
Fair value adjustments included in OCI			—						—						—						—						165												—						—						—						—						—
Fair value adjustments included in earnings			42						505						49						(444)						—												592						(87)						531						(457)						—
Ending balance			$	7,017					$	4,449					$	6,161					$	23,062					$	2,372											$	12,798					$	2,482					$	6,761					$	14,367					$	1,750
Nine Months Ended September 30,
Beginning balance			$	10,779					$	2,408					$	6,462					$	16,216					$	1,750											$	7,238					$	8,559					$	6,794					$	13,565					$	998
Additions			261						97						1,193						9,806						500												106						—						694						8,387						1,750
Transfers into Level 3			—						—						—						—						—												583						—						—						—						—
Sales and settlements			—						—						(1,001)						(3,430)						—												—						—						(441)						(1,898)						(1,000)
Fair value adjustments included in OCI			—						—						—						—						122												—						—						—						—						2
Fair value adjustments included in earnings			(4,023)						1,944						(493)						470						—												4,871						(6,077)						(286)						(5,687)						—
Ending balance			$	7,017					$	4,449					$	6,161					$	23,062					$	2,372											$	12,798					$	2,482					$	6,761					$	14,367					$	1,750

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						September 30, 2021												December 31, 2020
																		Range						Weighted Average						Range						Weighted Average
SBA/USDA loan servicing rights						Discounted cash flow						Discount rate						0.0% - 38.8%						9.3		%				1.6% - 44.1%						8.9		%
												Prepayment rate						3.5 - 39.3						16.8						2.7 - 33.6						17.8
Residential mortgage servicing rights						Discounted cash flow						Discount rate						10.0 - 11.0						10.0						10.0 - 11.0						10.0
												Prepayment rate						9.6 - 18.5						12.9						8.7 - 19.5						17.7
Corporate bonds						Indicative bid provided by a broker						Multiple factors, including but not limited to, current operations, financial condition, cash flows, and similar financing transactions executed in the market																		N/A						N/A
						Discounted cash flow						Discount rate						3.6 - 3.8						3.6
Derivative assets - mortgage						Internal model						Pull through rate						66.7 - 100						87.7						65.6 - 100						83.9
Derivative assets and liabilities - other						Dealer priced						Dealer priced						N/A						N/A						N/A						N/A

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Fair Value Option

United 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. The following tables present the fair value and outstanding principal balance of these loans, as well as the gain or loss recognized resulting from the change in fair value for the periods indicated (in thousands).

			Mortgage Loans Held for Sale
						September 30, 2021						December 31, 2020
			Outstanding principal balance			$	66,068					$	99,746
			Fair value			68,424						105,433

			Gain (Loss) Recognized on Mortgage Loans Held for Sale
			Location			Three Months Ended September 30,												Nine Months Ended September 30,
						2021						2020						2021						2020
			Mortgage loan gains and other related fees			$	(1,609)					$	1,758					$	(3,330)					$	5,029

Changes in fair value were mostly offset by hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of the lower of the amortized cost or fair value accounting or write-downs of individual assets due to impairment. The following table presents the fair value hierarchy and carrying value of assets that were still held as of September 30, 2021 and December 31, 2020, 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
			September 30, 2021
			Loans						$	—					$	—					$	2,817					$	2,817
			December 31, 2020
			Loans						$	—					$	—					$	29,404					$	29,404

Loans that are reported above as being measured at fair value on a nonrecurring basis are generally impaired loans that have either been partially charged off or have specific reserves assigned to them. Nonaccrual 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.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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.

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
September 30, 2021
Assets:
HTM debt securities						$	1,083,324					$	—					$	1,079,925					$	—					$	1,079,925
Loans and leases, net						11,091,417						—						—						11,045,904						11,045,904
Liabilities:
Deposits						16,865,417						—						16,864,366						—						16,864,366
Long-term debt						247,139						—						—						268,747						268,747
December 31, 2020
Assets:
HTM debt securities						$	420,361					$	—					$	437,193					$	—					$	437,193
Loans and leases, net						11,233,805						—						—						11,209,717						11,209,717
Liabilities:
Deposits						15,232,358						—						15,232,274						—						15,232,274
Long-term debt						326,956						—						—						336,763						336,763

 

Note 10 – Common Stock

During the second quarter of 2021, United’s shareholders approved an increase in the number of authorized shares of common stock from 150 million to 200 million shares.

In November of 2020, United’s Board of Directors re-authorized a common stock repurchase program to permit the repurchase of up to $50 million of its common stock. The program is scheduled to expire on the earlier of the repurchase of common stock having an aggregate purchase price of $50 million or December 31, 2021. During the three and nine months ended September 30, 2021, 342,744 and 492,744 shares were repurchased, respectively. No shares were repurchased during the three months ended September 30, 2020. During the nine months ended September 30, 2020, 826,482 shares were repurchased. As of September 30, 2021, United had remaining authorization to repurchase up to $34.9 million of outstanding common stock under the program.

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 restricted stock unit awards provide for accelerated vesting if there is a change in control (as defined in the plan document). As of September 30, 2021, 663,179 additional awards could be granted under the plan.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The table below presents restricted stock unit activity for the nine months ended September 30, 2021.

Restricted Stock Unit Awards						Shares						Weighted- Average Grant- Date Fair Value												Aggregate Intrinsic Value ($000)
Outstanding at December 31, 2020						893,431						$	23.75
Granted						298,481						30.27
Vested						(269,497)						27.78												$	8,653
Cancelled						(53,170)						24.87
Outstanding at September 30, 2021						869,245						24.68												28,529

 

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 the grant date per share fair market 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 nine months ended September 30, 2021 and 2020, expense of $4.42 million and $5.57 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 nine months ended September 30, 2021 and 2020, $397,000 and $367,000, 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 $1.23 million and $1.52 million was included in the determination of income tax expense for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, there was $17.2 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 2.7 years.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 September 30,												Nine Months Ended September 30,												Affected Line Item in the Statement Where Net Income is Presented
									2021						2020						2021						2020
			Realized gains on AFS securities:
									$	—					$	746					$	41					$	746					Securities gains, net
									—						(191)						(14)						(191)						Income tax expense
									$	—					$	555					$	27					$	555					Net of tax
			Amortization of losses included in net income on AFS securities transferred to HTM:
									$	—					$	(544)					$	—					$	(723)					Investment securities interest revenue
									—						130						—						173						Income tax benefit
									$	—					$	(414)					$	—					$	(550)					Net of tax
			Reclassifications related to derivative financial instruments accounted for as cash flow hedges:
			Interest rate contracts						$	(153)					$	(130)					$	(444)					$	(197)					Long-term debt interest expense
									39						33						113						50						Income tax benefit
									$	(114)					$	(97)					$	(331)					$	(147)					Net of tax
			Reclassifications related to defined benefit pension plan activity:
			Prior service cost						$	(117)					$	(133)					$	(351)					$	(398)					Salaries and employee benefits expense
			Actuarial losses						(143)						(82)						(431)						(245)						Other expense
									(260)						(215)						(782)						(643)						Total before tax
									66						55						200						164						Income tax benefit
									$	(194)					$	(160)					$	(582)					$	(479)					Net of tax
			Total reclassifications for the period						$	(308)					$	(116)					$	(886)					$	(621)					Net of tax

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 September 30,															Nine Months Ended September 30,
									2021						2020									2021						2020
						Net income			$	73,816					$	47,607								$	217,782					$	104,587
						Dividends on preferred stock			(1,719)						(1,814)									(5,157)						(1,814)
						Undistributed earnings allocated to participating securities			(448)						(356)									(1,342)						(779)
						Net income available to common shareholders			$	71,649					$	45,437								$	211,283					$	101,994
						Weighted average shares outstanding:
						Basic			87,211						87,129									87,274						81,815
						Effect of dilutive securities:
						Restricted stock units			144						76									139						61
						Diluted			87,355						87,205									87,413						81,876
						Net income per common share:
						Basic			$	0.82					$	0.52								$	2.42					$	1.25
						Diluted			$	0.82					$	0.52								$	2.42					$	1.25

 

At September 30, 2021, United had no potentially dilutive instruments outstanding that were not included in the above analysis.

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 14 – Regulatory Matters

As of September 30, 2021, United and the Bank were categorized as well-capitalized under the regulatory framework for prompt corrective action in effect at such time. To be categorized as well-capitalized at September 30, 2021, United and the Bank must have exceeded the well-capitalized guideline ratios in effect at such time, as set forth in the table below, and have met certain other requirements. Management believes that United and the Bank exceeded all well-capitalized requirements at September 30, 2021, and there have been no conditions or events since quarter-end that would change the status of well-capitalized.

