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UNITED COMMUNITY BANKS INC - Quarter Report: 2021 March (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________ to ___________
Commission file number 001-35095
UNITED COMMUNITY BANKS, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-1807304
(State of incorporation) (I.R.S. Employer Identification No.)
125 Highway 515 East 
Blairsville, Georgia
30512
(Address of principal executive offices)(Zip code)
(706) 781-2265
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common stock, par value $1 per shareUCBINasdaq Global Select Market
Depositary shares, each representing 1/1000th interest in a share of
Series I Non-Cumulative Preferred Stock
UCBIONasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes No

There were 86,778,590 shares of the registrant’s common stock, par value $1 per share, outstanding as of April 30, 2021.



UNITED COMMUNITY BANKS, INC.
FORM 10-Q
INDEX
 Item 1.Financial Statements. 
  
    
  
    
  
  
    
  
    
  
    
 
    
 
    
 
    
    
 
 
 

2


Glossary of Defined Terms

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

TermDefinition
2020 10-K
Annual Report on Form 10-K for the year ended December 31, 2020
ACLAllowance for credit losses
AFSAvailable-for-sale
ALCOAsset/Liability Management Committee
AOCIAccumulated other comprehensive income (loss)
ASUAccounting standards update
BankUnited Community Bank
BoardUnited Community Banks Inc., Board of Directors
BOLIBank-owned life insurance
CARES ActCoronavirus Aid, Relief, and Economic Security Act
CECLCurrent expected credit loss model
CET1Common equity tier 1
CMEChicago Mercantile Exchange
CompanyUnited Community Banks Incorporated (interchangeable with "United" below)
CVACredit valuation adjustments
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
Federal ReserveFederal Reserve System
FHLBFederal Home Loan Bank
FTEFully taxable equivalent
GAAPAccounting principles generally accepted in the United States of America
GSEU.S. government-sponsored enterprise
HELOCHome equity lines of credit
Holding CompanyUnited Community Banks, Inc. on an unconsolidated basis
HTMHeld-to-maturity
LIBORLondon Interbank Offered Rate
MD&AManagement's Discussion and Analysis of Financial Condition and Results of Operations
MBSMortgage-backed securities
NOWNegotiable order of withdrawal
NPANonperforming asset
OCIOther comprehensive income (loss)
PCDPurchased credit deteriorated loans
PPPPaycheck Protection Program
ReportQuarterly Report on Form 10-Q
SBAUnited States Small Business Administration
SeasideSeaside National Bank & Trust
SECSecurities and Exchange Commission
TDRTroubled debt restructuring
Three ShoresThree Shores Bancorporation, Inc.
U.S. TreasuryUnited States Department of the Treasury
UnitedUnited Community Banks, Inc. and its direct and indirect subsidiaries
USDAUnited States Department of Agriculture
3


Cautionary Note Regarding Forward-looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither statements of historical fact nor assurance of future performance and generally can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates”, or similar expressions. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about our future performance, operations, products and services, and should be viewed with caution.

Because forward-looking statements relate to the future, they are subject to known and unknown risks, uncertainties, assumptions, and changes in circumstances, many of which are beyond our control, and that are difficult to predict as to timing, extent, likelihood and degree of occurrence, and that could cause actual results to differ materially from the results implied or anticipated by the statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements, in addition to those referenced in Part II, Item 1A of this Report - “Risk Factors” - include, but are not limited to the following:

negative economic and political conditions that adversely affect the general economy, housing prices, the real estate market, the job market, consumer confidence, the financial condition of our borrowers and consumer spending habits, which may affect, among other things, the levels of non-performing assets, charge-offs and provision expense;
changes in loan underwriting, credit review or loss policies associated with economic conditions, examination conclusions or regulatory developments, either as they currently exist or as they may be affected by conditions associated with the COVID-19 pandemic;
the COVID-19 pandemic and its continuing effects on the economic and business environments in which we operate;
strategic, market, operational, liquidity and interest rate risks associated with our business;
continuation of historically low interest rates coupled with other potential fluctuations or unanticipated changes in the interest rate environment, including interest rate changes made by the Federal Reserve, the discontinuation of LIBOR as an interest rate benchmark, and cash flow reassessments, may reduce net interest margin and/or the volumes and values of loans made or held as well as the value of other financial assets;
our lack of geographic diversification and any unanticipated or greater than anticipated adverse conditions in the national or local economies in which we operate;
our loan concentration in industries or sectors that may experience unanticipated or anticipated adverse conditions greater than other industries or sectors in the national or local economies in which we operate;
the risks of expansion into new geographic or product markets;
risks with respect to future mergers or acquisitions, including our ability to successfully expand and complete acquisitions and integrate businesses and operations that we acquire;
our ability to attract and retain key employees;
competition from financial institutions and other financial service providers, including non-bank financial technology providers, and our ability to attract customers from other financial institutions;
losses due to fraudulent and negligent conduct of our customers, third party service providers or employees;
cybersecurity risks and the vulnerability of our network and online banking portals, and the systems of parties with whom we contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches that could adversely affect our business and financial performance or reputation;
our reliance on third parties to provide key components of our business infrastructure and services required to operate our business;
the risk that we may be required to make substantial expenditures to keep pace with regulatory initiatives and the rapid technological changes in the financial services market;
the availability of and access to capital;
legislative, regulatory or accounting changes that may adversely affect us;
volatility in the ACL resulting from the CECL methodology, either alone or as that may be affected by conditions arising out of the COVID-19 pandemic;
adverse results (including judgments, costs, fines, reputational harm, inability to obtain necessary approvals and/or other negative effects) from current or future litigation, regulatory proceedings, examinations, investigations, or similar matters, or developments related thereto;
any matter that would cause us to conclude that there was impairment of any asset, including intangible assets, such as goodwill;
limitations on our ability to declare and pay dividends and other distributions from the Bank to the Holding Company, which could affect Holding Company liquidity, including the ability to pay dividends to shareholders or undertake other capital initiatives, such as share repurchases; and
other risks and uncertainties disclosed in documents filed or furnished by us with or to the SEC, any of which could cause actual results to differ materially from future results expressed, implied or otherwise anticipated by such forward-looking statements.

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

4


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheets (Unaudited)
(in thousands, except share data)March 31,
2021
December 31,
2020
ASSETS  
Cash and due from banks$126,164 $148,896 
Interest-bearing deposits in banks1,207,949 1,459,723 
Cash and cash equivalents1,334,113 1,608,619 
Debt securities available-for-sale3,744,280 3,224,721 
Debt securities held-to-maturity (fair value $586,828 and $437,193, respectively)
587,696 420,361 
Loans held for sale at fair value164,979 105,433 
Loans and leases held for investment11,678,544 11,370,815 
Less allowance for credit losses - loans and leases(126,866)(137,010)
Loans and leases, net11,551,678 11,233,805 
Premises and equipment, net216,752 218,489 
Bank owned life insurance202,817 201,969 
Accrued interest receivable46,278 47,672 
Net deferred tax asset39,338 38,411 
Derivative financial instruments63,897 86,666 
Goodwill and other intangible assets, net380,838 381,823 
Other assets224,242 226,405 
Total assets$18,556,908 $17,794,374 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand$6,058,439 $5,390,291 
Interest-bearing deposits9,934,781 9,842,067 
Total deposits15,993,220 15,232,358 
Long-term debt311,591 326,956 
Derivative financial instruments33,455 29,003 
Accrued expenses and other liabilities187,558 198,527 
Total liabilities16,525,824 15,786,844 
Shareholders' equity:
Preferred stock, $1 par value: 10,000,000 shares authorized; Series I, $25,000 per share liquidation preference; 4,000 shares issued and outstanding
96,422 96,422 
Common stock, $1 par value: 150,000,000 shares authorized; 86,776,508 and 86,675,279 shares issued and outstanding, respectively
86,777 86,675 
Common stock issuable: 565,904 and 600,834 shares, respectively
10,485 10,855 
Capital surplus1,640,583 1,638,999 
Retained earnings192,185 136,869 
Accumulated other comprehensive income4,632 37,710 
Total shareholders' equity2,031,084 2,007,530 
Total liabilities and shareholders' equity$18,556,908 $17,794,374 
 
See accompanying notes to consolidated financial statements (unaudited).
5



UNITED COMMUNITY BANKS, INC.
Consolidated Statements of Income (Unaudited)
Three Months Ended
March 31,
(in thousands, except per share data)20212020
Interest revenue:
Loans, including fees$125,726 $118,063 
Investment securities, including tax exempt of $2,150 and $1,523, respectively
15,448 17,394 
Deposits in banks and short-term investments368 1,090 
Total interest revenue141,542 136,547 
Interest expense:
Deposits5,219 15,075 
Short-term borrowings— 
Federal Home Loan Bank advances
Long-term debt4,257 2,864 
Total interest expense9,478 17,941 
Net interest revenue132,064 118,606 
(Release of) provision for credit losses(12,281)22,191 
Net interest revenue after provision for credit losses144,345 96,415 
Noninterest income:
Service charges and fees7,570 8,638 
Mortgage loan gains and other related fees22,572 8,310 
Wealth management fees3,505 1,640 
Gains from sales of other loans, net1,030 1,674 
Other10,028 5,552 
Total noninterest income44,705 25,814 
Total revenue189,050 122,229 
Noninterest expenses:
Salaries and employee benefits60,585 51,358 
Communications and equipment7,203 5,946 
Occupancy6,956 5,714 
Advertising and public relations1,199 1,274 
Postage, printing and supplies1,822 1,670 
Professional fees4,234 4,097 
Lending and loan servicing expense2,877 2,293 
Outside services - electronic banking2,218 1,832 
FDIC assessments and other regulatory charges1,896 1,484 
Amortization of intangibles985 1,040 
Merger-related and other charges1,543 808 
Other3,676 4,022 
Total noninterest expenses95,194 81,538 
Net income before income taxes93,856 40,691 
Income tax expense20,150 8,807 
Net income$73,706 $31,884 
Net income available to common shareholders$71,525 $31,641 
Net income per common share:
Basic$0.82 $0.40 
Diluted0.82 0.40 
Weighted average common shares outstanding:
Basic87,322 79,340 
Diluted87,466 79,446 
See accompanying notes to consolidated financial statements (unaudited). 
6



UNITED COMMUNITY BANKS, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)Three Months Ended March 31,
Before-tax
Amount
Tax
(Expense)
Benefit
Net of Tax
Amount
2021
Net income$93,856 $(20,150)$73,706 
Other comprehensive income:
Unrealized losses on available-for-sale securities(50,235)12,550 (37,685)
Derivative instruments designated as cash flow hedges:
Unrealized holding gains on derivatives arising during the period5,783 (1,477)4,306 
Reclassification of losses on derivative instruments realized in net income144 (37)107 
Net cash flow hedge activity5,927 (1,514)4,413 
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan261 (67)194 
Total other comprehensive loss(44,047)10,969 (33,078)
Comprehensive income$49,809 $(9,181)$40,628 
2020
Net income$40,691 $(8,807)$31,884 
Other comprehensive income:
Unrealized gains on available-for-sale securities13,685 (3,433)10,252 
Amortization of losses included in net income on available-for-sale securities transferred to held-to-maturity83 (20)63 
Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plan214 (54)160 
Total other comprehensive income13,982 (3,507)10,475 
Comprehensive income$54,673 $(12,314)$42,359 

See accompanying notes to consolidated financial statements (unaudited).
7


UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)
(in thousands except share data) 
Shares of Common StockPreferred StockCommon StockCommon Stock IssuableCapital SurplusRetained EarningsAccumulated
Other Comprehensive Income (Loss)
Total
Balance at December 31, 202086,675,279 $96,422 $86,675 $10,855 $1,638,999 $136,869 $37,710 $2,007,530 
Net income73,706 73,706 
Other comprehensive loss(33,078)(33,078)
Preferred stock dividends(1,719)(1,719)
Common stock dividends ($0.19 per share)
(16,671)(16,671)
Impact of equity-based compensation awards35,170 36 576 404 1,016 
Impact of other United sponsored equity plans66,059 66 (946)1,180 300 
Balance at March 31, 202186,776,508 $96,422 $86,777 $10,485 $1,640,583 $192,185 $4,632 $2,031,084 
Balance at December 31, 201979,013,729 $— $79,014 $11,491 $1,496,641 $40,152 $8,394 $1,635,692 
Net income31,884 31,884 
Other comprehensive income10,475 10,475 
Purchases of common stock(826,482)(827)(19,955)(20,782)
Common stock dividends ($0.18 per share)
(14,301)(14,301)
Impact of equity-based compensation awards24,005 24 665 1,315 2,004 
Impact of other United sponsored equity plans72,292 73 (1,622)718 (831)
Adoption of new accounting standard(3,529)(3,529)
Balance at March 31, 202078,283,544 $— $78,284 $10,534 $1,478,719 $54,206 $18,869 $1,640,612 

See accompanying notes to consolidated financial statements (unaudited).
8


UNITED COMMUNITY BANKS, INC.
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31,
(in thousands)20212020
Operating activities:  
Net income$73,706 $31,884 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion, net(681)1,894 
(Release of) provision for credit losses(12,281)22,191 
Stock based compensation1,507 2,492 
Deferred income tax expense9,172 1,292 
Gains from sales of other loans, net(1,030)(1,674)
Changes in assets and liabilities:
Other assets and accrued interest receivable15,165 (45,851)
Accrued expenses and other liabilities8,652 8,456 
Loans held for sale(59,546)(31,475)
Net cash provided by (used in) operating activities34,664 (10,791)
Investing activities:
Debt securities held-to-maturity:
Proceeds from maturities and calls24,629 9,085 
Purchases(192,541)(15,989)
Debt securities available-for-sale:
Proceeds from sales— 1,000 
Proceeds from maturities and calls184,352 105,247 
Purchases(759,874)(70,075)
Net increase in loans(292,603)(110,222)
Equity investments, outflows(5,753)(4,330)
Equity investments, inflows4,984 — 
Proceeds from sales of premises and equipment287 102 
Purchases of premises and equipment(2,490)(2,596)
Proceeds from sale of other real estate1,308 63 
Other investing activities430 2,730 
Net cash used in investing activities(1,037,271)(84,985)
Financing activities:
Net increase in deposits761,630 137,783 
Repayment of long-term debt(15,632)— 
Proceeds from FHLB advances5,000 5,000 
Repayment of FHLB advances(5,000)(5,000)
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans248 199 
Cash paid for shares withheld to cover payroll taxes upon vesting of restricted stock units(574)(1,674)
Repurchase of common stock— (20,782)
Cash dividends on common stock(15,852)(14,454)
Cash dividends on preferred stock(1,719)— 
Net cash provided by financing activities728,101 101,072 
Net change in cash and cash equivalents(274,506)5,296 
Cash and cash equivalents, at beginning of period1,608,619 515,206 
Cash and cash equivalents, at end of period$1,334,113 $520,502 
Supplemental disclosures of cash flow information:
Significant non-cash investing and financing transactions:
Unsettled government guaranteed loan sales$— $485 
Transfers of loans to foreclosed properties1,059 127 

See accompanying notes to consolidated financial statements (unaudited). 
9

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


Note 1 – Accounting Policies
 
United’s accounting and financial reporting policies conform to GAAP and reporting guidelines of banking regulatory authorities. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in its 2020 10-K.
 
