# UNITED COMMUNITY BANKS INC (UCB) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from UNITED COMMUNITY BANKS INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/857855/000085785522000006/ucbi-20211231.htm
Accession: 0000857855-22-000006
Filing date: 2022-02-25
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/UCB/
All MD&A years: /company/UCB/mda/
Next year: /company/UCB/mda/fy2022/ (FY 2022)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes. The discussion of the components of our results of operations focuses on financial trends and events occurring between 2020 and 2021.

For additional information related to financial trends between 2020 and 2019 please see the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 25, 2021, which information under that caption is incorporated herein by this reference. Historical results of operations are not necessarily predictive of future results.

GAAP Reconciliation and Explanation

This Report contains financial information determined by methods other than in accordance with GAAP. Such non-GAAP financial information includes the following measures: “tangible book value per common share” and “tangible common equity to tangible assets.” In addition, management presents non-GAAP operating performance measures, which exclude merger-related and other items that are not part of our core business operations. Operating performance measures include “noninterest expenses – operating,” “net income – operating,” “diluted net income per common share – operating,” “return on common equity – operating,” “return on tangible common equity – operating,” “return on assets – operating” and “efficiency ratio – operating.” Management has developed internal processes and procedures to accurately capture and account for merger-related and other charges and those charges are reviewed with the audit committee of our Board each quarter. Management uses these non-GAAP measures because it believes they may provide useful supplemental information for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP measures may also provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as a comparison to financial results for prior periods. These non-GAAP measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP and are not necessarily comparable to other similarly titled measures used by other companies. To the extent applicable, reconciliations of these non-GAAP measures to the most directly comparable measures as reported in accordance with GAAP are included in Table 1 of MD&A.

Overview

We offer a wide array of commercial and consumer banking services and investment advisory services, which as of December 31, 2021 was comprised of a 171 branch network located throughout Georgia, South Carolina, North Carolina, Tennessee and Florida. We have grown organically as well as through strategic acquisitions. At December 31, 2021, we had consolidated total assets of $20.9 billion and 2,553 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 SCBFI. Prior to that, the Bank was a Georgia state-chartered bank subject to examination and reporting requirements of the GADBF. 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

In the past two years, we have continued to expand through acquisitions as follows: 

•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. We acquired total assets of $756 million, including $498 million in loans, and we assumed $658 million in deposits as of the acquisition date.

•On July 6, 2021, we acquired FinTrust, an investment advisory firm headquartered in Greenville, South Carolina, with additional locations in Anderson, South Carolina, and Athens and Macon, Georgia. The firm provides wealth and investment management services to individuals and institutions within its markets, which expands our Wealth Management division. As of December 31, 2021, FinTrust had assets under management of $2.19 billion.

•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, Seaside Wealth

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Management, and operated a 14-branch network located in key Florida metropolitan markets. We acquired total assets of $2.13 billion, including $1.43 billion in loans, and assumed $1.80 billion of deposits as of the acquisition date.

Subsequent to year-end, on January 1, 2022 we acquired Reliant, a bank headquartered in Brentwood, Tennessee, a suburb of Nashville, Tennessee. Reliant operates a 25 branch network in Tennessee, located primarily in the Nashville, Clarksville and Chattanooga metropolitan areas. It also has a manufactured housing finance group based in Knoxville. As of December 31, 2021, Reliant reported total assets of $3.00 billion, including loans of $2.38 billion, and deposits of $2.50 billion.

The acquired entities’ results are included in our consolidated results beginning on the respective acquisition dates. We continue to evaluate potential transactions as opportunities arise.

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 our participation in the CARES Act and PPP loan program. Loans with active COVID-19 payment deferrals have decreased by 96% since December 31, 2020, with $2.55 million outstanding at December 31, 2021.

LIBOR and Other Benchmark Rates

As previously disclosed, to facilitate an orderly transition from Interbank Offered Rates (“IBORs”) and other benchmark rates to alternative reference rates (“ARRs”), we have established an enterprise-wide program to identify, assess and monitor risks associated with the expected discontinuation or unavailability of benchmarks, including LIBOR. As part of this program, we continue to identify, assess and monitor risks associated with the expected discontinuation or unavailability of LIBOR and other benchmarks, and evaluate and address documentation and contractual mechanics of outstanding IBOR-based products and contracts that mature after 2021 and new and potential future ARR-based products and contracts to achieve operational readiness. This program includes active involvement of senior management and regular reports to the Enterprise Risk Committee. The program is structured to address the industry and regulatory engagement, client and financial contract changes, internal and external communications, technology and operations modifications, introduction of new products, migration of existing clients, and program strategy and governance. As the markets for ARRs continue to grow, we continue to monitor the development and usage of ARRs, including SOFR and BSBY. For more information on the expected replacement of LIBOR and other benchmark rates, see Part I, Item 1A. Risk Factors – Interest Rate and Yield Curve Risks of this Report.

Results of Operations

We reported net income of $270 million and net income - operating (non-GAAP) of $281 million in 2021. Net income - operating excludes merger related and other charges, which consists mostly of acquisition and branch closure costs. The following highlights the primary drivers of the increase in net income for 2021:

•We recorded a negative provision for credit losses of $37.6 million compared to provision expense of $80.4 million. The negative provision was mostly driven by a more favorable economic forecast as the state of the COVID-19 pandemic improved. The provision for 2020 included the combined impact of the transition of our allowance for credit losses methodology from incurred loss to CECL and the negative impact of the strained economic forecast due to the COVID-19 pandemic on our CECL model.

•Net interest revenue increased $47.3 million, which, in addition to loan growth, reflects the impact of deposit growth and the low interest rate environment on our net interest margin. During 2021, we further reduced our deposit interest rates and deployed surplus liquidity into our investment securities portfolio. Additionally, as a result of PPP loan forgiveness, accelerated recognition of related deferred fees and interest provided $7.05 million more in interest income on PPP loans compared to 2020. However, this was partially offset by a decrease in purchased loan accretion of $4.55 million compared to 2020.

•Noninterest income for 2021 was stable compared to 2020, which is the net result of several factors including an increase in wealth management fees, higher gains on other loan sales and other investments and a decrease in mortgage loan gains and related fees. The increase in wealth management fees mostly reflects the addition of FinTrust and a full year of fees from Seaside Wealth Management. The decrease in mortgage loan gains and fees is primarily volume driven as the robust demand for mortgage originations and refinances started to wane during the second half of 2021. See Tables 4 through 6 of MD&A for further detail on noninterest income.

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•Noninterest expenses increased $28.7 million, or 8%, compared to 2020. Most notably, salaries and employee benefits increased $17.4 million primarily due to growth in our employee base from acquisitions, higher commissions, incentives and bonuses reflecting strong performance during the year, offset by higher deferred loan origination costs from high loan production. Merger-related and other charges were up $6.95 million compared to 2020 reflective of our acquisition activity during 2021 and the Aquesta systems conversion completed during the fourth quarter of 2021. These increases were offset by a reduction of $9.29 million in advertising and public relations expense as 2020 included $10.0 million in contributions to establish our Foundation. See Table 7 of MD&A for further detail on noninterest expense.

Critical Accounting Estimates 

Our accounting and reporting policies are in accordance with GAAP and conform to general practices within the banking industry. Application of these principles requires management to make estimates, assumptions or judgments that affect the amounts reported in the financial statements and the accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments.

Estimates, assumptions or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon future events. Carrying assets and liabilities at fair value results in more financial statement volatility. The fair values and the information used to record the valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques. 

Certain policies inherently have a greater reliance on the use of estimates, assumptions or judgments and as such, have a greater possibility of producing results that could be materially different than originally reported. We have identified the determination of our ACL and fair value measurements to be the accounting areas that require the most subjective or complex judgments, estimates and assumptions, and where changes in those judgments, estimates and assumptions (based on new or additional information, changes in the economic climate and/or market interest rates, etc.) could have a significant effect on our financial statements. Therefore, we consider these policies, discussed below, to be critical accounting estimates and discuss them directly with the Audit Committee of our Board.

Our most significant accounting policies are presented in Note 1 to the accompanying consolidated financial statements. These policies, along with the disclosures presented in the other notes to the consolidated financial statements and in this MD&A, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. 

Allowance for Credit Losses 

The ACL represents management’s current estimate of credit losses for the remaining estimated life of financial instruments, with particular applicability on our balance sheet to loans and unfunded loan commitments. Estimating the amount of the ACL requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable and supportable forecasts, and the value of collateral on collateral-dependent loans. The loan portfolio also represents the largest asset type on our consolidated balance sheet. Loan losses are charged against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

There are many factors affecting the ACL; some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all the potential factors that could potentially result in credit losses, the process includes subjective elements and is susceptible to significant change. To the extent actual outcomes are worse than management estimates, additional provision for credit losses could be required that could adversely affect our earnings or financial position in future periods.