Regulatory capital ratios at September 30, 2021 and December 31, 2020, along with the minimum amounts required for capital adequacy purposes and to be well-capitalized under prompt corrective action provisions in effect at such times are presented below for United and the Bank (dollars in thousands):

																		United Community Banks, Inc. (Consolidated)												United Community Bank
						Minimum (1)						Well- Capitalized						September 30, 2021						December 31, 2020						September 30, 2021						December 31, 2020
Risk-based ratios:
CET1 capital						4.5		%				6.5		%				12.63		%				12.31		%				13.62		%				13.31		%
Tier 1 capital						6.0						8.0						13.38						13.10						13.62						13.31
Total capital						8.0						10.0						14.93						15.15						14.24						14.28
Leverage ratio						4.0						5.0						9.15						9.28						9.31						9.42
CET1 capital																		$	1,632,925					$	1,506,750					$	1,756,494					$	1,625,292
Tier 1 capital																		1,729,347						1,603,172						1,756,494						1,625,292
Total capital																		1,929,850						1,854,368						1,836,997						1,743,045
Risk-weighted assets																		12,929,134						12,240,440						12,897,800						12,207,940
Average total assets for the leverage ratio																		18,897,989						17,276,853						18,863,193						17,246,878

(1) As of September 30, 2021 and December 31, 2020 the additional capital conservation buffer in effect was 2.50%

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).

			September 30, 2021						December 31, 2020
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit			$	3,422,609					$	3,052,657
Letters of credit			28,625						31,748

 

United holds minor investments in certain limited partnerships for Community Reinvestment Act purposes. As of September 30, 2021, United had committed to fund an additional $8.43 million related to future capital calls that are not reflected in the consolidated balance sheet.

 

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.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 16 - Subsequent Events

Acquisition of Aquesta

Subsequent to quarter-end, on October 1, 2021, United completed the acquisition of Aquesta Financial Holdings, Inc. and its wholly-owned subsidiary, Aquesta Bank, collectively referred to as “Aquesta”. Aquesta is headquartered in Cornelius, North Carolina and operates a network of branches primarily located in the Charlotte metropolitan area. As of September 30, 2021, Aquesta reported total assets of $754 million, total loans of $500 million and total deposits of $658 million.

Aquesta shareholders received $132 million in total consideration, of which $89.6 million was United common stock (2.73 million shares), $40.5 million was cash and $1.48 million was comprised of option and warrant equity instruments. The acquisition will be accounted for as a business combination. Due to the timing of the acquisition, United is currently in the process of completing the purchase accounting and has not made all of the remaining required disclosures, such as the fair value of assets acquired and supplemental pro forma information, which will be disclosed in subsequent filings.

Announced Acquisition of Reliant

On July 14, 2021, United announced an agreement to acquire Reliant Bancorp, Inc. and its wholly-owned subsidiary, Reliant Bank, collectively referred to as “Reliant”. Reliant is headquartered in Brentwood, Tennessee, a suburb of Nashville, Tennessee and operates a 25 branch network in Tennessee, located primarily in the Nashville area, as well as branches in Clarksville and Chattanooga. It also has a manufactured housing finance group based in Knoxville. As of September 30, 2021, Reliant reported total assets of $3.01 billion, total loans of $2.39 billion, and total deposits of $2.55 billion. The merger, which is subject to regulatory approval, the approval of Reliant shareholders, and other customary conditions, is expected to close in the first quarter of 2022.

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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 September 30, 2021 and December 31, 2020 and our results of operations for the three and nine months ended September 30, 2021 and 2020. 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 2020 10-K, and the other reports we have filed with the SEC after we filed the 2020 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 162 branch network throughout Georgia, South Carolina, North Carolina, Tennessee and Florida. We have grown organically as well as through strategic acquisitions. At September 30, 2021, we had consolidated total assets of $19.5 billion and 2,480 full-time equivalent employees.

Effective July 1, 2021, the Bank moved its headquarters from Blairsville, Georgia to Greenville, South Carolina and became a South Carolina state-chartered bank subject to examination and reporting requirements of the South Carolina Board of Financial Institutions. Prior to that, the Bank was a Georgia state-chartered bank subject to examination and reporting requirements of the Georgia Department of Banking and Finance. Also effective July 1, 2021, the Holding Company, which remains headquartered in Blairsville, Georgia, elected to become a financial holding company, which allows us to engage in a broader range of financial activities. Neither of these changes had a material impact on our operations.

Recent Developments

Mergers and Acquisitions

•On July 1, 2020, we acquired Three Shores including its wholly-owned banking subsidiary, Seaside, headquartered in Orlando, Florida. Seaside was a premier commercial lender with a strong wealth management platform and operated a 14-branch network located in key Florida metropolitan markets. We acquired $2.13 billion of assets, $1.43 billion in loans and assumed $1.80 billion of deposits in the acquisition.

•On July 6, 2021, we acquired FinTrust, an investment advisory firm headquartered in Greenville, South Carolina, with additional locations in Anderson, South Carolina, and Athens and Macon, Georgia. The firm provides wealth and investment management services to individuals and institutions within its markets, which expands our Advisory Services division. As of September 30, 2021, FinTrust had assets under management of $2.10 billion across its advisory, retirement planning and brokerage businesses.

•Subsequent to quarter-end, on October 1, 2021, we acquired Aquesta, a bank headquartered in Cornelius, North Carolina. Aquesta’s high-touch customer service is delivered to retail and business customers through a network of branches primarily located in the Charlotte metropolitan area. As of September 30, 2021, Aquesta reported total assets of $754 million, total loans of $500 million and total deposits of $658 million.

•On July 14, 2021, we announced an agreement to acquire Reliant, which we plan to complete in the first quarter of 2022. Reliant is headquartered in Brentwood, Tennessee, a suburb of Nashville, Tennessee and operates a 25 branch network in Tennessee, located primarily in some of the Nashville area’s most attractive markets, as well as in Clarksville and Chattanooga, Tennessee. It also has a manufactured housing finance group based in Knoxville. As of September 30, 2021, Reliant reported total assets of $3.01 billion, total loans of $2.39 billion, and total deposits of $2.55 billion.

COVID-19

We continue to monitor the impact of the COVID-19 pandemic on our business and to offer assistance to our customers affected by its economic effects, through payment deferrals and participation in the CARES Act and PPP loan program. Loans with active COVID-19 payment deferrals have decreased by 87% since December 31, 2020, with $8.87 million outstanding at September 30, 2021.

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Results of Operations

We reported net income and diluted earnings per common share of $73.8 million and $0.82, respectively, for the third quarter of 2021 compared to $47.6 million and $0.52, respectively, for the same period in 2020. Operating net income (non-GAAP), which excludes merger-related and other charges, was $74.9 million for the third quarter of 2021, compared to $50.4 million for the same period in 2020. The increase in net income and operating net income was driven by increased net interest revenue and a release of provision for credit losses partly offset by a decrease in noninterest income and an increase in noninterest expense during the third quarter of 2021.

Net interest revenue increased to $141 million for the third quarter of 2021, compared to $128 million for the third quarter of 2020. Growth in our investment portfolio, accelerated recognition of PPP loan net deferred fees upon forgiveness, as well as a reduction of rates paid on deposits provided for much of the increase. The net interest margin decreased to 3.12% for the three months ended September 30, 2021 from 3.27% for the same period in 2020 primarily due to the effect of falling interest rates on our asset sensitive balance sheet and interest-earning assets shifting to be more heavily comprised of investment securities, which are generally lower-yielding than loans.

 

We recorded a negative provision for credit losses of $11.0 million for the third quarter of 2021, compared to $21.8 million of provision expense for the third quarter of 2020. The negative provision in 2021 resulted from a downward adjustment to the ACL, reflecting an improved economic forecast combined with low net charge-offs during the quarter. The provision for credit losses for the third quarter of 2020 reflected the expected macroeconomic effects of the COVID-19 pandemic and associated expected increase in net charge-offs. Net charge-offs for the third quarter of 2021 totaled $551,000 compared to $2.54 million for the same period in 2020.

Noninterest income of $40.1 million for the third quarter of 2021 was down $8.59 million, or 18%, from the third quarter of 2020. Lower gains on sales of mortgage loans and related fees drove most of the decrease, down $11.3 million compared to the same period of 2020. The decrease reflects the demand in the real estate mortgage market, which has started to level out after the initial surge in response to falling interest rates in early 2020. This decrease was partially offset by increases in wealth management fees, which reflects the addition of FinTrust’s wealth management business, and gains on sales of other loans driven by higher sales volume of equipment financing receivables.

Noninterest expense of $96.7 million for the third quarter of 2021, was relatively flat compared to the same period of 2020 as a result of the net effect of several fluctuations in noninterest expense items. Most notably, salaries and employee benefits expense increased $1.39 million, primarily as a result of the addition of FinTrust employees, while merger-related and other charges decreased $1.92 million. See Table 8 of MD&A for further detail on noninterest expense activity during the third quarter of 2021 compared to 2020.