In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes appearing in United’s 2020 10-K.

Note 2 –Accounting Standards Updates and Recently Adopted Standards

Recently Adopted Standards

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

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

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

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

In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The update removes disclosures that are no longer considered cost beneficial, clarifies specific requirements of disclosures, and adds disclosure requirements identified as relevant. United adopted this update as of January 1, 2021, with no material impact on the consolidated financial statements.

10

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

Note 3 – Investment Securities

The amortized cost basis, unrealized gains and losses and fair value of HTM debt securities as of the dates indicated are as follows (in thousands).
Amortized
Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair
Value
As of March 31, 2021    
U.S. Government agencies & GSEs$10,535 $— $590 $9,945 
State and political subdivisions238,813 4,670 5,655 237,828 
Residential MBS, Agency & GSEs135,156 3,923 1,231 137,848 
Commercial MBS, Agency & GSEs188,192 2,566 4,412 186,346 
Supranational entities15,000 — 139 14,861 
Total$587,696 $11,159 $12,027 $586,828 
As of December 31, 2020
U.S. Government agencies & GSEs$10,575 $26 $11 $10,590 
State and political subdivisions197,723 7,658 242 205,139 
Residential MBS, Agency & GSEs113,400 4,774 118,173 
Commercial MBS, Agency & GSEs98,663 4,874 246 103,291 
Total$420,361 $17,332 $500 $437,193 

The amortized cost basis, unrealized gains and losses, and fair value of AFS debt securities as of the dates indicated are presented below (in thousands).
Amortized
Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Fair
Value
As of March 31, 2021    
U.S. Treasuries$123,817 $3,752 $— $127,569 
U.S. Government agencies & GSEs176,847 642 3,967 173,522 
State and political subdivisions280,171 16,782 2,559 294,394 
Residential MBS, Agency & GSEs1,493,149 24,604 15,928 1,501,825 
Residential MBS, Non-agency155,370 5,446 160,810 
Commercial MBS, Agency & GSEs728,584 5,265 15,555 718,294 
Commercial MBS, Non-agency15,337 1,427 — 16,764 
Corporate bonds69,828 1,076 294 70,610 
Asset-backed securities678,802 2,313 623 680,492 
Total$3,721,905 $61,307 $38,932 $3,744,280 
As of December 31, 2020
U.S. Treasuries$123,677 $4,395 $— $128,072 
U.S. Government agencies & GSEs152,596 701 325 152,972 
State and political subdivisions253,630 20,891 49 274,472 
Residential MBS, Agency & GSEs1,275,551 29,107 766 1,303,892 
Residential MBS, Non-agency174,322 7,499 128 181,693 
Commercial MBS, Agency & GSEs524,852 8,013 597 532,268 
Commercial MBS, Non-agency15,350 1,513 — 16,863 
Corporate bonds70,057 1,711 71,767 
Asset-backed securities562,076 1,278 632 562,722 
Total$3,152,111 $75,108 $2,498 $3,224,721 
 
Securities with a carrying value of $1.23 billion and $1.11 billion were pledged, primarily to secure public deposits, at March 31, 2021 and December 31, 2020, respectively.

11

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

 The following table summarizes HTM debt securities in an unrealized loss position as of the dates indicated (in thousands).
 Less than 12 Months12 Months or MoreTotal
Fair ValueUnrealized
Loss
Fair ValueUnrealized
Loss
Fair ValueUnrealized
Loss
As of March 31, 2021      
U.S. Government agencies & GSEs$9,945 $590 $— $— $9,945 $590 
State and political subdivisions152,811 5,655 — — 152,811 5,655 
Residential MBS, Agency & GSEs39,628 1,231 — — 39,628 1,231 
Commercial MBS, Agency & GSEs104,848 4,412 — — 104,848 4,412 
Supranational entities14,861 139 — — 14,861 139 
Total unrealized loss position$322,093 $12,027 $— $— $322,093 $12,027 
As of December 31, 2020
U.S. Government agencies & GSEs$4,677 $11 $— $— $4,677 $11 
State and political subdivisions14,870 242 — — 14,870 242 
Residential MBS, Agency & GSEs999 — — 999 
Commercial MBS, Agency & GSEs24,956 236 1,352 10 26,308 246 
Total unrealized loss position$45,502 $490 $1,352 $10 $46,854 $500 
 
The following table summarizes AFS debt securities in an unrealized loss position as of the dates indicated (in thousands).
 Less than 12 Months12 Months or MoreTotal
Fair ValueUnrealized
Loss
Fair ValueUnrealized
Loss
Fair ValueUnrealized
Loss
As of March 31, 2021      
U.S. Government agencies & GSEs$116,612 $3,967 $— $— $116,612 $3,967 
State and political subdivisions57,585 2,559 — — 57,585 2,559 
Residential MBS, Agency & GSEs699,029 15,928 — — 699,029 15,928 
Residential MBS, Non-agency841 2,454 3,295 
Commercial MBS, Agency & GSEs434,542 15,555 — — 434,542 15,555 
Corporate bonds19,554 294 — — 19,554 294 
Asset-backed securities153,436 293 48,142 330 201,578 623 
Total unrealized loss position$1,481,599 $38,597 $50,596 $335 $1,532,195 $38,932 
As of December 31, 2020
U.S. Government agencies & GSEs$27,952 $324 $607 $$28,559 $325 
State and political subdivisions9,402 49 — — 9,402 49 
Residential MBS, Agency & GSEs232,199 766 — — 232,199 766 
Residential MBS, Non-agency2,331 128 — — 2,331 128 
Commercial MBS, Agency & GSEs89,918 597 — — 89,918 597 
Corporate bonds1,410 — — 1,410 
Asset-backed securities87,305 28 53,587 604 140,892 632 
Total unrealized loss position$450,517 $1,893 $54,194 $605 $504,711 $2,498 
 
At March 31, 2021, there were 213 AFS debt securities and 60 HTM debt securities that were in an unrealized loss position. United does not intend to sell nor does it believe it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at March 31, 2021 were primarily attributable to changes in interest rates.

At March 31, 2021 and December 31, 2020, calculated credit losses and, thus, the related ACL on HTM debt securities were not material due to the high credit quality of the portfolio, which included securities issued or guaranteed by U.S. Government agencies, GSEs, high credit quality municipalities and supranational entities. As a result, no ACL was recorded on the HTM portfolio at March 31, 2021 or December 31, 2020. In addition, based on the assessments performed at March 31, 2021 and December 31, 2020, there was no ACL required related to the AFS portfolio.

12

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

The following table presents accrued interest receivable for the periods indicated on HTM and AFS debt securities (in thousands), which was excluded from the estimate of credit losses.

Accrued Interest Receivable
Debt Securities:March 31, 2021December 31, 2020
HTM$2,242 $1,784 
AFS9,524 9,114 


The amortized cost and fair value of AFS and HTM debt securities at March 31, 2021, by contractual maturity, are presented in the following table (in thousands). Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations. 
 AFSHTM
 Amortized CostFair ValueAmortized CostFair Value
Within 1 year:
U.S. Treasuries$44,901 $45,525 $— $— 
U.S. Government agencies & GSEs281 281 — — 
State and political subdivisions20,010 20,120 1,700 1,732 
Corporate bonds11,633 11,722 — — 
76,825 77,648 1,700 1,732 
1 to 5 years:
U.S. Treasuries78,916 82,044 — — 
U.S. Government agencies & GSEs13,986 13,969 — — 
State and political subdivisions41,787 44,194 14,504 15,899 
Corporate bonds41,532 42,211 — — 
176,221 182,418 14,504 15,899 
5 to 10 years:
U.S. Government agencies & GSEs103,975 101,071 — — 
State and political subdivisions90,926 94,548 18,964 19,654 
Corporate bonds15,886 15,794 — — 
Supranational entities— — 15,000 14,861 
210,787 211,413 33,964 34,515 
More than 10 years:
U.S. Government agencies & GSEs58,605 58,201 10,535 9,945 
State and political subdivisions127,448 135,532 203,645 200,543 
Corporate bonds777 883 — — 
186,830 194,616 214,180 210,488 
Debt securities not due at a single maturity date:
Asset-backed securities678,802 680,492 — — 
Residential MBS1,648,519 1,662,635 135,156 137,848 
Commercial MBS743,921 735,058 188,192 186,346 
Total$3,721,905 $3,744,280 $587,696 $586,828 

13

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

Note 4 – Loans and Leases and Allowance for Credit Losses
 
Major classifications of the loan and lease portfolio (collectively referred to as the “loan portfolio” or “loans”) are summarized as of the dates indicated as follows (in thousands).
March 31, 2021December 31, 2020
Owner occupied commercial real estate$2,107,153 $2,090,443 
Income producing commercial real estate2,598,482 2,540,750 
Commercial & industrial (1)
2,643,279 2,498,560 
Commercial construction960,153 967,305 
Equipment financing912,650 863,830 
Total commercial9,221,717 8,960,888 
Residential mortgage1,362,088 1,284,920 
HELOC679,094 697,117 
Residential construction271,600 281,430 
Consumer144,045 146,460 
Total loans11,678,544 11,370,815 
Less allowance for credit losses - loans(126,866)(137,010)
Loans, net$11,551,678 $11,233,805 
(1) Commercial and industrial loans as of March 31, 2021 and December 31, 2020 included $883 million and $646 million of PPP loans, respectively.

Accrued interest receivable related to loans totaled $33.3 million and $35.5 million at March 31, 2021 and December 31, 2020, respectively, and was reported in accrued interest receivable on the consolidated balance sheets.

At March 31, 2021 and December 31, 2020, the loan portfolio was subject to blanket pledges on certain qualifying loan types with the FHLB and FRB to secure contingent funding sources.

The following table presents loans held for investment sold for the periods indicated (in thousands). The gains and losses on these loan sales were included in noninterest income on the consolidated statements of income.
Three Months Ended March 31,
20212020
Guaranteed portion of SBA/USDA loans$11,345 $4,034 
Equipment financing receivables1,059 22,217 
Total$12,404 $26,251 
  
At March 31, 2021 and December 31, 2020, equipment financing assets included leases of $37.6 million and $36.8 million, respectively. The components of the net investment in leases, which included both sales-type and direct financing, are presented below (in thousands).
 March 31, 2021December 31, 2020
Minimum future lease payments receivable$39,720 $38,934 
Estimated residual value of leased equipment3,433 3,263 
Initial direct costs686 672 
Security deposits(739)(727)
Purchase accounting premium93 117 
Unearned income(5,575)(5,457)
Net investment in leases$37,618 $36,802 
14

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


Minimum future lease payments expected to be received from equipment financing lease contracts as of March 31, 2021 were as follows (in thousands)
Year 
Remainder of 2021$11,794 
202212,744 
20238,597 
20244,311 
20252,091 
Thereafter183 
Total$39,720 

Nonaccrual and Past Due Loans
The following table presents the aging of the amortized cost basis in loans by aging category and accrual status as of the dates indicated (in thousands). Past due status is based on contractual terms of the loan. The accrual of interest is generally discontinued when a loan becomes 90 days past due. Deferrals related to the COVID-19 crisis are not reported as past due during the deferral period.
 Accruing
Current LoansLoans Past Due
30 - 59 Days60 - 89 Days> 90 DaysNonaccrual LoansTotal Loans
As of March 31, 2021
Owner occupied commercial real estate$2,097,553 $540 $1,152 $— $7,908 $2,107,153 
Income producing commercial real estate2,584,511 231 — — 13,740 2,598,482 
Commercial & industrial2,628,764 638 13 — 13,864 2,643,279 
Commercial construction957,435 734 — — 1,984 960,153 
Equipment financing908,694 1,470 315 — 2,171 912,650 
Total commercial9,176,957 3,613 1,480 — 39,667 9,221,717 
Residential mortgage1,345,427 2,547 64 — 14,050 1,362,088 
HELOC675,545 1,632 210 — 1,707 679,094 
Residential construction270,769 509 — — 322 271,600 
Consumer143,669 188 34 — 154 144,045 
Total loans$11,612,367 $8,489 $1,788 $— $55,900 $11,678,544 
As of December 31, 2020
Owner occupied commercial real estate$2,079,845 $2,013 $$— $8,582 $2,090,443 
Income producing commercial real estate2,522,743 1,608 1,250 — 15,149 2,540,750 
Commercial & industrial2,480,483 1,176 267 — 16,634 2,498,560 
Commercial construction964,947 231 382 — 1,745 967,305 
Equipment financing856,985 2,431 1,009 — 3,405 863,830 
Total commercial8,905,003 7,459 2,911 — 45,515 8,960,888 
Residential mortgage1,265,019 5,549 1,494 — 12,858 1,284,920 
HELOC692,504 1,942 184 — 2,487 697,117 
Residential construction280,551 365 — — 514 281,430 
Consumer145,770 429 36 — 225 146,460 
Total loans$11,288,847 $15,744 $4,625 $— $61,599 $11,370,815 


15

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)


The following table presents nonaccrual loans by loan class for the periods indicated (in thousands)
Nonaccrual Loans
 March 31, 2021December 31, 2020
With no allowanceWith an allowanceTotalWith no allowanceWith an allowanceTotal
Owner occupied commercial real estate$4,202 $3,706 $7,908 $6,614 $1,968 $8,582 
Income producing commercial real estate8,264 5,476 13,740 10,008 5,141 15,149 
Commercial & industrial6,376 7,488 13,864 2,004 14,630 16,634 
Commercial construction1,480 504 1,984 1,339 406 1,745 
Equipment financing19 2,152 2,171 156 3,249 3,405 
Total commercial20,341 19,326 39,667 20,121 25,394 45,515 
Residential mortgage3,226 10,824 14,050 1,855 11,003 12,858 
HELOC45 1,662 1,707 1,329 1,158 2,487 
Residential construction— 322 322 274 240 514 
Consumer152 154 181 44 225 
Total$23,614 $32,286 $55,900 $23,760 $37,839 $61,599 

Risk Ratings 
United categorizes commercial loans, with the exception of equipment financing receivables, into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current industry and economic trends, among other factors. United analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continual basis. United uses the following definitions for its risk ratings:

Pass. Loans in this category are considered to have a low probability of default and do not meet the criteria of the risk categories below.

