UNITED COMMUNITY BANKS INC (UCB) FY 2022 MD&A

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes. The discussion of the components of our results of operations focuses on financial trends and events occurring between 2021 and 2022.

For additional information related to financial trends between 2021 and 2020 please see the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 25, 2022, which information under that caption is incorporated herein by this reference. Historical results of operations are not necessarily predictive of future results.

GAAP Reconciliation and Explanation

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

Overview

We offer a wide array of commercial and consumer banking services and investment advisory services, which as of December 31, 2022, was comprised of a 192 branch network located throughout Georgia, South Carolina, North Carolina, Tennessee and Florida. Our equipment finance and SBA/USDA lending businesses operate throughout the United States. We have grown organically as well as through strategic acquisitions. At December 31, 2022, we had consolidated total assets of $24.0 billion and 2,843 full-time equivalent employees.

Recent Developments

Mergers and Acquisitions

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

•On January 1, 2022, we acquired Reliant, a bank which operated a 25-branch network primarily located in Middle Tennessee. In this acquisition, we acquired $2.96 billion of assets and assumed $2.66 billion of liabilities.

•On October 1, 2021, we acquired Aquesta, a bank which operated a network of branches primarily located in the Charlotte, North Carolina metropolitan area. We acquired total assets of $756 million, including $498 million in loans, and we assumed $658 million in deposits as of the acquisition date.

•On July 6, 2021, we acquired FinTrust, an investment advisory firm headquartered in Greenville, South Carolina, with additional locations in Anderson, South Carolina, and Athens and Macon, Georgia. The firm provides wealth and investment management services to individuals and institutions within its markets, which expanded our Wealth Management division.

Subsequent to year-end, on January 3, 2023, we completed the acquisition of Progress, a bank headquartered in Huntsville, Alabama that operates 13 offices in Alabama and the Florida Panhandle. As of December 31, 2022, Progress reported total assets of $1.76 billion, total loans of $1.48 billion and total deposits of $1.34 billion.

Also subsequent to year-end, on February 13, 2023, we announced an agreement to acquire First Miami, a bank headquartered in South Miami, Florida. First Miami operates 3 offices in the Miami metropolitan area and, as of December 31, 2022, had total assets of $1.0 billion, total loans of $594 million, and total deposits of $867 million. In addition to traditional banking products, First Miami

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offers private banking, trust and wealth management services with approximately $312 million in assets under administration. The merger, which is subject to regulatory approval, the approval of First Miami shareholders, and other customary conditions, is expected to close in the third quarter of 2023.

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

LIBOR and Other Benchmark Rates

As previously disclosed, to facilitate an orderly transition from Affected Benchmarks to ARRs, we maintain an enterprise-wide program to identify, assess and monitor risks associated with the expected discontinuation or non-representativeness of Affected Benchmarks. This program includes active involvement of senior management and regular reports through our risk management structure. Our activities are focused on operational implementation of the transition to ARRs, modification of financial contracts, internal and external communications, technology and operational system modifications and program strategy and governance. A significant majority of our derivative contracts and non-derivative contracts contain fallback provisions, fall within the scope of the Final Rule, or otherwise have an expected path that should allow for transition upon cessation of the Affected Benchmarks. Proactive efforts to transition Affected Benchmark-related arrangements in advance of cessation continue where applicable.

For more information on the expected replacement of LIBOR and other benchmark rates, see Part I, Item 1A. Risk Factors – Interest Rate and Yield Curve Risks of this Report.

Results of Operations

We reported net income of $277 million and net income - operating (non-GAAP) of $293 million in 2022. Net income - operating excludes merger related and other charges, which consists mostly of acquisition and branch closure costs. The following provides highlights of our financial results for 2022:

•We recorded a provision for credit losses of $63.9 million compared to a release of provision expense of $37.6 million for 2021. Provision expense for 2022 included $18.3 million related to the establishment of the ACL for the acquired Reliant non-PCD loans and unfunded commitments. The negative provision in 2021 was mostly driven by a more favorable economic forecast as the effects of the COVID-19 pandemic subsided.