Additional information on the loan portfolio and ACL can be found in the sections of MD&A titled “Asset Quality and Risk Elements” and “Nonperforming Assets.” Note 1 to the consolidated financial statements includes additional information on accounting policies related to the ACL.

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Fair Value Measurements

At December 31, 2021, the percentage of our total assets measured at fair value on a recurring basis was 22%. See Note 14 “Fair Value Measurements” in the consolidated financial statements herein for additional disclosures regarding the fair value of our assets and liabilities, including a description of the fair value hierarchy.

Fair value is defined by GAAP “as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.” GAAP further defines an “orderly transaction” as “a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets. It is not a forced transaction (for example, a forced liquidation or distress sale).”

The fair values for AFS and HTM securities are generally based upon quoted market prices or observable market prices for similar instruments. Management utilizes a third-party pricing service to assist with determining the fair value of our securities portfolio. The pricing service uses observable inputs when available including benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers. These values take into account recent market activity as well as other market observable data such as interest rate, spread and prepayment information. When market observable data is not available, which generally occurs due to the lack of liquidity for certain securities, the valuation of the security is subjective and may involve substantial judgment by management.

We have elected the fair value option for our portfolio of mortgage loans held for sale in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the value of derivative instruments used to economically hedge them. The fair value of mortgage loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan, and as such is categorized as level 2. 

We use derivatives primarily to manage our interest rate risk or to help our customers manage their interest rate risk. The fair values of derivative financial instruments are determined based on quoted market prices, dealer quotes and internal pricing models that are primarily sensitive to market observable data. However, we do evaluate the level of these observable inputs and there are some instances where we have determined that the inputs are not directly observable.

We recognize a servicing rights asset upon the sale of residential mortgage loans and SBA/USDA loans sold with servicing retained. Servicing right assets are carried at fair value. Given the nature of these SBA/USDA and residential mortgage servicing assets, the key valuation inputs are unobservable and we disclose them as a level 3 item.

As of December 31, 2021, we had level 3 assets, those valued using unobservable inputs, of $40.8 million. The total level 3 assets consisted of $25.2 million in residential mortgage servicing rights, $6.76 million in derivative assets, $6.51 million in servicing rights for SBA/USDA loans and $2.40 million of AFS debt securities. We also had level 3 derivative liabilities totaling $5.05 million.

From time to time, we may record assets at fair value on a nonrecurring basis, usually as a result of the write-downs of individual assets due to impairment. In particular, nonaccrual loans may be carried at the fair value of collateral if repayment is expected solely from the collateral. Although management believes its processes for determining the fair value of collateral-dependent loans are appropriate, the processes require management judgment and assumptions and the value of such assets at the time they are revalued or divested may be significantly different from management’s determination of fair value.

For business combinations, we measure and record assets acquired and liabilities assumed at fair value at the date of acquisition, including identifiable intangible assets. Note 1 to the consolidated financial statements includes additional information on accounting policies and estimates related to acquisition activities.

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UNITED COMMUNITY BANKS, INC.

Table 1 Selected Financial Information

For the Years Ended December 31,

(in thousands, except per share data)

[[GREPCENT_TABLE]]
[["","","2021","","2020","","2019"],["INCOME SUMMARY"],["Interest revenue","","$","578,794","","","$","557,996","","","$","552,706"],["Interest expense","","29,760","","","56,237","","","83,312"],["Net interest revenue","","549,034","","","501,759","","","469,394"],["(Release of) provision for credit losses","","(37,550)","","","80,434","","","13,150"],["Noninterest income","","157,818","","","156,109","","","104,713"],["Total revenue","","744,402","","","577,434","","","560,957"],["Noninterest expenses","","396,639","","","367,989","","","322,245"],["Income before income tax expense","","347,763","","","209,445","","","238,712"],["Income tax expense","","77,962","","","45,356","","","52,991"],["Net income","","269,801","","","164,089","","","185,721"],["Merger-related and other charges","","13,970","","","7,018","","","7,357"],["Income tax benefit of merger-related and other charges","","(3,174)","","","(1,340)","","","(1,695)"],["Net income - operating (1)*","","$","280,597","","","$","169,767","","","$","191,383"],["PERFORMANCE MEASURES"],["Per common share:"],["Diluted net income - GAAP","","$","2.97","","","$","1.91","","","$","2.31"],["Diluted net income - operating (1)*","","3.09","","","1.98","","","2.38"],["Common stock cash dividends declared","","0.78","","","0.72","","","0.68"],["Book value","","23.63","","","21.90","","","20.53"],["Tangible book value (3)*","","18.42","","","17.56","","","16.28"],["Key Performance Ratios:"],["Return on common equity - GAAP (2)","","13.14","%","","9.25","%","","11.89","%"],["Return on common equity - operating (1)(2)*","","13.68","","","9.58","","","12.25"],["Return on tangible common equity - operating (1)(2)(3)*","","17.33","","","12.24","","","15.81"],["Return on assets - GAAP","","1.37","","","1.04","","","1.46"],["Return on assets - operating (1)*","","1.42","","","1.07","","","1.51"],["Net interest margin (FTE)","","3.07","","","3.55","","","4.07"],["Efficiency ratio - GAAP","","55.80","","","55.71","","","55.77"],["Efficiency ratio - operating (1)*","","53.83","","","54.64","","","54.50"],["Equity to total assets","","10.61","","","11.29","","","12.66"],["Tangible common equity to tangible assets (3)*","","8.09","","","8.81","","","10.32"],["ASSET QUALITY"],["Total NPAs","","$","32,855","","","$","62,246","","","$","35,817"],["ACL - loans","","102,532","","","137,010","","","62,089"],["Net charge-offs","","38","","","18,316","","","12,216"],["ACL - loans to loans","","0.87","%","","1.20","%","","0.70","%"],["Net charge-offs to average loans","","\u2014","","","0.17","","","0.14"],["NPAs to total assets","","0.16","","","0.35","","","0.28"],["AT PERIOD END ($ in millions)"],["Loans","","$","11,760","","","$","11,371","","","$","8,813"],["Investment securities","","5,653","","","3,645","","","2,559"],["Total assets","","20,947","","","17,794","","","12,916"],["Deposits","","18,241","","","15,232","","","10,897"],["Shareholders\u2019 equity","","2,222","","","2,008","","","1,636"],["Common shares outstanding (thousands)","","89,350","","","86,675","","","79,014"]]
[[/GREPCENT_TABLE]]

(1) Excludes merger-related and other charges, which includes amortization of certain executive change of control benefits, 2019 executive retirement charges and termination of the Funded Plan.. (2) Net income less preferred stock dividends, divided by average realized common equity, which excludes AOCI. (3) Excludes effect of acquisition related intangibles and associated amortization.

* Represents a non-GAAP measure. See reconciliation of non-GAAP measures to related GAAP financial measures on the following page. For more information, see “GAAP Reconciliation and Explanation” in the MD&A section of this Report.

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UNITED COMMUNITY BANKS, INC.

Table 1 (Continued) - Non-GAAP Performance Measures Reconciliation

Selected Financial Information

For the Years Ended December 31,

(in thousands, except per share data)

[[GREPCENT_TABLE]]
[["","","2021","","2020","","2019"],["Noninterest expense reconciliation"],["Noninterest expenses (GAAP)","","$","396,639","","","$","367,989","","","$","322,245"],["Merger-related and other charges","","(13,970)","","","(7,018)","","","(7,357)"],["Noninterest expenses - operating","","$","382,669","","","$","360,971","","","$","314,888"],["Net income reconciliation"],["Net income (GAAP)","","$","269,801","","","$","164,089","","","$","185,721"],["Merger-related and other charges","","13,970","","","7,018","","","7,357"],["Income tax benefit of merger-related and other charges","","(3,174)","","","(1,340)","","","(1,695)"],["Net income - operating","","$","280,597","","","$","169,767","","","$","191,383"],["Diluted income per common share reconciliation"],["Diluted income per common share (GAAP)","","$","2.97","","","$","1.91","","","$","2.31"],["Merger-related and other charges","","0.12","","","0.07","","","0.07"],["Diluted income per common share - operating","","$","3.09","","","$","1.98","","","$","2.38"],["Book value per common share reconciliation"],["Book value per common share (GAAP)","","$","23.63","","","$","21.90","","","$","20.53"],["Effect of goodwill and other intangibles","","(5.21)","","","(4.34)","","","(4.25)"],["Tangible book value per common share","","$","18.42","","","$","17.56","","","$","16.28"],["Return on tangible common equity reconciliation"],["Return on common equity (GAAP)","","13.14","%","","9.25","%","","11.89","%"],["Merger-related and other charges","","0.54","","","0.33","","","0.36"],["Return on common equity - operating","","13.68","","","9.58","","","12.25"],["Effect of goodwill and other intangibles","","3.65","","","2.66","","","3.56"],["Return on tangible common equity - operating","","17.33","%","","12.24","%","","15.81","%"],["Return on assets reconciliation"],["Return on assets (GAAP)","","1.37","%","","1.04","%","","1.46","%"],["Merger-related and other charges","","0.05","","","0.03","","","0.05"],["Return on assets - operating","","1.42","%","","1.07","%","","1.51","%"],["Efficiency ratio reconciliation"],["Efficiency ratio (GAAP)","","55.80","%","","55.71","%","","55.77","%"],["Merger-related and other charges","","(1.97)","","","(1.07)","","","(1.27)"],["Efficiency ratio - operating","","53.83","%","","54.64","%","","54.50","%"],["Tangible common equity to tangible assets reconciliation"],["Equity to assets (GAAP)","","10.61","%","","11.29","%","","12.66","%"],["Effect of goodwill and other intangibles","","(2.06)","","","(1.94)","","","(2.34)"],["Effect of preferred equity","","(0.46)","","","(0.54)","","","\u2014"],["Tangible common equity to tangible assets","","8.09","%","","8.81","%","","10.32","%"]]
[[/GREPCENT_TABLE]]