Watch. Loans in this category are presently protected from apparent loss; however, weaknesses exist that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. These loans require more than the ordinary amount of supervision. Collateral values generally afford adequate coverage, but may not be immediately marketable.

Substandard. These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged. Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. There is the distinct possibility that United will sustain some loss if deficiencies are not corrected. If possible, immediate corrective action is taken.

Doubtful. Specific weaknesses characterized as Substandard that are severe enough to make collection in full highly questionable and improbable. There is no reliable secondary source of full repayment.
 
Loss. Loans categorized as Loss have the same characteristics as Doubtful; however, probability of loss is certain. Loans classified as Loss are charged off.
 
Equipment Financing Receivables and Consumer Purpose Loans. United applies a pass / fail grading system to all equipment financing receivables and consumer purpose loans. Under this system, loans that are on nonaccrual status, become past due 90 days, or are in bankruptcy are classified as “fail” and all other loans are classified as “pass”. For reporting purposes, loans in these categories that are classified as “fail” are reported as substandard and all other loans are reported as pass.

16

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

Based on the most recent analysis performed, the amortized cost of loans by risk category by vintage year as of the date indicated is as follows (in thousands).
Term Loans by Origination YearRevolversRevolvers converted to term loansTotal
As of March 31, 202120212020201920182017Prior
Pass
Owner occupied commercial real estate$179,476 $701,135 $317,755 $199,511 $191,124 $350,036 $46,178 $9,426 $1,994,641 
Income producing commercial real estate182,686 804,728 368,588 338,718 236,773 327,673 26,325 12,336 2,297,827 
Commercial & industrial696,983 792,547 227,628 216,428 81,554 114,095 445,382 3,877 2,578,494 
Commercial construction112,225 297,204 191,433 168,966 44,357 20,829 14,333 4,058 853,405 
Equipment financing139,648 376,918 247,084 107,756 32,220 6,339 — — 909,965 
Total commercial1,311,018 2,972,532 1,352,488 1,031,379 586,028 818,972 532,218 29,697 8,634,332 
Residential mortgage217,716 444,751 159,000 108,791 100,023 309,592 16 5,032 1,344,921 
HELOC— — — — — — 660,070 16,513 676,583 
Residential construction57,904 178,711 11,751 4,301 4,257 14,072 — 59 271,055 
Consumer16,880 44,170 21,069 11,063 3,378 3,979 42,517 681 143,737 
1,603,518 3,640,164 1,544,308 1,155,534 693,686 1,146,615 1,234,821 51,982 11,070,628 
Watch
Owner occupied commercial real estate7,364 7,861 18,539 4,203 3,681 16,321 100 — 58,069 
Income producing commercial real estate11,606 28,811 59,580 51,067 15,200 37,827 — 1,651 205,742 
Commercial & industrial145 2,463 14,537 542 1,387 490 7,758 224 27,546 
Commercial construction539 19,080 12,828 28,164 23,801 481 — — 84,893 
Equipment financing— — — — — — — — — 
Total commercial19,654 58,215 105,484 83,976 44,069 55,119 7,858 1,875 376,250 
Residential mortgage— — — — — — — — — 
HELOC— — — — — — — — — 
Residential construction— — — — — — — — — 
Consumer— — — — — — — — — 
19,654 58,215 105,484 83,976 44,069 55,119 7,858 1,875 376,250 
Substandard
Owner occupied commercial real estate2,615 12,137 10,231 8,289 5,257 12,508 2,381 1,025 54,443 
Income producing commercial real estate6,259 40,630 7,590 2,114 5,588 32,639 — 93 94,913 
Commercial & industrial5,981 1,281 8,466 6,486 2,060 7,432 4,935 598 37,239 
Commercial construction676 2,804 645 13,699 335 2,689 — 1,007 21,855 
Equipment financing— 514 1,107 655 254 155 — — 2,685 
Total commercial15,531 57,366 28,039 31,243 13,494 55,423 7,316 2,723 211,135 
Residential mortgage161 1,911 2,366 3,821 1,450 6,659 — 799 17,167 
HELOC— — — — — — 79 2,432 2,511 
Residential construction— 71 35 54 382 — — 545 
Consumer— — 76 46 45 117 — 24 308 
15,692 59,348 30,516 35,164 14,992 62,581 7,395 5,978 231,666 
Total$1,638,864 $3,757,727 $1,680,308 $1,274,674 $752,747 $1,264,315 $1,250,074 $59,835 $11,678,544 

17

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

Term Loans by Origination YearRevolversRevolvers converted to term loansTotal
As of December 31, 202020202019201820172016Prior
Pass
Owner occupied commercial real estate$707,501 $368,615 $231,316 $197,778 $201,362 $229,667 $56,273 $9,072 $2,001,584 
Income producing commercial real estate815,799 376,911 361,539 277,769 206,068 198,080 28,542 12,128 2,276,836 
Commercial & industrial1,092,767 287,857 263,439 115,790 92,968 58,359 515,593 3,777 2,430,550 
Commercial construction314,154 217,643 226,308 53,708 30,812 21,985 20,278 3,947 888,835 
Equipment financing413,653 270,664 125,869 39,982 9,404 445 — — 860,017 
Total commercial3,343,874 1,521,690 1,208,471 685,027 540,614 508,536 620,686 28,924 8,457,822 
Residential mortgage468,945 195,213 125,492 120,944 122,013 230,771 18 5,393 1,268,789 
HELOC— — — — — — 675,878 17,581 693,459 
Residential construction225,727 30,646 4,026 4,544 3,172 12,546 — 64 280,725 
Consumer54,997 25,528 14,206 4,531 3,595 1,677 41,445 76 146,055 
4,093,543 1,773,077 1,352,195 815,046 669,394 753,530 1,338,027 52,038 10,846,850 
Watch
Owner occupied commercial real estate8,759 4,088 4,221 10,025 11,138 4,728 100 — 43,059 
Income producing commercial real estate35,471 42,831 39,954 13,238 24,164 11,337 — 1,681 168,676 
Commercial & industrial1,451 16,315 2,176 630 459 17 6,464 — 27,512 
Commercial construction21,366 272 816 23,292 11,775 477 — — 57,998 
Equipment financing— — — — — — — — — 
Total commercial67,047 63,506 47,167 47,185 47,536 16,559 6,564 1,681 297,245 
Residential mortgage— — — — — — — — — 
HELOC— — — — — — — — — 
Residential construction— — — — — — — — — 
Consumer— — — — — — — — — 
67,047 63,506 47,167 47,185 47,536 16,559 6,564 1,681 297,245 
Substandard
Owner occupied commercial real estate6,586 10,473 7,596 3,717 6,753 8,473 1,528 674 45,800 
Income producing commercial real estate45,125 8,940 2,179 5,034 31,211 2,652 — 97 95,238 
Commercial & industrial1,545 5,536 6,193 1,684 1,292 1,485 22,170 593 40,498 
Commercial construction2,466 735 13,741 340 1,931 250 — 1,009 20,472 
Equipment financing631 1,392 1,371 306 96 17 — — 3,813 
Total commercial56,353 27,076 31,080 11,081 41,283 12,877 23,698 2,373 205,821 
Residential mortgage2,049 2,106 3,174 1,369 679 5,860 — 894 16,131 
HELOC— — — — — — 265 3,393 3,658 
Residential construction106 37 54 124 380 — — 705 
Consumer— 97 49 60 78 98 — 23 405 
58,508 29,316 34,357 12,514 42,164 19,215 23,963 6,683 226,720 
Total$4,219,098 $1,865,899 $1,433,719 $874,745 $759,094 $789,304 $1,368,554 $60,402 $11,370,815 

Troubled Debt Restructurings and Other Modifications
As of March 31, 2021 and December 31, 2020, United had TDRs totaling $59.3 million and $61.6 million, respectively. As of March 31, 2021 and December 31, 2020, United had remaining deferrals related to the COVID-19 pandemic of approximately $48.1 million and $70.7 million, respectively, which generally represented payment deferrals for up to 90 days. To the extent that these deferrals qualified under either the CARES Act or interagency guidance, they were not considered new TDRs.

18

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

Loans modified under the terms of a TDR during the three months ended March 31, 2021 and 2020 are presented in the following table. In addition, the table presents loans modified under the terms of a TDR that defaulted (became 90 days or more delinquent or otherwise in default of modified terms) during the periods presented and were initially restructured within one year prior to default (dollars in thousands).
 New TDRs
 Post-Modification Amortized Cost by Type of ModificationTDRs Modified Within the Previous Twelve Months That Have Subsequently Defaulted
Number of
 Contracts
Rate  
Reduction
StructureOtherTotalNumber of  
Contracts
Amortized Cost
Three Months Ended March 31, 2021       
Owner occupied commercial real estate— $— $— $— $— — $— 
Income producing commercial real estate— — 1,319 1,319 — — 
Commercial & industrial— — 103 103 11 
Commercial construction— 309 — 309 — — 
Equipment financing28 — 2,136 — 2,136 62 
Total commercial33 — 2,445 1,422 3,867 73 
Residential mortgage— 69 — 69 413 
HELOC— — — — — — — 
Residential construction— — — — — — — 
Consumer— — — — — — — 
Total loans34 $— $2,514 $1,422 $3,936 $486 
Three Months Ended March 31, 2020       
Owner occupied commercial real estate$— $— $990 $990 — $— 
Income producing commercial real estate— 67 165 232 — — 
Commercial & industrial— — — — — 
Commercial construction— — — — — — — 
Equipment financing— 434 — 434 — — 
Total commercial11 — 501 1,155 1,656 
Residential mortgage— 278 — 278 — — 
HELOC— — — — — — — 
Residential construction— — — — — — — 
Consumer— — 11 11 
Total loans18 $— $779 $1,166 $1,945 $

Allowance for Credit Losses
The ACL for loans represents management’s estimate of life of loan credit losses in the portfolio as of the end of the period. The ACL related to unfunded commitments is included in other liabilities in the consolidated balance sheet.
The following table presents the balance and activity in the ACL by portfolio segment for the periods indicated (in thousands).
Three Months Ended March 31,
20212020
Beginning BalanceCharge-OffsRecoveries(Release) ProvisionEnding BalanceDec. 31, 2019
Balance
Adoption of CECLJan. 1, 2020
Balance
Charge-OffsRecoveries(Release) ProvisionEnding Balance
Owner occupied commercial real estate$20,673 $— $240 $(1,631)$19,282 $11,404 $(1,616)$9,788 $(6)$1,034 $184 $11,000 
Income producing commercial real estate41,737 (1,007)16 (5,835)34,911 12,306 (30)12,276 (411)141 4,578 16,584 
Commercial & industrial22,019 (2,894)5,647 (3,022)21,750 5,266 4,012 9,278 (7,561)376 8,738 10,831 
Commercial construction10,952 (178)156 (358)10,572 9,668 (2,583)7,085 — 141 2,330 9,556 
Equipment financing16,820 (2,058)547 1,891 17,200 7,384 5,871 13,255 (1,863)356 2,990 14,738 
Residential mortgage15,341 (215)123 (669)14,580 8,081 1,569 9,650 (284)275 1,422 11,063 
HELOC8,417 — 73 (1,610)6,880 4,575 1,919 6,494 (20)103 310 6,887 
Residential construction764 (10)70 538 1,362 2,504 (1,771)733 (22)34 71 816 
Consumer287 (471)266 247 329 901 (491)410 (638)231 427 430 
ACL - loans137,010 (6,833)7,138 (10,449)126,866 62,089 6,880 68,969 (10,805)2,691 21,050 81,905 
ACL - unfunded commitments10,558 — — (1,832)8,726 3,458 1,871 5,329 — — 1,141 6,470 
Total ACL$147,568 $(6,833)$7,138 $(12,281)$135,592 $65,547 $8,751 $74,298 $(10,805)$2,691 $22,191 $88,375 

At March 31, 2021 and December 31, 2020, United used a one-year reasonable and supportable forecast period. Expected credit losses were estimated using a regression model for each segment based on historical data from peer banks combined with a third party
19

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

vendor’s economic forecast to predict the change in credit losses. These results were then combined with a starting value that was based on United’s recent default experience, which was adjusted for select portfolios based on expectations of future performance. At March 31, 2021, the third party vendor’s forecast, which was representative of a baseline scenario, improved significantly from December 31, 2020, including the unemployment rate which has a significant impact on our models and led to the negative provision for loan losses in the first quarter. United adjusted the economic forecast by eliminating the initial spike in unemployment to account for the impact of government stimulus programs, which mitigated some of the negative impact on forecasted losses as the unemployment rate was rising and had the opposite effect as the unemployment rate was improving. In addition, United applied qualitative factors to income producing commercial real estate, owner occupied commercial real estate and commercial construction portfolios to compensate for elevated criticized and classified loan levels.