For the nine months ended September 30, 2021 and 2020, we reported net income of $218 million and $105 million, respectively, and diluted earnings per common share of $2.42 and $1.25, respectively. Operating net income (non-GAAP) for the nine months ended September 30, 2021 and 2020, of $221 million and $108 million, respectively, excluded merger-related charges for both periods. Net interest revenue and net interest margin for the nine months ended September 30, 2021 were $411 million and 3.17%, respectively, compared to $356 million and 3.55%, respectively, for the same period in 2020. Results of operations for the nine months ended September 30, 2021 were largely driven by the same factors affecting the quarter, however the results for the nine months ended also reflect the of effect of the acquisition of Three Shores on July 1, 2020 and PPP loans for the full first nine months of 2021.

Results for the third quarter and first nine months of 2021 are discussed in further detail throughout the following sections of MD&A.

Critical Accounting Policies

 

Our accounting and reporting policies are in accordance with GAAP and conform to general practices within the banking industry. Our more critical accounting and reporting policies include accounting for the ACL and fair value measurements, both of which involve the use of estimates and require significant judgments by management. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or consolidated results of operations. Our critical accounting policies are discussed in MD&A in our 2020 10-K. There have been no significant changes to our critical accounting policies in 2021.

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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,” “dividend payout ratio – operating” and “efficiency ratio – operating.” Management has developed internal policies and procedures to accurately capture and account for merger-related and other charges and those charges are reviewed with the Audit Committee of our Board each quarter. Management uses these non-GAAP measures because it believes 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. Management believes these non-GAAP measures may also provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as a comparison to financial results for prior periods. 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
Selected Financial Information
(in thousands, except per share data)
						2021																		2020												Third Quarter 2021 - 2020 Change						For the Nine Months Ended September 30,												YTD Change
						Third Quarter						Second Quarter						First Quarter						Fourth Quarter						Third Quarter												2021						2020
INCOME SUMMARY
Interest revenue						$	147,675					$	145,809					$	141,542					$	156,071					$	141,773											$	435,026					$	401,925
Interest expense						6,636						7,433						9,478						10,676						13,319												23,547						45,561
Net interest revenue						141,039						138,376						132,064						145,395						128,454						10		%				411,479						356,364						15		%
(Release of) provision for credit losses						(11,034)						(13,588)						(12,281)						2,907						21,793												(36,903)						77,527
Noninterest income						40,095						35,841						44,705						41,375						48,682						(18)						120,641						114,734						5
Total revenue						192,168						187,805						189,050						183,863						155,343						24						569,023						393,571						45
Expenses						96,749						95,540						95,194						106,490						95,981						1						287,483						261,499						10
Income before income tax expense						95,419						92,265						93,856						77,373						59,362						61						281,540						132,072						113
Income tax expense						21,603						22,005						20,150						17,871						11,755						84						63,758						27,485						132
Net income						73,816						70,260						73,706						59,502						47,607						55						217,782						104,587						108
Merger-related and other charges						1,437						1,078						1,543						2,452						3,361												4,058						4,566
Income tax benefit of merger-related and other charges						(328)						(246)						(335)						(552)						(519)												(909)						(788)
Net income - operating (1)						$	74,925					$	71,092					$	74,914					$	61,402					$	50,449					49						$	220,931					$	108,365					104
PERFORMANCE MEASURES
Per common share:
Diluted net income - GAAP						$	0.82					$	0.78					$	0.82					$	0.66					$	0.52					58						$	2.42					$	1.25					94
Diluted net income - operating (1)						0.83						0.79						0.83						0.68						0.55						51						2.45						1.29						90
Cash dividends declared						0.20						0.19						0.19						0.18						0.18						11						0.58						0.54						7
Book value						23.25						22.81						22.15						21.90						21.45						8						23.25						21.45						8
Tangible book value (3)						18.68						18.49						17.83						17.56						17.09						9						18.68						17.09						9
Key performance ratios:
Return on common equity - GAAP (2)(4)						14.26		%				14.08		%				15.37		%				12.36		%				10.06		%										14.55		%				8.11		%
Return on common equity - operating (1)(2)(4)						14.48						14.25						15.63						12.77						10.69												14.77						8.40
Return on tangible common equity - operating (1)(2)(3)(4)						18.23						17.81						19.68						16.23						13.52												18.55						10.76
Return on assets - GAAP (4)						1.48						1.46						1.62						1.30						1.07												1.52						0.93
Return on assets - operating (1)(4)						1.50						1.48						1.65						1.34						1.14												1.54						0.97
Dividend payout ratio - GAAP						24.39						24.36						23.17						27.27						34.62												23.97						43.20
Dividend payout ratio - operating (1)						24.10						24.05						22.89						26.47						32.73												23.67						41.86
Net interest margin (FTE) (4)						3.12						3.19						3.22						3.55						3.27												3.17						3.55
Efficiency ratio - GAAP						53.11						54.53						53.55						56.73						54.14												53.72						55.30
Efficiency ratio - operating (1)						52.33						53.92						52.68						55.42						52.24												52.97						54.34
Equity to total assets						10.89						11.04						10.95						11.29						11.47												10.89						11.47
Tangible common equity to tangible assets (3)						8.53						8.71						8.57						8.81						8.89												8.53						8.89
ASSET QUALITY
Nonperforming loans						$	44,923					$	46,123					$	55,900					$	61,599					$	49,084					(8)						$	44,923					$	49,084					(8)
Foreclosed properties						412						224						596						647						953												412						953
Total NPAs						45,335						46,347						56,496						62,246						50,037						(9)						45,335						50,037						(9)
ACL - loans						99,620						111,616						126,866						137,010						134,256						(26)						99,620						134,256						(26)
Net charge-offs						551						(456)						(305)						1,515						2,538												(210)						16,801
ACL - loans to loans						0.89		%				0.98		%				1.09		%				1.20		%				1.14		%										0.89		%				1.14		%
Net charge-offs to average loans (4)						0.02						(0.02)						(0.01)						0.05						0.09												—						0.22
NPAs to loans and foreclosed properties						0.41						0.41						0.48						0.55						0.42												0.41						0.42
NPAs to total assets						0.23						0.25						0.30						0.35						0.29												0.23						0.29
AVERAGE BALANCES ($ in millions)
Loans						$	11,205					$	11,617					$	11,433					$	11,595					$	11,644					(4)						$	11,417					$	10,088					13
Investment securities						5,122						4,631						3,991						3,326						2,750						86						4,587						2,560						79
Earning assets						18,078						17,540						16,782						16,394						15,715						15						17,473						13,498						29
Total assets						19,322						18,792						18,023						17,698						17,013						14						18,717						14,718						27
Deposits						16,637						16,132						15,366						15,057						14,460						15						16,050						12,490						29
Shareholders’ equity						2,119						2,060						2,025						1,994						1,948						9						2,068						1,763						17
Common shares - basic (thousands)						87,211						87,289						87,322						87,258						87,129						—						87,274						81,815						7
Common shares - diluted (thousands)						87,355						87,421						87,466						87,333						87,205						—						87,413						81,876						7
AT PERIOD END ($ in millions)
Loans						$	11,191					$	11,391					$	11,679					$	11,371					$	11,799					(5)						$	11,191					$	11,799					(5)
Investment securities						5,335						4,928						4,332						3,645						3,089						73						5,335						3,089						73
Total assets						19,481						18,896						18,557						17,794						17,153						14						19,481						17,153						14
Deposits						16,865						16,328						15,993						15,232						14,603						15						16,865						14,603						15
Shareholders’ equity						2,122						2,086						2,031						2,008						1,967						8						2,122						1,967						8
Common shares outstanding (thousands)						86,559						86,665						86,777						86,675						86,611						—						86,559						86,611						—

(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.

