UNITED COMMUNITY BANKS, INC. The following is a discussion of our financial condition atJune 30, 2021 andDecember 31, 2020 and our results of operations for the three and six months endedJune 30, 2021 and 2020. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements and is intended to provide insight into our results of operations and financial condition. The following discussion and analysis should be read along with our consolidated financial statements and related notes included in Part I - Item 1 of this Report, "Cautionary Note Regarding Forward-Looking Statements" and the risk factors discussed in our 2020 10-K, and the other reports we have filed with theSEC after we filed the 2020 10-K.
Unless the context otherwise requires, the terms "we," "our," "us" refer to United on a consolidated basis. References to the Holding Company refer to United Community Banks, Inc. on an unconsolidated basis.
Overview
We offer a wide array of commercial and consumer banking services and investment advisory services through a 162 branch network throughoutGeorgia ,South Carolina ,North Carolina ,Tennessee andFlorida . We have grown organically as well as through strategic acquisitions. AtJune 30, 2021 , we had consolidated total assets of$18.9 billion and 2,440 full-time equivalent employees.
Recent Developments
Mergers and Acquisitions •OnJuly 1, 2020 , we acquired Three Shores including its wholly-owned banking subsidiary, Seaside, headquartered inOrlando, Florida .Seaside was a premier commercial lender with a strong wealth management platform and operated a 14-branch network located in keyFlorida metropolitan markets. We acquired$2.13 billion of assets and assumed$1.99 billion of liabilities in the acquisition. •Subsequent to quarter-end, onJuly 6, 2021 , we acquiredFinTrust Capital Partners, LLC , and its operating subsidiariesFinTrust Capital Advisors, LLC ,FinTrust Capital Benefit Group, LLC andFinTrust Brokerage Services, LLC , collectively referred to as "FinTrust". FinTrust is an investment advisory firm headquartered inGreenville, South Carolina , with additional locations inAnderson, South Carolina , andAthens andMacon, Georgia . The firm provides wealth and investment management services to individuals and institutions within its markets, which expands our Advisory Services division. As ofJune 30, 2021 , FinTrust had assets under management of$2.09 billion across its advisory, retirement planning and brokerage businesses. •OnMay 27, 2021 , we announced an agreement to acquire Aquesta Financial Holdings, Inc. and its wholly-owned subsidiary,Aquesta Bank , collectively referred to as "Aquesta", which we plan to complete in October of 2021. Aquesta is headquartered inCornelius, North Carolina . The bank's high-touch customer service is delivered to retail and business customers through a network of nine branches primarily located in theCharlotte metropolitan area in addition to locations inWilmington andRaleigh, North Carolina , as well asGreenville andCharleston, South Carolina . As ofJune 30, 2021 , Aquesta reported total assets of$736 million , total loans of$524 million and total deposits of$641 million . •OnJuly 14, 2021 , we announced an agreement to acquire Reliant Bancorp, Inc. and its wholly-owned subsidiary,Reliant Bank , collectively referred to as "Reliant", which we plan to complete in the first quarter of 2022. Reliant is headquartered inBrentwood, Tennessee , a suburb ofNashville, Tennessee and operates a 25 branch network inTennessee , located primarily in some of theNashville area's most attractive markets, as well as inClarksville andChattanooga . It also has a manufactured housing finance group based inKnoxville . As ofJune 30, 2021 , Reliant reported total assets of$3.10 billion , total loans of$2.32 billion , and total deposits of$2.63 billion .
COVID-19
During the second quarter of 2021, as a result of the widespread distribution of COVID-19 vaccinations and reduction in COVID-19 cases nationally and within our markets, we substantially returned to normal retail operations by reopening the majority of our branch lobbies. We continue to monitor the impact of the COVID-19 pandemic on our business and to offer assistance to our customers affected by its economic effects, through payment deferrals and participation in the CARES Act and PPP loan program. Loans with active COVID-19 payment deferrals have declined dramatically, with$17.8 million outstanding atJune 30, 2021 , a 75% reduction sinceDecember 31, 2020 . 33 --------------------------------------------------------------------------------
Other
EffectiveJuly 1, 2021 , the Bank moved its headquarters fromBlairsville, Georgia toGreenville, South Carolina and became aSouth Carolina state-chartered bank subject to examination and reporting requirements of theSouth Carolina Board of Financial Institutions . Prior to that, the Bank was aGeorgia state-chartered bank subject to examination and reporting requirements of theGeorgia Department of Banking and Finance . Also effectiveJuly 1, 2021 , the Holding Company, which remains headquartered inBlairsville, 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. Results of Operations We reported net income and diluted earnings per common share of$70.3 million and$0.78 , respectively, for the second quarter of 2021 compared to$25.1 million and$0.32 , respectively, for the same period in 2020. Operating net income (non-GAAP), which excludes merger-related and other charges, was$71.1 million for the second quarter of 2021, compared to$25.4 million for the same period in 2020. The increase in net income and operating net income was driven by increased net interest revenue and a release of provision for credit losses partly offset by a decrease in noninterest income and an increase in noninterest expense during the second quarter of 2021. Net interest revenue increased to$138 million for the second quarter of 2021, compared to$109 million for the second quarter of 2020, due to several factors including loan growth, much of which resulted from the addition of PPP loans and loans acquired from Three Shores, accelerated recognition of net deferred fees on forgiven and repaid PPP loans and a more favorable deposit mix. The net interest margin decreased to 3.19% for the three months endedJune 30, 2021 from 3.42% for the same period in 2020 primarily due to the effect of falling interest rates on our asset sensitive balance sheet and a change in the composition of interest-earning assets as we strategically increased our securities portfolio to deploy excess liquidity from strong deposit growth. We recorded a negative provision for credit losses of$13.6 million for the second quarter of 2021, compared to$33.5 million of provision expense for the second quarter of 2020. The negative provision in 2021 resulted from a downward adjustment to the ACL, reflecting an improved economic forecast. The provision for credit losses for the second quarter of 2020 reflected the expected macroeconomic effects of the COVID-19 pandemic and associated increase in charge-offs. We recognized net recoveries for the second quarter of 2021 of$456,000 compared to$6.15 million of net charge-offs for the same period in 2020. Noninterest income of$35.8 million for the second quarter of 2021 was down$4.40 million , or 11%, from the second quarter of 2020. Gains on sales of mortgage loans and related fees drove most of the decrease, down$12.5 million compared to the same period of 2020. The decrease reflects the demand in the real estate mortgage market, which, while still strong, has started to level out after the initial surge in response to falling interest rates in early 2020. This decrease was partially offset by increases in gains on sales of other loans, driven by higher sales volume of SBA/USDA and equipment financing receivables, and wealth management fees, which reflects the addition of Three Shores' wealth management business. For the second quarter of 2021, noninterest expenses of$95.5 million increased$11.6 million , or 14%, compared to the same period of 2020. The increase was primarily attributable to a$7.60 million increase in salaries and employee benefits, which was driven by several factors, including the inclusion of Three Shores employees, higher mortgage commissions, incentives and bonus accruals as a result of strong production during the period and annual merit increases effective in April of 2021. For the six months endedJune 30, 2021 and 2020, we reported net income of$144 million and$57.0 million , respectively, and diluted earnings per common share of$1.60 and$0.71 , respectively. Operating net income (non-GAAP) for the six months endedJune 30, 2021 and 2020, of$146 million and$57.9 million , respectively, excluded merger-related charges for both periods. Net interest revenue and net interest margin for the six months endedJune 30, 2021 were$270 million and 3.20%, respectively, compared to$228 million and 3.73%, respectively, for the same period in 2020. Results of operations for the six months endedJune 30, 2021 were largely driven by the same factors affecting the quarter and are discussed in further detail throughout the following sections of MD&A. Critical Accounting Policies Our accounting and reporting policies are in accordance with GAAP and conform to general practices within the banking industry. Our more critical accounting and reporting policies include accounting for the ACL and fair value measurements, both of which involve the use of estimates and require significant judgments by management. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or consolidated results of operations. Our critical accounting policies are discussed in MD&A in our 2020 10-K. There have been no significant changes to our critical accounting policies in 2021. 34 --------------------------------------------------------------------------------
Non-GAAP Reconciliation and Explanation
This Report contains financial information determined by methods other than in
accordance with GAAP. Such non-GAAP financial information includes the following
measures: "tangible book value per common share," and "tangible common equity to
tangible assets." In addition, management presents non-GAAP operating
performance measures, which exclude merger-related and other items that are not
part of our ongoing business operations. Operating performance measures include
"expenses - operating," "net income - operating," "diluted income per common
share - operating," "return on common equity - operating," "return on tangible
common equity - operating," "return on assets - operating," "dividend payout
ratio - operating" and "efficiency ratio - operating." Management has developed
internal policies and procedures to accurately capture and account for
merger-related and other charges and those charges are reviewed with the Audit
Committee of our Board each quarter. Management uses these non-GAAP measures
because it believes they provide useful supplemental information for evaluating
our operations and performance over periods of time, as well as in managing and
evaluating our business and in discussions about our operations and performance.