For periods beyond the reasonable and supportable forecast period of one year, United reverted to historical credit loss information on a straight line basis over two years. For all collateral types excluding residential mortgage, United reverted to through-the-cycle average default rates using peer data from 2000 to 2017. For loans secured by residential mortgages, the peer data was adjusted for changes in lending practices designed to prevent the magnitude of losses observed during the mortgage crisis.

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

Note 5 – Derivatives and Hedging Activities

The table below presents the fair value of derivative financial instruments as of the dates indicated as well as their classification on the consolidated balance sheets (in thousands):
March 31, 2021December 31, 2020
Notional AmountFair ValueNotional AmountFair Value
Derivative AssetDerivative LiabilityDerivative AssetDerivative Liability
Derivatives designated as hedging instruments:
Cash flow hedge of subordinated debt$100,000 $7,780 $— $100,000 $3,378 $— 
Cash flow hedge of trust preferred securities20,000 — — 20,000 — — 
Fair value hedge of brokered time deposits10,000 — — 20,000 — — 
Total130,000 7,780 — 140,000 3,378 — 
Derivatives not designated as hedging instruments:
Customer derivative positions1,349,716 43,777 13,623 1,329,271 72,508 17 
Dealer offsets to customer derivative positions1,349,716 982 15,226 1,329,271 24,614 
Risk participations62,592 22 48,843 28 12 
Mortgage banking - loan commitment234,659 5,957 — 253,243 10,751 — 
Mortgage banking - forward sales commitment421,547 3,050 — 325,145 — 1,964 
Bifurcated embedded derivatives51,935 2,350 19 51,935 — 1,449 
Dealer offsets to bifurcated embedded derivatives51,935 — 4,565 51,935 — 947 
Total3,522,100 56,117 33,455 3,389,643 83,288 29,003 
Total derivatives$3,652,100 $63,897 $33,455 $3,529,643 $86,666 $29,003 
Total gross derivative instruments$63,897 $33,455 $86,666 $29,003 
Less: Amounts subject to master netting agreements(571)(571)(114)(114)
Less: Cash collateral received/pledged(8,765)(20,737)(3,200)(27,092)
Net amount$54,561 $12,147 $83,352 $1,797 

United clears certain derivatives centrally through the CME. CME rules legally characterize variation margin payments for centrally cleared derivatives as settlements of the derivatives’ exposure rather than as collateral. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting purposes. Variation margin, as determined by the CME, is settled daily. As a result, derivative contracts that clear through the CME have an estimated fair value of zero.

20

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

Hedging Derivatives

Cash Flow Hedges of Interest Rate Risk 
United enters into cash flow hedges to mitigate exposure to the variability of future cash flows or other forecasted transactions. As of March 31, 2021 and December 31, 2020 United utilized interest rate caps and swaps to hedge the variability of cash flows due to changes in interest rates on certain of its variable-rate subordinated debt and trust preferred securities. United considers these derivatives to be highly effective at achieving offsetting changes in cash flows attributable to changes in interest rates. Therefore, changes in the fair value of these derivative instruments are recognized in OCI. Gains and losses related to changes in fair value are reclassified into earnings in the periods the hedged forecasted transactions occur. Losses representing amortization of the premium recorded on cash flow hedges, which is a component excluded from the assessment of effectiveness, are recognized in earnings on a straight-line basis in the same caption as the hedged item over the term of the hedge. Over the next twelve months, United expects to reclassify $587,000 of losses from AOCI into earnings related to these agreements.

Fair Value Hedges of Interest Rate Risk 
United is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in interest rates. United uses interest rate derivatives to manage its exposure to changes in fair value on these instruments attributable to changes in interest rates. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same income statement line item as the offsetting loss or gain on the related derivatives.

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

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

The table below presents the effect of derivatives in hedging relationships, all of which are interest rate contracts, on the consolidated statement of income for the periods indicated (in thousands)
Interest expense
20212020
Three Months Ended March 31,
Total expense presented in the consolidated statements of income$(9,478)$(17,941)
Net income recognized on fair value hedges78 
Net expense recognized on cash flow hedges (1)
(144)— 
 (1) Includes $116,000 of premium amortization expense excluded from the assessment of hedge effectiveness for the three months ended March 31, 2021.

The table below presents the carrying amount of hedged fixed-rate brokered time deposits and cumulative fair value hedging adjustments included in the carrying amount of the hedged liability for the periods presented (in thousands).
March 31, 2021December 31, 2020
Balance Sheet LocationCarrying amount of Assets (Liabilities)Hedge Accounting Basis AdjustmentCarrying amount of Assets (Liabilities)Hedge Accounting Basis Adjustment
Deposits$(10,143)$(155)$(20,216)$(235)

Derivatives Not Designated as Hedging Instruments 
Customer derivative positions include swaps, caps, and collars between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back program. In addition, United occasionally enters into credit risk participation agreements with counterparty banks to accept or transfer a portion of the credit risk related to interest rate swaps. The agreements, which are typically executed in conjunction with a participation in a loan with the same customer, allow customers to execute an interest rate swap with one bank while allowing for the distribution of the credit risk among participating members.

21

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

United also has three interest rate swap contracts that are not designated as hedging instruments but are economic hedges of market-linked brokered certificates of deposit. The market-linked brokered certificates of deposit contain embedded derivatives that are bifurcated from the host instruments and are marked to market through earnings. The fair value marks on the market-linked swaps and the bifurcated embedded derivatives tend to move in opposite directions with changes in 90-day LIBOR and therefore provide an economic hedge.
  
In addition, United originates certain residential mortgage loans with the intention of selling these loans. Between the time United enters into an interest-rate lock commitment to originate a residential mortgage loan that is to be held for sale and the time the loan is funded and eventually sold, United is subject to the risk of variability in market prices. United enters into forward sale agreements to mitigate risk and to protect the expected gain on the eventual loan sale. The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding derivative instruments. Fair value adjustments on these derivative instruments are recorded within mortgage loan gains and other related fee income in the consolidated statements of income. 

The table below presents the gains and losses recognized in income on derivatives not designated as hedging instruments for the periods indicated (in thousands)
Location of Gain (Loss) Recognized in Income on DerivativesAmount of Gain (Loss) Recognized in Income on Derivatives
Three Months Ended March 31,
 20212020
Customer derivatives and dealer offsets Other noninterest income$1,897 $1,424 
Bifurcated embedded derivatives and dealer offsetsOther noninterest income459 (195)
Mortgage banking derivativesMortgage loan revenue3,836 (829)
Risk participationsOther noninterest income(205)(17)
  $5,987 $383 
 
Credit-Risk-Related Contingent Features 
United manages its credit exposure on derivatives transactions by entering into a bilateral credit support agreement with each non-customer counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty.
 
United’s agreements with each of its derivative counterparties provide that if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with derivative counterparties also include provisions that if not met, could result in United being declared in default. United has agreements with certain of its derivative counterparties that provide that if United fails to maintain its status as a well-capitalized institution or is subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and United would be required to settle its obligations under the agreements. Derivatives that are centrally cleared do not have credit-risk-related features that would require additional collateral if United’s credit rating were downgraded.
 
Note 6 – Assets and Liabilities Measured at Fair Value
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, United uses a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). United has processes in place to review the significant valuation inputs and to reassess how the instruments are classified in the valuation framework.
Fair Value Hierarchy
Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that United has the ability to access.
Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
22

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

Level 3 Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
In instances when the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities
AFS debt securities and equity securities with readily determinable fair values are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include MBS issued by GSEs, municipal bonds, corporate debt securities, asset-backed securities and supranational entity securities and are valued based on observable inputs that include: quoted market prices for similar assets, quoted market prices that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the securities. Securities classified as Level 3 include those traded in less liquid markets and are valued based on estimates obtained from broker-dealers that are not directly observable.
 
Deferred Compensation Plan Assets and Liabilities
Included in other assets in the consolidated balance sheet are assets related to employee deferred compensation plans. The assets associated with these plans are invested in mutual funds and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which mirrors the fair value of the invested assets and is included in other liabilities in the consolidated balance sheet.
 
Mortgage Loans Held for Sale
United has elected the fair value option for most of its newly originated mortgage loans held for sale in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the value of derivative instruments used to economically hedge them. The fair value of mortgage loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan, and are classified as Level 2.
 
Derivative Financial Instruments
United uses derivatives to manage interest rate risk. The valuation of these instruments is typically determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. United also uses best effort and mandatory delivery forward loan sale commitments to hedge risk in its mortgage lending business.
 
United incorporates CVAs as necessary to appropriately reflect the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, United has considered the effect of netting and any applicable credit enhancements, such as collateral postings, thresholds and guarantees.
 
Management has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. However, the CVAs associated with these derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. Generally, management’s assessment of the significance of the CVAs has indicated that they are not a significant input to the overall valuation of the derivatives. In cases where management’s assessment indicates that the CVA is a significant input, the related derivative is disclosed as a Level 3 value.

Other derivatives classified as Level 3 include structured derivatives for which broker quotes, used as a key valuation input, were not observable. Risk participation agreements are classified as Level 3 instruments due to the incorporation of significant Level 3 inputs used to evaluate the probability of funding and the likelihood of customer default. Interest rate lock commitments, which relate to
23

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

mortgage loan commitments, are categorized as Level 3 instruments as the fair value of these instruments is based on unobservable inputs for commitments that United does not expect to fund.
 
Servicing Rights for Residential and SBA/USDA Loans
United recognizes servicing rights upon the sale of residential and SBA/USDA loans sold with servicing retained. Management has elected to carry these assets at fair value. Given the nature of these assets, the key valuation inputs are unobservable and management classifies these assets as Level 3.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of the dates indicated, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).
March 31, 2021Level 1Level 2Level 3Total
Assets:    
AFS debt securities:    
U.S. Treasuries$127,569 $— $— $127,569 
U.S. Government agencies & GSEs— 173,522 — 173,522 
State and political subdivisions— 294,394 — 294,394 
Residential MBS— 1,662,635 — 1,662,635 
Commercial MBS— 735,058 — 735,058 
Corporate bonds— 68,860 1,750 70,610 
Asset-backed securities— 680,492 — 680,492 
Equity securities with readily available fair values921 1,056 — 1,977 
Mortgage loans held for sale— 164,979 — 164,979 
Deferred compensation plan assets10,133 — — 10,133 
Servicing rights for SBA/USDA loans— — 6,226 6,226 
Residential mortgage servicing rights— — 20,728 20,728 
Derivative financial instruments— 55,589 8,308 63,897 
Total assets$138,623 $3,836,585 $37,012 $4,012,220 
Liabilities:
Deferred compensation plan liability$10,156 $— $— $10,156 
Derivative financial instruments— 28,849 4,606 33,455 
Total liabilities$10,156 $28,849 $4,606 $43,611 
24

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

December 31, 2020Level 1Level 2Level 3Total
Assets:    
AFS debt securities:    
U.S. Treasuries$128,072 $— $— $128,072 
U.S. Government agencies & GSE's— 152,972 — 152,972 
State and political subdivisions— 274,472 — 274,472 
Residential MBS— 1,485,585 — 1,485,585 
Commercial MBS— 549,131 — 549,131 
Corporate bonds— 70,017 1,750 71,767 
Asset-backed securities— 562,722 — 562,722 
Equity securities with readily available fair values774 913 — 1,687 
Mortgage loans held for sale— 105,433 — 105,433 
Deferred compensation plan assets9,584 — — 9,584 
Servicing rights for SBA/USDA loans— — 6,462 6,462 
Residential mortgage servicing rights— — 16,216 16,216 
Derivative financial instruments— 75,887 10,779 86,666 
Total assets$138,430 $3,277,132 $35,207 $3,450,769 
Liabilities:
Deferred compensation plan liability$9,590 $— $— $9,590 
Derivative financial instruments— 26,595 2,408 29,003 
Total liabilities$9,590 $26,595 $2,408 $38,593 
 
The following table shows a reconciliation of the beginning and ending balances for the periods indicated for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands).
20212020
Derivative AssetsDerivative LiabilitiesSBA/USDA loan servicing rightsResidential mortgage servicing rightsAFS
Debt Securities
Derivative
Assets
Derivative
Liabilities
SBA/USDA loan servicing rightsResidential mortgage servicing rights AFS
 Debt Securities
Three Months Ended March 31,
Balance at beginning of period$10,779 $2,408 $6,462 $16,216 $1,750 $7,238 $8,559 $6,794 $13,565 $998 
Additions175 — 229 3,201 — — — 95 2,115 — 
Sales and settlements— — (191)(1,129)— — — (307)(493)(1,000)
Amounts included in OCI— — — — — — — — — 
Amounts included in earnings - fair value adjustments(2,646)2,198 (274)2,440 — 123 (5,842)(292)(4,128)— 
Balance at end of period$8,308 $4,606 $6,226 $20,728 $1,750 $7,361 $2,717 $6,290 $11,059 $— 

25

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

The following table presents quantitative information about significant Level 3 inputs for fair value on a recurring basis as of the dates indicated. 
Level 3 Assets and LiabilitiesValuation TechniqueSignificant Unobservable InputsMarch 31, 2021December 31, 2020
RangeWeighted AverageRangeWeighted Average
SBA/USDA loan servicing rightsDiscounted cash flowDiscount rate
—% - 48.1%
9.2 %
1.6% - 44.1%
8.9 %
Prepayment rate
 0.5 - 33.7
18.1 
2.7 - 33.6
17.8 
Residential mortgage servicing rightsDiscounted cash flowDiscount rate
10.0 - 11.0
10.0 
10.0 - 11.0
10.0 
Prepayment rate
7.5 - 17.8
12.9 
8.7 - 19.5
17.7 
Corporate bondsIndicative bid provided by a brokerMultiple factors, including but not limited to, current operations, financial condition, cash flows, and similar financing transactions executed in the marketN/AN/AN/AN/A
Derivative assets - mortgageInternal modelPull through rate
46.1 - 98.9
85.5 
65.6 - 100
83.9 
Derivative assets and liabilities - otherDealer pricedDealer pricedN/AN/AN/AN/A
 
Fair Value Option
United records mortgage loans held for sale at fair value under the fair value option. Interest income on these loans is calculated based on the note rate of the loan and is recorded in interest revenue. The following tables present the fair value and outstanding principal balance of these loans, as well as the gain or loss recognized resulting from the change in fair value for the periods indicated (in thousands).
Mortgage Loans Held for Sale
March 31, 2021December 31, 2020
Outstanding principal balance$161,534 $99,746 
Fair value164,979 105,433 
Gain (Loss) Recognized on Mortgage Loans Held for Sale
LocationThree Months Ended
March 31,
20212020
 Mortgage loan gains and other related fees$(2,242)$1,725 

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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of the lower of the amortized cost or fair value accounting or write-downs of individual assets due to impairment. The following table presents the fair value hierarchy and carrying value of assets that were still held as of March 31, 2021 and December 31, 2020, for which a nonrecurring fair value adjustment was recorded during the year-to-date periods presented (in thousands).
 Level 1Level 2Level 3Total
March 31, 2021    
Loans$— $— $5,853 $5,853 
December 31, 2020
Loans$— $— $29,404 $29,404 

Loans that are reported above as being measured at fair value on a nonrecurring basis are generally impaired loans that have either been partially charged off or have specific reserves assigned to them. Nonaccrual loans that are collateral dependent are generally
26

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

written down to net realizable value, which reflects fair value less the estimated costs to sell. Specific reserves that are established based on appraised value of collateral are considered nonrecurring fair value adjustments as well. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the impaired loan as nonrecurring Level 3.