40

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			UNITED COMMUNITY BANKS, INC.
			Table 1 (Continued) - Non-GAAP Performance Measures Reconciliation
			Selected Financial Information
			(in thousands, except per share data)
									2021																		2020												For the Nine Months Ended September 30,
									Third Quarter						Second Quarter						First Quarter						Fourth Quarter						Third Quarter						2021						2020
			Expense reconciliation
			Expenses (GAAP)						$	96,749					$	95,540					$	95,194					$	106,490					$	95,981					$	287,483					$	261,499
			Merger-related and other charges						(1,437)						(1,078)						(1,543)						(2,452)						(3,361)						(4,058)						(4,566)
			Expenses - operating						$	95,312					$	94,462					$	93,651					$	104,038					$	92,620					$	283,425					$	256,933
			Net income reconciliation
			Net income (GAAP)						$	73,816					$	70,260					$	73,706					$	59,502					$	47,607					$	217,782					$	104,587
			Merger-related and other charges						1,437						1,078						1,543						2,452						3,361						4,058						4,566
			Income tax benefit of merger-related and other charges						(328)						(246)						(335)						(552)						(519)						(909)						(788)
			Net income - operating						$	74,925					$	71,092					$	74,914					$	61,402					$	50,449					$	220,931					$	108,365
			Diluted income per common share reconciliation
			Diluted income per common share (GAAP)						$	0.82					$	0.78					$	0.82					$	0.66					$	0.52					$	2.42					$	1.25
			Merger-related and other charges, net of tax						0.01						0.01						0.01						0.02						0.03						0.03						0.04
			Diluted income per common share - operating						$	0.83					$	0.79					$	0.83					$	0.68					$	0.55					$	2.45					$	1.29
			Book value per common share reconciliation
			Book value per common share (GAAP)						$	23.25					$	22.81					$	22.15					$	21.90					$	21.45					$	23.25					$	21.45
			Effect of goodwill and other intangibles						(4.57)						(4.32)						(4.32)						(4.34)						(4.36)						(4.57)						(4.36)
			Tangible book value per common share						$	18.68					$	18.49					$	17.83					$	17.56					$	17.09					$	18.68					$	17.09
			Return on tangible common equity reconciliation
			Return on common equity (GAAP)						14.26		%				14.08		%				15.37		%				12.36		%				10.06		%				14.55		%				8.11		%
			Merger-related and other charges, net of tax						0.22						0.17						0.26						0.41						0.63						0.22						0.29
			Return on common equity - operating						14.48						14.25						15.63						12.77						10.69						14.77						8.40
			Effect of goodwill and other intangibles						3.75						3.56						4.05						3.46						2.83						3.78						2.36
			Return on tangible common equity - operating						18.23		%				17.81		%				19.68		%				16.23		%				13.52		%				18.55		%				10.76		%
			Return on assets reconciliation
			Return on assets (GAAP)						1.48		%				1.46		%				1.62		%				1.30		%				1.07		%				1.52		%				0.93		%
			Merger-related and other charges, net of tax						0.02						0.02						0.03						0.04						0.07						0.02						0.04
			Return on assets - operating						1.50		%				1.48		%				1.65		%				1.34		%				1.14		%				1.54		%				0.97		%
			Dividend payout ratio reconciliation
			Dividend payout ratio (GAAP)						24.39		%				24.36		%				23.17		%				27.27		%				34.62		%				23.97		%				43.20		%
			Merger-related and other charges, net of tax						(0.29)						(0.31)						(0.28)						(0.80)						(1.89)						(0.30)						(1.34)
			Dividend payout ratio - operating						24.10		%				24.05		%				22.89		%				26.47		%				32.73		%				23.67		%				41.86		%
			Efficiency ratio reconciliation
			Efficiency ratio (GAAP)						53.11		%				54.53		%				53.55		%				56.73		%				54.14		%				53.72		%				55.30		%
			Merger-related and other charges						(0.78)						(0.61)						(0.87)						(1.31)						(1.90)						(0.75)						(0.96)
			Efficiency ratio - operating						52.33		%				53.92		%				52.68		%				55.42		%				52.24		%				52.97		%				54.34		%
			Tangible common equity to tangible assets reconciliation
			Equity to total assets (GAAP)						10.89		%				11.04		%				10.95		%				11.29		%				11.47		%				10.89		%				11.47		%
			Effect of goodwill and other intangibles						(1.87)						(1.82)						(1.86)						(1.94)						(2.02)						(1.87)						(2.02)
			Effect of preferred equity						(0.49)						(0.51)						(0.52)						(0.54)						(0.56)						(0.49)						(0.56)
			Tangible common equity to tangible assets						8.53		%				8.71		%				8.57		%				8.81		%				8.89		%				8.53		%				8.89		%

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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 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 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 stockholders’ equity.

The following tables indicate 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 periods presented.

For the quarter:

Average PPP loans for the third quarter of 2021 decreased $1.03 billion compared to the third quarter of 2020, which mostly reflects SBA loan forgiveness. This was the primary driver of the decrease in average total loans for the third quarter of 2021 compared to the same period of 2020 and more than offset organic loan growth for the period. The forgiveness of PPP loans and strong growth in deposits generated additional liquidity, which we deployed into our investment portfolio, resulting in increases in average securities of $2.37 billion for the three months ended September 30, 2021 compared to the same period of 2020. This additional liquidity was also reflected in our cash balances.

Net interest revenue for the third quarter was $141 million, while FTE net interest revenue was $142 million, representing a 10% increase from the third quarter of 2020. The increase was mostly driven by the growth in the investment portfolio, accelerated recognition of net deferred PPP loan fees upon forgiveness and our ability to decrease our rates paid on deposits in a historically low interest rate environment. Deferred fees recognized on PPP loans totaled $12.9 million for the three months ended September 30, 2021, compared to $5.15 million for the comparable period of 2020. Additionally, rates paid on interest-bearing deposits fell 27 basis points compared to the third quarter of 2020, which contributed to the $5.86 million decrease in interest paid on these deposits compared to the same period of 2020. The impact of the decrease in interest rates on interest expense more than offset the impact of the growth in interest-bearing deposits of $970 million.

Despite an increase in net interest revenue, the net interest spread and net interest margin for the third quarter of 2021 decreased 4 basis points and 15 basis points, respectively, from the same period of 2020 primarily due to a mix shift in our interest-earning assets. The average interest-earning asset mix for the three months ended September 30, 2021 compared to the same period of 2020 was comprised more heavily of investment securities and cash, both of which are lower-yielding than loans, which contributed to the net interest margin and spread compression.

For the nine months ended:

In contrast to the three months ended, average loans for the nine months ended September 30, 2021 increased compared to the same period of 2020, reflecting loans acquired from Three Shores for the full nine months of 2021 and higher average PPP loans, which combined contributed approximately $821 million to the increase. Consistent with the quarter, additional liquidity provided by deposit growth and PPP loan forgiveness resulted in higher average cash balances and deployment of excess liquidity into our investment portfolio. Average securities increased $2.03 billion for the nine months ended September 30, 2021 compared to the same period of 2020.

Net interest revenue for the first nine months of 2021 was $411 million, while FTE net interest revenue was $415 million, representing a 16% increase from the first nine months of 2020. The increase was primarily driven by the loan growth discussed above and accelerated recognition of net deferred PPP loan fees of $33.7 million. These sources of income were partially offset by the impact of historically low interest rates on our asset sensitive balance sheet. Consistent with the quarter, during the nine months ended September 30, 2021, the average interest rate paid on interest-bearing deposits decreased 42 basis points compared to the same period of 2020, which contributed to a net reduction in interest expense of $23.4 million compared to the nine months ended September 30, 2020, despite growth in average interest-bearing deposits of $1.86 billion. The net interest spread and net interest margin for the first nine months of 2021 decreased 23 basis points and 38 basis points, respectively, from the same period of 2020 primarily due to the same factors impacting the quarter.

42

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Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended September 30,

						2021																		2020
(dollars in thousands, FTE)						Average Balance						Interest						Average Rate						Average Balance						Interest						Average Rate
Assets:
Interest-earning assets:
Loans, net of unearned income (FTE) (1)(2)						$	11,204,653					$	128,185					4.54		%				$	11,644,202					$	126,342					4.32		%
Taxable securities (3)						4,738,860						16,260						1.37						2,499,649						12,663						2.03
Tax-exempt securities (FTE) (1)(3)						383,196						3,061						3.20						249,959						2,544						4.07
Federal funds sold and other interest-earning assets						1,751,222						1,185						0.27						1,321,445						1,132						0.34
Total interest-earning assets (FTE)						18,077,931						148,691						3.27						15,715,255						142,681						3.61
Noninterest-earning assets:
Allowance for credit losses						(111,952)																		(128,581)
Cash and due from banks						124,360																		135,949
Premises and equipment						228,556																		216,326
Other assets (3)						1,002,810																		1,074,529
Total assets						$	19,321,705																	$	17,013,478
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and interest-bearing demand						$	3,594,670					1,290						0.14						$	2,890,735					1,634						0.22
Money market						4,010,720						1,119						0.11						3,501,781						3,017						0.34
Savings						1,120,843						55						0.02						864,849						47						0.02
Time						1,466,821						609						0.16						1,933,764						4,127						0.85
Brokered time deposits						63,917						69						0.43						96,198						173						0.72
Total interest-bearing deposits						10,256,971						3,142						0.12						9,287,327						8,998						0.39
Federal funds purchased and other borrowings						—						—						—						4,405						2						0.18
Federal Home Loan Bank advances						54						—						—						2,818						27						3.81
Long-term debt						257,139						3,494						5.39						327,017						4,292						5.22
Total borrowed funds						257,193						3,494						5.39						334,240						4,321						5.14
Total interest-bearing liabilities						10,514,164						6,636						0.25						9,621,567						13,319						0.55
Noninterest-bearing liabilities:
Noninterest-bearing deposits						6,379,969																		5,172,999
Other liabilities						308,551																		270,451
Total liabilities						17,202,684																		15,065,017
Shareholders' equity						2,119,021																		1,948,461
Total liabilities and shareholders' equity						$	19,321,705																	$	17,013,478
Net interest revenue (FTE)												$	142,055																	$	129,362
Net interest-rate spread (FTE)																		3.02		%																3.06		%
Net interest margin (FTE) (4)																		3.12		%																3.27		%

 

(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)AFS securities are shown at amortized cost. Pretax unrealized gains of $39.6 million and $77.0 million in 2021 and 2020, respectively, are included in other assets for purposes of this presentation.