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Net Interest Revenue

Net interest revenue, which is the difference between the interest earned on assets and the interest paid on deposits and borrowed funds, is the single largest component of revenue. Management seeks to optimize this revenue while balancing interest rate, credit, and liquidity risks. The banking industry uses two key ratios to measure relative profitability of net interest revenue, which are the net interest spread and the net interest margin. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest spread eliminates the effect of noninterest-earning assets as well as noninterest-bearing deposits and other noninterest-bearing funding sources and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company’s balance sheet and is defined as net interest revenue as a percentage of total average interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with noninterest-bearing deposits and shareholders’ equity.

Net interest revenue for 2021 was $549 million, compared to $502 million for 2020. FTE net interest revenue totaled $553 million in 2021, an increase of $47.9 million, or 9%, from 2020. The net interest spread was 2.96% and 3.31% for 2021 and 2020, respectively, while the net interest margin was 3.07% and 3.55%, respectively. The following tables indicate the relationship between interest revenue and expense and the average amounts of assets and liabilities, which provide further insight into net interest spread and net interest margin for the periods indicated. The following discussion provides additional detail on the average balances and net interest revenue for the years ended December 31, 2021 and 2020.

For 2021, we reported a $21.4 million increase in FTE interest revenue compared to 2020. Although partially offset by the effect of the low interest rate environment, growth in average loans for the year ended December 31, 2021 of $1.02 billion compared to 2020 provided much of the increase in interest revenue. In addition to organic loan growth, the full year effect of loans acquired from Three Shores and the addition of loans acquired from Aquesta in the fourth quarter of 2021 contributed $560 million to the increase in average loans. PPP loan forgiveness, which resulted in a $92 million decrease in average PPP loans for 2021 compared to 2020, partially offset net loan growth. Additional components of loan interest revenue included PPP related interest income and accelerated recognition of deferred fees upon loan forgiveness and purchased loan accretion, which increased $7.05 million and decreased $4.55 million, respectively, in 2021 compared to 2020.

The increase in net interest revenue for 2021 was also positively affected by the reduction in deposit interest expense of $26.9 million, despite growing average interest-bearing deposits by $1.74 billion for the year ended December 31, 2021 compared to 2020. $461 million of the increase in average interest-bearing deposits was attributable to the inclusion of Three Shores deposits for the full year of 2021 and the addition of deposits from Aquesta in the fourth quarter of 2021. The decrease in interest expense was a result of our ability to further decrease rates paid on deposits in the current low rate environment, a higher proportion of our deposits residing in noninterest-bearing account types (38% in 2021 compared to 35% in 2020), a more favorable interest-bearing deposit mix and reduced utilization of higher-cost brokered time deposits.

The additional liquidity provided by deposit growth and PPP loan forgiveness more than provided for our funding needs and resulted in higher average cash balances and deployment of surplus liquidity into our investment portfolio. Average investment securities increased $2.08 billion and provided an increase in interest revenue of $9.56 million compared to 2020.

During 2021, the shift in the composition of average interest-earning assets to be more heavily comprised of investment securities and cash resulted in net interest margin and spread compression compared to 2020. In addition, the continuation of the historically low interest rate environment negatively impacted our asset sensitive balance sheet and contributed to the net interest margin compression.

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Table 2 - Average Consolidated Balance Sheets and Net Interest Margin Analysis

For the Years Ended December 31,

(in thousands, FTE)

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["","Average Balance","","Interest","","Avg. Rate","","Average Balance","","Interest","","Avg. Rate","","Average Balance","","Interest","","Avg. Rate"],["Assets:"],["Interest-earning assets:"],["Loans, net of unearned income (FTE) (1)(2)","$","11,485,876","","","$","504,015","","","4.39","%","","$","10,466,653","","","$","492,223","","","4.70","%","","$","8,708,035","","","$","475,803","","","5.46","%"],["Taxable securities (3)","4,446,712","","","61,994","","","1.39","","","2,532,750","","","55,031","","","2.17","","","2,475,102","","","69,920","","","2.82"],["Tax-exempt securities (FTE) (1)(3)","382,915","","","12,059","","","3.15","","","219,668","","","9,458","","","4.31","","","171,549","","","6,130","","","3.57"],["Federal funds sold and other interest-earning assets","1,680,151","","","4,784","","","0.28","","","1,007,059","","","4,753","","","0.47","","","254,370","","","3,499","","","1.38"],["Total interest-earning assets (FTE)","17,995,654","","","582,852","","","3.24","","","14,226,130","","","561,465","","","3.95","","","11,609,056","","","555,352","","","4.78"],["Noninterest-earning assets:"],["Allowance for credit losses","(121,586)","","","","","","","(106,812)","","","","","","","(62,900)"],["Cash and due from banks","139,728","","","","","","","136,702","","","","","","","121,649"],["Premises and equipment","230,276","","","","","","","217,751","","","","","","","220,523"],["Other assets (3)","1,013,956","","","","","","","993,584","","","","","","","798,649"],["Total assets","$","19,258,028","","","","","","","$","15,467,355","","","","","","","$","12,686,977"],["Liabilities and Shareholders\u2019 Equity:"],["Interest-bearing liabilities:"],["Interest-bearing deposits:"],["NOW and interest-bearing demand","$","3,610,601","","","5,468","","","0.15","","","$","2,759,383","","","7,735","","","0.28","","","$","2,249,713","","","13,665","","","0.61"],["Money market","3,972,358","","","5,380","","","0.14","","","3,023,928","","","13,165","","","0.44","","","2,221,478","","","18,983","","","0.85"],["Savings deposits","1,095,071","","","217","","","0.02","","","821,344","","","169","","","0.02","","","690,028","","","149","","","0.02"],["Time deposits","1,529,072","","","3,663","","","0.24","","","1,832,319","","","20,146","","","1.10","","","1,791,319","","","28,313","","","1.58"],["Brokered deposits","67,230","","","117","","","0.17","","","97,788","","","557","","","0.57","","","240,646","","","5,746","","","2.39"],["Total interest-bearing deposits","10,274,332","","","14,845","","","0.14","","","8,534,762","","","41,772","","","0.49","","","7,193,184","","","66,856","","","0.93"],["Federal funds purchased and other borrowings","44","","","\u2014","","","\u2014","","","1,220","","","3","","","0.25","","","33,504","","","838","","","2.50"],["FHLB advances","1,195","","","3","","","0.25","","","749","","","28","","","3.74","","","106,973","","","2,697","","","2.52"],["Long-term debt","276,492","","","14,912","","","5.39","","","274,069","","","14,434","","","5.27","","","247,732","","","12,921","","","5.22"],["Total borrowed funds","277,731","","","14,915","","","5.37","","","276,038","","","14,465","","","5.24","","","388,209","","","16,456","","","4.24"],["Total interest-bearing liabilities","10,552,063","","","29,760","","","0.28","","","8,810,800","","","56,237","","","0.64","","","7,581,393","","","83,312","","","1.10"],["Noninterest-bearing liabilities:"],["Noninterest-bearing deposits","6,276,094","","","","","","","4,600,152","","","","","","","3,385,431"],["Other liabilities","322,566","","","","","","","235,120","","","","","","","164,550"],["Total liabilities","17,150,723","","","","","","","13,646,072","","","","","","","11,131,374"],["Shareholders\u2019 equity","2,107,305","","","","","","","1,821,283","","","","","","","1,555,603"],["Total liabilities and shareholders\u2019 equity","$","19,258,028","","","","","","","$","15,467,355","","","","","","","$","12,686,977"],["Net interest revenue (FTE)","","","$","553,092","","","","","","","$","505,228","","","","","","","$","472,040"],["Net interest-rate spread (FTE)","","","","","2.96","%","","","","","","3.31","%","","","","","","3.68","%"],["Net interest margin (FTE) (4)","","","","","3.07","%","","","","","","3.55","%","","","","","","4.07","%"]]
[[/GREPCENT_TABLE]]

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

(2)Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued.