Assets and Liabilities Not Measured at Fair Value  
For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.
 
Cash and cash equivalents and repurchase agreements have short maturities and therefore the carrying value approximates fair value. Due to the short-term settlement of accrued interest receivable and payable, the carrying amount closely approximates fair value.
 
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings. All estimates are inherently subjective in nature. Changes in assumptions could significantly affect the estimates.
 
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
 
Off-balance sheet instruments (commitments to extend credit and standby letters of credit) for which draws can be reasonably predicted are generally short-term in maturity and are priced at variable rates. Therefore, the estimated fair value associated with these instruments is immaterial.

The carrying amount and fair values as of the dates indicated for other financial instruments that are not measured at fair value on a recurring basis are as follows (in thousands).
 Fair Value Level
Carrying AmountLevel 1Level 2Level 3Total
March 31, 2021     
Assets:     
HTM debt securities$587,696 $— $586,828 $— $586,828 
Loans and leases, net11,551,678 — — 11,574,199 11,574,199 
Liabilities:
Deposits15,993,220 — 15,993,408 — 15,993,408 
Long-term debt311,591 — — 322,569 322,569 
December 31, 2020
Assets:
HTM debt securities$420,361 $— $437,193 $— $437,193 
Loans and leases, net11,233,805 — — 11,209,717 11,209,717 
Liabilities:
Deposits15,232,358 — 15,232,274 — 15,232,274 
Long-term debt326,956 — — 336,763 336,763 
 
27

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

Note 7 – Stock-Based Compensation
 
United has an equity compensation plan that allows for grants of various share-based compensation. The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years. Certain restricted stock unit awards provide for accelerated vesting if there is a change in control (as defined in the plan document). As of March 31, 2021, 893,536 additional awards could be granted under the plan.
 
The table below presents restricted stock unit activity for the three months ended March 31, 2021.
Restricted Stock Unit AwardsSharesWeighted-
Average Grant-
Date Fair Value
Aggregate
Intrinsic
Value ($000)
Outstanding at December 31, 2020893,431 $23.75 
Granted45,471 28.65 
Vested(70,244)29.35 $2,317 
Cancelled(35,583)26.15 
Outstanding at March 31, 2021833,075 23.45 28,425 
 
Compensation expense for restricted stock units and performance stock units without market conditions is based on the market value of United’s common stock on the date of grant. Compensation expense for performance stock units with market conditions is based on the grant date per share fair market value, which was estimated using the Monte Carlo Simulation valuation model. United recognizes the impact of forfeitures as they occur. The value of restricted stock unit and performance stock unit awards is amortized into expense over the service period.

For the three months ended March 31, 2021 and 2020, expense of $1.41 million and $2.40 million, respectively, was recognized related to restricted stock unit and performance stock unit awards granted to United employees, which was included in salaries and employee benefits expense. In addition, for the three months ended March 31, 2021 and 2020, $100,000 and $93,000, respectively, was recognized in other expense for restricted stock unit awards granted to members of United’s Board of Directors.

A deferred income tax benefit related to stock-based compensation expense of $385,000 and $637,000 was included in the determination of income tax expense for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, there was $13.0 million of unrecognized expense related to non-vested restricted stock unit and performance stock unit awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.5 years.


28

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

Note 8 – Reclassifications Out of AOCI

The following table presents the details regarding amounts reclassified out of AOCI for the periods indicated (in thousands). Amounts shown in parentheses reduce earnings.
Details about AOCI ComponentsThree Months Ended
March 31,
Affected Line Item in the Statement Where Net Income is Presented
20212020
Amortization of losses included in net income on AFS securities transferred to HTM:
 $— $(83)Investment securities interest revenue
 — 20 Income tax benefit
 $— $(63)Net of tax
Reclassifications related to derivative financial instruments accounted for as cash flow hedges:
Interest rate contracts$(144)$— Long-term debt interest expense
 37 — Income tax benefit
 $(107)$— Net of tax
Reclassifications related to defined benefit pension plan activity:
Prior service cost$(117)$(133)Salaries and employee benefits expense
Actuarial losses(144)(81)Other expense
 (261)(214)Total before tax
 67 54 Income tax benefit
 $(194)$(160)Net of tax
Total reclassifications for the period$(301)$(223)Net of tax

Note 9 – Earnings Per Share
 
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data).
Three Months Ended
March 31,
 20212020
Net income$73,706 $31,884 
Dividends on preferred stock(1,719)— 
Undistributed earnings allocated to participating securities(462)(243)
Net income available to common shareholders$71,525 $31,641 
Weighted average shares outstanding:
Basic87,322 79,340 
Effect of dilutive securities:
Restricted stock units144 106 
Diluted87,466 79,446 
Net income per common share:
Basic$0.82 $0.40 
Diluted$0.82 $0.40 
 
At March 31, 2021, United had no potentially dilutive instruments outstanding that were not included in the above analysis. At March 31, 2020, United excluded 1,000 potentially dilutive shares of common stock issuable upon exercise of stock options with a weighted average exercise price of $30.45 from the computation of diluted earnings per share because of their antidilutive effect.
 
29

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

Note 10 – Regulatory Matters

As of March 31, 2021, United and the Bank were categorized as well-capitalized under the regulatory framework for prompt corrective action in effect at such time. To be categorized as well-capitalized at March 31, 2021, United and the Bank must have exceeded the well-capitalized guideline ratios in effect at such time, as set forth in the table below, and have met certain other requirements. Management believes that United and the Bank exceeded all well-capitalized requirements at March 31, 2021, and there have been no conditions or events since quarter-end that would change the status of well-capitalized.

Regulatory capital ratios at March 31, 2021 and December 31, 2020, along with the minimum amounts required for capital adequacy purposes and to be well-capitalized under prompt corrective action provisions in effect at such times are presented below for United and the Bank (dollars in thousands):
United Community Banks, Inc.
(Consolidated)
United Community Bank
Minimum (1)
Well-
Capitalized
March 31,
2021
December 31,
2020
March 31,
2021
December 31,
2020
Risk-based ratios:
CET1 capital4.5 %6.5 %12.34 %12.31 %12.80 %13.31 %
Tier 1 capital6.0 8.0 13.11 13.10 12.80 13.31 
Total capital8.0 10.0 14.92 15.15 13.66 14.28 
Leverage ratio4.0 5.0 9.39 9.28 9.13 9.42 
CET1 capital$1,555,850 $1,506,750 $1,605,736 $1,625,292 
Tier 1 capital1,652,272 1,603,172 1,605,736 1,625,292 
Total capital1,880,373 1,854,368 1,713,837 1,743,045 
Risk-weighted assets12,603,232 12,240,440 12,545,967 12,207,940 
Average total assets for the
  leverage ratio
17,605,291 17,276,853 17,582,607 17,246,878 
(1) As of March 31, 2021 and December 31, 2020 the additional capital conservation buffer in effect was 2.50%

Note 11 – Commitments and Contingencies
 
United is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of these instruments reflect the extent of involvement United has in particular classes of financial instruments. The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. United uses the same credit policies in making commitments and conditional obligations as it uses for underwriting on-balance sheet instruments. In most cases, collateral or other security is required to support financial instruments with credit risk.
 
The following table summarizes the contractual amount of off-balance sheet instruments as of the dates indicated (in thousands).
March 31, 2021December 31, 2020
Financial instruments whose contract amounts represent credit risk:  
Commitments to extend credit$3,156,771 $3,052,657 
Letters of credit28,886 31,748 
 
United holds minor investments in certain limited partnerships for Community Reinvestment Act purposes. As of March 31, 2021, United had committed to fund an additional $8.43 million related to future capital calls that are not reflected in the consolidated balance sheet.
 
United, in the normal course of business, is subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Although it is not possible to predict the outcome of these lawsuits, or the range of any possible loss, management, after consultation with legal counsel, does not anticipate that the ultimate aggregate liability, if any, arising from these lawsuits will have a material adverse effect on United’s financial position or results of operations.
 
30

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

Note 12 - Subsequent Events

During the second quarter of 2021, through the date of this Report, United repurchased 150,000 shares for $5.10 million in accordance with its common stock repurchase plan.

United has provided a redemption notice to the holders of the 2022 senior debentures of $50.0 million. Repayment is scheduled to occur during the second quarter of 2021.


31


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

The following is a discussion of our financial condition at March 31, 2021 and December 31, 2020 and our results of operations for the three months ended March 31, 2021 and 2020. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements and is intended to provide insight into our results of operations and financial condition. The following discussion and analysis should be read along with our consolidated financial statements and related notes included in Part I - Item 1 of this Report, “Cautionary Note Regarding Forward-Looking Statements” and the risk factors discussed in our 2020 10-K, and the other reports we have filed with the SEC after we filed the 2020 10-K.

Unless the context otherwise requires, the terms “we,” “our,” “us” refer to United on a consolidated basis. 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 161 branch network throughout Georgia, South Carolina, North Carolina, Tennessee and Florida. We have grown organically as well as through strategic acquisitions. At March 31, 2021, we had consolidated total assets of $18.6 billion and 2,396 full-time equivalent employees.

Recent Developments
Mergers and Acquisitions
On July 1, 2020, we acquired Three Shores including its wholly-owned banking subsidiary, Seaside, headquartered in Orlando, Florida. Seaside was a premier commercial lender with a strong wealth management platform and operated a 14-branch network located in key Florida metropolitan markets. We acquired $2.13 billion of assets and assumed $1.99 billion of liabilities in the acquisition.
COVID-19
During 2020 and continuing into 2021, the effects of the COVID-19 pandemic, including preventative and protective government issued mandates, materially restricted the level of economic activity in our markets. These government mandates included restrictions on travel and business operations, stay-at-home advisories and requirements and temporary closures of businesses deemed to be non-essential. In turn, unemployment dramatically increased in the United States and, while it has receded from its highest levels, it continues to negatively impact many businesses, and thereby threatens the repayment ability of some of our borrowers. The distribution of COVID-19 vaccinations and reduction in COVID-19 cases since the peak during the fourth quarter of 2020 and beginning of 2021 has resulted in a projected improved outlook of the pandemic. We nevertheless continue to monitor the impact of the COVID-19 pandemic on our business and to offer assistance to our customers affected by its economic impacts, through payment deferrals, waiving certain fees, suspending property foreclosures and participating in the CARES Act and PPP.

Results of Operations
We reported net income and diluted earnings per common share of $73.7 million and $0.82, respectively, for the first quarter of 2021. This compared to net income and diluted earnings per common share of $31.9 million and $0.40, respectively, for the same period in 2020.

We reported net income - operating (non-GAAP) of $74.9 million for the first quarter of 2021, compared to $32.5 million for the same period in 2020. For the first quarters of 2021 and 2020, net income - operating (non-GAAP) excludes merger-related and other charges, which net of tax, totaled $1.21 million and $626,000, respectively.

Net interest revenue increased to $132 million for the first quarter of 2021, compared to $119 million for the first quarter of 2020, due to several factors including loan growth, mostly from the acquisition of Three Shores and addition of PPP loans, accelerated recognition of net deferred fees on forgiven and repaid PPP loans and a more favorable deposit mix, which included a reduction in higher cost time deposits and an increase in noninterest-bearing deposits. The net interest margin decreased to 3.22% for the three months ended March 31, 2021 from 4.07% for the same period in 2020 primarily due to the effect of falling interest rates on our asset sensitive balance sheet.
 
We recorded a negative provision for credit losses of $12.3 million for the first quarter of 2021, compared to $22.2 million of provision expense for the first quarter of 2020. The negative provision in 2021 resulted from a downward adjustment to the ACL, reflecting a combination of the Bank’s own credit trends and an improved economic forecast compared to the first quarter of 2020.
32


The provision for credit losses during the first quarter of 2020 reflected the economic forecast at the onset of the COVID-19 pandemic and increased charge-offs. We recognized net recoveries for the first quarter of 2021 of $305,000 compared to $8.11 million of net charge-offs for the same period in 2020. During the first quarter of 2021, net recoveries were primarily a result of the recovery of one loan charged off prior to 2021. During the first quarter of 2020, we also had one loan that elevated the level of charge-offs recorded for the period.

Noninterest income of $44.7 million for the first quarter of 2021 was up $18.9 million, or 73%, from the first quarter of 2020. The primary driver of the increase was a $14.3 million increase in mortgage loan gains and related fees, resulting from strong demand for mortgage originations and refinances in the low interest rate environment, as well as a positive fair value adjustment to our mortgage servicing right asset.

For the first quarter of 2021, noninterest expenses of $95.2 million increased $13.7 million, or 17%, compared to the same period of 2020. The increase was primarily attributable to a $9.23 million increase in salaries and employee benefits, which was driven by several factors, including higher mortgage commissions as a result of increased mortgage production and the inclusion of Three Shores employees for the first quarter of 2021.