•Net interest revenue increased $203 million, which reflects, in addition to organic loan growth, the impact of rising interest rates and the acquisitions of Reliant and Aquesta. During 2022, our net interest margin increased 31 basis points to 3.38% as the Federal Reserve increased the target federal funds rate by 425 basis points over the course of 2022, which allowed our loan yields to increase while we were able to slowly raise deposit rates and remain competitive. The widening net interest margin and the resulting increase in net interest revenue more than offset the $101 million increase in the provision for credit losses noted above.

•Noninterest income for 2022 was down $20.1 million, or 13%, compared to 2021, which substantially resulted from lower mortgage fees which were down $25.9 million from 2021 reflecting the natural slowing of the mortgage origination business as a result of higher mortgage rates. The slowing of the mortgage origination business is reflected in the dollar amount of loans closed, which was $1.53 billion in 2022 compared with $2.43 billion in 2021. Our mortgage servicing business generally performs inversely to our origination business and provides a natural, albeit imperfect, hedge due to slowing prepayment of mortgages as rates rise. This resulted in less reduction in our mortgage servicing rights asset and a positive market value adjustment, which combined added $9.92 million to mortgage fees, offsetting some of the decline in the origination business. Securities losses of $3.87 million realized in 2022 also contributed to the decrease in noninterest income. Most other noninterest income sources were up from 2021 reflecting the acquisitions of FinTrust, Aquesta and Reliant as well as general business growth. See Tables 4 through 6 of MD&A for further detail on noninterest income.

•Noninterest expenses increased $73.5 million, or 19%, compared to 2021, largely driven by the addition of FinTrust, Aquesta and Reliant operating expenses. Most notably, salaries and employee benefits increased $34.8 million, primarily due to growth in our employee base from acquisitions, partially offset by higher deferred loan origination costs from high loan production. Merger-related and other charges were up $5.41 million compared to 2021, which mostly reflects Reliant merger costs, including systems conversion. See Table 7 of MD&A for further detail on noninterest expense.

Critical Accounting Estimates

Our accounting and reporting policies are in accordance with GAAP and conform to general practices within the banking industry. Application of these principles requires management to make estimates, assumptions or judgments that affect the amounts reported in

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the financial statements and the accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments.

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

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

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

Allowance for Credit Losses

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

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

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

Fair Value Measurements

At December 31, 2022, the percentage of our total assets measured at fair value on a recurring basis was 16%. See Note 15 “Fair Value Measurements” in the consolidated financial statements herein for additional disclosures regarding the fair value of our assets and liabilities, including a description of the fair value hierarchy.

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

The fair values for AFS and HTM securities are generally based upon quoted market prices or observable market prices for similar instruments. Management utilizes a third-party pricing service to assist with determining the fair value of our securities portfolio. The pricing service uses observable inputs when available including benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers. These values take into account recent market activity as well as other market

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observable data such as interest rate, spread and prepayment information. When market observable data is not available, which generally occurs due to the lack of liquidity for certain securities, the valuation of the security is subjective and may involve substantial judgment by management.

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

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

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

As of December 31, 2022, we had level 3 assets, those valued using unobservable inputs, of $55.5 million. The total level 3 assets consisted of $36.6 million in residential mortgage servicing rights, $11.5 million in derivative assets, $5.19 million in servicing rights for SBA/USDA loans and $2.21 million of AFS debt securities. We also had level 3 derivative liabilities totaling $12.8 million.

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

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

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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)

(1) Excludes merger-related and other charges. (2) Net income less preferred stock dividends, divided by average realized common equity, which excludes AOCI. (3) Excludes effect of acquisition related intangibles and associated amortization.