Management believes these non-GAAP measures may also provide users of our
financial information with a meaningful measure for assessing our financial
results and credit trends, as well as a comparison to financial results for
prior periods. Nevertheless, non-GAAP measures have inherent limitations, are
not required to be uniformly applied and are not audited. These non-GAAP
measures should be viewed in addition to, and not as an alternative to or
substitute for, measures determined in accordance with GAAP. In addition,
because non-GAAP measures are not standardized, it may not be possible to
compare our non-GAAP measures to similarly titled measures used by other
companies. To the extent applicable, reconciliations of these non-GAAP measures
to the most directly comparable measures as reported in accordance with GAAP are
included in Table 1 of MD&A.
35
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UNITED COMMUNITY BANKS, INC.
Table 1 - Financial Highlights
Selected Financial Information
(in thousands, except per share
data)
2021 2020 Second Quarter For the Six Months Ended June 30,
2021 - 2020
Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter Change 2021 2020 YTD Change
INCOME SUMMARY
Interest revenue $ 145,809 $ 141,542 $ 156,071 $ 141,773 $ 123,605 $ 287,351 $ 260,152
Interest expense 7,433 9,478 10,676 13,319 14,301 16,911 32,242
Net interest revenue 138,376 132,064 145,395 128,454 109,304 27 % 270,440 227,910 19 %
(Release of) provision for credit
losses (13,588) (12,281) 2,907 21,793 33,543 (25,869) 55,734
Noninterest income 35,841 44,705 41,375 48,682 40,238 (11) 80,546 66,052 22
Total revenue 187,805 189,050 183,863 155,343 115,999 62 376,855 238,228 58
Expenses 95,540 95,194 106,490 95,981 83,980 14 190,734 165,518 15
Income before income tax expense 92,265 93,856 77,373 59,362 32,019 188 186,121 72,710 156
Income tax expense 22,005 20,150 17,871 11,755 6,923 218 42,155 15,730 168
Net income 70,260 73,706 59,502 47,607 25,096 180 143,966 56,980 153
Merger-related and other charges 1,078 1,543 2,452 3,361 397 2,621 1,205
Income tax benefit of
merger-related and other charges (246) (335) (552) (519) (87) (581) (269)
Net income - operating (1) $ 71,092 $ 74,914 $ 61,402 $ 50,449 $ 25,406 180 $ 146,006 $ 57,916 152
PERFORMANCE MEASURES
Per common share:
Diluted net income - GAAP $ 0.78 $ 0.82 $ 0.66 $ 0.52 $ 0.32 144 $ 1.60 $ 0.71 125
Diluted net income - operating
(1) 0.79 0.83 0.68 0.55 0.32 147 1.62 0.73 122
Cash dividends declared 0.19 0.19 0.18 0.18 0.18 6 0.38 0.36 6 Book value 22.81 22.15 21.90 21.45 21.22 7 22.81 21.22 7 Tangible book value (3) 18.49 17.83 17.56 17.09 16.95 9 18.49 16.95 9 Key performance ratios: Return on common equity - GAAP (2)(4) 14.08 % 15.37 % 12.36 % 10.06 % 6.17 % 14.71 % 7.01 % Return on common equity - operating (1)(2)(4) 14.25 15.63 12.77 10.69 6.25 14.92 7.13 Return on tangible common equity - operating (1)(2)(3)(4) 17.81 19.68 16.23 13.52 8.09 18.72 9.20 Return on assets - GAAP (4) 1.46 1.62 1.30 1.07 0.71 1.54 0.85 Return on assets - operating (1)(4) 1.48 1.65 1.34 1.14 0.72 1.56 0.86 Dividend payout ratio - GAAP 24.36 23.17 27.27 34.62 56.25 23.75 50.70 Dividend payout ratio - operating (1) 24.05 22.89 26.47 32.73 56.25 23.46 49.32 Net interest margin (FTE) (4) 3.19 3.22 3.55 3.27 3.42 3.20 3.73 Efficiency ratio - GAAP 54.53 53.55 56.73 54.14 55.86 54.04 56.00 Efficiency ratio - operating (1) 53.92 52.68 55.42 52.24 55.59 53.30 55.59 Equity to total assets 11.04 10.95 11.29 11.47 11.81 11.04 11.81 Tangible common equity to tangible assets (3) 8.71 8.57 8.81 8.89 9.12 8.71 9.12 ASSET QUALITY Nonperforming loans$ 46,123 $ 55,900 $ 61,599 $ 49,084 $ 48,021 (4)$ 46,123 $ 48,021 (4) Foreclosed properties 224 596 647 953 477 224 477 Total NPAs 46,347 56,496 62,246 50,037 48,498 (4) 46,347 48,498 (4) ACL - loans 111,616 126,866 137,010 134,256 103,669 8 111,616 103,669 8 Net charge-offs (456) (305) 1,515 2,538 6,149 (761) 14,263 (105) ACL - loans to loans 0.98 % 1.09 % 1.20 % 1.14 % 1.02 % 0.98 % 1.02 % Net charge-offs to average loans (4) (0.02) (0.01) 0.05 0.09 0.25 (0.01) 0.31 NPAs to loans and foreclosed properties 0.41 0.48 0.55 0.42 0.48 0.41 0.48 NPAs to total assets 0.25 0.30 0.35 0.29 0.32 0.25 0.32 AVERAGE BALANCES ($ in millions) Loans$ 11,617 $
11,433
19 $ 11,525 $ 9,301 24
Investment securities 4,631 3,991 3,326 2,750 2,408 92 4,313 2,464 75 Earning assets 17,540 16,782 16,394 15,715 12,958 35 17,163 12,378 39 Total assets 18,792 18,023 17,698 17,013 14,173 33 18,410 13,558 36 Deposits 16,132 15,366 15,057 14,460 12,071 34 15,751 11,493 37 Shareholders' equity 2,060 2,025 1,994 1,948 1,686 22 2,042 1,670
22
Common shares - basic (thousands) 87,289 87,322 87,258 87,129 78,920 11 87,306 79,130 10 Common shares - diluted (thousands) 87,421 87,466 87,333 87,205 78,924 11 87,443 79,186 10 AT PERIOD END ($ in millions) Loans$ 11,391 $ 11,679 $ 11,371 $ 11,799 $ 10,133 12$ 11,391 $ 10,133 12 Investment securities 4,928 4,332 3,645 3,089 2,432 103 4,928 2,432 103 Total assets 18,896 18,557 17,794 17,153 15,005 26 18,896 15,005 26 Deposits 16,328 15,993 15,232 14,603 12,702 29 16,328 12,702 29 Shareholders' equity 2,086 2,031 2,008 1,967 1,772 18 2,086 1,772 18 Common shares outstanding (thousands) 86,665 86,777 86,675 86,611 78,335 11 86,665 78,335 11 (1) Excludes merger-related and other charges. (2) Net income less preferred stock dividends, divided by average realized common equity, which excludes AOCI. (3) Excludes effect of acquisition related intangibles and associated amortization. (4) Annualized. 36 --------------------------------------------------------------------------------
UNITED COMMUNITY BANKS, INC.