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 to be made 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.

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.

33


UNITED COMMUNITY BANKS, INC.
Table 1 - Financial Highlights
Selected Financial Information
 20212020
First Quarter
2021 - 2020 Change
(in thousands, except per share data)
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
INCOME SUMMARY 
Interest revenue$141,542 $156,071 $141,773 $123,605 $136,547 
Interest expense9,478 10,676 13,319 14,301 17,941 
Net interest revenue132,064 145,395 128,454 109,304 118,606 11 %
(Release of) provision for credit losses(12,281)2,907 21,793 33,543 22,191 
Noninterest income44,705 41,375 48,682 40,238 25,814 73 
Total revenue189,050 183,863 155,343 115,999 122,229 55 
Expenses95,194 106,490 95,981 83,980 81,538 17 
Income before income tax expense93,856 77,373 59,362 32,019 40,691 131 
Income tax expense20,150 17,871 11,755 6,923 8,807 129 
Net income73,706 59,502 47,607 25,096 31,884 131 
Merger-related and other charges1,543 2,452 3,361 397 808 
Income tax benefit of merger-related and other charges(335)(552)(519)(87)(182)
Net income - operating (1)
$74,914 $61,402 $50,449 $25,406 $32,510 130 
PERFORMANCE MEASURES
Per common share:
Diluted net income - GAAP$0.82 $0.66 $0.52 $0.32 $0.40 105 
Diluted net income - operating (1)
0.83 0.68 0.55 0.32 0.41 102 
Cash dividends declared0.19 0.18 0.18 0.18 0.18 
Book value22.15 21.90 21.45 21.22 20.80 
Tangible book value (3)
17.83 17.56 17.09 16.95 16.52 
Key performance ratios:
Return on common equity - GAAP (2)(4)
15.37 %12.36 %10.06 %6.17 %7.85 %
Return on common equity - operating (1)(2)(4)
15.63 12.77 10.69 6.25 8.01 
Return on tangible common equity - operating (1)(2)(3)(4)
19.68 16.23 13.52 8.09 10.57 
Return on assets - GAAP (4)
1.62 1.30 1.07 0.71 0.99 
Return on assets - operating (1)(4)
1.65 1.34 1.14 0.72 1.01 
Dividend payout ratio - GAAP23.17 27.27 34.62 56.25 45.00 
Dividend payout ratio - operating (1)
22.89 26.47 32.73 56.25 43.90 
Net interest margin (FTE) (4)
3.22 3.55 3.27 3.42 4.07 
Efficiency ratio - GAAP53.55 56.73 54.14 55.86 56.15 
Efficiency ratio - operating (1)
52.68 55.42 52.24 55.59 55.59 
Equity to total assets10.95 11.29 11.47 11.81 12.54 
Tangible common equity to tangible assets (3)
8.57 8.81 8.89 9.12 10.22 
ASSET QUALITY
Nonperforming loans$55,900 $61,599 $49,084 $48,021 $36,208 54 
Foreclosed properties596 647 953 477 475 
Total NPAs56,496 62,246 50,037 48,498 36,683 54 
ACL - loans126,866 137,010 134,256 103,669 81,905 55 
Net charge-offs(305)1,515 2,538 6,149 8,114 
ACL - loans to loans1.09 %1.20 %1.14 %1.02 %0.92 %
Net charge-offs to average loans (4)
(0.01)0.05 0.09 0.25 0.37 
NPAs to loans and foreclosed properties0.48 0.55 0.42 0.48 0.41 
NPAs to total assets0.30 0.35 0.29 0.32 0.28 
AVERAGE BALANCES ($ in millions)
Loans$11,433 $11,595 $11,644 $9,773 $8,829 29 
Investment securities3,991 3,326 2,750 2,408 2,520 58 
Earning assets16,782 16,394 15,715 12,958 11,798 42 
Total assets18,023 17,698 17,013 14,173 12,944 39 
Deposits15,366 15,057 14,460 12,071 10,915 41 
Shareholders’ equity2,025 1,994 1,948 1,686 1,653 23 
Common shares - basic (thousands)87,322 87,258 87,129 78,920 79,340 10 
Common shares - diluted (thousands)87,466 87,333 87,205 78,924 79,446 10 
AT PERIOD END ($ in millions)
Loans$11,679 $11,371 $11,799 $10,133 $8,935 31 
Investment securities4,332 3,645 3,089 2,432 2,540 71 
Total assets18,557 17,794 17,153 15,005 13,086 42 
Deposits15,993 15,232 14,603 12,702 11,035 45 
Shareholders’ equity2,031 2,008 1,967 1,772 1,641 24 
Common shares outstanding (thousands)86,777 86,675 86,611 78,335 78,284 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.
34


UNITED COMMUNITY BANKS, INC.
Table 1 (Continued) - Non-GAAP Performance Measures Reconciliation
Selected Financial Information
 20212020
(in thousands, except per share data)
First Quarter
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Expense reconciliation     
Expenses (GAAP)$95,194 $106,490 $95,981 $83,980 $81,538 
Merger-related and other charges(1,543)(2,452)(3,361)(397)(808)
Expenses - operating$93,651 $104,038 $92,620 $83,583 $80,730 
Net income reconciliation
Net income (GAAP)$73,706 $59,502 $47,607 $25,096 $31,884 
Merger-related and other charges1,543 2,452 3,361 397 808 
Income tax benefit of merger-related and other charges(335)(552)(519)(87)(182)
Net income - operating$74,914 $61,402 $50,449 $25,406 $32,510 
Diluted income per common share reconciliation
Diluted income per common share (GAAP)$0.82 $0.66 $0.52 $0.32 $0.40 
Merger-related and other charges, net of tax0.01 0.02 0.03 — 0.01 
Diluted income per common share - operating$0.83 $0.68 $0.55 $0.32 $0.41 
Book value per common share reconciliation
Book value per common share (GAAP)$22.15 $21.90 $21.45 $21.22 $20.80 
Effect of goodwill and other intangibles(4.32)(4.34)(4.36)(4.27)(4.28)
Tangible book value per common share$17.83 $17.56 $17.09 $16.95 $16.52 
Return on tangible common equity reconciliation
Return on common equity (GAAP)15.37 %12.36 %10.06 %6.17 %7.85 %
Merger-related and other charges, net of tax0.26 0.41 0.63 0.08 0.16 
Return on common equity - operating15.63 12.77 10.69 6.25 8.01 
Effect of goodwill and other intangibles4.05 3.46 2.83 1.84 2.56 
Return on tangible common equity - operating19.68 %16.23 %13.52 %8.09 %10.57 %
Return on assets reconciliation
Return on assets (GAAP)1.62 %1.30 %1.07 %0.71 %0.99 %
Merger-related and other charges, net of tax0.03 0.04 0.07 0.01 0.02 
Return on assets - operating1.65 %1.34 %1.14 %0.72 %1.01 %
Dividend payout ratio reconciliation
Dividend payout ratio (GAAP)23.17 %27.27 %34.62 %56.25 %45.00 %
Merger-related and other charges, net of tax(0.28)(0.80)(1.89)— (1.10)
Dividend payout ratio - operating22.89 %26.47 %32.73 %56.25 %43.90 %
Efficiency ratio reconciliation
Efficiency ratio (GAAP)53.55 %56.73 %54.14 %55.86 %56.15 %
Merger-related and other charges(0.87)(1.31)(1.90)(0.27)(0.56)
Efficiency ratio - operating52.68 %55.42 %52.24 %55.59 %55.59 %
Tangible common equity to tangible assets reconciliation
Equity to total assets (GAAP)10.95 %11.29 %11.47 %11.81 %12.54 %
Effect of goodwill and other intangibles(1.86)(1.94)(2.02)(2.05)(2.32)
Effect of preferred equity(0.52)(0.54)(0.56)(0.64)— 
Tangible common equity to tangible assets8.57 %8.81 %8.89 %9.12 %10.22 %
35


Net Interest Revenue

Net interest revenue, which is the difference between the interest earned on assets and the interest paid on deposits and borrowed funds, is the single largest component of total revenue. Management seeks to optimize this revenue while balancing interest rate, credit and liquidity risks.

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

Net interest revenue for the first quarters of 2021 and 2020 was $132 million and $119 million, respectively. As set forth in the following table, FTE net interest revenue for the first quarter of 2021 was $133 million, representing an increase of $13.6 million, or 11%, from the same period in 2020. The net interest spread for the first quarters of 2021 and 2020 was 3.06% and 3.73%, respectively. The net interest margin for the first quarters of 2021 and 2020 was 3.22% and 4.07%, respectively.

The following table indicates the relationship between interest revenue and expense and the average amounts of assets and liabilities for the periods indicated. Both average assets and average liabilities for the three months ended March 31, 2021 increased compared to the same period of 2020. The increase in average assets was primarily driven by increases in average loans of $2.60 billion, average securities of $1.47 billion and interest-bearing deposits in banks of $909 million. The increase in average liabilities was primarily driven by the $4.45 billion increase in average deposits, which funded much of the growth in average assets for the three months ended March 31, 2021.

In addition to organic growth, the increases in average loans and deposits reflect loans and deposits acquired from Seaside 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 quarter of 2021. Approximately $2.30 billion of the increase in average loans can be attributed to the Seaside and PPP loan portfolios. In addition, the forgiveness of PPP loans has generated additional liquidity, reflected in higher cash balances and a larger investment portfolio.

The increase in net interest revenue for the three months ended March 31, 2021 compared to the same period of 2020 was primarily driven by the acquisition of Seaside, the loan growth discussed above and accelerated recognition of net deferred PPP loan fees upon loan forgiveness or repayment. These contributors to net interest revenue were partially offset by the impact of historically low interest rates and a $2.59 million decrease in purchase loan accretion compared to the same period of 2020, which in turn negatively impacted our net interest margin and net interest spread. Additionally, while PPP loans have significantly contributed to loan growth over the past few quarters, the low contractual interest rate on these loans has exerted negative pressure on the net interest margin and net interest spread. The impact of the decrease in net interest margin was partially mitigated by the growth in noninterest-bearing deposits, which increased $2.07 billion since the first quarter of 2020. Noninterest-bearing deposits comprised 36% of average total deposits for the first quarter of 2021 compared to 32% for the first quarter of 2020. The investment of excess cash into our securities portfolio also has helped improve the earning asset mix and mitigate the impact of the low interest rate environment.

36


Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended March 31,
 20212020
(dollars in thousands, FTE)Average BalanceInterestAverage RateAverage BalanceInterestAverage Rate
Assets:      
Interest-earning assets:      
Loans, net of unearned income (FTE) (1)(2)
$11,432,908 $125,122 4.44 %$8,828,880 $117,796 5.37 %
Taxable securities (3)
3,686,405 13,298 1.44 2,357,635 15,871 2.69 
Tax-exempt securities (FTE) (1)(3)
304,983 2,888 3.79 162,253 2,045 5.04 
Federal funds sold and other interest-earning assets1,357,890 1,222 0.36 448,775 1,632 1.46 
Total interest-earning assets (FTE)16,782,186 142,530 3.44 11,797,543 137,344 4.68 
Noninterest-earning assets:
Allowance for credit losses(143,703)(69,777)
Cash and due from banks140,292 128,254 
Premises and equipment221,411 219,243 
Other assets (3)
1,023,275 868,452 
Total assets$18,023,461 $12,943,715 
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and interest-bearing demand$3,331,043 1,486 0.18 $2,412,733 2,978 0.50 
Money market3,732,988 1,804 0.20 2,340,723 4,531 0.78 
Savings989,584 49 0.02 712,110 35 0.02 
Time1,642,423 1,588 0.39 1,841,552 7,250 1.58 
Brokered time deposits75,259 292 1.57 80,821 281 1.40 
Total interest-bearing deposits9,771,297 5,219 0.22 7,387,939 15,075 0.82 
Federal funds purchased and other borrowings12 — — 396 1.02 
Federal Home Loan Bank advances3,333 0.24 165 2.44 
Long-term debt317,172 4,257 5.44 212,762 2,864 5.41 
Total borrowed funds320,517 4,259 5.39 213,323 2,866 5.40 
Total interest-bearing liabilities10,091,814 9,478 0.38 7,601,262 17,941 0.95 
Noninterest-bearing liabilities:
Noninterest-bearing deposits5,594,394 3,527,385 
Other liabilities312,610 162,187 
Total liabilities15,998,818 11,290,834 
Shareholders' equity2,024,643 1,652,881 
Total liabilities and shareholders' equity$18,023,461 $12,943,715 
Net interest revenue (FTE) $133,052 $119,403 
Net interest-rate spread (FTE)  3.06 %3.73 %
Net interest margin (FTE) (4)
  3.22 %4.07 %
 
(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 $58.3 million and $52.9 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.


37


The following table shows the relative effect on net interest revenue for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate). Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.
 
Table 3 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis
(in thousands)
Three Months Ended March 31, 2021
Compared to 2020
Increase (Decrease) Due to Changes in
 VolumeRateTotal
Interest-earning assets:
Loans (FTE)$30,863 $(23,537)$7,326 
Taxable securities6,668 (9,241)(2,573)
Tax-exempt securities (FTE)1,450 (607)843 
Federal funds sold and other interest-earning assets1,498 (1,908)(410)
Total interest-earning assets (FTE)40,479 (35,293)5,186 
Interest-bearing liabilities:
NOW and interest-bearing demand accounts863 (2,355)(1,492)
Money market accounts1,801 (4,528)(2,727)
Savings deposits14 — 14 
Time deposits(710)(4,952)(5,662)
Brokered deposits(20)31 11 
Total interest-bearing deposits1,948 (11,804)(9,856)
Federal funds purchased & other borrowings— (1)(1)
FHLB advances(2)
Long-term debt1,401 (8)1,393 
Total borrowed funds1,404 (11)1,393 
Total interest-bearing liabilities3,352 (11,815)(8,463)
Increase in net interest revenue (FTE)$37,127 $(23,478)$13,649 

Provision for Credit Losses
 
The ACL represents management’s estimate of life of loan credit losses in the loan portfolio and unfunded loan commitments. Management’s estimate of credit losses under CECL is determined using a model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and resulting provision for credit losses.