(3)Securities available for sale are shown at amortized cost. Pretax unrealized gains of $28.7 million, $67.3 million and $12.8 million in 2021, 2020 and 2019 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.

48

The following table shows the relative effect on net interest revenue resulting from changes in the average outstanding balances (volume) of interest-earning assets and interest-bearing liabilities and the rates we earned and paid on such assets and liabilities.

Table 3 - Change in Interest Revenue and Interest Expense

(in thousands, FTE)

[[GREPCENT_TABLE]]
[["","2021 Compared to 2020Increase (decrease) due to changes in","","2020 Compared to 2019Increase (decrease) due to changes in"],["","Volume","","Rate","","Total","","Volume","","Rate","","Total"],["Interest-earning assets:"],["Loans","$","46,031","","","$","(34,239)","","","$","11,792","","","$","88,168","","","$","(71,748)","","","$","16,420"],["Taxable securities","31,477","","","(24,514)","","","6,963","","","1,594","","","(16,483)","","","(14,889)"],["Tax-exempt securities","5,642","","","(3,041)","","","2,601","","","1,923","","","1,405","","","3,328"],["Federal funds sold and other interest-earning assets","2,386","","","(2,355)","","","31","","","4,788","","","(3,534)","","","1,254"],["Total interest-earning assets","85,536","","","(64,149)","","","21,387","","","96,473","","","(90,360)","","","6,113"],["Interest-bearing liabilities:"],["Interest-bearing deposits:"],["NOW and interest-bearing demand","1,946","","","(4,213)","","","(2,267)","","","2,602","","","(8,532)","","","(5,930)"],["Money market","3,239","","","(11,024)","","","(7,785)","","","5,431","","","(11,249)","","","(5,818)"],["Savings deposits","54","","","(6)","","","48","","","27","","","(7)","","","20"],["Time deposits","(2,879)","","","(13,604)","","","(16,483)","","","634","","","(8,801)","","","(8,167)"],["Brokered deposits","(137)","","","(303)","","","(440)","","","(2,273)","","","(2,916)","","","(5,189)"],["Total interest-bearing deposits","2,223","","","(29,150)","","","(26,927)","","","6,421","","","(31,505)","","","(25,084)"],["Federal funds purchased and other short-term borrowings","(1)","","","(2)","","","(3)","","","(431)","","","(404)","","","(835)"],["FHLB advances","11","","","(36)","","","(25)","","","(3,548)","","","879","","","(2,669)"],["Long-term debt","128","","","350","","","478","","","1,386","","","127","","","1,513"],["Total borrowed funds","138","","","312","","","450","","","(2,593)","","","602","","","(1,991)"],["Total interest-bearing liabilities","2,361","","","(28,838)","","","(26,477)","","","3,828","","","(30,903)","","","(27,075)"],["Increase in net interest revenue","$","83,175","","","$","(35,311)","","","$","47,864","","","$","92,645","","","$","(59,457)","","","$","33,188"]]
[[/GREPCENT_TABLE]]

Any variance attributable jointly to volume and rate changes is allocated to the volume and rate variance in proportion to the relationship of the absolute dollar amount of the change in each.

Provision for Credit Losses

The ACL represents management’s estimate of life of loan credit losses in the loan portfolio and unfunded loan commitments. Management’s estimate of credit losses under CECL is determined using a model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and resulting provision for credit losses. We recorded a negative provision for credit losses of $37.6 million in 2021, compared to provision expense of $80.4 million in 2020. 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 2021 was primarily a result of an improved economic forecast combined with low net charge-offs recognized during the period. During 2021, we had one large commercial credit recovery, strong recoveries from a number of other credits and lower charge-offs in comparison to 2020. The negative provision was partially offset by provision expense for the initial ACL recognized on Aquesta’s non-PCD loans and unfunded commitments of $2.98 million and $287,000, respectively, during the fourth quarter of 2021.

During 2020, the provision for credit losses was elevated due to our implementation of CECL combined with a stressed economic forecast amidst the COVID-19 pandemic. In addition, we recorded provision expense for the initial ACL recorded on Three Shores’ non-PCD loans and unfunded commitments of $9.78 million and $913,000, respectively. Loan growth also contributed to the higher provision for credit losses, but this impact on the provision was partially mitigated by the fact that PPP loans originated in 2020 are 100% government guaranteed, requiring no ACL.

Additional discussion on credit quality and the ACL is included in the “Asset Quality and Risk Elements” and “Critical Accounting Estimates” sections of this report, as well as Note 1 to the consolidated financial statements.

49

Noninterest Income

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

[[GREPCENT_TABLE]]
[["Table 4 - Noninterest Income"],["For the Years Ended December 31,"],["(in thousands)","","","","","","","Change"],["","2021","","2020","","2019","","2021-2020"],["Service charge and fees:"],["Overdraft fees","$","10,137","","","$","10,800","","","$","14,553","","","(6)","%"],["ATM and debit card interchange fees","13,737","","","13,299","","","13,517","","","3"],["Other service charges and fees","9,994","","","8,302","","","8,727","","","20"],["Total service charges and fees","33,868","","","32,401","","","36,797","","","5"],["Mortgage loan gains and related fees","58,446","","","76,087","","","27,145","","","(23)"],["Wealth management fees","18,998","","","9,240","","","6,150","","","106"],["Gains from sales of other loans, net","11,267","","","5,420","","","6,867","","","108"],["Securities gains (losses), net","83","","","748","","","(1,021)"],["Other noninterest income:"],["Other lending and loan servicing fees","9,427","","","8,028","","","4,054","","","17"],["Customer derivatives","3,198","","","6,392","","","2,875","","","(50)"],["Other investment gains","4,886","","","735","","","1,103"],["BOLI","3,552","","","5,080","","","5,417","","","(30)"],["Treasury management income","2,910","","","2,138","","","1,453","","","36"],["Other","11,183","","","9,840","","","13,873","","","14"],["Total other noninterest income","35,156","","","32,213","","","28,775","","","9"],["Total noninterest income","$","157,818","","","$","156,109","","","$","104,713","","","1"]]
[[/GREPCENT_TABLE]]

During 2021, total service charges and fees increased compared to 2020 primarily due to the addition of Three Shores and Aquesta customers and the receipt of larger vendor rebates, which were partially offset by a decrease in overdraft fees. Overdraft fees have remained at relatively low levels since the onset of the COVID-19 pandemic. During 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. During the fourth quarter of 2021, we updated our consumer overdraft policy to include the addition of a fee forgiveness feature, which provides one fee waiver per year per account, to increase the overdraft threshold, which is the amount an account balance must be overdrawn before a fee is charged, and to lower the daily fee item limit. We expect these changes to our overdraft policy to reduce our overdraft fee income in 2022.

Mortgage loan gains and related fees consist 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 closely 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.

Mortgage loan gains and related fees for 2021 decreased $17.6 million or 23% compared to 2020. The decrease is primarily attributable to a decrease in volume of mortgage rate locks and mortgage sales as demand for refinances and home purchases has started to normalize after several quarters of strong demand resulting from the drop in interest rates in early 2020. Additionally, our gain on sale spread for 2021 decreased to 4.18% compared to 4.55% for 2020, contributing to the decrease in mortgage loan gains. During both 2021 and 2020 we recorded negative adjustments related to fair value and decay to the mortgage servicing rights asset; however, the negative adjustments recorded in 2021 of $3.57 million were significantly less than those recorded in 2020 of $9.25 million, which offset the decrease in mortgage loan gains for 2021.