Table 1 (Continued) - Non-GAAP Performance Measures Reconciliation
Selected Financial Information
(in thousands, except per share
data)
2021 2020 For the Six Months Ended June 30,
Second Quarter FirstQuarter Fourth Quarter Third Quarter Second Quarter
2021 2020
Expense reconciliation
Expenses (GAAP)$ 95,540 $
95,194
$ 165,518
Merger-related and other
charges (1,078) (1,543) (2,452) (3,361) (397) (2,621) (1,205) Expenses - operating$ 94,462 $
93,651
$ 164,313
Net income reconciliation
Net income (GAAP)$ 70,260 $
73,706
$ 56,980
Merger-related and other
charges 1,078 1,543 2,452 3,361 397 2,621 1,205
Income tax benefit of
merger-related and other
charges (246) (335) (552) (519) (87) (581) (269) Net income - operating$ 71,092 $
74,914
$ 57,916
Diluted income per common share
reconciliation
Diluted income per common share
(GAAP)$ 0.78 $
0.82 $ 0.66
$ 1.60 $ 0.71
Merger-related and other
charges, net of tax 0.01 0.01 0.02 0.03 - 0.02 0.02
Diluted income per common share
- operating$ 0.79 $
0.83 $ 0.68
$ 1.62 $ 0.73 Book value per common share reconciliation Book value per common share (GAAP)$ 22.81 $
22.15
$ 22.81 $ 21.22
Effect of goodwill and other
intangibles (4.32) (4.32) (4.34) (4.36) (4.27) (4.32) (4.27)
Tangible book value per common
share$ 18.49 $
17.83
$ 18.49 $ 16.95 Return on tangible common equity reconciliation Return on common equity (GAAP) 14.08 %
15.37 % 12.36 % 10.06 % 6.17 % 14.71 % 7.01 % Merger-related and other charges, net of tax 0.17 0.26 0.41 0.63 0.08 0.21 0.12 Return on common equity - operating 14.25 15.63 12.77 10.69 6.25 14.92 7.13
Effect of goodwill and other
intangibles 3.56 4.05 3.46 2.83 1.84 3.80 2.07 Return on tangible common equity - operating 17.81 % 19.68 % 16.23 % 13.52 % 8.09 % 18.72 % 9.20 %
Return on assets reconciliation
Return on assets (GAAP) 1.46 % 1.62 % 1.30 % 1.07 % 0.71 % 1.54 % 0.85 % Merger-related and other charges, net of tax 0.02 0.03 0.04 0.07 0.01 0.02 0.01 Return on assets - operating 1.48 % 1.65 % 1.34 % 1.14 % 0.72 % 1.56 % 0.86 % Dividend payout ratio reconciliation Dividend payout ratio (GAAP) 24.36 % 23.17 % 27.27 % 34.62 % 56.25 % 23.75 % 50.70 %
Merger-related and other
charges, net of tax (0.31) (0.28) (0.80) (1.89) - (0.29) (1.38)
Dividend payout ratio -
operating 24.05 % 22.89 % 26.47 % 32.73 % 56.25 % 23.46 % 49.32 %
Efficiency ratio reconciliation
Efficiency ratio (GAAP) 54.53 % 53.55 % 56.73 % 54.14 % 55.86 % 54.04 % 56.00 %
Merger-related and other
charges (0.61) (0.87) (1.31) (1.90) (0.27) (0.74) (0.41) Efficiency ratio - operating 53.92 % 52.68 % 55.42 % 52.24 % 55.59 % 53.30 % 55.59 %
Tangible common equity to
tangible assets reconciliation
Equity to total assets (GAAP) 11.04 % 10.95 % 11.29 % 11.47 % 11.81 % 11.04 % 11.81 %
Effect of goodwill and other
intangibles (1.82) (1.86) (1.94) (2.02) (2.05) (1.82) (2.05)
Effect of preferred equity (0.51) (0.52) (0.54) (0.56) (0.64) (0.51) (0.64)
Tangible common equity to
tangible assets 8.71 % 8.57 % 8.81 % 8.89 % 9.12 % 8.71 % 9.12 %
37--------------------------------------------------------------------------------
Net Interest Revenue
Net interest revenue, which is the difference between the interest earned on assets and the interest paid on deposits and borrowed funds, is the single largest component of total revenue. Management seeks to optimize this revenue while balancing interest rate, credit and liquidity risks. The banking industry uses two ratios to measure the relative profitability of net interest revenue. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread eliminates the effect of noninterest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company's balance sheet and is defined as net interest revenue as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with noninterest-bearing deposits and stockholders' equity. The following tables indicate the relationship between interest revenue and expense and the average amounts of assets and liabilities, which provides further insight into net interest spread and net interest margin for the periods indicated. As shown in the tables, both average assets and average liabilities for the three and six months endedJune 30, 2021 increased compared to the same periods of 2020. The increase in average assets was primarily in average interest-earning assets including average loans, securities and interest-earning deposits in banks. The increase in average liabilities was driven by the increase in both average interest-bearing and noninterest-bearing deposits. In addition to organic growth, the increases in average loans and deposits reflect those acquired from Three Shores and the addition of PPP loans to our loan portfolio. PPP loans also contributed to deposit growth, since in many cases the proceeds of PPP loans remained in United customer deposit accounts during the first half of 2021. Approximately$1.93 billion of the increase in average loans for the three months endedJune 30, 2021 can be attributed to the Three Shores and PPP loan portfolios. The forgiveness of PPP loans and strong growth in deposits generated additional liquidity, which we deployed into our investment portfolio and was also reflected in our cash balances. Net interest revenue for the second quarter and first six months of 2021 was$138 million and$270 million , respectively. As set forth in the following tables, FTE net interest revenue for the second quarter and first six months of 2021 was$139 million and$272 million , representing 27% and 19% increases, respectively, from the second quarter and first six months of 2020. The increase in net interest revenue for the three and six months endedJune 30, 2021 compared to the same periods of 2020 was primarily driven by the loan growth discussed above and accelerated recognition of net deferred PPP loan fees upon forgiveness or repayment, partially offset by the impact of historically low interest rates on our asset sensitive balance sheet. The net interest spread for the second quarter and first six months of 2021 decreased 7 and 36 basis points, respectively, from the same periods of 2020. The net interest margin for the second quarter and first six months of 2021 decreased 23 basis points and 53 basis points, respectively, from the same periods of 2020. The decrease in the net interest margin and net interest spread during the three and six months endedJune 30, 2021 was primarily attributable to the impact of falling interest rates as the decreases in loan and securities yields exceeded the decrease in deposit rates. Also, strong deposit growth led to a changing mix of interest-earning assets, which contributed to the net interest margin and net interest spread compression as average cash balances increased and the average balance of the lower-yielding investment securities portfolio as a percentage of total assets was 25% for the second quarter of 2021 compared with 17% for the same period of 2020. The impact of the falling yield on our interest-earning assets was partially mitigated by a more favorable interest-bearing deposit mix. For the three months endedJune 30, 2021 , 84% of interest-bearing deposits consisted of lower-cost transaction deposits compared to 75% for the same period of 2020, representing a shift from higher-cost time deposits. The shift in the interest-bearing deposit mix was also evident when comparing the six months endedJune 30, 2021 and 2020. The decrease in the net interest margin was also partially offset by continued growth in noninterest-bearing deposits. 38
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Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended
2021 2020
(dollars in thousands, FTE) Average Balance
Interest Average Rate Average Balance Interest Average Rate
Assets:
Interest-earning assets: Loans, net of unearned income (FTE) (1)(2)$ 11,616,802 $ 127,458 4.40 %$ 9,772,703 $ 107,398 4.42 % Taxable securities (3) 4,242,297 15,287 1.44 2,229,371 14,045 2.52 Tax-exempt securities (FTE) (1)(3) 388,609 3,030 3.12 178,903 2,110 4.72 Federal funds sold and other interest-earning assets 1,292,026 1,055 0.33 776,776 857 0.44 Total interest-earning assets (FTE) 17,539,734 146,830 3.36 12,957,753 124,410 3.86 Noninterest-earning assets: Allowance for credit losses (128,073) (89,992) Cash and due from banks 152,443 138,842 Premises and equipment 225,017 217,096 Other assets (3) 1,002,634 949,201 Total assets$ 18,791,755 $ 14,172,900 Liabilities and Shareholders' Equity: Interest-bearing liabilities: Interest-bearing deposits: NOW and interest-bearing demand$ 3,428,009 1,382 0.16$ 2,444,895 1,628 0.27 Money market 3,814,960 1,355 0.14 2,541,805 3,421 0.54 Savings 1,080,267 53 0.02 788,247 39 0.02 Time 1,548,487 899 0.23 1,805,671 6,058 1.35 Brokered time deposits 64,332 (69) (0.43) 130,556 125 0.39 Total interest-bearing deposits 9,936,055 3,620 0.15 7,711,174 11,271 0.59 Federal funds purchased and other borrowings 111 - - 1 - - Federal Home Loan Bank advances - - - - - - Long-term debt 285,389 3,813 5.36 228,096 3,030 5.34 Total borrowed funds 285,500 3,813 5.36 228,097 3,030 5.34 Total interest-bearing liabilities 10,221,555 7,433 0.29 7,939,271 14,301 0.72 Noninterest-bearing liabilities: Noninterest-bearing deposits 6,196,045 4,360,095 Other liabilities 314,130 187,375 Total liabilities 16,731,730 12,486,741 Shareholders' equity 2,060,025 1,686,159 Total liabilities and shareholders' equity$ 18,791,755 $ 14,172,900 Net interest revenue (FTE)$ 139,397 $ 110,109 Net interest-rate spread (FTE) 3.07 % 3.14 % Net interest margin (FTE) (4) 3.19 % 3.42 % (1)Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 26%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate. (2)Included in the average balance of loans outstanding are loans on which the accrual of interest has been discontinued and loans that are held for sale. (3)AFS securities are shown at amortized cost. Pretax unrealized gains of$28.6 million and$66.3 million in 2021 and 2020, respectively, are included in other assets for purposes of this presentation. (4)Net interest margin is taxable equivalent net interest revenue divided by average interest-earning assets. 39 --------------------------------------------------------------------------------
Table 3 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Six Months Ended
2021 2020
(dollars in thousands, fully taxable equivalent (FTE)) Average Balance Interest Average Rate Average Balance Interest Average Rate
Assets:
Interest-earning assets: Loans, net of unearned income (FTE) (1)(2)$ 11,525,363 $ 252,580 4.42 %$ 9,300,792 $ 225,194 4.87 % Taxable securities (3) 3,932,545 28,585 1.45 2,293,502 29,916 2.61 Tax-exempt securities (FTE) (1)(3) 380,370 5,918 3.11 170,578 4,155 4.87 Federal funds sold and other interest-earning assets 1,324,776 2,277 0.34 612,776 2,489 0.81 Total interest-earning assets (FTE) 17,163,054 289,360 3.40 12,377,648 261,754 4.25 Non-interest-earning assets: Allowance for loan losses (135,845) (79,885) Cash and due from banks 146,401 133,548 Premises and equipment 223,224 218,170 Other assets (3) 1,012,896 908,828 Total assets$ 18,409,730 $ 13,558,309 Liabilities and Shareholders' Equity: Interest-bearing liabilities: Interest-bearing deposits: NOW and interest-bearing demand$ 3,379,794 2,868 0.17$ 2,428,815 4,606 0.38 Money market 3,774,201 3,159 0.17 2,441,264 7,952 0.66 Savings 1,035,176 102 0.02 750,179 74 0.02 Time 1,595,196 2,487 0.31 1,823,612 13,308 1.47 Brokered time deposits 69,765 223 0.64 105,689 406 0.77 Total interest-bearing deposits 9,854,132 8,839 0.18 7,549,559 26,346 0.70 Federal funds purchased and other borrowings 62 - - 199 1 1.01 Federal Home Loan Bank advances 1,657 2 0.24 83 1 2.42 Long-term debt 301,193 8,070 5.40 220,429 5,894 5.38 Total borrowed funds 302,912 8,072 5.37 220,711 5,896 5.37 Total interest-bearing liabilities 10,157,044 16,911 0.34 7,770,270 32,242 0.83 Noninterest-bearing liabilities: Noninterest-bearing deposits 5,896,882 3,943,740 Other liabilities 313,374 174,781 Total liabilities 16,367,300 11,888,791 Shareholders' equity 2,042,430 1,669,518 Total liabilities and shareholders' equity$ 18,409,730 $ 13,558,309 Net interest revenue (FTE)$ 272,449 $ 229,512 Net interest-rate spread (FTE) 3.06 % 3.42 % Net interest margin (FTE) (4) 3.20 % 3.73 % (1)Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 26%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate. (2)Included in the average balance of loans outstanding are loans on which the accrual of interest has been discontinued and loans that are held for sale. (3)Securities AFS are shown at amortized cost. Pretax unrealized gains of$43.4 million and$59.6 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. 40 -------------------------------------------------------------------------------- The following table shows the relative effect on net interest revenue for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate). Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category. Table 4 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis (in thousands) Three Months Ended June 30, 2021 Six Months Ended June 30, 2021 Compared to 2020 Increase (Decrease) Due to Changes in Volume Rate Total Volume Rate Total
Interest-earning assets:
Loans (FTE) $ 20,233 $ (173) $ 20,060 $ 50,203 $ (22,817) $ 27,386
Taxable securities 8,999 (7,757) 1,242 15,535 (16,866) (1,331)
Tax-exempt securities (FTE) 1,823 (903) 920 3,683 (1,920) 1,763
Federal funds sold and other
interest-earning assets 462 (264) 198 1,777 (1,989) (212)
Total interest-earning assets (FTE) 31,517 (9,097) 22,420 71,198 (43,592) 27,606
Interest-bearing liabilities:
NOW and interest-bearing demand accounts 524 (770) (246) 1,390 (3,128) (1,738)
Money market accounts 1,203 (3,269) (2,066) 2,975 (7,768) (4,793)
Savings deposits 14 - 14 28 - 28
Time deposits (758) (4,401) (5,159) (1,487) (9,334) (10,821)
Brokered deposits (37) (157) (194) (122) (61) (183)
Total interest-bearing deposits 946 (8,597) (7,651) 2,784 (20,291) (17,507)
Federal funds purchased & other borrowings - - - - (1) (1)
FHLB advances - - - 3 (2) 1
Long-term debt 765 18 783 2,164 12 2,176
Total borrowed funds 765 18 783 2,167 9 2,176
Total interest-bearing liabilities 1,711 (8,579) (6,868) 4,951 (20,282) (15,331)
Increase in net interest revenue (FTE) $ 29,806 $ (518) $ 29,288 $ 66,247 $ (23,310) $ 42,937 Provision for Credit Losses The ACL represents management's estimate of life of loan credit losses in the loan portfolio and unfunded loan commitments. Management's estimate of credit losses under CECL is determined using a model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and resulting provision for credit losses. We recorded negative provisions for credit losses of$13.6 million and$25.9 million for the three and six months endedJune 30, 2021 , respectively, compared to$33.5 million and$55.7 million in provision expense for the same periods in 2020, respectively. The amount of provision recorded in each period was the amount required such that the total ACL reflected the appropriate balance as determined by management reflecting expected life of loan losses. The negative provision expense for the three and six months endedJune 30, 2021 compared to the same periods of 2020 was primarily a result of an improved economic forecast combined with net recoveries recognized during the second quarter and first half of 2021. The provision for credit losses for the second quarter and first half of 2020 was elevated due to a less optimistic economic forecast amidst the COVID-19 pandemic. For the six months endedJune 30, 2021 , net loan charge-offs (recoveries) as an annualized percentage of average outstanding loans were (0.01)% compared to 0.31% for the same period in 2020. The net recoveries amount recorded during the first six months of 2021 was mostly attributable to one large commercial credit recovery during the first quarter, strong recoveries from a number of other credits and lower charge-offs during the second quarter.
Additional discussion on credit quality and the ACL is included in the "Asset Quality and Risk Elements" section of MD&A in this Report.
41
--------------------------------------------------------------------------------Noninterest income
The following table presents the components of noninterest income for the
periods indicated.