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

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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)

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Net Interest Revenue

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

Net interest revenue for 2022 was $752 million, compared to $549 million for 2021. The net interest spread was 3.18% and 2.96% for 2022 and 2021, respectively, while the net interest margin was 3.38% and 3.07%, respectively. The following tables indicate the relationship between interest revenue and expense and the average amounts of assets and liabilities, which provide further insight into net interest spread and net interest margin for the periods indicated. The following discussion provides additional detail on the average balances and net interest revenue for the years ended December 31, 2022 and 2021.

For 2022, we reported a $235 million, or 40%, increase in FTE interest revenue compared to 2021. The main driver of the increase was the impact of rising interest rates on our asset sensitive balance sheet resulting from the Federal Reserve’s 425 basis point increase in the target federal funds rate. We were able to control the increase in interest rates on deposits while benefiting from increases in interest rates in our interest-earning assets, leading our net interest margin to expand by 31 basis points. Growth in average loans for the year ended December 31, 2022 of $3.09 billion, or 27%, compared to 2021 also contributed to the increase in interest revenue. The acquisitions of Reliant and Aquesta contributed $2.25 billion and $320 million, respectively, to the increase in average loans. PPP loan forgiveness, which resulted in a $368 million decrease in average loans for 2022 compared to 2021, partially offset net loan growth. Loan interest revenue included PPP-related interest income and accelerated recognition of deferred fees upon loan forgiveness and purchased loan accretion, which decreased $40.3 million and $10.3 million, respectively, in 2022 compared to 2021. These decreases in loan interest revenue were more than offset by the effect of rising interest rates and increased volume.

Controlling the increase in interest expense while maintaining liquidity was a key aspect of our 2022 margin expansion. In 2020 and 2021, we experienced significant deposit growth, which allowed us to grow our investment portfolio with the surplus liquidity. Much of this deposit growth appeared to be related to the pandemic, which we believed would eventually leave the bank as conditions returned to normal. As interest rates began to rise, our interest earning assets began to reprice faster than our cost of funds leading to the widening of our net interest margin. However, later in the year, we saw deposit balances begin to leave the bank as customers could achieve better returns in other investments. To address deposit balance attrition, we raised deposit pricing, which contributed to an increase in deposit interest expense of $27.3 million in 2022 compared to 2021, and we relied more heavily on wholesale funding sources to meet our short-term funding needs. These factors caused our cost of funds to increase and slowed the margin expansion. The average balance of interest-bearing deposits increased $2.35 billion for the year ended December 31, 2022 compared to 2021, mostly as a result of the acquisitions of Reliant and Aquesta.

As noted above, we began using wholesale funding sources to meet our short-term liquidity needs. The daily average balance of FHLB advances and short-term borrowings for 2022 were $34.0 million and $13.0 million, respectively. Our use of wholesale funding increased toward the end of 2022, with the year-end balances of FHLB advances and short-term borrowings rising to $550 million and $159 million, respectively. This shift in funding mix toward more expensive wholesale sources contributed to the 19 basis point increase in the average rate on interest-bearing liabilities from 2021 to 2022.

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

For the Years Ended December 31,

(in thousands, FTE)

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

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

(3)Unrealized gains and losses, including those related to the transfer from AFS to HTM, have been reclassified to other assets. Pretax unrealized losses of $277 million in 2022 and pretax unrealized gains of $28.7 million and $67.3 million in 2021 and 2020, respectively, are included in other assets for purposes of this presentation.

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

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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)

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

Provision for Credit Losses

The ACL represents management’s estimate of life of loan credit losses in the loan portfolio and unfunded loan commitments. Management’s estimate of credit losses under CECL is determined using a model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and resulting provision for credit losses. We recorded a provision for credit losses of $63.9 million in 2022, compared to a release of provision expense of $37.6 million in 2021. The amount of provision recorded in each period was the amount required such that the total ACL reflected the appropriate balance as determined by management reflecting expected life of loan losses.

The provision expense recorded during 2022 was primarily a result of a more negative economic forecast as of December 31, 2022 compared to that of the prior year, combined with higher net charge-offs recognized during the period. The 2022 provision expense included the initial provision for credit losses on Reliant’s non-PCD loans and unfunded commitments of $15.2 million and $3.12 million, respectively.