50

[[GREPCENT_TABLE]]
[["Table 5 - Selected Mortgage Metrics"],["For the Years Ended December 31,"],["(dollars in thousands)"],["","","2021","","2020","","","","Change"],["","Mortgage rate locks","$","3,120,137","","","$","3,304,774","","","","","(6)","%"],["","# of mortgage rate locks","8,956","","","11,539","","","","","(22)"],["","Mortgage loans sold","$","1,347,105","","","$","1,466,314","","","","","(8)"],["","# of mortgage loans sold","5,535","","6,344","","","","(13)"],["","Mortgage loans originated"],["","Purchases","$","1,386,046","","","$","1,128,412","","","","","23"],["","Refinances","1,039,192","","","993,650","","","","","5"],["","Total","$","2,425,238","","","$","2,122,062","","","","","14"],["","# of mortgage loans originated","7,169","","","7,631","","","","","(6)"]]
[[/GREPCENT_TABLE]]

Our SBA/USDA lending strategy includes selling a portion of the loan production each quarter. The amount of loans sold depends on several variables including the current lending environment and balance sheet management activities. From time to time, we also sell certain equipment financing receivables based on market conditions. During 2021, we sold a higher volume of SBA and equipment financing receivables, as well as USDA renewable energy loans. We sold fewer SBA loans during 2020 as a result of less-favorable pricing for these loans during the first quarter of 2020, due to the market disruption caused by the COVID-19 pandemic. The following table presents loans sold and corresponding gains recognized on SBA/USDA loans and other loans sold for the periods indicated.

[[GREPCENT_TABLE]]
[["Table 6 - Other Loan Sales"],["For the Years Ended December 31,"],["(in thousands)","2021","","2020"],["","","Loans Sold","","Gain","","Loans Sold","","Gain"],["","Guaranteed portion of SBA/USDA loans","$","90,903","","","$","8,843","","","$","48,385","","","$","4,132"],["","Equipment financing receivables","59,097","","","2,424","","","27,018","","","1,288"],["","Total","$","150,000","","","$","11,267","","","$","75,403","","","$","5,420"]]
[[/GREPCENT_TABLE]]

The increase in wealth management fees for 2021 compared to 2020 was driven by the growth in our wealth management business through the acquisition of FinTrust and the inclusion of Seaside Wealth Management for the full year of 2021. As of December 31, 2021, we had assets under management and assets under advisement totaling $4.69 billion, which included FinTrust, Seaside Wealth Management and United Community Bank Advisory Services, compared to $2.31 billion as of December 31, 2020, which included Seaside Wealth Management and United Community Bank Advisory Services.

The change in other noninterest income for 2021 compared to 2020 was primarily driven by the following factors:

•Other investment performance in 2021 yielded net higher positive fair value adjustments when compared to 2020. During the first half of 2020, we recorded negative fair value adjustments resulting from the COVID-19 pandemic related market disruption. These losses were more than offset by gains recorded during the second half of 2020 as the pandemic outlook improved.

•Lending and loan servicing fees for 2021 increased compared 2020, mostly due to volume-driven fee income from our equipment finance business, partially offset by negative fair value adjustments to our SBA/USDA servicing asset.

•BOLI income decreased compared to the previous two years as we recognized death benefits in 2020 and 2019, whereas no such benefits were recognized during 2021.

•Customer derivative income for 2021 decreased compared to 2020 due to increases in interest rates negatively impacting the demand for customer derivative products. This was partially offset by the reduction of a credit valuation adjustment to certain of our customer derivatives during the fourth quarter of 2021 due to the underlying loans being upgraded.

51

Noninterest Expenses

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

[[GREPCENT_TABLE]]
[["Table 7 - Noninterest Expenses"],["For the Years Ended December 31,"],["(in thousands)","","","","","","","Change"],["","2021","","2020","","2019","","2021-2020"],["Salaries and employee benefits","$","241,443","","","$","224,060","","","$","196,440","","","8","%"],["Occupancy","28,619","","","25,791","","","23,350","","","11"],["Communications and equipment","29,829","","","27,149","","","24,613","","","10"],["Professional fees","20,589","","","18,032","","","17,028","","","14"],["Lending and loan servicing expense","10,859","","","10,993","","","9,416","","","(1)"],["Outside services - electronic banking","9,481","","","7,513","","","7,020","","","26"],["Postage, printing and supplies","7,110","","","6,779","","","6,370","","","5"],["Advertising and public relations","5,910","","","15,203","","","6,170","","","(61)"],["FDIC assessments and other regulatory charges","7,398","","","5,982","","","4,901","","","24"],["Amortization of intangibles","4,045","","","4,168","","","4,489","","","(3)"],["Other","17,386","","","15,301","","","15,092","","","14"],["Total excluding merger-related and other charges and amortization of noncompete agreements","382,669","","","360,971","","","314,889","","","6"],["Merger-related and other charges","13,970","","","7,018","","","6,907","","","99"],["Amortization of noncompete agreements","\u2014","","","\u2014","","","449"],["Total noninterest expenses","$","396,639","","","$","367,989","","","$","322,245","","","8"]]
[[/GREPCENT_TABLE]]

Noninterest expenses for 2021 totaled $397 million, up 8% from 2020. The addition of Three Shores, FinTrust and Aquesta’s operating expenses for the full year, second half and fourth quarter of 2021, respectively, contributed to the increase, particularly in salaries and benefits and occupancy costs.

Salaries and employee benefits for 2021 increased $17.4 million compared to 2020. In addition to the growth in our employee base from acquisitions, the increase was also attributable to increased mortgage, brokerage, and equipment finance commissions as well as other incentives and bonuses resulting from strong performance during the year. The increase also reflects merit increases awarded during the second quarter of 2021. These increases were partially offset by higher deferred loan origination costs resulting from increased loan production. Full time equivalent headcount totaled 2,553 at December 31, 2021, up from 2,399 at December 31, 2020.

Communications and equipment expense increased primarily due to incremental software contract costs. The increase in professional fees was primarily driven by an increase in legal fees compared to 2020. FDIC assessments and other regulatory charges increased compared to 2020 as a result of higher FDIC assessments driven by the increase in our average total assets. The increase in outside services - electronic banking reflects higher volume-based ATM network and internet banking costs. Advertising and public relations expense decreased compared to 2020 as 2020 included $10.0 million in contributions to the United Community Bank Foundation in its inaugural year.

Merger-related and other charges for 2021 were primarily related to the acquisitions of FinTrust and Aquesta. Merger-related and other charges for 2020 primarily consisted of merger costs related to the acquisition of Three Shores, severance, and branch closure costs.

Balance Sheet Review

Total assets at December 31, 2021 were $20.9 billion, an increase of $3.15 billion, or 18%, from December 31, 2020. Total liabilities at December 31, 2021 were $18.7 billion, an increase of $2.94 billion, or 19% from December 31, 2020. Shareholders’ equity totaled $2.22 billion and $2.01 billion at December 31, 2021 and 2020, respectively. The following discussion of the major components of our balance sheet highlights significant activity resulting in the change in our financial condition between December 31, 2020 and December 31, 2021.

52

Loans

Our loan portfolio is our largest category of interest-earning assets. At December 31, 2021, total loans were $11.8 billion compared to $11.4 billion at December 31, 2020, an increase of 3%. The net increase in loans was primarily attributable to organic growth and loans acquired in the Aquesta transaction of $498 million, partially offset by PPP loan forgiveness. PPP loans outstanding as of December 31, 2021 and 2020 were $88.3 million and $646 million, respectively, a decrease of $558 million. The following presents the composition of our loan portfolio as of the dates indicated.

Table 8 - Loan Portfolio Composition

As of December 31, 2021

The following table sets forth the maturity distribution of our loan portfolio, including the interest rate sensitivity for loans maturing after one year. Approximately 73% of all loans were secured by real estate at year-end 2021.

Table 9 - Loan Portfolio Maturity

As of December 31, 2021

(in thousands)

[[GREPCENT_TABLE]]
[["","Maturity","","Rate Structure for Loans Maturing Over One Year"],["","One Year or Less","","2 - 5 Years","","6 - 15 Years","","After 15 Years","","Total","","Fixed Rate","","Floating Rate"],["Owner occupied commercial real estate","$","159,435","","","$","831,406","","","$","1,229,102","","","$","101,742","","","$","2,321,685","","","$","1,530,653","","","$","631,597"],["Income producing commercial real estate","408,865","","","1,427,209","","","737,811","","","26,973","","","2,600,858","","","1,179,225","","","1,012,768"],["Commercial & industrial (1)","345,996","","","1,017,122","","","457,002","","","90,042","","","1,910,162","","","638,924","","","925,242"],["Commercial construction","277,397","","","510,188","","","200,535","","","26,710","","","1,014,830","","","202,731","","","534,702"],["Equipment financing","42,303","","","853,858","","","186,860","","","\u2014","","","1,083,021","","","1,040,718","","","\u2014"],["Total commercial","1,233,996","","","4,639,783","","","2,811,310","","","245,467","","","8,930,556","","","4,592,251","","","3,104,309"],["Residential mortgage","24,182","","","19,338","","","131,107","","","1,463,258","","","1,637,885","","","569,070","","","1,044,633"],["HELOC","22,150","","","31,325","","","86,097","","","554,462","","","694,034","","","730","","","671,154"],["Residential construction","312,021","","","10,101","","","36,407","","","1,286","","","359,815","","","12,567","","","35,227"],["Consumer direct","28,707","","","95,075","","","11,505","","","2,769","","","138,056","","","98,775","","","10,574"],["Total loans","$","1,621,056","","","$","4,795,622","","","$","3,076,426","","","$","2,267,242","","","$","11,760,346","","","$","5,273,393","","","$","4,865,897"]]
[[/GREPCENT_TABLE]]

(1) Includes $88.3 million of PPP loans.