Table 5 - Noninterest Income
(in thousands)
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 Amount Percent 2021 2020 Amount Percent
Overdraft fees $ 2,274 $ 1,997 $ 277 14 % $ 4,616 $ 5,516 $ (900) (16) %
ATM and debit card fees 3,306 3,199 107 3 6,396 6,268 128 2
Other service charges and
fees 2,755 1,799 956 53 4,893 3,849 1,044 27
Total service charges and
fees 8,335 6,995 1,340 19 15,905 15,633 272 2
Mortgage loan gains and
related fees 11,136 23,659 (12,523) (53) 33,708 31,969 1,739 5
Wealth management fees 3,822 1,324 2,498 189 7,327 2,964 4,363 147
Gains on sales of other loans 4,123 1,040 3,083 296 5,153 2,714 2,439 90
Securities gains, net 41 - 41 41 - 41
Other noninterest income:
Other lending and loan
servicing fees 2,085 1,298 787 61 4,245 2,963 1,282 43 Customer derivatives 260 1,181 (921) (78) 1,952 2,588 (636) (25)
Other investment gains
(losses) 1,648 18 1,630 3,154 (1,139) 4,293 BOLI 972 2,032 (1,060) (52) 1,829 2,877 (1,048) (36) Treasury management income 710 462 248 54 1,355 971 384 40 Other 2,709 2,229 480 22 5,877 4,512 1,365 30 Total other noninterest income 8,384 7,220 1,164 16 18,412 12,772 5,640 44 Total noninterest income$ 35,841 $ 40,238 $ (4,397) (11)$ 80,546 $ 66,052 $ 14,494 22 Total service charges and fees for the first half of 2021 were flat compared to the same period of 2020, reflecting an increase in other service charges and fees that was mostly offset by a decrease in overdraft fees. During the second quarter of 2021, total service charges and fees increased$1.34 million compared to the respective period of 2020, which was mostly driven by the receipt of larger vendor rebates reflected in other service charges and fees for the three and six months ended 2021. Overdraft fees have remained at relatively low levels since the onset of the COVID-19 pandemic. During the first half of 2020, the decrease in overdraft fees was attributable to lower transaction volume due to widespread economic shutdowns combined with government stimulus payments disbursed during the second quarter, both of which increased transaction deposit account balances. During the first half of 2021, transaction deposit account balances remained elevated due to government stimulus payments and customer preferences to allocate more funds to transaction deposit accounts rather than time deposits in the current low interest rate environment. Mortgage loan gains and related fees consists primarily of fees earned on mortgage originations, gains on the sale of mortgages in the secondary market and fair value adjustments to our mortgage servicing asset. We recognize the majority of gains on mortgages at the point customers enter into mortgage rate lock commitments, making our mortgage pipeline a significant driver of mortgage gains in any given period. The change in mortgage loan gains and related fees is strongly tied to the interest rate environment. Customer demand, also primarily driven by interest rates, as well as the market-driven gain on sale spread are also primary drivers of mortgage income. From the second quarter of 2020 through the first quarter of 2021, we experienced a strong demand for mortgage refinances and home purchases following the drop in interest rates in early 2020. During the second quarter of 2021, the demand for refinances began to decrease as rates increased, resulting in a decrease in the volume of mortgage rate locks compared to the same period of 2020. Overall mortgage originations for the three and six months endedJune 30, 2021 surpassed that of the respective periods of 2020 as the demand for home purchases remained strong. Offsetting strong mortgage origination demand, during the three months endedJune 30, 2021 and 2020, we recorded negative fair value adjustments to the mortgage servicing rights asset of$2.58 million and$1.78 million , respectively, as projected mortgage prepayments accelerated as interest rates decreased. Additionally, our gain on sale spread for the second quarter of 2021 of 3.86% decreased compared to 4.24% for the second quarter of 2020 contributing to the decrease in mortgage loan gains. 42 -------------------------------------------------------------------------------- Table 6 - Selected Mortgage Metrics (dollars in thousands) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % Change 2021 2020 % Change Mortgage rate locks$ 701,666 $ 801,836 (12) %$ 1,695,005 $ 1,602,493 6 % # of mortgage rate locks 2,090 2,981 (30) 5,072 5,877 (14) Mortgage loans sold$ 407,468 $ 395,406 3$ 743,141 $ 654,518 14 # of mortgage loans sold 1,704 1,712 - 3,109 2,870 8 Mortgage loans originated: Purchases$ 406,552 $ 242,920 67$ 699,471 $ 461,498 52 Refinances 271,850 318,868 (15) 635,403 488,149 30 Total$ 678,402 $ 561,788 21$ 1,334,874 $ 949,647 41 # of mortgage loans originated 1,992 2,095 (5) 4,134 3,565 16 Gains on the sale of other loans for the second quarter and first six months of 2021 were up significantly compared to the same periods of 2020 mostly due to the sale of equipment financing loans and leases andUSDA renewable energy loans in the second quarter of 2021. 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. The following table presents loans sold and the corresponding gains or losses recognized on the sale for the periods indicated. Table 7 - Other Loan Sales (in thousands) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Loans Sold Gain (Loss) Loans Sold Gain (Loss) Loans Sold Gain (Loss) Loans Sold Gain (Loss) Guaranteed portion of SBA/USDA loans$ 32,303 $ 3,320 $ 14,035 $ 1,021 $ 43,648 $ 4,343 $ 18,069 $ 1,436 Equipment financing receivables 18,908 803 1,704 19 19,967 810 23,921 1,278 Total$ 51,211 $ 4,123 $ 15,739 $ 1,040 $ 63,615 $ 5,153 $ 41,990 $ 2,714
The increase in brokerage and wealth management fees during the second quarter and first six months of 2021 from the same periods of 2020 was primarily a result of the addition of the Three Shores wealth management business.
Other noninterest income for the for the three and six months endedJune 30, 2021 increased from the same periods of 2020 primarily due to positive fair value adjustments on deferred compensation plan assets and other investments compared to negative fair value adjustments during the first half of 2020 resulting from the COVID-19 pandemic related market disruption. The increase in lending and loan servicing fees also contributed to the increase in other income, which was mostly attributable to volume driven fee income from our equipment finance business. These increases were offset by a decrease in BOLI income compared to three and six months endedJune 30, 2020 , which included a death benefit gain of$1.10 million . Customer derivative income also decreased for the three and six months endedJune 30, 2021 compared to the same periods of 2020 due to increases in interest rates negatively impacting the demand for customer derivative products. 43 --------------------------------------------------------------------------------
Noninterest Expenses
The following table presents the components of noninterest expenses for the
periods indicated.
Table 8 - Noninterest Expenses
(in thousands)
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 Amount Percent 2021 2020 Amount Percent
Salaries and employee benefits
15 % $ 119,999 $ 103,169 $ 16,830 16 %
Communications and equipment 7,408 6,556 852 13 14,611 12,502 2,109 17
Occupancy 7,078 5,945 1,133 19 14,034 11,659 2,375 20
Advertising and public relations 1,493 2,260 (767) (34) 2,692 3,534 (842) (24)
Postage, printing and supplies 1,618 1,613 5 - 3,440 3,283 157 5
Professional fees 4,928 4,823 105 2 9,162 8,920 242 3
Lending and loan servicing
expense 3,181 3,189 (8) - 6,058 5,482 576 11Outside services - electronic
banking 2,285 1,796 489 27 4,503 3,628 875 24
regulatory charges 1,901 1,558 343 22 3,797 3,042 755 25 Amortization of intangibles 929 987 (58) (6) 1,914 2,027 (113) (6) Other 4,227 3,045 1,182 39 7,903 7,067 836 12
Total excluding merger-related
and other charges 94,462 83,583 10,879 13 188,113 164,313 23,800 14 Merger-related and other charges 1,078 397 681 2,621 1,205
1,416
Total noninterest expenses$ 95,540 $ 83,980 $ 11,560 14$ 190,734 $ 165,518 $ 25,216 15 Salaries and employee benefits for the second quarter and first six months of 2021 increased from the same periods of 2020 as a result of several factors including growth in our employee base from the acquisition of Three Shores as well as increased mortgage commissions and other incentives resulting from increased production and strong performance. The increase also reflected our merit-based salary increases awarded during the second quarter of 2021. These increases in expense were partially offset by higher deferred loan origination costs related to increases in loan production. Full-time equivalent headcount totaled 2,440 atJune 30, 2021 , up from 2,297 atJune 30, 2020 . Communications and equipment expense increased for the second quarter and first six months of 2021 compared to the same periods of 2020 primarily due to incremental software contract costs. The increase in occupancy costs was mostly attributable to the addition of operating lease costs associated with the acquired Three Shores' locations. Advertising and public relations expense for the three and six months endedJune 30, 2021 decreased relative to the same periods of 2020 as 2020 included contributions to theUnited Community Bank Foundation in its inaugural year. The increase in outside services - electronic banking primarily related to increased internet banking costs. Merger-related and other charges for the second quarter and first six months of 2021 primarily consisted of expenses associated with the acquisitions of Three Shores and FinTrust. Merger-related and other charges for the three and six months endedJune 30, 2020 were mostly related to the acquisition of Three Shores.
Balance Sheet Review
Total assets atJune 30, 2021 andDecember 31, 2020 were$18.9 billion and$17.8 billion , respectively. Total liabilities atJune 30, 2021 andDecember 31, 2020 were$16.8 billion and$15.8 billion , respectively. Shareholders' equity totaled$2.09 billion and$2.01 billion atJune 30, 2021 andDecember 31, 2020 , respectively. The increase in assets was primarily evident in our investment portfolio, which we have strategically grown by$1.28 billion during 2021 to deploy excess liquidity provided by PPP loan forgiveness and growth in our customer deposits.