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

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Table 3 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Nine Months Ended September 30,

						2021																		2020
(dollars in thousands, fully taxable equivalent (FTE))						Average Balance						Interest						Average Rate						Average Balance						Interest						Average Rate
Assets:
Interest-earning assets:
Loans, net of unearned income (FTE) (1)(2)						$	11,417,285					$	380,765					4.46		%				$	10,087,630					$	351,536					4.65		%
Taxable securities (3)						4,206,099						44,845						1.42						2,362,674						42,579						2.40
Tax-exempt securities (FTE) (1)(3)						381,323						8,979						3.14						197,231						6,699						4.53
Federal funds sold and other interest-earning assets						1,468,487						3,462						0.31						850,722						3,621						0.57
Total interest-earning assets (FTE)						17,473,194						438,051						3.35						13,498,257						404,435						4.00
Non-interest-earning assets:
Allowance for loan losses						(127,793)																		(96,235)
Cash and due from banks						138,973																		134,354
Premises and equipment						225,021																		217,551
Other assets (3)						1,007,669																		964,511
Total assets						$	18,717,064																	$	14,718,438
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and interest-bearing demand						$	3,452,206					4,158						0.16						$	2,583,911					6,240						0.32
Money market						3,853,907						4,278						0.15						2,797,350						10,969						0.52
Savings						1,064,045						157						0.02						788,681						121						0.02
Time						1,551,934						3,096						0.27						1,860,597						17,435						1.25
Brokered time deposits						67,794						292						0.58						102,502						579						0.75
Total interest-bearing deposits						9,989,886						11,981						0.16						8,133,041						35,344						0.58
Federal funds purchased and other borrowings						41						—						—						1,611						3						0.25
Federal Home Loan Bank advances						1,117						2						0.24						1,001						28						3.74
Long-term debt						286,347						11,564						5.40						256,218						10,186						5.31
Total borrowed funds						287,505						11,566						5.38						258,830						10,217						5.27
Total interest-bearing liabilities						10,277,391						23,547						0.31						8,391,871						45,561						0.73
Noninterest-bearing liabilities:
Noninterest-bearing deposits						6,059,680																		4,356,484
Other liabilities						311,749																		206,904
Total liabilities						16,648,820																		12,955,259
Shareholders' equity						2,068,244																		1,763,179
Total liabilities and shareholders' equity						$	18,717,064																	$	14,718,438
Net interest revenue (FTE)												$	414,504																	$	358,874
Net interest-rate spread (FTE)																		3.04		%																3.27		%
Net interest margin (FTE) (4)																		3.17		%																3.55		%

 

(1)Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used 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)Securities AFS are shown at amortized cost. Pretax unrealized gains of $40.3 million and $65.5 million in 2021 and 2020, respectively, are included in other assets for purposes of this presentation.

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

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

												Three Months Ended September 30, 2021																					Nine Months Ended September 30, 2021
												Compared to 2020 Increase (Decrease) Due to Changes in
												Volume						Rate						Total									Volume						Rate						Total
						Interest-earning assets:
						Loans (FTE)						$	(4,875)					$	6,718					$	1,843								$	44,834					$	(15,605)					$	29,229
						Taxable securities						8,653						(5,056)						3,597									24,316						(22,050)						2,266
						Tax-exempt securities (FTE)						1,148						(631)						517									4,809						(2,529)						2,280
						Federal funds sold and other interest-earning assets						321						(268)						53									1,903						(2,062)						(159)
						Total interest-earning assets (FTE)						5,247						763						6,010									75,862						(42,246)						33,616
						Interest-bearing liabilities:
						NOW and interest-bearing demand accounts						340						(684)						(344)									1,675						(3,757)						(2,082)
						Money market accounts						386						(2,284)						(1,898)									3,118						(9,809)						(6,691)
						Savings deposits						13						(5)						8									41						(5)						36
						Time deposits						(811)						(2,707)						(3,518)									(2,496)						(11,843)						(14,339)
						Brokered deposits						(47)						(57)						(104)									(169)						(118)						(287)
						Total interest-bearing deposits						(119)						(5,737)						(5,856)									2,169						(25,532)						(23,363)
						Federal funds purchased & other borrowings						(1)						(1)						(2)									(1)						(2)						(3)
						FHLB advances						(13)						(14)						(27)									3						(29)						(26)
						Long-term debt						(945)						147						(798)									1,214						164						1,378
						Total borrowed funds						(959)						132						(827)									1,216						133						1,349
						Total interest-bearing liabilities						(1,078)						(5,605)						(6,683)									3,385						(25,399)						(22,014)
						Increase in net interest revenue (FTE)						$	6,325					$	6,368					$	12,693								$	72,477					$	(16,847)					$	55,630

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 negative provisions for credit losses of $11.0 million and $36.9 million for the three and nine months ended September 30, 2021, respectively, compared to $21.8 million and $77.5 million in provision expense for the same periods in 2020, respectively. 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 negative provision expense for the three and nine months ended September 30, 2021 compared to the same periods of 2020 was primarily a result of an improved economic forecast combined with low net charge-offs recognized during the third quarter and net recoveries recorded during the first nine months of 2021. The amount of net recoveries recorded during the first nine months of 2021 was mostly attributable to one large commercial credit recovery during the first quarter, strong recoveries from a number of other credits and lower charge-offs during the second and third quarters. The provision for credit losses for the third quarter and first nine months of 2020 was elevated due to a relatively stressed economic forecast amidst the COVID-19 pandemic.

 

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 5 - Noninterest Income
(in thousands)

						Three Months Ended September 30,												Change												Nine Months Ended September 30,												Change
						2021						2020						Amount						Percent						2021						2020						Amount						Percent
			Overdraft fees			$	2,858					$	2,484					$	374					15		%				$	7,474					$	8,000					$	(526)					(7)		%
			ATM and debit card fees			3,867						3,577						290						8						10,263						9,845						418						4
			Other service charges and fees			2,625						2,199						426						19						7,518						6,048						1,470						24
			Total service charges and fees			9,350						8,260						1,090						13						25,255						23,893						1,362						6
			Mortgage loan gains and related fees			13,828						25,144						(11,316)						(45)						47,536						57,113						(9,577)						(17)
			Wealth management fees			5,554						3,055						2,499						82						12,881						6,019						6,862						114
			Gains on sales of other loans			2,353						1,175						1,178						100						7,506						3,889						3,617						93
			Securities gains, net			—						746						(746)												41						746						(705)
			Other noninterest income:
			Other lending and loan servicing fees			2,825						2,869						(44)						(2)						7,070						5,832						1,238						21
			Customer derivatives			585						2,258						(1,673)						(74)						2,537						4,846						(2,309)						(48)
			Other investment gains (losses)			1,333						911						422												4,487						(228)						4,715
			BOLI			832						1,214						(382)						(31)						2,661						4,091						(1,430)						(35)
			Treasury management income			765						568						197						35						2,120						1,539						581						38
			Other			2,670						2,482						188						8						8,547						6,994						1,553						22
			Total other noninterest income			9,010						10,302						(1,292)						(13)						27,422						23,074						4,348						19
			Total noninterest income			$	40,095					$	48,682					$	(8,587)					(18)						$	120,641					$	114,734					$	5,907					5

During the third quarter and first nine months of 2021, total service charges and fees increased compared to the respective periods of 2020, which was mostly driven by the addition of Three Shores customers and the receipt of larger vendor rebates. While overdraft fee income has started to normalize, overdraft fees have remained at relatively low levels since the onset of the COVID-19 pandemic. During the first nine months of 2020, the decrease in overdraft fees was attributable to lower transaction volume due to widespread economic shutdowns combined with government stimulus payments disbursed during the second quarter of 2020, both of which increased transaction deposit account balances. During the first nine months of 2021, transaction deposit account balances remained elevated due to government stimulus payments and customer preferences to allocate more funds to transaction deposit accounts rather than time deposits in the current low interest rate environment.

Mortgage loan gains and related fees consists primarily of fees earned on mortgage originations, gains on the sale of mortgages in the secondary market and fair value adjustments to our mortgage servicing asset. We recognize the majority of gains on mortgages when customers enter into mortgage rate lock commitments, making our mortgage pipeline a significant driver of mortgage gains in any given period. The change in mortgage loan gains and related fees is strongly tied to the interest rate environment. Customer demand, primarily driven by interest rates, as well as the market-driven gain on sale spread are also primary drivers of mortgage income. From the second quarter of 2020 through the first quarter of 2021, we experienced a strong demand for mortgage refinances and home purchases following the drop in interest rates in early 2020. Since the second quarter of 2021, the demand for refinances has decreased as rates have started to increase, which in turn has also resulted in a decrease in volume of mortgage rate locks. However, the demand for home purchases remained strong for the three and nine months ended September 30, 2021 resulting in higher purchase originations compared to the respective periods of 2020. Offsetting strong mortgage origination demand, during the three months ended September 30, 2021 and 2020, we recorded negative adjustments related to fair value and decay to the mortgage servicing rights asset of $1.32 million and $1.18 million, respectively. Additionally, our gain on sale spread for the third quarter of 2021 of 4.82% decreased compared to 5.43% for the third quarter of 2020 contributing to the decrease in mortgage loan gains.