53

As of December 31, 2021, our 25 largest credit relationships consisted of loans and loan commitments ranging from $23.9 million to $63.9 million, with an aggregate total credit exposure of $881 million. Total credit exposure included $264 million in unfunded commitments and $617 million in balances outstanding, excluding participations sold.

Asset Quality and Risk Elements 

We manage asset quality and control credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices. Our credit administration function is responsible for monitoring asset quality and Board approved portfolio concentration limits, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures. Additional information on our credit administration function is included in Part I, Item 1 of this Report under the heading “Lending Activities.” 

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

The ACL reflects management’s assessment of the life of loan expected credit losses in the loan portfolio and unfunded loan commitments. This assessment involves uncertainty and judgment and is subject to change in future periods. The amount of any changes could be significant if the assessment of loan quality or collateral values changes substantially with respect to one or more loan relationships or portfolios or if there is a significant change in the reasonable and supportable forecast used to model our expected credit losses. The allocation of the ACL is based on reasonable and supportable forecasts, historical data, subjective judgment and estimates and therefore, may not be predictive of the specific amounts or loan categories in which charge-offs may ultimately occur. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for credit losses in future periods if, in their opinion, the results of their review warrant such additions. See the Critical Accounting Estimates section for additional information on the ACL.

The ACL, which includes a portion related to unfunded commitments, totaled $114 million at December 31, 2021 compared with $148 million at December 31, 2020. At December 31, 2021, the ACL for loans was $103 million, or 0.87% of total loans, compared with $137 million, or 1.20%, of loans at December 31, 2020.

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 concerns in several COVID-19 impacted industries as evidenced by elevated levels of criticized loans, as well as concerns over the impact of inflationary pressure on commercial real estate values. The ACL at December 31, 2021 reflects $3.54 million of allowance established for Aquesta PCD loans at acquisition with no impact to earnings, as well as the impact of loan growth during 2021, including the non-PCD loans received through the Aquesta acquisition.

The ACL as of December 31, 2020 reflects the implementation of CECL on January 1, 2020, which added $6.88 million to the ACL for loans and $1.87 million to the reserve for unfunded commitments, the negative impact of the COVID-19 pandemic on the economic forecast used in our CECL model, $11.2 million of allowance established for Three Shores PCD loans at acquisition with no impact to earnings, as well as the impact of loan growth during 2020 including the non-PCD loans received through the Three Shores acquisition. The impact of loan growth on the ACL was partially mitigated by the fact that PPP loans are considered low risk assets due to the 100% guarantee by the SBA.

54

 The following table summarizes the allocation of the ACL for each of the past three years.

Table 10 - Allocation of ACL

As of December 31,

(in thousands)

[[GREPCENT_TABLE]]
[["","CECL","","Incurred Loss"],["","2021","","2020","","2019"],["","ACL","","% of loans in each category to total loans","","ACL","","% of loans in each category to total loans","","ACL","","% of loans in each category to total loans"],["Owner occupied commercial real estate","$","14,282","","","20","","","$","20,673","","","18","","","$","11,404","","","20"],["Income producing commercial real estate","24,156","","","22","","","41,737","","","22","","","12,306","","","23"],["Commercial & industrial","16,592","","","16","","","22,019","","","22","","","5,266","","","14"],["Commercial construction","9,956","","","9","","","10,952","","","9","","","9,668","","","11"],["Equipment financing","16,290","","","9","","","16,820","","","8","","","7,384","","","8"],["Total commercial","81,276","","","76","","","112,201","","","79","","","46,028","","","76"],["Residential mortgage","12,390","","","14","","","15,341","","","11","","","8,081","","","13"],["HELOC","6,568","","","6","","","8,417","","","6","","","4,575","","","7"],["Residential construction","1,847","","","3","","","764","","","3","","","2,504","","","3"],["Consumer","451","","","1","","","287","","","1","","","901","","","1"],["Total ACL - loans","102,532","","","100","","","137,010","","","100","","","62,089","","","100"],["ACL - unfunded commitments","10,992","","","","","10,558","","","","","3,458"],["Total ACL","$","113,524","","","","","$","147,568","","","","","$","65,547"],["ACL- loans as a percentage of total loans","0.87","%","","","","1.20","%","","","","0.70","%"]]
[[/GREPCENT_TABLE]]

The following table summarizes net charge-offs to average loans for each of the past three years.

Table 11 - Net Charge-offs

Years Ended December 31,

(in thousands) 

[[GREPCENT_TABLE]]
[["","2021","","2020","","2019"],["","Average Loans","","Net Charge-Offs (Recoveries)","","Net Charge-Offs to Average Loans","","Average Loans","","Net Charge-Offs (Recoveries)","","Net Charge-Offs to Average Loans","","Average Loans","","Net Charge-Offs (Recoveries)","","Net Charge-Offs to Average Loans"],["Owner occupied commercial real estate","$","2,159,153","","","$","316","","","0.01","%","","$","1,867,935","","","$","(2,495)","","","(0.13)","%","","$","1,661,068","","","$","(370)","","","(0.02)","%"],["Income producing commercial real estate","2,571,923","","","(229)","","","(0.01)","","","2,283,157","","","4,884","","","0.21","","","1,909,934","","","944","","","0.05"],["Commercial & industrial","2,242,764","","","(2,499)","","","(0.11)","","","2,297,522","","","9,336","","","0.41","","","1,273,645","","","4,997","","","0.39"],["Commercial construction","958,791","","","(747)","","","(0.08)","","","967,030","","","(319)","","","(0.03)","","","932,806","","","(875)","","","(0.09)"],["Equipment financing","971,355","","","3,105","","","0.32","","","794,042","","","6,760","","","0.85","","","665,318","","","4,894","","","0.74"],["Residential mortgage","1,462,421","","","(220)","","","(0.02)","","","1,197,511","","","(57)","","","\u2014","","","1,092,447","","","135","","","0.01"],["HELOC","675,873","","","(405)","","","(0.06)","","","680,775","","","(456)","","","(0.07)","","","675,115","","","386","","","0.06"],["Residential construction","301,591","","","(147)","","","(0.05)","","","243,133","","","(63)","","","(0.03)","","","217,810","","","149","","","0.07"],["Consumer*","142,005","","","864","","","0.61","","","135,548","","","726","","","0.54","","","279,892","","","1,956","","","0.70"],["","$","11,485,876","","","$","38","","","\u2014","","","$","10,466,653","","","$","18,316","","","0.17","","","$","8,708,035","","","$","12,216","","","0.14"]]
[[/GREPCENT_TABLE]]

*2019 amounts include indirect auto loans.

55

Nonperforming Assets

The following table presents NPAs, which consist of nonaccrual loans and foreclosed properties, for the periods indicated.

Table 12 - NPAs

As of December 31,

(in thousands)

[[GREPCENT_TABLE]]
[["","","2021","","2020","","2019"],["","Nonaccrual loans","$","32,812","","","$","61,599","","","$","35,341"],["","Foreclosed properties","43","","","647","","","476"],["","Total NPAs","$","32,855","","","$","62,246","","","$","35,817"],["","Nonaccrual loans to total loans","0.28","%","","0.54","%","","0.40","%"],["","NPAs to total assets","0.16","","","0.35","","","0.28"],["","ACL - loans to nonaccrual loans coverage ratio","3.12","","2.22","","1.76"]]
[[/GREPCENT_TABLE]]

The decrease in NPAs since December 31, 2020 was primarily a result of a decrease in nonaccrual loans, which resulted from a combination of payoffs and paydowns.

At December 31, 2021 and 2020, we had $52.4 million and $61.6 million, respectively, in loans with terms that have been modified in a TDR. Included therein were $11.5 million and $20.6 million, respectively, of TDRs that were nonaccrual loans. The remaining TDRs with aggregate balances of $40.9 million and $41.0 million, respectively, were performing according to their modified terms and were therefore not considered to be NPAs.