Loans
Our loan portfolio is our largest category of interest-earning assets. The
following table presents a summary by loan type of the loan portfolio, of which
approximately 71% was secured by real estate at
44
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Table 9 - Loans Outstanding
(in thousands)
June 30, 2021 December 31, 2020
% of total % of total
Amortized Cost loans Amortized Cost loans
Owner occupied commercial real estate $ 2,149,371 19 % $ 2,090,443 18 %
Income producing commercial real estate 2,550,243 22 2,540,750 22
Commercial & industrial (1) 2,234,646 20 2,498,560 22
Commercial construction 926,809 8 967,305 9
Equipment financing 968,805 8 863,830 8
Total commercial 8,829,874 77 8,960,888 79
Residential mortgage 1,472,608 13 1,284,920 11
HELOC 660,881 6 697,117 6
Residential construction 288,708 3 281,430 3
Consumer 138,675 1 146,460 1
Total loans $ 11,390,746 100 % $ 11,370,815 100 %
(1) Commercial and industrial loans as of
Asset Quality and Risk Elements
We manage asset quality and control credit risk through review and oversight of
the loan portfolio as well as adherence to policies designed to promote sound
underwriting and loan monitoring practices. Our credit risk management function
is responsible for monitoring asset quality and Board approved portfolio
concentration limits, establishing credit policies and procedures and enforcing
the consistent application of these policies and procedures. Additional
information on our credit administration function is included in Part I, Item 1
under the heading Lending Activities in our 2020 10-K.
We conduct reviews of classified performing and non-performing loans, TDRs, past
due loans and portfolio concentrations on a regular basis to identify risk
migration and potential charges to the ACL. These items are discussed in a
series of meetings attended by credit risk management leadership and leadership
from various lending groups. In addition to the reviews mentioned above, an
independent loan review team reviews the portfolio to ensure consistent
application of risk rating policies and procedures.
The ACL reflects management's assessment of the life of loan expected credit
losses in the loan portfolio and unfunded loan commitments. This assessment
involves uncertainty and judgment and is subject to change in future periods.
The amount of any changes could be significant if management's assessment of
loan quality or collateral values changes substantially with respect to one or
more loan relationships or portfolios. The allocation of the ACL is based on
reasonable and supportable forecasts, historical data, subjective judgment and
estimates and therefore, is not necessarily indicative of the specific amounts
or loan categories in which charge-offs may ultimately occur. In addition, bank
regulatory authorities, as part of their periodic examination of the Bank, may
require adjustments to the provision for credit losses in future periods if, in
their opinion, the results of their review warrant such additions. See the
Critical Accounting Policies section of MD&A in our 2020 10-K for additional
information on the allowance for credit losses.
45
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The following table presents a summary of the changes in the ACL for the periods
indicated.
Table 10 - ACL
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
ACL - loans, beginning of period $ 126,866 $ 81,905 $ 137,010 $ 62,089
Adoption of CECL - - - 6,880
ACL - loans, adjusted beginning balance 126,866 81,905 137,010 68,969
Charge-offs:
Owner occupied commercial real estate 1 - 1 6
Income producing commercial real estate 52 4,589 1,059 5,000
Commercial & industrial 857 254 3,751 7,815
Commercial construction 46 239 224 239
Equipment financing 1,188 2,085 3,246 3,948
Residential mortgage - 50 215 334
HELOC 34 98 34 118
Residential construction - 32 10 54
Consumer 353 712 824 1,350
Total charge-offs 2,531 8,059 9,364 18,864
Recoveries:
Owner occupied commercial real estate 156 466 396 1,500
Income producing commercial real estate 213 41 229 182
Commercial & industrial 797 291 6,444 667
Commercial construction 339 117 495 258
Equipment financing 887 420 1,434 776
Residential mortgage 194 56 317 331
HELOC 146 196 219 299
Residential construction 33 37 103 71
Consumer 222 286 488 517
Total recoveries 2,987 1,910 10,125 4,601
Net (recoveries) charge-offs (456) 6,149 (761) 14,263
(Release of) provision for credit losses - loans (15,706) 27,913 (26,155) 48,963
ACL - loans, end of period 111,616 103,669 111,616 103,669
ACL - unfunded commitments, beginning of period 8,726 6,470 10,558 3,458
Adoption of CECL - - - 1,871
ACL - unfunded commitments, adjusted beginning balance 8,726 6,470 10,558 5,329
Provision for credit losses - unfunded commitments 2,118 5,630 286 6,771
ACL - unfunded commitments, end of period 10,844 12,100 10,844 12,100
Total ACL $ 122,460 $ 115,769 $ 122,460 $ 115,769
Total loans:
At period-end $ 11,390,746 $ 10,132,510 $ 11,390,746 $ 10,132,510
Average 11,616,802 9,772,703 11,525,363 9,300,792
ACL - loans, as a percentage of period-end loans 0.98 % 1.02 % 0.98 % 1.02 %
As a percentage of average loans (annualized):
Net charge-offs (0.02) 0.25 (0.01) 0.31
Provision for credit losses - loans (0.54) 1.15 (0.46) 1.06
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 the increase in
special mention and substandard assets at June 30, 2021 .
46
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The following table presents a summary of loans by risk category for the dates
indicated. See Note 4 to the consolidated financial statements in this Report
for detailed descriptions of the risk categories.
Table 11 - Risk Categories
(in thousands)
June 30, 2021 December 31, 2020 Change
% of total % of total
Amortized Cost loans Amortized Cost loans Amount Percent
Pass $ 10,781,793 95 % $ 10,846,850 95 % $ (65,057) (1) %
Special mention 369,964 3 297,245 3 72,719 24
Substandard 238,989 2 226,720 2 12,269 5
Total loans $ 11,390,746 100 % $ 11,370,815 100 % $ 19,931 -
The increase in special mention and substandard loans since December 31, 2020
mostly reflects downgrades made during the first quarter of 2021 that remained
in place as of June 30, 2021 . Downgrades primarily consisted of borrowers in
industries with potentially higher risk of being impacted by the social and
economic effects of the COVID-19 pandemic, such as senior care and hotels. We
anticipate these borrowers' financial position to strengthen in the second half
of 2021 as the economic outlook of the pandemic continues to improve.
We classify loans as substandard when there is one or more well-defined
weaknesses that jeopardize the repayment by the borrower and there is a distinct
possibility that we could sustain some loss if the deficiency is not corrected.
At June 30, 2021 , substandard loans included accrual and nonaccrual loans of
$193 million and $46.1 million , respectively. Special mention loans continue to
accrue interest.
Nonperforming Assets
NPAs, which include nonaccrual loans and foreclosed properties, totaled $46.3
million at June 30, 2021 , compared with $62.2 million at December 31, 2020 . The
decrease in NPAs since December 31, 2020 is primarily a result of paydowns and
payoffs of nonaccrual loans.
Our policy is to place loans on nonaccrual status when, in the opinion of
management, the full principal and interest on a loan is not likely to be
collected or when the loan becomes 90 days past due. A loan may continue on
accrual after 90 days, however, if it is well collateralized and in the process
of collection. When a loan is placed on nonaccrual status, interest previously
accrued but not collected is reversed against current interest revenue. Interest
payments received on nonaccrual loans are applied to reduce the loan's amortized
cost. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current, there is a sustained period of
repayment performance and future payments are reasonably assured.
Generally, we do not commit to lend additional funds to customers whose loans
are on nonaccrual status, although in certain isolated cases, we execute
forbearance agreements whereby we agree to continue to fund construction loans
to completion or other lines of credit as long as the borrower meets the
conditions of the forbearance agreement. We may also fund other amounts
necessary to protect collateral such as amounts to pay past due property taxes
and insurance coverage.
Foreclosed property is initially recorded at fair value, less estimated costs to
sell. If the fair value, less estimated costs to sell, at the time of
foreclosure is less than the loan balance, the deficiency is charged against the
allowance for loan losses. If the lesser of fair value, less estimated costs to
sell, or the listed selling price, less the costs to sell, of the foreclosed
property decreases during the holding period, a valuation allowance is
established with a charge to foreclosed property expense. When the foreclosed
property is sold, a gain or loss is recognized on the sale for the difference
between the sales proceeds and the carrying amount of the property.
47
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The table below summarizes NPAs.