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Table 6 - Selected Mortgage Metrics
(dollars in thousands)
			Three Months Ended September 30,																		Nine Months Ended September 30,
			2021						2020						% Change						2021						2020						% Change
Mortgage rate locks			$	730,566					$	909,834					(20)		%				$	2,425,571					$	2,512,327					(3)		%
# of mortgage rate locks			2,077						3,022						(31)						7,149						8,899						(20)
Mortgage loans sold			$	319,232					$	402,265					(21)						$	1,062,373					$	1,056,783					1
# of mortgage loans sold			1,299						1,754						(26)						4,408						4,624						(5)
Mortgage loans originated:
Purchases			$	354,378					$	327,269					8						$	1,053,849					$	788,767					34
Refinances			214,018						241,863						(12)						849,421						730,012						16
Total			$	568,396					$	569,132					—						$	1,903,270					$	1,518,779					25
# of mortgage loans originated			1,615						2,102						(23)						5,749						5,667						1

 

Our SBA/USDA lending strategy includes selling a portion of the loan production each quarter. The amount of loans sold depends on several variables including the current lending environment and balance sheet management activities. From time to time, we also sell certain equipment financing receivables based on market conditions. Gains on the sale of other loans for the first nine months of 2021 increased compared to the same period of 2020 mostly due to the sale of equipment financing loans and leases and USDA renewable energy loans in the second quarter of 2021. The following table presents loans sold and the corresponding gains or losses recognized on the sale for the periods indicated.

Table 7 - Other Loan Sales
(in thousands)
			Three Months Ended September 30,																								Nine Months Ended September 30,
			2021												2020												2021												2020
			Loans Sold						Gain (Loss)						Loans Sold						Gain (Loss)						Loans Sold						Gain (Loss)						Loans Sold						Gain (Loss)
Guaranteed portion of SBA/USDA loans			$	13,484					$	1,492					$	13,464					$	1,177					$	57,132					$	5,835					$	31,533					$	2,613
Equipment financing receivables			19,273						861						950						(2)						39,240						1,671						24,871						1,276
Total			$	32,757					$	2,353					$	14,414					$	1,175					$	96,372					$	7,506					$	56,404					$	3,889

The increase in wealth management fees during the third quarter and first nine months of 2021 compared to the same periods of 2020 was primarily a result of the growth of our wealth management business through the acquisitions of FinTrust and Three Shores. FinTrust is the main driver of the increase for the three months ended September 30, 2021, while Three Shores, which was acquired July 1, 2020, also contributed to much of the increase during the first nine months of 2021.

The change in other noninterest income for the three and nine months ended September 30, 2021 compared to the same periods of 2020 was primarily driven by the following factors:

•Other investment performance for the three and nine months ended September 30, 2021, yielded net higher positive fair value adjustments when compared to the same periods of 2020. The nine months ended September 30, 2020 included losses recorded during the first half of 2020 resulting from the COVID-19 pandemic related market disruption. These losses were more than offset by gains recorded during the third quarter of 2020 as the pandemic outlook improved.

•Lending and loan servicing fees for the third quarter of 2021 decreased compared to the third quarter of 2020, but increased for the nine months ended 2021 compared to the same period of 2020. Volume-driven fee income from our equipment finance business increased for the three and nine months ended September 30, 2021, which was a main driver for the increase in lending and loan servicing fees for the nine months ended September 30, 2021. However, for the third quarter of 2021, this increase was more than offset by a negative adjustment to our SBA servicing asset, which resulted primarily from payoffs and paydowns, compared to a positive adjustment during the third quarter of 2020.

•BOLI income decreased compared to the three and nine months ended September 30, 2020, which included death benefit gains of $274,000 and $1.37 million, respectively.

•Customer derivative income also decreased for the three and nine months ended September 30, 2021 compared to the same periods of 2020 due to increases in interest rates negatively impacting the demand for customer derivative products.

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Noninterest Expenses 

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

Table 8 - Noninterest Expenses
(in thousands)

						Three Months Ended September 30,												Change												Nine Months Ended September 30,												Change
						2021						2020						Amount						Percent						2021						2020						Amount						Percent
			Salaries and employee benefits			$	60,458					$	59,067					$	1,391					2		%				$	180,457					$	162,236					$	18,221					11		%
			Communications and equipment			7,368						6,960						408						6						21,979						19,462						2,517						13
			Occupancy			7,096						7,050						46						1						21,130						18,709						2,421						13
			Advertising and public relations			1,458						1,778						(320)						(18)						4,150						5,312						(1,162)						(22)
			Postage, printing and supplies			1,731						1,703						28						2						5,171						4,986						185						4
			Professional fees			5,347						5,083						264						5						14,509						14,003						506						4
			Lending and loan servicing expense			2,450						3,043						(593)						(19)						8,508						8,525						(17)						—
			Outside services - electronic banking			2,308						1,888						420						22						6,811						5,516						1,295						23
			FDIC assessments and other regulatory charges			1,723						1,346						377						28						5,520						4,388						1,132						26
			Amortization of intangibles			1,028						1,099						(71)						(6)						2,942						3,126						(184)						(6)
			Other			4,345						3,603						742						21						12,248						10,670						1,578						15
			Total excluding merger-related and other charges			95,312						92,620						2,692						3						283,425						256,933						26,492						10
			Merger-related and other charges			1,437						3,361						(1,924)												4,058						4,566						(508)
			Total noninterest expenses			$	96,749					$	95,981					$	768					1						$	287,483					$	261,499					$	25,984					10

Salaries and employee benefits for the third quarter of 2021 increased compared to the same quarter of 2020 primarily due to the addition of FinTrust employees, higher brokerage and equipment finance commissions as well as other incentives reflective of strong performance during the quarter. These increases were partially offset by higher deferred loan origination costs resulting from increased loan production. The increase also reflected our merit-based salary increases awarded during the second quarter of 2021. In addition to these factors, the increase in salaries and employee benefits for the nine months ended September 30, 2021 compared to the same period of 2020 was also attributable to the addition of Three Shores employees beginning on July 1, 2020 and higher mortgage commissions as a result of strong mortgage production for first nine months of 2021. Full-time equivalent headcount totaled 2,480 at September 30, 2021, up from 2,414 at September 30, 2020.

Communications and equipment expense increased for the third quarter and first nine months of 2021 compared to the same periods of 2020 primarily due to incremental software contract costs. The increase in occupancy costs for the nine months ended September 30, 2021 was mostly attributable to the addition of operating lease costs associated with the acquired Three Shores’ locations. Advertising and public relations expense for the three and nine months ended September 30, 2021 decreased relative to the same periods of 2020 as 2020 included contributions to the United Community Bank Foundation in its inaugural year. Lending and loan servicing expense for the third quarter of 2021 decreased compared to the same period of 2020 partially due to lower mortgage production volume. The increase in outside services - electronic banking primarily related to increased ATM network and internet banking costs.

Merger-related and other charges for the third quarter and first nine months of 2021 primarily consisted of expenses associated with the acquisitions of Three Shores, FinTrust and Aquesta. Merger-related and other charges for the three and nine months ended September 30, 2020 were mostly related to the acquisition of Three Shores.

Balance Sheet Review

 

Total assets at September 30, 2021 and December 31, 2020 were $19.5 billion and $17.8 billion, respectively. Total liabilities at September 30, 2021 and December 31, 2020 were $17.4 billion and $15.8 billion, respectively. Shareholders’ equity totaled $2.12 billion and $2.01 billion at September 30, 2021 and December 31, 2020, respectively. The increase in assets was primarily evident in our investment portfolio, which we have strategically grown by $1.69 billion during 2021 to deploy excess liquidity provided by PPP loan forgiveness and growth in our customer deposits.

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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, of which approximately 73% was secured by real estate at September 30, 2021.

Table 9 - Loans Outstanding
(in thousands)

			September 30, 2021												December 31, 2020
			Amortized Cost						% of total loans						Amortized Cost						% of total loans
Owner occupied commercial real estate			$	2,148,946					19		%				$	2,090,443					18		%
Income producing commercial real estate			2,542,106						23						2,540,750						22
Commercial & industrial (1)			1,879,466						17						2,498,560						22
Commercial construction			947,023						8						967,305						9
Equipment financing			1,016,903						9						863,830						8
Total commercial			8,534,444						76						8,960,888						79
Residential mortgage			1,532,625						14						1,284,920						11
HELOC			661,352						6						697,117						6
Residential construction			320,880						3						281,430						3
Consumer			141,736						1						146,460						1
Total loans			$	11,191,037					100		%				$	11,370,815					100		%

(1) Commercial and industrial loans as of September 30, 2021 and December 31, 2020 included $150 million and $646 million of PPP loans, respectively.