The CARES Act and interagency guidance granted temporary relief from TDR classification for certain loans restructured as a result of the impact of the COVID-19 pandemic. During 2020 and early 2021, we granted a significant number of payment deferral requests to our borrowers related to the economic disruption created by the COVID-19 pandemic. To the extent that these deferrals qualified under either the CARES Act or interagency guidance, they were not considered new TDRs. The majority of borrowers who were granted a payment deferral have since returned to their normal payment schedules. As of December 31, 2021 and 2020, COVID-19 related deferrals totaled $2.55 million and $70.7 million, respectively.

Investment Securities

The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk in other categories of the balance sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits and borrowings. During 2021, strong deposit growth provided surplus liquidity, which we strategically deployed into our investment securities portfolio. The table below presents a summary of our investment securities balances as of the dates indicated.

Table 13 - Investment Securities

As of December 31,

(in thousands)

[[GREPCENT_TABLE]]
[["","","2021","","2020"],["","","Carrying Value","","% of portfolio","","Carrying Value","","% of portfolio","","2021 - 2020$ Change"],["","AFS","$","4,496,824","","","80","%","","$","3,224,721","","","88","%","","$","1,272,103"],["","HTM","1,156,098","","","20","","","420,361","","","12","","","735,737"],["","Total Investment Securities","$","5,652,922","","","","","$","3,645,082","","","","","$","2,007,840"],["","Investment securities as a % of total assets","27","%","","","","20","%"]]
[[/GREPCENT_TABLE]]

56

Table 14 - Investment Securities Portfolio Composition

As of December 31,

Mortgage-backed securities, which include both U.S. government sponsored agency and non-agency securities, make up the largest portion of our investment securities portfolio. As we have grown our portfolio, we have continued to purchase mortgage-backed securities in order to obtain a favorable yield with low risk. These securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest. The actual maturities of these securities will differ from the contractual maturities because the loans underlying the security can prepay. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining or prolonged low interest rate environment, we may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields. In a rising rate environment, the opposite may occur. Prepayments tend to slow and the weighted average life extends. This is referred to as extension risk, which can lead to lower levels of liquidity due to the delay of cash receipts, and can result in the holding of a below market yielding asset for a longer period of time.

As shown in the chart above, 75% of our investment securities portfolio is comprised of U.S. government or government sponsored agency securities. In addition, as of December 31, 2021, our state and political subdivision securities were all rated A or better. As a reflection of the high credit quality of the portfolio, at December 31, 2021 and 2020, no ACL for HTM or AFS debt securities was recorded. See Note 5 to the consolidated financial statements for further discussion of the investment portfolio and related fair value and maturity information. Unrealized losses on fixed income securities at December 31, 2021 primarily reflected the effect of changes in interest rates.

Goodwill and Other Intangible Assets

Goodwill represents the premium paid for acquired companies above the fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets. Management evaluates goodwill for impairment annually, or more frequently if a triggering event indicates there may be impairment. Upon the occurrence of a triggering event, a qualitative assessment is performed to determine whether it is more likely than not that the fair value of the entity is less than its carrying amount. When it is more likely than not that impairment has occurred, management is required to perform a quantitative analysis and, if necessary, adjust the carrying amount of goodwill by recording a goodwill impairment loss. During much of 2020 our common stock price traded below book value due to market concerns about the potential economic impact of the COVID-19 pandemic. As a result, we performed a qualitative assessment of goodwill at the end of each quarter of 2020, none of which yielded a determination that it was more likely than not our fair value was less than our carrying value. During the fourth quarter of 2020 and throughout 2021, our stock price returned to trading above book value. Our annual assessment during the fourth quarter of 2021 gave no indication that it was more likely than not that our fair value was less than our carrying value.

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.

57

In connection with the acquisition of Aquesta, we recorded goodwill and a core deposit intangible of $70.0 million and $2.03 million, respectively. 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. Customer deposits as of December 31, 2021 were up $3.11 billion, or 21%, compared to December 31, 2020, which has allowed us to reduce our utilization of brokered deposits. Much of the growth is due to COVID stimulus funds which have boosted deposits across the banking industry. In addition to organic growth, the increase in customer deposits was also attributable to $658 million of deposits acquired from Aquesta as of the acquisition date. Our customer deposit composition has shifted from time deposits to transaction deposits as customer preference has shifted to allocate funds to more liquid account types in the current low rate environment. The following table sets forth the deposit composition for the periods indicated. As of December 31, 2021 and 2020, we had $7.97 billion and $5.08 billion, respectively, in uninsured deposits.

Table 15 - Deposits

As of December 31,

(in thousands) 

[[GREPCENT_TABLE]]
[["","","2021","","2020"],["","","Balance","","Customer Deposit Composition","","Balance","","Customer Deposit Composition"],["","Noninterest-bearing demand","$","6,956,981","","","38","%","","$","5,390,291","","","36","%"],["","NOW and interest-bearing demand","4,252,209","","","24","","","3,346,490","","","22"],["","Money market and savings","5,399,133","","","30","","","4,501,189","","","30"],["","Time","1,442,498","","","8","","","1,704,290","","","12"],["","Total customer deposits","18,050,821","","","100","%","","14,942,260","","","100","%"],["","Brokered deposits","190,358","","","","","290,098"],["","Total deposits","$","18,241,179","","","","","$","15,232,358"]]
[[/GREPCENT_TABLE]]

The following table sets forth the scheduled maturities of time deposits greater than $250,000.

Table 16 - Maturities of Time Deposits Greater than $250,000

As of December 31, 2021

(in thousands) 

[[GREPCENT_TABLE]]
[["","Three months or less","$","91,874"],["","Over three through six months","48,784"],["","Over six months through twelve months","76,457"],["","Over one year","38,497"],["","Total","$","255,612"]]
[[/GREPCENT_TABLE]]

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.

58

The Bank’s main source of liquidity is customer interest-bearing and noninterest-bearing deposit accounts, which we are able to attract at any time by competing more aggressively on pricing. Liquidity is also available from wholesale funding sources consisting primarily of Federal funds purchased, FHLB advances, and brokered deposits. These sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs. At December 31, 2021, we had sufficient qualifying collateral to increase FHLB advances by $1.19 billion. We also had unpledged investment securities of $4.19 billion at December 31, 2021 that could be used as collateral for additional borrowings.

In addition, because the Holding Company is a separate entity and apart from the Bank, it must provide for its own liquidity. The Holding Company is responsible for the payment of dividends declared for its common and preferred shareholders, and interest and principal on any outstanding debt or trust preferred securities. The Holding Company currently has internal capital resources to meet these obligations. While the Holding Company has access to the capital markets and maintains a line of credit as a contingent funding source, the ultimate sources of its liquidity are subsidiary service fees and dividends from the Bank, which are limited by applicable law and regulations. In 2021 and 2020, the Bank paid dividends of $217 million and $150 million, respectively, to the Holding Company. Holding Company liquidity is managed to a minimum of 15-months of positive cash flow after considering all of its liquidity needs over this period.

Significant uses and sources of cash during the year ended December 31, 2021 are summarized below. See the consolidated statement of cash flows in this Report for further detail.

•Net cash provided by operating activities of $359 million reflects net income of $270 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 release of provision for credit losses of $37.6 million and deferred income tax expense of $20.8 million.

•Net cash used in investing activities of $1.81 billion consisted primarily of $3.39 billion of purchases of AFS and HTM debt securities, partially offset by $1.33 billion 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 $2.16 billion consisted primarily of a net increase in deposits of $2.35 billion, which was partially offset by the net repayment of long-term debt of $80.6 million, $73.8 million in common and preferred stock dividends, and repurchases of common stock of $15.1 million.

In the opinion of management, our liquidity position at December 31, 2021 was sufficient to meet our expected cash requirements.

59

The following table presents the amortized cost of securities by contractual maturity of investment securities and weighted average yields on a FTE basis. The composition and maturity / repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs..Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations. 