We recorded a negative provision for credit losses of $12.3 million for the three months ended March 31, 2021, compared to $22.2 million in provision expense for the same period in 2020. The amount of provision recorded in each period was the amount required such that the total ACL reflected the appropriate balance as determined by management reflecting expected life of loan losses. The negative provision expense for the three months ended March 31, 2021 compared to the same period of 2020 was primarily a result of an improved economic forecast compared to the first quarter of 2020 combined with net recoveries recognized during the first quarter of 2021. The provision for credit losses for the first quarter of 2020 was elevated due to a less optimistic economic forecast at the onset of the COVID-19 pandemic.

For the three months ended March 31, 2021, net loan charge-offs (recoveries) as an annualized percentage of average outstanding loans were (0.01)% compared to 0.37% for the same period in 2020. The net recoveries amount recorded during the first three months of 2021 was mostly attributable to one large commercial credit.
 
Additional discussion on credit quality and the ACL is included in the “Asset Quality and Risk Elements” section of MD&A in this Report.

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Noninterest Income
 
The following table presents the components of noninterest income for the periods indicated.
Table 4 - Noninterest Income
(in thousands)
 Three Months Ended
March 31,
Change
 20212020AmountPercent
Service charges and fees:
Overdraft fees$2,342 $3,519 $(1,177)(33)%
ATM and debit card fees3,090 3,069 21 
Other service charges and fees2,138 2,050 88 
Total service charges and fees7,570 8,638 (1,068)(12)
Mortgage loan gains and related fees22,572 8,310 14,262 172 
Wealth management fees3,505 1,640 1,865 114 
Gains on sales of other loans1,030 1,674 (644)(38)
Other noninterest income:
Other lending and loan servicing fees2,160 1,665 495 30 
Customer derivatives1,692 1,407 285 20 
Other investment gains (losses)1,506 (1,157)2,663 
BOLI857 845 12 
Treasury management income645 509 136 27 
Other3,168 2,283 885 39 
Total other noninterest income10,028 5,552 4,476 81 
Total noninterest income$44,705 $25,814 $18,891 73 

During the first quarter of 2021, we recognized lower overdraft transaction fees compared to the same period of 2020 due to increased customer deposit account balances resulting from government stimulus payments combined with lower transaction volume due to the COVID-19 pandemic-related shutdown.

Mortgage loan gains and related fees for the first quarter of 2021 increased $14.3 million from the same period of 2020, reflecting an increase in demand for mortgage rate locks and mortgage refinances due to a historically low interest rate environment compared to the same period of 2020. During March of 2020, the national federal funds rate decreased 150 basis points in response to the COVID-19 pandemic. While mortgage interest rates have remained low, rates began trending upward toward the end of the first quarter of 2021. As a result, projected mortgage prepayments decelerated, which resulted in a positive fair value adjustment to the mortgage servicing rights asset, contributing to the increase in mortgage loan gain and related fees for the first quarter of 2021. The following table summarizes mortgage loan sales and closings for the periods presented.

Table 5 - Mortgage Loan Sales
(dollars in thousands)
Three Months Ended
March 31,
20212020% Change
Mortgage loans sold$335,673 $259,112 30 %
# of mortgage loans sold1,405 1,158 21 
Mortgage loans closed
Originations$292,919 $218,578 34 
Refinances363,553 169,281 115 
Total$656,472 $387,859 69 
# of mortgage loans closed2,142 1,470 46 

Wealth management fees for the first quarter of 2021 increased 114% compared to the same period of 2020, which was primarily driven by the addition of Three Shores’ wealth management business.
 
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Gains on the sale of other loans for the first quarter of 2021 decreased $644,000 compared to the same period of 2020. For the periods presented, loans sold consisted of SBA/USDA loans and equipment financing receivables. 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. During the first quarter of 2021, we sold more SBA/USDA loans compared to the same period of last year, as market conditions for the sale of these loans has improved since the onset of the COVID-19 pandemic. In the first quarter of 2020, due to the market disruption caused by the COVID-19 pandemic, we held more of our SBA/USDA loan production in portfolio rather than selling to the secondary market. From time to time, we also sell certain equipment financing receivables. During the first quarter of 2021, we sold a nominal amount of equipment financing receivables compared to the same period of 2020. The following table presents loans sold and the corresponding gains or losses recognized on the sale for the periods indicated.

Table 6 - Other Loan Sales
(in thousands)
Three Months Ended March 31,
20212020
Loans SoldGain (Loss)Loans SoldGain (Loss)
Guaranteed portion of SBA/USDA loans$11,345 $1,023 $4,034 $415 
Equipment financing receivables1,059 22,217 1,259 
Total$12,404 $1,030 $26,251 $1,674 

Other noninterest income for the first quarter of 2021 increased from the same period 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 quarter of 2020, which resulted from the COVID-19 pandemic related market disruption.

Noninterest Expenses 

The following table presents the components of noninterest expenses for the periods indicated. 
Table 7 - Noninterest Expenses
(in thousands)
 Three Months Ended
March 31,
Change
 20212020AmountPercent
Salaries and employee benefits$60,585 $51,358 $9,227 18 %
Communications and equipment7,203 5,946 1,257 21 
Occupancy6,956 5,714 1,242 22 
Advertising and public relations1,199 1,274 (75)(6)
Postage, printing and supplies1,822 1,670 152 
Professional fees4,234 4,097 137 
Lending and loan servicing expense2,877 2,293 584 25 
Outside services - electronic banking2,218 1,832 386 21 
FDIC assessments and other regulatory charges1,896 1,484 412 28 
Amortization of core deposit intangibles985 1,040 (55)(5)
Other3,676 4,022 (346)(9)
Total excluding merger-related and other charges93,651 80,730 12,921 16 
Merger-related and other charges1,543 808 735 
Total noninterest expenses$95,194 $81,538 $13,656 17 

Salaries and employee benefits for the first quarter of 2021 increased 18% from same period of 2020. The increase was primarily attributable to higher mortgage commissions, other incentives and bonus accrual resulting from increased production and strong performance during the first quarter of 2021. The three months ended March 31, 2021 also reflects the addition of Three Shores employees. These increases were partially offset by a decrease in stock compensation expense and an increase in deferred loan costs, resulting from strong loan production, including mortgage and third round PPP loans, compared to the same period of 2020. Full time equivalent headcount totaled 2,396 at March 31, 2021, up from 2,332 at March 31, 2020.

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Communications and equipment expense increased primarily due to incremental software contract costs. The increase in occupancy costs for the first quarter of 2021 compared to the same period of 2020 was mostly attributable to the addition of operating lease costs associated with the Three Shores’ locations. The increase in lending and loan servicing expense was driven by strong loan production in the first quarter of 2021. The increase in FDIC assessments and other regulatory charges was primarily attributable to an increased assessment base driven by higher average total assets compared to the first quarter of 2020, partly due to the acquisition of Three Shores. The decrease in other noninterest expense was attributable to lower travel expenses as a result of the COVID-19 pandemic and net gains on sale of foreclosed properties during the first quarter of 2021.

Merger-related and other charges for the three months ended March 31, 2021 consisted primarily of merger-related expenses associated with the acquisition of Three Shores, including costs associated with system conversion, which occurred during the first quarter of 2021. Merger-related and other charges for the three months ended March 31, 2020 consisted primarily of merger-related expenses associated with First Madison Bank & Trust and Three Shores, as well as branch closure costs.

Balance Sheet Review
 
Total assets at March 31, 2021 and December 31, 2020 were $18.6 billion and $17.8 billion, respectively. The increase in assets was primarily evident in loans, which included PPP loan originations during the quarter, and investments. An increase in customer deposits provided liquidity, some of which was strategically deployed to fund a larger investment portfolio. Total liabilities at March 31, 2021 and December 31, 2020 were $16.5 billion and $15.8 billion, respectively, with the increase quarter over quarter primarily due to the aforementioned customer deposit growth. Shareholders’ equity totaled $2.03 billion and $2.01 billion at March 31, 2021 and December 31, 2020, respectively.

Loans

Our loan portfolio is our largest category of interest-earning assets. Total loans averaged $11.4 billion in the first quarter of 2021, compared with $8.83 billion in the first quarter of 2020, an increase of 29%, much of which resulted from the Three Shores acquisition and our participation in the PPP program. At March 31, 2021, total loans were $11.7 billion, an increase of 3%, from December 31, 2020. The following table presents a summary by loan type of the loan portfolio, of which approximately 68% was secured by real estate at March 31, 2021.

Table 8 - Loans Outstanding
(in thousands)
March 31, 2021December 31, 2020
Amortized Cost% of total loansAmortized Cost% of total loans
Owner occupied commercial real estate$2,107,153 18 %$2,090,443 18 %
Income producing commercial real estate2,598,482 22 2,540,750 22 
Commercial & industrial (1)
2,643,279 23 2,498,560 22 
Commercial construction960,153 967,305 
Equipment financing912,650 863,830 
Total commercial9,221,717 79 8,960,888 79 
Residential mortgage1,362,088 12 1,284,920 11 
HELOC679,094 697,117 
Residential construction271,600 281,430 
Consumer144,045 146,460 
Total loans$11,678,544 100 %$11,370,815 100 %
((1) Commercial and industrial loans as of March 31, 2021 and December 31, 2020 included $883 million and $646 million of PPP loans, respectively.

Asset Quality and Risk Elements
 
We manage asset quality and control credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices. Our credit administration function is responsible for monitoring asset quality and Board approved portfolio concentration limits, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures. Additional information on our credit administration function is included in Part I, Item 1 under the heading Lending Activities in our 2020 10-K.
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We classify loans as “substandard” when there is a well-defined weakness or weaknesses that jeopardizes the repayment by the borrower and there is a distinct possibility that we could sustain some loss if the deficiency is not corrected. Performing substandard loans, which are substandard loans that are still accruing interest, totaled $176 million and $165 million, respectively, at March 31, 2021 and December 31, 2020.
 
We conduct reviews of classified performing and non-performing loans, TDRs, past due loans and portfolio concentrations on a regular basis to identify risk migration and potential charges to the ACL. These items are discussed in a series of meetings attended by Credit Risk Management leadership and leadership from various lending groups. In addition to the reviews mentioned above, an independent loan review team reviews the portfolio to ensure consistent application of risk rating policies and procedures.

The ACL reflects management’s assessment of the life of loan expected credit losses in the loan portfolio and unfunded loan commitments. This assessment involves uncertainty and judgment and is subject to change in future periods. The amount of any changes could be significant if management’s assessment of loan quality or collateral values changes substantially with respect to one or more loan relationships or portfolios. The allocation of the ACL is based on reasonable and supportable forecasts, historical data, subjective judgment and estimates and therefore, is not necessarily indicative of the specific amounts or loan categories in which charge-offs may ultimately occur. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for credit losses in future periods if, in their opinion, the results of their review warrant such additions. See the Critical Accounting Policies section of MD&A in our 2020 10-K for additional information on the allowance for credit losses.

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The following table presents a summary of the changes in the ACL for the periods indicated.
Table 9 - ACL
(in thousands)
 Three Months Ended
March 31,
 20212020
ACL - loans, beginning of period$137,010 $62,089 
Adoption of CECL— 6,880 
ACL - loans, adjusted beginning balance137,010 68,969 
Charge-offs:
Owner occupied commercial real estate— 
Income producing commercial real estate1,007 411 
Commercial & industrial2,894 7,561 
Commercial construction178 — 
Equipment financing2,058 1,863 
Residential mortgage215 284 
HELOC— 20 
Residential construction10 22 
Consumer471 638 
Total charge-offs6,833 10,805 
Recoveries:
Owner occupied commercial real estate240 1,034 
Income producing commercial real estate16 141 
Commercial & industrial5,647 376 
Commercial construction156 141 
Equipment financing547 356 
Residential mortgage123 275 
HELOC73 103 
Residential construction70 34 
Consumer266 231 
Total recoveries7,138 2,691 
Net (recoveries) charge-offs(305)8,114 
(Release of) provision for credit losses - loans(10,449)21,050 
ACL - loans, end of period126,866 81,905 
ACL - unfunded commitments, beginning of period10,558 3,458 
Adoption of CECL— 1,871 
ACL - unfunded commitments, adjusted beginning balance10,558 5,329 
(Release of) provision for credit losses - unfunded commitments(1,832)1,141 
ACL - unfunded commitments, end of period8,726 6,470 
Total ACL$135,592 $88,375 
Total loans:
At period-end$11,678,544 $8,935,424 
Average11,432,908 8,828,880 
ACL - loans, as a percentage of period-end loans1.09 %0.92 %
As a percentage of average loans (annualized):
Net charge-offs(0.01)0.37 
Provision for credit losses - loans(0.37)0.96 

The reduction in the ACL since December 31, 2020 reflects an improved economic forecast, which includes an improved COVID-19 pandemic outlook, 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 to compensate for the increase in criticized and classified assets at March 31, 2021. In addition, the impact of loan growth on the ACL was partially mitigated by the fact that PPP loans originated during the first quarter of 2021 of approximately $518 million were considered low risk assets due to the 100% guarantee by the SBA.
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Nonperforming Assets

NPAs, which include nonaccrual loans and foreclosed properties, totaled $56.5 million at March 31, 2021, compared with $62.2 million at December 31, 2020. The decrease in NPAs since December 31, 2020 is primarily a result of a decrease in 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 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.