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. Additional information on our credit administration function is included in Part I, Item 1 under the heading Lending Activities in our 2020 10-K.

 

We conduct reviews of classified performing and non-performing loans, TDRs, past due loans and portfolio concentrations on a regular basis to identify risk migration and potential charges to the ACL. These items are discussed in a series of meetings attended by credit risk management leadership and leadership from various lending groups. In addition to the reviews mentioned above, an independent loan review team reviews the portfolio to ensure consistent application of risk rating policies and procedures.

The ACL reflects management’s assessment of the life of loan expected credit losses in the loan portfolio and unfunded loan commitments. This assessment involves uncertainty and judgment and is subject to change in future periods. The amount of any changes could be significant if management’s 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. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for credit losses in future periods if, in their opinion, the results of their review warrant such additions. See the Critical Accounting Policies section of MD&A in our 2020 10-K for additional information on the allowance for credit losses.

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The following table presents a summary of the changes in the ACL for the periods indicated.

Table 10 - ACL
(in thousands)

						Three Months Ended September 30,												Nine Months Ended September 30,
						2021						2020						2021						2020
			ACL - loans, beginning of period			$	111,616					$	103,669					$	137,010					$	62,089
			Adoption of CECL			—						—						—						6,880
			ACL - loans, adjusted beginning balance			111,616						103,669						137,010						68,969
			Impact of merger - ACL - PCD loans			—						11,152						—						11,152
			Charge-offs:
			Owner occupied commercial real estate			443						—						1,503						6
			Income producing commercial real estate			120						3,033						174						8,033
			Commercial & industrial			320						303						4,017						8,118
			Commercial construction			—						487						224						726
			Equipment financing			1,165						2,418						4,411						6,366
			Residential mortgage			127						13						342						347
			HELOC			65						44						99						162
			Residential construction			—						26						10						80
			Consumer			611						432						1,435						1,782
			Total charge-offs			2,851						6,756						12,215						25,620
			Recoveries:
			Owner occupied commercial real estate			536						725						932						2,225
			Income producing commercial real estate			75						1,248						304						1,430
			Commercial & industrial			411						408						6,855						1,075
			Commercial construction			123						658						618						916
			Equipment financing			653						425						2,087						1,201
			Residential mortgage			76						48						393						379
			HELOC			167						169						386						468
			Residential construction			37						26						140						97
			Consumer			222						511						710						1,028
			Total recoveries			2,300						4,218						12,425						8,819
			Net charge-offs (recoveries)			551						2,538						(210)						16,801
			(Release of) provision for credit losses - loans			(11,445)						21,973						(37,600)						70,936
			ACL - loans, end of period			99,620						134,256						99,620						134,256
			ACL - unfunded commitments, beginning of period			10,844						12,100						10,558						3,458
			Adoption of CECL			—						—						—						1,871
			ACL - unfunded commitments, adjusted beginning balance			10,844						12,100						10,558						5,329
			Provision for credit losses - unfunded commitments			411						(180)						697						6,591
			ACL - unfunded commitments, end of period			11,255						11,920						11,255						11,920
			Total ACL			$	110,875					$	146,176					$	110,875					$	146,176
			Total loans:
			At period-end			$	11,191,037					$	11,798,910					$	11,191,037					$	11,798,910
			Average			11,204,653						11,644,202						11,417,285						10,087,630
			ACL - loans, as a percentage of period-end loans			0.89		%				1.14		%				0.89		%				1.14		%
			As a percentage of average loans (annualized):
			Net charge-offs			0.02						0.09						—						0.22
			Provision for credit losses - loans			(0.41)						0.75						(0.44)						0.94

The reduction in the ACL since December 31, 2020 reflects an improved economic forecast, which includes an improved COVID-19 pandemic outlook, government stimulus spending, projected GDP growth and a continued low interest rate environment. Qualitative factors were used to moderate the improvement in the economic forecast for certain portfolios in recognition of continued elevated

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levels of special mention and substandard assets at September 30, 2021, primarily due to slower improvement in several COVID-19 impacted industries.

The following table presents a summary of loans by risk category for the dates indicated. See Note 6 to the consolidated financial statements in this Report for detailed descriptions of the risk categories.

Table 11 - Risk Categories
(in thousands)
						September 30, 2021						June 30, 2021						March 31, 2021						December 31, 2020						September 30, 2020
			Pass			$	10,691,234					$	10,781,793					$	11,070,628					$	10,846,850					$	11,481,859
			Special mention			227,708						369,964						376,250						297,245						142,480
			Substandard			222,095						238,989						231,666						226,720						174,571
			Total loans			$	11,141,037					$	11,390,746					$	11,678,544					$	11,370,815					$	11,798,910

During the fourth quarter of 2020 and first quarter of 2021, we downgraded loans to certain borrowers whose financial performance was impacted by the social and economic effects of the COVID-19 pandemic, such as senior care and hotels. During the third quarter of 2021, to the extent these borrowers’ financial position strengthened as the economic outlook of the pandemic improved, we made risk grade upgrades as deemed appropriate by management.

We classify loans as substandard when there is one or more well-defined weaknesses that jeopardize the repayment by the borrower and there is a distinct possibility that we could sustain some loss if the deficiency is not corrected. At September 30, 2021, substandard loans included accrual and nonaccrual loans of $177 million and $44.9 million, respectively. Special mention loans continue to accrue interest.

Nonperforming Assets

NPAs, which include nonaccrual loans and foreclosed properties, totaled $45.3 million at September 30, 2021, compared with $62.2 million at December 31, 2020. The decrease in NPAs since December 31, 2020 is primarily a result of paydowns and payoffs of nonaccrual loans.

 

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 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.

Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell, at the time of foreclosure is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the lesser of fair value, less estimated costs to sell, or the listed selling price, less the costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property expense. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property.

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The table below summarizes NPAs.

Table 12 - NPAs
(in thousands)

						September 30, 2021						December 31, 2020
			Nonaccrual loans:
			Owner occupied commercial real estate			4,945						8,582
			Income producing commercial real estate			13,462						15,149
			Commercial & industrial			8,507						16,634
			Commercial construction			1,202						1,745
			Equipment financing			1,845						3,405
			Total commercial			29,961						45,515
			Residential mortgage			13,222						12,858
			HELOC			1,364						2,487
			Residential construction			260						514
			Consumer			116						225
			Total nonaccrual loans			44,923						61,599
			Foreclosed properties			412						647
			Total NPAs			$	45,335					$	62,246
			Nonaccrual loans as a percentage of total loans			0.40		%				0.54		%
			NPAs as a percentage of total loans and foreclosed properties			0.41						0.55
			NPAs as a percentage of total assets			0.23						0.35

At September 30, 2021 and December 31, 2020, we had $53.0 million and $61.6 million, respectively, in loans with terms that have been modified in TDRs. Included therein were $16.4 million and $20.6 million, respectively, of TDRs that were classified as nonaccrual and were included in nonperforming loans. The remaining TDRs with an aggregate balance of $36.6 million and $41.0 million, respectively, were performing according to their modified terms and were therefore not considered to be nonperforming assets.

The CARES Act and interagency guidance granted temporary relief from TDR classification for certain loans restructured as a result of COVID-19. During 2020, we granted a significant number of payment deferral requests to our borrowers related to the economic disruption created by COVID-19. The following table presents remaining COVID-19 related deferrals. To the extent that these deferrals qualified under either the CARES Act or interagency guidance, they were not considered new TDRs as of September 30, 2021 and December 31, 2020.

Table 13 - COVID-19 Deferrals
(in thousands)

						September 30, 2021						December 31, 2020
			Owner occupied commercial real estate			$	3,433					$	4,774
			Income producing commercial real estate			—						45,190
			Commercial & industrial			404						5,682
			Commercial construction			—						1,745
			Equipment financing			2,384						3,474
			Total commercial			6,221						60,865
			Residential mortgage			2,519						8,731
			HELOC			125						1,012
			Residential construction			—						55
			Consumer			—						46
			Total COVID-19 deferrals			$	8,865					$	70,709

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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 September 30, 2021 and December 31, 2020, we had HTM debt securities with a carrying amount of $1.08 billion and $420 million, respectively, and AFS debt securities totaling $4.25 billion and $3.22 billion, respectively. The increased balances at September 30, 2021 reflect our decision to deploy liquidity generated through strong deposit growth by purchasing additional investment securities. At September 30, 2021 and December 31, 2020, the securities portfolio represented approximately 27% and 20%, respectively, of total assets.