The negative provision expense for 2021 was primarily a result of an improved economic forecast combined with low net charge-offs recognized during the period. The negative provision was partially offset by provision expense for the initial ACL recognized on Aquesta’s non-PCD loans and unfunded commitments of $2.98 million and $287,000, respectively, during the fourth quarter of 2021.

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

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Noninterest Income

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

During 2022, total service charges and fees increased compared to 2021 primarily due to the addition of Reliant and Aquesta customers for the full year of 2022 in addition to increases in organic transaction volume. Growth in overdraft fees was partially moderated by the impact of updates to our consumer overdraft policy implemented in the fourth quarter of 2021. The policy updates included the addition of a fee forgiveness feature, an increase to the overdraft threshold and a lower daily fee item limit.

Mortgage loan gains and related fees consist primarily of fees earned on mortgage originations, gains on the sale of mortgages in the secondary market, mortgage derivative hedging gains and losses and fair value adjustments to our mortgage loans held for sale and our mortgage servicing asset. The change in mortgage income is strongly tied to the interest rate environment and industry conditions. We recognize the majority of income on mortgages when customers enter into mortgage rate lock commitments, making our mortgage rate lock volume a significant driver of mortgage gains in any given period.

The decrease in mortgage loan gains and related fees was primarily a result of tapering mortgage refinance and mortgage rate lock demand compared to 2021, as reflected in the following table. In addition, we held more of our mortgage production in portfolio in comparison to 2021, which contributed to the decrease in volume of loans sold. During 2022, we recorded $6.35 million in positive fair value adjustments, including decay, to the mortgage servicing rights asset, which partially offset the decrease in mortgage loan gains. In comparison, we recorded a negative fair value adjustment, including decay, to the mortgage servicing rights asset of $3.57 million during 2021.

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Our SBA/USDA lending strategy includes selling a portion of the loan production each quarter. The amount of loans sold depends on several variables including the current lending environment and balance sheet management activities. From time to time, we also sell certain equipment financing receivables based on market conditions. During 2022, we sold a higher volume of SBA and equipment financing receivables, although the gain on sale spread was lower than the prior year. The following table presents loans sold and corresponding gains recognized on SBA/USDA loans and other loans sold for the periods indicated.

The increase in wealth management fees for 2022 compared to 2021 was largely due to the inclusion of FinTrust for the full year of 2022 compared with only six months of 2021. As of December 31, 2022, we had assets under management and assets under advisement totaling $4.30 billion, compared to $4.69 billion as of December 31, 2021.

The change in other noninterest income for 2022 compared to 2021 was primarily driven by the following factors:

•Other investment performance in 2022 yielded net lower positive fair value adjustments when compared to 2021. Unrealized losses in our deferred compensation plan assets in 2022 compared to unrealized gains in 2021 were the main driver of the decrease, partially offset by increased unrealized gains on equity securities and limited partnership investments.

•Lending and loan servicing fees for 2022 increased compared to 2021, mostly due to volume-driven fee income from our equipment finance business, partially offset by negative fair value adjustments to our SBA/USDA servicing asset.

•The increase in BOLI income in 2022 compared to 2021 reflects income earned on BOLI policies acquired with Reliant as well as death benefits recognized.

•Customer derivative income for 2022 decreased compared to 2021 due to rising interest rates negatively impacting the demand for customer derivative products. This was partially offset by improvements in the CVA on customer derivatives. The CVA improved due to rising interest rates, which lowered our overall credit exposure on customer derivative positions, and credit upgrades to underlying loans associated with the positions.

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Noninterest Expenses

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

Noninterest expenses for 2022 totaled $470 million, up 19% from 2021. The addition of Reliant, FinTrust and Aquesta’s operating expenses for the full year of 2022 contributed to the increase, particularly in salaries and benefits and occupancy costs.