Table 12 - NPAs
(in thousands)
June 30, December 31,
2021 2020
Nonaccrual loans:
Owner occupied commercial real estate 6,128 8,582
Income producing commercial real estate 13,100 15,149
Commercial & industrial 8,563 16,634
Commercial construction 1,229 1,745
Equipment financing 1,771 3,405
Total commercial 30,791 45,515
Residential mortgage 13,485 12,858
HELOC 1,433 2,487
Residential construction 307 514
Consumer 107 225
Total nonaccrual loans 46,123 61,599
Foreclosed properties 224 647
Total NPAs $ 46,347 $ 62,246
Nonaccrual loans as a percentage of total
loans 0.40 % 0.54 %
NPAs as a percentage of total loans and
foreclosed properties 0.41 0.55
NPAs as a percentage of total assets 0.25 0.35
At June 30, 2021 and December 31, 2020 , we had $57.3 million and $61.6 million ,
respectively, in loans with terms that have been modified in TDRs. Included
therein were $16.7 million and $20.6 million , respectively, of TDRs that were
classified as nonaccrual and were included in nonperforming loans. The remaining
TDRs with an aggregate balance of $40.6 million and $41.0 million , respectively,
were performing according to their modified terms and were therefore not
considered to be nonperforming assets.
The CARES Act and interagency guidance granted temporary relief from TDR
classification for certain loans restructured as a result of COVID-19. During
2020, we granted a significant number of payment deferral requests to our
borrowers related to the economic disruption created by COVID-19. We continued
to grant payment deferral requests in 2021 to certain borrowers. The following
table presents remaining COVID-19 related deferrals that, to the extent they
qualified for exemption, were not considered TDRs as of June 30, 2021 and
December 31, 2020 .
Table 13 - COVID-19 Deferrals
(in thousands)
June 30, December 31,
2021 2020
Owner occupied commercial real estate $ 1,460 $ 4,774
Income producing commercial real estate 7,791 45,190
Commercial & industrial 1,024 5,682
Commercial construction 170 1,745
Equipment financing 5,512 3,474
Total commercial 15,957 60,865
Residential mortgage 1,655 8,731
HELOC - 1,012
Residential construction 140 55
Consumer 61 46
Total COVID-19 deferrals $ 17,813 $ 70,709
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The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits and borrowings. AtJune 30, 2021 andDecember 31, 2020 , we had HTM debt securities with a carrying amount of$852 million and$420 million , respectively, and AFS debt securities totaling$4.08 billion and$3.22 billion , respectively. The increased balances atJune 30, 2021 reflect our decision to deploy liquidity generated through strong deposit growth by purchasing additional investment securities. AtJune 30, 2021 andDecember 31, 2020 , the securities portfolio represented approximately 26% and 20%, respectively, of total assets. In accordance with CECL, our HTM debt securities portfolio is evaluated quarterly to assess whether an ACL is required. We measure expected credit losses on HTM debt securities on a collective basis by major security type. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. AtJune 30, 2021 andDecember 31, 2020 , calculated credit losses on HTM debt securities were not material due to the high credit quality of the portfolio, which included securities issued or guaranteed byU.S. Government agencies, GSEs, high credit quality municipalities and supranational entities. As a result, no ACL for HTM debt securities was recorded. For AFS debt securities in an unrealized loss position, if we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, the security's amortized cost basis is written down to fair value through income. Absent an intent or more than likely requirement to sell, we evaluate whether the decline in fair value has resulted from credit losses or other factors. The evaluation considers factors such as the extent to which fair value is less than amortized cost, changes to the security's rating, and adverse conditions specific to the security. If the evaluation indicates a credit loss exists, an ACL may be recorded, with such allowance limited to the amount by which fair value is below amortized cost. Any impairment unrelated to credit factors is recognized in OCI. AtJune 30, 2021 andDecember 31, 2020 , there was no ACL related to the AFS debt securities portfolio. Losses on fixed income securities atJune 30, 2021 andDecember 31, 2020 primarily reflected the effect of changes in interest rates. Deposits Customer deposits are the primary source of funds for the continued growth of our earning assets. Our high level of service, as evidenced by our strong customer satisfaction scores, has been instrumental in attracting and retaining customer deposit accounts. In addition to organic growth, atJune 30, 2021 , the increase in core transaction deposits was also attributable to PPP-related deposits. The growth in customer deposits has allowed us to reduce our usage of brokered deposits, which is reflected in the decrease sinceDecember 31, 2020 . The decline in time deposits is mostly driven by customer preference to allocate funds to transaction deposits in the current low rate environment. The following table sets forth the deposit composition for the periods indicated. Table 14 - Deposits (in thousands) June 30, 2021 December 31, 2020 Noninterest-bearing demand$ 6,260,756 $ 5,390,291 NOW and interest-bearing demand 3,518,686 3,346,490 Money market and savings 4,864,308 4,501,189 Time 1,500,049 1,704,290 Total customer deposits 16,143,799 14,942,260 Brokered deposits 183,968 290,098 Total deposits$ 16,327,767 $ 15,232,358 Borrowing Activities
At
Contractual Obligations
There have not been any material changes to our contractual obligations since
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--------------------------------------------------------------------------------Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit, letters of credit and financial guarantees.
A commitment to extend credit is an agreement to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Letters of credit and financial guarantees are conditional commitments issued to guarantee a customer's performance to a third party and have essentially the same credit risk as extending loan facilities to customers. Those commitments are primarily issued to local businesses. The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, letters of credit and financial guarantees is represented by the contractual amount of these instruments. We use the same credit underwriting procedures for making commitments, letters of credit and financial guarantees, as we use for underwriting on-balance sheet instruments. Management evaluates each customer's creditworthiness on a case-by-case basis and the amount of the collateral, if deemed necessary, is based on the credit evaluation. Collateral held varies, but may include unimproved and improved real estate, certificates of deposit, personal property or other acceptable collateral. All of these instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The total amount of these instruments does not necessarily represent future cash requirements because a significant portion of these instruments expire without being used. We are not involved in off-balance sheet contractual relationships, other than those disclosed in this report, that could result in liquidity needs or other commitments, or that could significantly affect earnings. See Note 22 to the consolidated financial statements included in our 2020 10-K and Note 12 to the consolidated financial statements in this Report for additional information on off-balance sheet arrangements.
Interest Rate Sensitivity Management
The absolute level and volatility of interest rates can have a significant
effect on profitability. The objective of interest rate risk management is to
identify and manage the sensitivity of net interest revenue to changing interest
rates, consistent with our overall financial goals. Based on economic
conditions, asset quality and various other considerations, management
establishes tolerance ranges for interest rate sensitivity and manages within
these ranges.
Net interest revenue and the fair value of financial instruments are influenced
by changes in the level of interest rates. We limit our exposure to fluctuations
in interest rates through policies established by our ALCO and approved by the
Board. The ALCO meets periodically and has responsibility for formulating and
recommending asset/liability management policies to the Board, formulating and
implementing strategies to improve balance sheet positioning and/or earnings,
and reviewing interest rate sensitivity.
One of the tools management uses to estimate and manage the sensitivity of net
interest revenue to changes in interest rates is an asset/liability simulation
model. Resulting estimates are based upon several assumptions for each scenario,
including loan and deposit re-pricing characteristics and the rate of
prepayments. The ALCO periodically reviews the assumptions for reasonableness
based on historical data and future expectations; however, actual net interest
revenue may differ from model results. The primary objective of the simulation
model is to measure the potential change in net interest revenue over time using
multiple interest rate scenarios. The base scenario assumes rates remain flat
and is the scenario to which all others are compared, in order to measure the
change in net interest revenue. Policy limits are based on immediate rate shock
scenarios, as well as gradually rising and falling rate scenarios, which are all
compared to the base scenario. Our assumptions include floors such that market
rates and discount rates do not go below zero. Other scenarios analyzed may
include delayed rate shocks, yield curve steepening or flattening, or other
variations in rate movements. While the primary policy scenarios focus on a
12-month time frame, longer time horizons are also modeled.
Our policy is based on the 12-month impact on net interest revenue of interest
rate shocks and ramps that increase from 100 to 400 basis points or decrease 100
to 200 basis points from the base scenario. In the shock scenarios, rates
immediately change the full amount at the scenario onset. In the ramp scenarios,
rates change by 25 basis points per month. Our policy limits the projected
change in net interest revenue over the first 12 months to an 8% decrease for
each 100 basis point change in the increasing and decreasing rate ramp and shock
scenarios. The following table presents our interest sensitivity position at the
dates indicated.