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 September 30, 2021 and December 31, 2020, 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 an intent or more than likely requirement to sell, 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 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 September 30, 2021 and December 31, 2020, there was no ACL related to the AFS debt securities portfolio. Losses on fixed income securities at September 30, 2021 and December 31, 2020 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 September 30, 2021 and December 31, 2020, the net carrying amount of goodwill was $382 million and $368 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 FinTrust, we recorded goodwill and a customer relationship intangible of $14.2 million and $7.53 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. In addition to organic growth, at September 30, 2021, the increase in core transaction deposits was also attributable to PPP-related deposits. The growth in customer deposits has allowed us to reduce our utilization of brokered deposits, which is reflected in the decrease since December 31, 2020. The decline in time deposits is mostly driven by customer preference to allocate funds to more liquid transaction deposits in the current low rate environment. The following table sets forth the deposit composition for the periods indicated.

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Table 14 - Deposits

(in thousands) 

						September 30, 2021						December 31, 2020
			Noninterest-bearing demand			$	6,492,519					$	5,390,291
			NOW and interest-bearing demand			3,699,951						3,346,490
			Money market and savings			5,048,992						4,501,189
			Time			1,440,160						1,704,290
			Total customer deposits			16,681,622						14,942,260
			Brokered deposits			183,795						290,098
			Total deposits			$	16,865,417					$	15,232,358

Borrowing Activities

At September 30, 2021 and December 31, 2020, we had long-term debt outstanding of $247 million and $327 million, respectively, which includes senior debentures, subordinated debentures, and trust preferred securities. As a result of the additional liquidity provided by PPP loans and core deposit growth, we repaid several of our long-term debt instruments during the first nine months of 2021 including the 2025 subordinated debentures, the Southern Bancorp Capital Trust I trust preferred securities, the 2022 senior debentures, and the 2026 subordinated debentures, which combined reduced our long-term debt outstanding by $80.6 million.

Contractual Obligations

 

There have not been any material changes to our contractual obligations since December 31, 2020.

 

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.

 

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 22 to the consolidated financial statements included in our 2020 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

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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 several 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.

Table 15 - Interest Sensitivity

									Increase (Decrease) in Net Interest Revenue from Base Scenario at
									September 30, 2021												December 31, 2020
			Change in Rates						Shock						Ramp						Shock						Ramp
			100 basis point increase						4.78		%				3.93		%				3.80		%				2.88		%
			100 basis point decrease						(4.35)						(3.76)						(1.89)						(1.82)

 

Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities. These repricing characteristics are the time frames within which the interest-earning assets and interest-bearing liabilities are subject to change in interest rates either at replacement, repricing or maturity. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates. Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates on a net basis within an acceptable timeframe, thereby minimizing the potentially adverse effect of interest rate changes on net interest revenue.

 

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

 

Derivative financial instruments are used to manage interest rate sensitivity. These contracts generally consist of interest rate swaps under which we pay a variable rate (or fixed rate, as the case may be) and receive a fixed rate (or variable rate, as the case may be). In addition, investment securities and wholesale funding strategies are used to manage interest rate risk.

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

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

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Liquidity Management 

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

An important part of the Bank’s liquidity resides in the asset portion of the balance sheet, which provides liquidity primarily through loan interest and principal repayments and the maturities and sales of securities, as well as the ability to use these assets as collateral for borrowings on a secured basis.

The Bank’s main source of liquidity is customer interest-bearing and noninterest-bearing deposit accounts. Liquidity is also available from wholesale funding sources consisting primarily of 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. 

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. Effective July 1, 2021, the Bank became a South Carolina state-chartered bank, which permits the Bank 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. Prior to the conversion to a South Carolina state-chartered bank, Georgia law generally limited the payment of dividends by the Bank from retained earnings of up to 50% of its prior year earnings without requesting approval of the Georgia Department of Banking and Finance. Holding Company liquidity is managed to a minimum of 15-months of anticipated cash expenditures after considering all of its liquidity needs over this period.

At September 30, 2021, we had sufficient qualifying collateral to provide borrowing capacity for FHLB advances of $1.29 billion, as well as unpledged investment securities of $4.12 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.

Significant uses and sources of cash during the nine months ended September 30, 2021 are summarized below. See the consolidated statement of cash flows in this Report for further detail.

•Net cash provided by operating activities of $283 million reflects net income of $218 million adjusted for non-cash transactions, gains on sales of securities and other loans and changes in other assets and liabilities. Significant non-cash transactions for the period included a $36.9 million release of provision for credit losses and deferred income tax expense of $21.3 million.

•Net cash used in investing activities of $1.56 billion primarily consisted of purchases of AFS and HTM debt securities of $2.63 billion, partially offset by proceeds from securities sales, maturities and calls, reflecting our strategic decision to deploy excess liquidity into the securities portfolio.

•Net cash provided by financing activities of $1.48 billion was driven by strong deposit growth as our net increase in deposits totaled $1.63 billion, which was partially offset by our repayment of long-term debt of $80.6 million and dividends on common and preferred stock of $54.5 million.

In the opinion of management, our liquidity position at September 30, 2021 was sufficient to meet our expected cash flow requirements.

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Capital Resources and Dividends

 

Shareholders’ equity at September 30, 2021 was $2.12 billion, an increase of $115 million from December 31, 2020 primarily due to year-to-date earnings partially offset by dividends declared and unrealized losses on AFS debt securities.

The following table shows capital ratios, as calculated under applicable regulatory guidelines, at September 30, 2021 and December 31, 2020. As of September 30, 2021, capital levels remained characterized as “well-capitalized” under prompt corrective action provisions in effect at the time.

Additional information related to capital ratios, as calculated under regulatory guidelines, as of September 30, 2021 and December 31, 2020, is provided in Note 14 to the consolidated financial statements in this Report.

Table 16 – Capital Ratios

																								United Community Banks, Inc. (Consolidated)												United Community Bank
						Minimum						Well- Capitalized						Minimum Capital Plus Capital Conservation Buffer						September 30, 2021						December 31, 2020						September 30, 2021						December 31, 2020
Risk-based ratios:
CET1 capital						4.5		%				6.5		%				7.0		%				12.63		%				12.31		%				13.62		%				13.31		%
Tier 1 capital						6.0						8.0						8.5						13.38						13.10						13.62						13.31
Total capital						8.0						10.0						10.5						14.93						15.15						14.24						14.28
Leverage ratio						4.0						5.0						N/A						9.15						9.28						9.31						9.42

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 September 30, 2021 from that presented in our 2020 10-K. Our interest rate sensitivity position at September 30, 2021 is set forth in Table 15 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 September 30, 2021. 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 September 30, 2021 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 Aquesta acquisition and the proposed Reliant acquisition, which are set forth in the final prospectuses filed with the SEC pursuant to Rule 424(b)(3) respectively on August 6, 2021 and October 22, 2021 (and incorporated herein by this reference), there have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on February 25, 2021.

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

Unregistered Sales of Equity Securities

In connection with the FinTrust acquisition, on July 6, 2021, we issued 132,299 shares of our common stock without registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance upon the exemption from registration set forth in section 4(a)(2) of the Securities Act.

Issuer Purchases of Equity Securities

The following table contains information regarding purchases of our common stock made during the quarter ended September 30, 2021 by or on behalf of United or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Exchange Act:

(Dollars in thousands, except for per share amounts)						Total Number of Shares Purchased						Average Price Paid per Share						Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs						Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1, 2021 - July 31, 2021						171,985						$	29.05					171,985						$	39,902
August 1, 2021 - August 31, 2021						170,759						29.30						170,759						34,899
September 1, 2021 - September 30, 2021						—						—						—						—
Total						342,744						$	29.18					342,744						$	34,899

 

(1) In November of 2020, United’s Board re-authorized its common stock repurchase program to permit the repurchase of up to $50.0 million of its common stock. The program is scheduled to expire on the earlier of the repurchase of our common stock having an aggregate purchase price of $50 million or December 31, 2021. Under the program, shares may be repurchased in open market transactions or in privately negotiated transactions, from time to time, subject to market conditions, including transactions outside the safe harbor provided by Exchange Act Rule 10b-18 (but nevertheless adhering to Rule 10-b-18’s requirements). The approved share repurchase program does not obligate us to repurchase any dollar amount or number of shares.

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Item 6. Exhibits

(d)     Exhibits. See Exhibit Index below.

EXHIBIT INDEX
Exhibit No.						Description
2.1						Agreement and Plan of Merger and Reorganization, dated as of May 26, 2021, by and between United Community Banks, Inc. and Aquesta Financial Holdings, Inc. (incorporated by reference to Annex A to the proxy statement/prospectus filed by United Community Banks, Inc. with the SEC pursuant to Rule 424(b)(3) on August 6, 2021).
2.2						Agreement and Plan of Merger, dated as of July 14, 2021, by and between United Community Banks, Inc. and Reliant Bancorp, Inc. (incorporated herein by reference to Annex A to the proxy statement/prospectus filed by United Community Banks, Inc. with the SEC pursuant to Rule 424(b)(3) on October 22, 2021).
3.1						Restated Articles of Incorporation of United Community Banks, Inc. as amended through August 13, 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 September 30, 2021, 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 September 30, 2021 (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: November 5, 2021

 

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