Salaries and employee benefits for 2022 increased $34.8 million compared to 2021. In addition to the growth in our employee base from acquisitions, the increase was also attributable to merit increases awarded during the second quarter of 2022 and a mid-year inflation-related salary adjustment for certain employees. These increases were partially offset by higher deferred loan origination costs resulting from increased loan production and lower deferred compensation plan expense driven by an unrealized loss on the investments in the plan. Full time equivalent headcount totaled 2,843 at December 31, 2022, up from 2,553 at December 31, 2021.

Occupancy costs increased 27% in 2022 compared to 2021, primarily due to acquisitions. We operated 192 branches at December 31, 2022, compared to 171 branches at December 31, 2021. Communications and equipment expense increased primarily due to incremental software contract costs. The increase in outside services - electronic banking reflects higher volume-based ATM network and internet banking costs.

Advertising and public relations expense increased compared to 2021 as a result of charitable contributions made to the United Community Bank Foundation, new marketing campaigns, promotions and sponsorships. In 2022, we made a $650,000 contribution to the United Community Bank Foundation. FDIC assessments and other regulatory charges increased compared to 2021 as a result of the increase in our average total assets and an increase in our assessment rate. We expect FDIC assessment expense to continue to increase in 2023 as result of the FDIC’s announced assessment rate increase of 2 basis points. Amortization of intangibles increased with the additional customer deposit and customer relationship intangibles recorded as a result of the acquisitions since mid-2021.

The increase in other expense in 2022 was primarily due to an increase in travel and meals expense, as well as increases in fraud losses. Merger-related and other charges for 2022 were primarily related to the acquisition of Reliant, including its system conversion during the second quarter of 2022. Merger-related and other charges for 2021 primarily consisted of merger costs related to the acquisitions of FinTrust and Aquesta.

Balance Sheet Review

Total assets at December 31, 2022 were $24.0 billion, an increase of $3.06 billion, or 15%, from December 31, 2021. Total liabilities at December 31, 2022 were $21.3 billion, an increase of $2.58 billion, or 14% from December 31, 2021. Shareholders’ equity totaled $2.70 billion and $2.22 billion at December 31, 2022 and 2021, respectively. The following discussion of the major components of our balance sheet highlights significant activity resulting in the change in our financial condition between December 31, 2021 and December 31, 2022.

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Loans

Our loan portfolio is our largest category of interest-earning assets. At December 31, 2022, total loans were $15.3 billion compared to $11.8 billion at December 31, 2021, an increase of 30%. The net increase in loans was primarily attributable to organic growth and loans acquired in the Reliant transaction of $2.32 billion. The following presents the composition of our loan portfolio as of the dates indicated.

Table 8 - Loan Portfolio Composition

As of December 31, 2022

The following table sets forth the maturity distribution of our loan portfolio, including the interest rate sensitivity for loans maturing after one year. Approximately 73% of all loans were secured by real estate at year-end 2022.

Table 9 - Loan Portfolio Maturity

As of December 31, 2022

(in thousands)

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As of December 31, 2022, our 25 largest credit relationships consisted of loans and loan commitments ranging from $35.5 million to $60.0 million, with an aggregate total credit exposure of $1.1 billion, including $324 million in unfunded commitments and $774 million in balances outstanding, excluding participations sold.

Asset Quality and Risk Elements

We manage asset quality and control credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices. Our credit administration function is responsible for monitoring asset quality and Board approved portfolio concentration limits, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures.

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

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

The ACL, which includes a portion related to unfunded commitments, totaled $181 million at December 31, 2022 compared with $114 million at December 31, 2021. At December 31, 2022, the ACL for loans was $159 million, or 1.04% of total loans, compared with $103 million, or 0.87%, of loans at December 31, 2021.

The increase in the ACL since December 31, 2021 reflects loan growth and a less favorable economic forecast as of December 31, 2022 compared to that of December 31, 2021. In addition, the acquisition of Reliant added $31.1 million to the ACL as of the acquisition date. Of this amount, $12.7 million was reclassified from the amortized cost basis of PCD loans with no impact to earnings, $15.2 million was recorded as provision for credit losses on acquired non-PCD loan balances and $3.12 million was recorded as provision for unfunded commitments on the acquired balance of unfunded commitments.