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--------------------------------------------------------------------------------Table 15 - Interest Sensitivity
Increase (Decrease) in Net Interest Revenue from Base Scenario at
June 30, 2021 December 31, 2020
Change in Rates Shock Ramp Shock Ramp
100 basis point increase 3.58 % 2.63 % 3.80 % 2.88 %
100 basis point decrease (3.53) (3.20) (1.89) (1.82)
Interest rate sensitivity is a function of the repricing characteristics of the
portfolio of assets and liabilities. These repricing characteristics are the
time frames within which the interest-earning assets and interest-bearing
liabilities are subject to change in interest rates either at replacement,
repricing or maturity. Interest rate sensitivity management focuses on the
maturity structure of assets and liabilities and their repricing characteristics
during periods of changes in market interest rates. Effective interest rate
sensitivity management seeks to ensure that both assets and liabilities respond
to changes in interest rates on a net basis within an acceptable timeframe,
thereby minimizing the potentially adverse effect of interest rate changes on
net interest revenue.
We have discretion in the extent and timing of deposit repricing depending upon
the competitive pressures in the markets in which we operate. Changes in the mix
of earning assets or supporting liabilities can either increase or decrease the
net interest margin without affecting interest rate sensitivity. The interest
rate spread between an asset and its supporting liability can vary significantly
even when the timing of repricing for both the asset and the liability remains
the same, due to the two instruments repricing according to different indices.
This is commonly referred to as basis risk.
Derivative financial instruments are used to manage interest rate sensitivity.
These contracts generally consist of interest rate swaps under which we pay a
variable rate (or fixed rate, as the case may be) and receive a fixed rate (or
variable rate, as the case may be). In addition, investment securities and
wholesale funding strategies are used to manage interest rate risk.
Derivative financial instruments that are designated as accounting hedges are
classified as either cash flow or fair value hedges. The change in fair value of
cash flow hedges is recognized in OCI. Fair value hedges recognize in earnings
both the effect of the change in the fair value of the derivative financial
instrument and the offsetting effect of the change in fair value of the hedged
asset or liability associated with the particular risk of that asset or
liability being hedged. We have other derivative financial instruments that are
not designated as accounting hedges, but are used for interest rate risk
management purposes and as effective economic hedges. Derivative financial
instruments that are not accounted for as accounting hedges are marked to market
through earnings.
Our policy requires all non-customer derivative financial instruments be used
only for asset/liability management through the hedging of specific
transactions, positions or risks, and not for trading or speculative purposes.
Management believes that the risk associated with using derivative financial
instruments to mitigate interest rate risk sensitivity is appropriately
monitored and controlled and will not have any material adverse effect on
financial condition or results of operations. In order to mitigate potential
credit risk, from time to time we may require the counterparties to derivative
contracts to pledge cash and/or securities as collateral to cover the net
exposure.
Liquidity Management
Liquidity is defined as the ability to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by increasing
liabilities. Liquidity management involves maintaining the ability to meet the
daily cash flow requirements of customers, both depositors and borrowers. The
primary objective is to ensure that sufficient funding is available, at a
reasonable cost, to meet ongoing operational cash needs and to take advantage of
revenue producing opportunities as they arise. While the desired level of
liquidity will vary depending upon a variety of factors, our primary goal is to
maintain a sufficient level of liquidity in all expected economic environments.
To assist in determining the adequacy of our liquidity, we perform a variety of
liquidity stress tests. We maintain an unencumbered liquid asset reserve to help
ensure our ability to meet our obligations under normal conditions for at least
a 12-month period and under severely adverse liquidity conditions for a minimum
of 30 days.
An important part of the Bank's liquidity resides in the asset portion of the
balance sheet, which provides liquidity primarily through loan interest and
principal repayments and the maturities and sales of securities, as well as the
ability to use these assets as collateral for borrowings on a secured basis.
The Bank's main source of liquidity is customer interest-bearing and
noninterest-bearing deposit accounts. Liquidity is also available from wholesale
funding sources consisting primarily of Federal funds purchased, FHLB advances,
and brokered deposits. These sources of liquidity are generally short-term in
nature and are used as necessary to fund asset growth and meet other short-term
liquidity needs.
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In addition, because the Holding Company is a separate entity and apart from the
Bank, it must provide for its own liquidity. The Holding Company is responsible
for the payment of dividends declared for its common and preferred shareholders,
and interest and principal on any outstanding debt or trust preferred
securities. The Holding Company currently has internal capital resources to meet
these obligations. While the Holding Company has access to the capital markets
and maintains a line of credit as a contingent funding source, the ultimate
sources of its liquidity are subsidiary service fees and dividends from the
Bank, which are limited by applicable law and regulations. Effective July 1,
2021 , the Bank became a South Carolina state-chartered bank, which permits the
Bank to pay a dividend of up to 100% of its current year earnings without
requesting approval of the South Carolina Board of Financial Institutions ,
provided certain conditions are met. Prior to the conversion to a South Carolina
state-chartered bank, Georgia law generally limited the payment of dividends by
the Bank from retained earnings of up to 50% of its prior year earnings without
requesting approval of the Georgia Department of Banking and Finance . Holding
Company liquidity is managed to a minimum of 15-months of positive cash flow
after considering all of its liquidity needs over this period.
At June 30, 2021 , we had sufficient qualifying collateral to provide borrowing
capacity for FHLB advances of $1.26 billion , as well as unpledged investment
securities of $3.78 billion that could be used as collateral for additional
borrowings. In addition, we have the ability to attract retail deposits by
competing more aggressively on pricing.
Significant uses and sources of cash during the six months ended June 30, 2021
are summarized below. See the consolidated statement of cash flows in this
Report for further detail.
•Net cash provided by operating activities of $162 million reflects net income
of $144 million adjusted for non-cash transactions, gains on sales of securities
and other loans and changes in other assets and liabilities. Significant
non-cash transactions for the period included a $25.9 million release of
provision for credit losses and deferred income tax expense of $14.6 million .
•Net cash used in investing activities of $1.34 billion primarily consisted of
purchases of AFS and HTM debt securities of $1.91 billion , partially offset by
proceeds from securities sales, maturities and calls, reflecting our strategic
decision to deploy excess liquidity into the securities portfolio.
•Net cash provided by financing activities of $989 million was driven by our
strong deposit growth as our net increase in deposits totaled $1.10 billion ,
which was partially offset by our repayment of long-term debt of $65.6 million
and dividends on common and preferred stock of $36.0 million .
In the opinion of management, our liquidity position at June 30, 2021 was
sufficient to meet our expected cash flow requirements.
Capital Resources and Dividends
Shareholders' equity atJune 30, 2021 was$2.09 billion , an increase of$78.8 million fromDecember 31, 2020 primarily due to year-to-date earnings partially offset by dividends declared and a decrease in the value of AFS debt securities. The following table shows capital ratios, as calculated under applicable regulatory guidelines, atJune 30, 2021 andDecember 31, 2020 . As ofJune 30, 2021 , capital levels remained characterized as "well-capitalized" under prompt corrective action provisions in effect at the time. Additional information related to capital ratios, as calculated under regulatory guidelines, as ofJune 30, 2021 andDecember 31, 2020 , is provided in Note 11 to the consolidated financial statements in this Report. Table 16 - Capital Ratios United Community Banks, Inc. (Consolidated) United Community Bank Minimum Capital Plus Well- Capital ConservationJune 30 ,December 31 ,June 30 ,December 31 , Minimum Capitalized Buffer 2021 2020 2021 2020 Risk-based ratios: CET1 capital 4.5 % 6.5 % 7.0 % 12.59 % 12.31 % 13.21 % 13.31 % Tier 1 capital 6.0 8.0 8.5 13.34 13.10 13.21 13.31 Total capital 8.0 10.0 10.5 15.09 15.15 14.03 14.28 Leverage ratio 4.0 5.0 N/A 9.26 9.28 9.16 9.42 52
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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 in that primarily all assets and liabilities of a bank are
monetary in nature with relatively little investment in fixed assets or
inventories. Inflation has an important effect on the growth of total assets and
the resulting need to increase equity capital at higher than normal rates in
order to maintain an appropriate equity to assets ratio.
Management believes the effect of inflation on financial results depends on our
ability to react to changes in interest rates, and by such reaction, reduce the
inflationary effect on performance. We have an asset/liability management
program to manage interest rate sensitivity. In addition, periodic reviews of
banking services and products are conducted to adjust pricing in view of current
and expected costs.
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