The table below summarizes NPAs.
Table 10 - NPAs
(in thousands)
March 31,
2021
December 31,
2020
Nonaccrual loans:
Owner occupied commercial real estate7,908 8,582 
Income producing commercial real estate13,740 15,149 
Commercial & industrial13,864 16,634 
Commercial construction1,984 1,745 
Equipment financing2,171 3,405 
Total commercial39,667 45,515 
Residential mortgage14,050 12,858 
HELOC1,707 2,487 
Residential construction322 514 
Consumer154 225 
Total nonaccrual loans55,900 61,599 
Foreclosed properties596 647 
Total NPAs$56,496 $62,246 
Nonaccrual loans as a percentage of total loans0.48 %0.54 %
NPAs as a percentage of total loans and foreclosed properties0.48 0.55 
NPAs as a percentage of total assets0.30 0.35 

At March 31, 2021 and December 31, 2020, we had $59.3 million and $61.6 million, respectively, in loans with terms that have been modified in TDRs. Included therein were $17.3 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 $42.0 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 March 31, 2021 and December 31, 2020.
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Table 11 - COVID-19 Deferrals
(in thousands)
March 31, 2021December 31, 2020
Owner occupied commercial real estate$6,399 $4,774 
Income producing commercial real estate21,734 45,190 
Commercial & industrial1,163 5,682 
Commercial construction73 1,745 
Equipment financing12,135 3,474 
Total commercial41,504 60,865 
Residential mortgage6,165 8,731 
HELOC368 1,012 
Residential construction45 55 
Consumer23 46 
Total COVID-19 deferrals$48,105 $70,709 

Investment Securities
The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits and borrowings.
At March 31, 2021 and December 31, 2020, we had HTM debt securities with a carrying amount of $588 million and $420 million, respectively, and AFS debt securities totaling $3.74 billion and $3.22 billion, respectively. The increased balances at March 31, 2021 reflect our decision to deploy liquidity generated through strong deposit growth by purchasing additional investment securities. At March 31, 2021 and December 31, 2020, the securities portfolio represented approximately 23% and 20%, respectively, of total assets.
In accordance with CECL, our HTM debt securities portfolio is evaluated quarterly to assess whether an ACL is required. We measure expected credit losses on HTM debt securities on a collective basis by major security type. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. At March 31, 2021 and December 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 by U.S. Government agencies, GSEs, high credit quality municipalities and supranational entities. As a result, no ACL for HTM debt securities was recorded.
For AFS debt securities in an unrealized loss position, if we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, the security's amortized cost basis is written down to fair value through income. Absent an intent or more than likely requirement to sell, we evaluate whether the decline in fair value has resulted from credit losses or other factors. The evaluation considers factors such as the extent to which fair value is less than amortized cost, changes to the security’s rating, and adverse conditions specific to the security. If the evaluation indicates a credit loss exists, an ACL may be recorded, with such allowance limited to the amount by which fair value is below amortized cost. Any impairment unrelated to credit factors is recognized in OCI. At March 31, 2021 and December 31, 2020, there was no ACL related to the AFS debt securities portfolio. Losses on fixed income securities at March 31, 2021 and December 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, at March 31, 2021, the increase in core transaction deposits was also attributable to PPP-related deposits. The following table sets forth the deposit composition for the periods indicated.

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Table 12 - Deposits
(in thousands) 
March 31, 2021December 31, 2020
Noninterest-bearing demand$6,058,439 $5,390,291 
NOW and interest-bearing demand3,417,915 3,346,490 
Money market and savings4,729,011 4,501,189 
Time1,587,653 1,704,290 
Total customer deposits15,793,018 14,942,260 
Brokered deposits200,202 290,098 
Total deposits$15,993,220 $15,232,358 

Borrowing Activities
 
At March 31, 2021 and December 31, 2020, we had long-term debt outstanding of $312 million and $327 million, respectively, which includes senior debentures, subordinated debentures, and trust preferred securities. The reduction in long-term debt since December 31, 2020 is a result of the repayment of the 2025 subordinated debentures and the Southern Bancorp Capital Trust I trust preferred securities of $11.3 million and $4.38 million, respectively. During the first quarter of 2021, we also provided a redemption notice to the holders of the 2022 senior debentures of $50.0 million. Repayment is scheduled to occur during the second quarter of 2021.

Contractual Obligations
 
There have not been any material changes to our contractual obligations since December 31, 2020.
 
Off-Balance Sheet Arrangements
 
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit, letters of credit and financial guarantees.
 
A commitment to extend credit is an agreement to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Letters of credit and financial guarantees are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as extending loan facilities to customers. Those commitments are primarily issued to local businesses.
 
The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, letters of credit and financial guarantees is represented by the contractual amount of these instruments. We use the same credit underwriting procedures for making commitments, letters of credit and financial guarantees, as we use for underwriting on-balance sheet instruments. Management evaluates each customer’s creditworthiness on a case-by-case basis and the amount of the collateral, if deemed necessary, is based on the credit evaluation. Collateral held varies, but may include unimproved and improved real estate, certificates of deposit, personal property or other acceptable collateral.
 
All of these instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The total amount of these instruments does not necessarily represent future cash requirements because a significant portion of these instruments expire without being used. We are not involved in off-balance sheet contractual relationships, other than those disclosed in this report, that could result in liquidity needs or other commitments, or that could significantly affect earnings. See Note 22 to the consolidated financial statements included in our 2020 10-K and Note 11 to the consolidated financial statements in this Report for additional information on off-balance sheet arrangements.

Interest Rate Sensitivity Management

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

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

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

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

Table 13 - Interest Sensitivity
 Increase (Decrease) in Net Interest Revenue from Base Scenario at
 March 31, 2021December 31, 2020
Change in RatesShockRampShockRamp
100 basis point increase2.84 %2.17 %3.80 %2.88 %
100 basis point decrease(2.80)(2.49)(1.89)(1.82)
 
Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities. These repricing characteristics are the time frames within which the interest-earning assets and interest-bearing liabilities are subject to change in interest rates either at replacement, repricing or maturity. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates. Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates on a net basis within an acceptable timeframe, thereby minimizing the potentially adverse effect of interest rate changes on net interest revenue.
 
We have discretion in the extent and timing of deposit repricing depending upon the competitive pressures in the markets in which we operate. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. The interest rate spread between an asset and its supporting liability can vary significantly even when the timing of repricing for both the asset and the liability remains the same, due to the two instruments repricing according to different indices. This is commonly referred to as basis risk.
 
Derivative financial instruments are used to manage interest rate sensitivity. These contracts generally consist of interest rate swaps under which we pay a variable rate (or fixed rate, as the case may be) and receive a fixed rate (or variable rate, as the case may be). In addition, investment securities and wholesale funding strategies are used to manage interest rate risk.

Derivative financial instruments that are designated as accounting hedges are classified as either cash flow or fair value hedges. The change in fair value of cash flow hedges is recognized in OCI. Fair value hedges recognize in earnings both the effect of the change in the fair value of the derivative financial instrument and the offsetting effect of the change in fair value of the hedged asset or liability associated with the particular risk of that asset or liability being hedged. We have other derivative financial instruments that are not designated as accounting hedges, but are used for interest rate risk management purposes and as effective economic hedges. Derivative financial instruments that are not accounted for as accounting hedges are marked to market through earnings.
Our policy requires all non-customer derivative financial instruments be used only for asset/liability management through the hedging of specific transactions, positions or risks, and not for trading or speculative purposes. Management believes that the risk associated with using derivative financial instruments to mitigate interest rate risk sensitivity is appropriately monitored and controlled and will not have any material adverse effect on financial condition or results of operations. In order to mitigate potential credit risk, from time to time we may require the counterparties to derivative contracts to pledge cash and/or securities as collateral to cover the net exposure. 
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Liquidity Management 
Liquidity is defined as the ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the ability to meet the daily cash flow requirements of customers, both depositors and borrowers. The primary objective is to ensure that sufficient funding is available, at a reasonable cost, to meet ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, our primary goal is to maintain a sufficient level of liquidity in all expected economic environments. To assist in determining the adequacy of our liquidity, we perform a variety of liquidity stress tests. We maintain an unencumbered liquid asset reserve to help ensure our ability to meet our obligations under normal conditions for at least a 12-month period and under severely adverse liquidity conditions for a minimum of 30 days.
An important part of the Bank’s liquidity resides in the asset portion of the balance sheet, which provides liquidity primarily through loan interest and principal repayments and the maturities and sales of securities, as well as the ability to use these assets as collateral for borrowings on a secured basis.
The Bank’s main source of liquidity is customer interest-bearing and noninterest-bearing deposit accounts. Liquidity is also available from wholesale funding sources consisting primarily of Federal funds purchased, FHLB advances, and brokered deposits. These sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs. 
In addition, because the Holding Company is a separate entity and apart from the Bank, it must provide for its own liquidity. The Holding Company is responsible for the payment of dividends declared for its common and preferred shareholders, and interest and principal on any outstanding debt or trust preferred securities. The Holding Company currently has internal capital resources to meet these obligations. While the Holding Company has access to the capital markets and maintains a line of credit as a contingent funding source, the ultimate sources of its liquidity are subsidiary service fees and dividends from the Bank, which are limited by applicable law and regulations. 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 March 31, 2021, we had sufficient qualifying collateral to provide borrowing capacity for FHLB advances of $1.46 billion and Federal Reserve discount window borrowing capacity of $1.63 billion, as well as unpledged investment securities of $3.10 billion that could be used as collateral for additional borrowings. In addition to these wholesale sources, we have the ability to attract retail deposits by competing more aggressively on pricing.
As disclosed in the consolidated statement of cash flows, net cash provided by operating activities was $34.7 million for the three months ended March 31, 2021. Net income of $73.7 million for the three-month period included non-cash expense and income items consisting primarily of the following: release of provision of $12.3 million, deferred income tax expense of $9.17 million, stock-based compensation expense of $1.51 million, net gains on the sales of other loans of $1.03 million and net depreciation, amortization and accretion income of $681,000. Uses of cash from operating activities included an increase in loans held for sale of $59.5 million, which was partially offset by cash provided by a decrease in other assets and accrued interest receivable of $15.2 million and an increase in accrued expenses and other liabilities of $8.65 million. Net cash used in investing activities of $1.04 billion included a $293 million net increase in loans, $760 million in purchases of AFS debt securities, $193 million in purchases of HTM debt securities, $5.75 million in additional investments in equity investments and $2.49 million in purchases of premises and equipment. These uses of cash were partially offset by $184 million in proceeds from maturities and calls of AFS debt securities, $24.6 million in proceeds from maturities and calls of HTM debt securities and $4.98 million in receipts from equity investments. Net cash provided by financing activities of $728 million consisted primarily of a net increase in deposits of $762 million, which was partially offset by the repayment of long-term debt of $15.6 million and payment of cash dividends on common and preferred stock of $17.6 million. In the opinion of management, our liquidity position at March 31, 2021 was sufficient to meet our expected cash flow requirements.

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Capital Resources and Dividends
 
Shareholders’ equity at March 31, 2021 was $2.03 billion, an increase of $23.6 million from December 31, 2020 primarily due to year-to-date earnings partially offset by dividends declared and a decrease in the value of AFS securities.

The following table shows capital ratios, as calculated under applicable regulatory guidelines, at March 31, 2021 and December 31, 2020. As of March 31, 2021, capital levels remained characterized as “well-capitalized” under prompt corrective action provisions in effect at the time. The decrease in the Bank’s ratios as of March 31, 2021 was primarily attributable to a dividend paid to the Holding Company.

Additional information related to capital ratios, as calculated under regulatory guidelines, as of March 31, 2021 and December 31, 2020, is provided in Note 10 to the consolidated financial statements.

Table 14 – Capital Ratios
United Community Banks, Inc.
(Consolidated)
United Community Bank
MinimumWell-
Capitalized
Minimum Capital Plus Capital Conservation BufferMarch 31,
2021
December 31,
2020
March 31,
2021
December 31,
2020
Risk-based ratios:
CET1 capital4.5 %6.5 %7.0 %12.34 %12.31 %12.80 %13.31 %
Tier 1 capital6.0 8.0 8.5 13.11 13.10 12.80 13.31 
Total capital8.0 10.0 10.5 14.92 15.15 13.66 14.28 
Leverage ratio4.0 5.0 N/A9.39 9.28 9.13 9.42 

Effect of Inflation and Changing Prices
 
A bank’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature with relatively little investment in fixed assets or inventories. Inflation has an important effect on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio.
 
Management believes the effect of inflation on financial results depends on our ability to react to changes in interest rates, and by such reaction, reduce the inflationary effect on performance. We have an asset/liability management program to manage interest rate sensitivity. In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.

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Item 3.    Quantitative and Qualitative Disclosure About Market Risk
 
There have been no material changes in our market risk as of March 31, 2021 from that presented in our 2020 10-K. Our interest rate sensitivity position at March 31, 2021 is set forth in Table 13 in MD&A of this Report and incorporated herein by this reference.
 
Item 4.    Controls and Procedures

    (a) Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures (as such term is defined in Exchange Act Rule 13a-15(e)) as of March 31, 2021. Based on that evaluation, our principal executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

    (b) Changes in Internal Control Over Financial Reporting. No change in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended March 31, 2021 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION 

Item 1. Legal Proceedings
 
In the ordinary course of business, the Holding Company and the Bank are parties to various legal proceedings. Additionally, in the ordinary course of business, the Holding Company and the Bank are subject to regulatory examinations and investigations. Based on our current knowledge and advice of counsel, in the opinion of management there is no such pending or threatened legal matter which would result in a material adverse effect upon our consolidated financial condition or results of operations.

Items 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on February 25, 2021.

Item 6. Exhibits

(d)     Exhibits. See Exhibit Index below.

EXHIBIT INDEX
Exhibit No. Description
 
 
 
101
Interactive data files for United Community Bank, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL: (i) the Consolidated Balance Sheets (unaudited); (ii) the Consolidated Statements of Income (unaudited); (iii) the Consolidated Statements of Comprehensive Income (unaudited); (iv) the Consolidated Statements in Shareholders’ Equity (unaudited); (v) the Consolidated Statements of Cash Flows (unaudited); and (vi) the Notes to Consolidated Financial Statements (unaudited).
104
The cover page from United Community Bank’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (formatted in Inline XBRL and included in Exhibit 101)



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Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 UNITED COMMUNITY BANKS, INC.
  
 /s/ H. Lynn Harton
 H. Lynn Harton
 President and Chief Executive Officer
 (Principal Executive Officer)
  
 /s/ Jefferson L. Harralson
 Jefferson L. Harralson
 Executive Vice President and Chief Financial Officer
 (Principal Financial Officer)
  
 /s/ Alan H. Kumler
 Alan H. Kumler
 Senior Vice President and Chief Accounting Officer
 (Principal Accounting Officer)
  
 Date: May 7, 2021
 

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