Table 17 - Contractual Maturity of AFS and HTM Debt Securities

As of December 31, 2021

(in thousands)

[[GREPCENT_TABLE]]
[["","Maturity By Years"],["","1 or Less","","1 to 5","","6 to 10","","Over 10","","Total"],["","Balance","","WA Yield","","Balance","","WA Yield","","Balance","","WA Yield","","Balance","","WA Yield","","Balance","","WA Yield"],["AFS"],["U.S. Treasuries","$","54,974","","1.95","%","","$","74,101","","1.68","%","","$","88,952","","0.96","%","","$","\u2014","","\u2014","%","","$","218,027","","1.46","%"],["U.S. Government agencies & GSEs","87","","1.40","","","22,946","","1.39","","","79,812","","1.21","","","87,010","","1.75","","","189,855","","1.48"],["State and political subdivisions","15,008","","2.53","","","33,290","","3.00","","","135,265","","2.69","","","79,706","","3.46","","","263,269","","2.96"],["Residential MBS, Agency & GSE","\u2014","","\u2014","","","7,994","","2.32","","","34,629","","2.45","","","2,037,077","","1.35","","","2,079,700","","1.37"],["Residential MBS, Non-agency","\u2014","","\u2014","","","\u2014","","\u2014","","","\u2014","","\u2014","","","81,925","","3.06","","","81,925","","3.06"],["Commercial MBS, Agency & GSE","897","","0.65","","","118,803","","1.79","","","282,086","","0.96","","","468,777","","1.33","","","870,563","","1.27"],["Commercial MBS, Non-agency","\u2014","","\u2014","","","\u2014","","\u2014","","","\u2014","","\u2014","","","15,202","","4.19","","","15,202","","4.19"],["Corporate bonds","2,657","","0.61","","","100,553","","1.42","","","90,169","","1.91","","","785","","2.76","","","194,164","","1.64"],["Asset-backed securities","655","","3.02","","","376,006","","0.36","","","24,073","","0.51","","","203,090","","1.02","","","603,824","","0.59"],["Total AFS securities","$","74,278","","2.01","","","$","733,693","","1.04","","","$","734,986","","1.48","","","$","2,973,572","","1.45","","","$","4,516,529","","1.40"],["HTM"],["U.S. Treasuries","$","\u2014","","\u2014","%","","$","\u2014","","\u2014","%","","$","19,803","","1.40","%","","$","\u2014","","\u2014","%","","$","19,803","","1.40","%"],["U.S. Government agencies & GSEs","\u2014","","\u2014","","","\u2014","","\u2014","","","31,962","","1.61","","","38,218","","1.77","","","70,180","","1.70"],["State and political subdivisions","5,200","","3.70","","","8,762","","4.64","","","38,188","","2.02","","","205,538","","2.51","","","257,688","","2.53"],["Residential MBS, Agency & GSE","\u2014","","\u2014","","","4,573","","2.86","","","9,152","","2.62","","","367,916","","1.92","","","381,641","","1.95"],["Commercial MBS, Agency & GSE","\u2014","","\u2014","","","1,651","","2.40","","","175,916","","1.44","","","234,219","","2.07","","","411,786","","1.80"],["Supranational entities","\u2014","","\u2014","","","\u2014","","\u2014","","","15,000","","1.64","","","\u2014","","\u2014","","","15,000","","1.64"],["Total HTM securities","$","5,200","","3.70","","","$","14,986","","3.85","","","$","290,021","","1.58","","","$","845,891","","2.10","","","$","1,156,098","","2.00"]]
[[/GREPCENT_TABLE]]

At December 31, 2021, the effective duration of the investment portfolio was 4.0 years, compared to 3.7 years at December 31, 2020. 

Contractual Obligations and Other Commitments

The following discussion provides an overview of United’s significant contractual obligations and other commitments.

Long-term Debt

At December 31, 2021 and 2020, we had long-term debt outstanding of $247 million and $327 million, respectively, which included 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 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. The following tables provides long-term debt outstanding by maturity in five year increments. Additional information regarding these debt instruments is provided in Note 12 to the consolidated financial statements.

60

Table 18 - Long-term Debt by Maturity Category

As of December 31, 2021

(in thousands)

[[GREPCENT_TABLE]]
[["","Next 5 years","$","\u2014"],["","6 - 10 years","235,000"],["","11 - 15 years","20,620"],["","","255,620"],["","Less discount","(8,260)"],["","Total long-term debt","$","247,360"]]
[[/GREPCENT_TABLE]]

Operating Lease Obligations

We are party to operating lease agreements for many of our branch locations, ATMs, loan production offices and operation centers. For qualifying leases with a term exceeding one year we record a lease liability and ROU asset on our balance sheet. As of December 31, 2021, the lease liability and ROU asset totaled $31.1 million and $29.4 million, respectively, compared to $33.1 million and $31.4 million, respectively, at December 31, 2020. During 2021, we obtained $4.49 million in ROU assets in exchange for operating lease liabilities of approximately the same amount, $2.87 million of which were acquired in the Aquesta and FinTrust transactions. The majority of the leases assumed were for retail branch locations and office spaces.

As of December 31, 2021 the remaining terms of our leases ranged from one to 12 years. Certain of our leases contain options to renew the lease at the end of the current term. Unless we have determined we are reasonably likely to renew the lease, these options have been excluded from the calculation of our lease liability and ROU asset. Additional information regarding operating leases is provided in Note 13 to the consolidated financial statements.

Capital Expenditures

During 2021, we purchased $26.5 million of fixed assets, which excludes fixed assets acquired from FinTrust and Aquesta. Most of our capital expenditures related to investments in technology equipment, software and branch and operations locations. As of December 31, 2021 and 2020, we had $10.1 million and $7.59 million in construction in progress. Most notably, construction in progress includes costs related to the construction of the Bank’s new Greenville, South Carolina headquarters building, which is expected to be completed in 2023. As of December 31, 2021, we estimate the total cost of the headquarters project will be approximately $72.0 million, $58.0 million of which has yet to be incurred.

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments included commitments to extend credit and letters of credit, which totaled $3.62 billion at December 31, 2021.

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

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

All of these instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The total amount of these instruments does not necessarily represent future cash requirements because a significant portion of these instruments expire without being used. We believe that we have adequate sources of liquidity to fund commitments that are drawn upon by the borrowers.

61

In addition, we hold minor investments in certain limited partnerships for CRA purposes. As of December 31, 2021, we had committed to fund an additional $13.7 million related to future capital calls that has not been reflected in the consolidated balance sheet. As of December 31, 2021, we also had a $10.0 million commitment for future capital calls to a fintech fund limited partnership that has not been reflected in the consolidated balance sheet.

We are not involved in off-balance sheet contractual relationships, other than those disclosed in this Report, that could result in liquidity needs or other commitments, or that could significantly affect earnings. See Note 22 to the consolidated financial statements for additional information on off-balance sheet arrangements.

Capital Resources and Dividends

The maintenance and management of capital levels is one of management’s significant priorities. Shareholders’ equity at December 31, 2021 was $2.22 billion, an increase of $215 million from December 31, 2020. The increase was primarily a result of net income of $270 million and the issuance of $95.5 million of common stock in connection with the Aquesta and FinTrust acquisitions. These increases were partially offset by dividends on common and preferred stock of $76.0 million, common stock repurchases of $15.1 million, and other comprehensive loss of $64.2 million mostly driven by unrealized holding losses on AFS debt securities.

Under the risk-based capital guidelines of Basel III, assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor, or, if relevant, the guarantor or the nature of the collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with the category. The resulting weighted values from each of the risk categories are added together, and generally this sum is our total RWAs. RWAs for purposes of our capital ratios are calculated under these guidelines.

CET1 capital consists of common shareholders’ equity, excluding AOCI, intangible assets (goodwill, deposit-based intangibles and certain other intangibles, including certain servicing assets), net of associated deferred tax liabilities, and disallowed deferred tax assets. Tier 1 capital consists of CET1 plus non-cumulative perpetual preferred stock. Tier 2 capital includes the allowable portion of the ACL up to 1.25% of RWA as well as qualifying subordinated debt and trust preferred securities. Tier 1 capital plus Tier 2 capital is referred to as Total risk-based capital.

We have outstanding junior subordinated debentures related to trust preferred securities totaling $20.6 million at December 31, 2021, of which $20.0 million (excluding common securities) qualified as Tier 2 capital. Further information on trust preferred securities is provided in Note 12 to the consolidated financial statements.

The following table outlines the minimum ratios required for capital adequacy purposes, as well as the thresholds for a categorization of “well-capitalized”.

Table 19 - Capital Ratios

As of December 31,

[[GREPCENT_TABLE]]
[["","","","","","","","United Community Banks, Inc. (consolidated)","","United Community Bank"],["","Minimum Capital","","Well-Capitalized","","Minimum Capital Plus Capital Conservation Buffer","","2021","","2020","","2021","","2020"],["Risk-based ratios:"],["CET1 capital","4.5","%","","6.5","%","","7.0","%","","12.46","%","","12.31","%","","12.87","%","","13.31","%"],["Tier 1 capital","6.0","","","8.0","","","8.5","","","13.17","","","13.10","","","12.87","","","13.31"],["Total capital","8.0","","","10.0","","","10.5","","","14.65","","","15.15","","","13.46","","","14.28"],["Leverage ratio","4.0","","","5.0","","","N/A","","8.75","","","9.28","","","8.53","","","9.42"]]
[[/GREPCENT_TABLE]]

Additional information related to capital ratios, as calculated under regulatory guidelines, is provided in Note 21 to the consolidated financial statements. As of December 31, 2021 and 2020, both United and the Bank were characterized as “well-capitalized”. 

62

Effect of Inflation and Changing Prices

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

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

63