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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)

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

Table 11 - Net Charge-offs

Years Ended December 31,

(in thousands)

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Nonperforming Assets

The following table presents NPAs, which consist of nonaccrual loans and OREO and repossessed assets, for the periods indicated.

Table 12 - NPAs

As of December 31,

(in thousands)

The increase in NPAs since December 31, 2021 was primarily due to the addition of the manufactured housing portfolio from Reliant, an overall increase in equipment financing nonaccrual loans and the migration of two large commercial and industrial relationships to nonaccrual status.

At December 31, 2022 and 2021, we had $41.2 million and $52.4 million, respectively, in loans with terms that have been modified in a TDR. Included therein were $14.5 million and $11.5 million, respectively, of TDRs that were nonaccrual loans. The remaining TDRs with aggregate balances of $26.7 million and $40.9 million, respectively, were performing according to their modified terms and were therefore not considered to be NPAs.

Investment Securities

The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk in other categories of the balance sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits and borrowings. During the first half of 2022, we continued to deploy liquidity generated through strong deposit growth by purchasing additional investment securities. However, in the second half of 2022, we slowed our securities purchases as we began to experience some deposit attrition, which absorbed much of our surplus liquidity. During 2022, United transferred AFS debt securities to HTM with a fair value on the transfer date of $1.29 billion, which included unrealized losses recorded in AOCI totaling $87.4 million. Transfer date unrealized losses are amortized and reclassified out of AOCI as a yield adjustment, which is offset by discount accretion of the transferred HTM securities. Amortization of transfer date unrealized losses and discount accretion are recognized over the remaining life of the securities. The table below presents a summary of our investment securities balances as of the dates indicated.

Table 13 - Investment Securities

As of December 31,

(in thousands)

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Table 14 - Investment Securities Portfolio Composition

As of December 31,

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

As shown in the chart above, 77% of our investment securities portfolio is comprised of U.S. government or government sponsored agency securities. In addition, as of December 31, 2022, our state and political subdivision securities were all rated A or better. As a reflection of the high credit quality of the portfolio, at December 31, 2022 and 2021, no ACL for HTM or AFS debt securities was recorded. See Note 5 to the consolidated financial statements for further discussion of the investment portfolio and related fair value and maturity information. Unrealized losses on fixed income securities at December 31, 2022 primarily reflected the effect of changes in interest rates.

Goodwill and Other Intangible Assets

Goodwill represents the premium paid for acquired companies above the fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets. Management evaluates goodwill for impairment annually, or more frequently if a triggering event indicates there may be impairment. Upon the occurrence of a triggering event, a qualitative assessment is performed to determine whether it is more likely than not that the fair value of the entity is less than its carrying amount. When it is more likely than not that impairment has occurred, management is required to perform a quantitative analysis and, if necessary, adjust the carrying amount of goodwill by recording a goodwill impairment loss. No such triggering events occurred during 2022 and our annual assessment provided no indication that a goodwill impairment was required.

We also have core deposit and customer relationship intangible assets, representing the value of acquired deposit and customer relationships, respectively, which are amortizing intangible assets. Amortizing intangible assets are required to be tested for impairment only when events or circumstances indicate that impairment may exist.

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In connection with the acquisition of Reliant, we recorded goodwill and a core deposit intangible of $299 million and $14.5 million, respectively.

Deposits

Customer deposits are the primary source of funding for our earning assets. Our high level of service, as evidenced by our strong customer satisfaction scores, has been instrumental in attracting and retaining customer deposit accounts. The increase in deposits since December 31, 2021 was primarily driven by the deposits assumed in the Reliant transaction, which had a balance of $2.50 billion as of the acquisition date. More recently, we have experienced some deposit balance attrition, mostly in noninterest-bearing demand accounts, as rising interest rates have given customers more attractive returns for excess liquidity outside of standard deposit products. As of December 31, 2022 and 2021, we had $8.31 billion and $7.97 billion, respectively, in uninsured deposits. The following table sets forth the deposit composition for the periods indicated.

Table 15 - Deposits

As of December 31,

(in thousands)

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

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

As of December 31, 2022

(in thousands)

Liquidity Management

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

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

The Bank’s main source of liquidity is customer interest-bearing and noninterest-bearing deposit accounts, which we are able to attract at any time by competing more aggressively on pricing. Liquidity is also available from wholesale funding sources consisting primarily of Federal funds purchased, securities sold under agreements to repurchase, FHLB advances and brokered deposits. These

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sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs. At December 31, 2022, we had sufficient qualifying collateral to support additional FHLB advances of $999 million and Federal Reserve discount window borrowing capacity of $2.46 billion. We also had unpledged investment securities of $3.70 billion at December 31, 2022 that could be used as collateral for additional borrowings.

In the second half of 2022, we began to experience balance attrition in our deposit accounts as rising interest rates gave customers other alternatives for achieving higher returns on their cash deposits outside of the banking system. Our experience with deposit attrition was not unique to us but was part of a trend throughout the banking industry and was not unexpected as the entire banking industry had experienced abnormally high deposit growth over the past two years, partly resulting from the COVID-19 pandemic. As a result of the higher-than-normal deposit growth, there has been an expectation that some of the built-up balances would leave the banking system as conditions changed. Much of the surplus liquidity that built up in the two years leading up to mid-2022 was invested in our investment securities portfolio, which had grown significantly over that time period and created a large source of stored liquidity. In response to deposit balance attrition, we have suspended investment securities purchases and allowed cash flows from maturing securities to meet a portion of our funding needs. We also began using short-term borrowings to supplement our near-term funding requirements. Although it is difficult to predict the timing and extent of the deposit balance attrition, we have significant sources of liquidity through secured borrowings and other unsecured funding sources as noted above, and we have been adjusting our deposit pricing to remain competitive within our markets in an effort to slow the balance attrition.

In addition, because the Holding Company is a separate entity and apart from the Bank, it must provide for its own liquidity. The Holding Company is responsible for the payment of dividends declared for its common and preferred shareholders, and interest and principal on any outstanding debt or trust preferred securities. The Holding Company currently has internal capital resources to meet these obligations. While the Holding Company has access to the capital markets and maintains a line of credit as a contingent funding source, the ultimate sources of its liquidity are subsidiary service fees and dividends from the Bank, which are limited by applicable law and regulations. In 2022 and 2021, the Bank paid dividends of $133 million and $217 million, respectively, to the Holding Company. Holding Company liquidity is managed to a minimum of 15-months of positive cash flow after considering all of its liquidity needs over this period.

Significant uses and sources of cash during the year ended December 31, 2022 are summarized below. See the consolidated statement of cash flows in this Report for further detail.

•Net cash provided by operating activities of $607 million reflects net income of $277 million adjusted for non-cash transactions, gains on sales of securities and other loans and changes in other assets and liabilities. Significant non-cash transactions for the period included provision for credit losses of $63.9 million, depreciation, amortization and accretion of $46.7 million and deferred income tax expense of $10.9 million.

•Net cash used in investing activities of $2.02 billion consisted primarily of $1.99 billion of purchases of AFS and HTM debt securities and a $1.23 billion net increase in loans, offset by $1.23 billion proceeds from securities sales, maturities and calls.

•Net cash used in financing activities of $259 million consisted primarily of a net decrease in deposits of $867 million and $93.8 million in common and preferred stock dividends, partially offset by net proceeds from FHLB advances and other short-term borrowings of $709 million.

In the opinion of management, our liquidity position at December 31, 2022 was sufficient to meet our expected cash requirements.

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

Table 17 - Contractual Maturity of AFS and HTM Debt Securities

As of December 31, 2022

(in thousands)

At December 31, 2022, the effective duration of the investment portfolio was 4.7 years, compared to 4.0 years at December 31, 2021.

Contractual Obligations and Other Commitments

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

Long-term Debt

At December 31, 2022 and 2021, we had long-term debt outstanding of $325 million and $247 million, respectively, which included senior debentures, subordinated debentures, and trust preferred securities. The following tables provides long-term debt outstanding by maturity in five year increments. During 2022, as part of the Reliant acquisition, we assumed subordinated debt and trust preferred securities with an acquisition date fair value totaling $76.7 million Additional information regarding these debt instruments is provided in Note 13 to the consolidated financial statements.

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Table 18 - Long-term Debt by Maturity Category

As of December 31, 2022

(in thousands)

Operating Lease Obligations

We are party to operating lease agreements for many of our branch locations, ATMs, loan production offices and operation centers. For qualifying leases with a term exceeding one year we record a lease liability and ROU asset on our balance sheet. As of December 31, 2022, the lease liability and ROU asset totaled $41.7 million and $40.0 million, respectively, compared to $31.1 million and $29.4 million, respectively, at December 31, 2021. During 2022, we obtained $23.9 million in ROU assets in exchange for operating lease liabilities of approximately the same amount, $14.3 million of which were acquired in the Reliant transaction. Leases assumed were for retail branch locations and office spaces.

As of December 31, 2022, the remaining terms of our leases ranged from a few months to 11 years. Certain of our leases contain options to renew the lease at the end of the current term. Unless we have determined we are reasonably likely to renew the lease, these options have been excluded from the calculation of our lease liability and ROU asset. Additional information regarding operating leases is provided in Note 14 to the consolidated financial statements.

Capital Expenditures

During 2022, we purchased $42.7 million of fixed assets, which excludes fixed assets acquired in the Reliant acquisition. As of December 31, 2022 and 2021, we had $34.7 million and $10.1 million in construction in progress. Most notably, construction in progress includes costs related to the construction of the Bank’s new Greenville, South Carolina headquarters building, which is expected to be completed in 2024. As of December 31, 2022, we estimate the total cost of the headquarters project will be approximately $73 million, $40 million of which has yet to be incurred.

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments included commitments to extend credit and letters of credit, which totaled $4.73 billion at December 31, 2022.

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

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

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

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In addition, we hold investments in certain limited partnerships for tax credit and CRA purposes. As of December 31, 2022, for certain of these investments, we had committed to fund an additional $6.29 million related to future capital calls that has not been reflected in the consolidated balance sheet. As of December 31, 2022, we also had $17.4 million in commitments for future capital calls to fintech fund limited partnerships that have not been reflected in the consolidated balance sheet.

We are not involved in off-balance sheet contractual relationships, other than those disclosed in this Report, that could result in liquidity needs or other commitments, or that could significantly affect earnings. See Note 23 to the consolidated financial statements for additional information on off-balance sheet arrangements.

Capital Resources and Dividends

The maintenance and management of capital levels is one of management’s significant priorities. Shareholders’ equity at December 31, 2022 was $2.70 billion, an increase of $478 million from December 31, 2021. The increase was primarily a result of net income of $277 million and the issuance of $596 million of common stock in connection with the Reliant acquisition. These increases were partially offset by dividends on common and preferred stock of $99.3 million and other comprehensive loss of $303 million mostly driven by unrealized holding losses on AFS debt securities resulting from rising interest rates.

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

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

We have outstanding junior subordinated debentures related to trust preferred securities totaling $34.3 million at December 31, 2022, of which $33.0 million (excluding common securities) qualified as Tier 2 capital. Further information on trust preferred securities is provided in Note 13 to the consolidated financial statements.

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

Table 19 - Capital Ratios

As of December 31,

Additional information related to capital ratios, as calculated under regulatory guidelines, is provided in Note 22 to the consolidated financial statements. As of December 31, 2022 and 2021, both United and the Bank were characterized as “well-capitalized”.

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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.

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