UNITED BANKSHARES INC/WV
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2022
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: 002-86947
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
(Address of principal executive offices) |
Zip Code | |
Registrant’s telephone number, including area code: (304 ) 424-8716
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
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 Data File required to be submitted pursuant to Rule 405 of Regulation Yes ☒ No ☐
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).Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, 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.| ☒ | Accelerated filer | ☐ | ||||
Non-accelerated filer |
☐ | Smaller reporting company | ||||
| Emerging growth company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule ☒
12b-2
of the Act). Yes ☐ No
As of , the registrant had 134,592,185 shares of common stock, $2.50 par value per share, outstanding.
July
31
, 2022UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM
10-Q
TABLE OF CONTENTS
| Page | ||||
| PART I. FINANCIAL INFORMATION |
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| Item 1. Financial Statements |
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| 4 | ||||
| 5 | ||||
| 7 | ||||
| 8 | ||||
| 10 | ||||
| 11 | ||||
| 62 | ||||
| 83 | ||||
| 86 | ||||
| PART II. OTHER INFORMATION |
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| 87 | ||||
| 87 | ||||
| 88 | ||||
| 88 | ||||
| 88 | ||||
| 88 | ||||
| 89 | ||||
| 91 | ||||
2
PART I - FINANCIAL INFORMATION
Item 1. |
FINANCIAL STATEMENTS (UNAUDITED) |
The June 30, 2022 and December 31, 2021, consolidated balance sheets of United Bankshares, Inc. and Subsidiaries (“United” or the “Company”), consolidated statements of income and comprehensive income for the three and six months ended June 30, 2022 and 2021, the related consolidated statement of changes in shareholders’ equity for the three and six months ended June 30, 2022 and 2021, the related condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021, and the notes to consolidated financial statements appear on the following pages.
3
CONSOLIDATED BALANCE SHEETS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except par value) |
June 30 2022 |
December 31 2021 |
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| Assets |
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| Cash and due from banks |
$ | $ | ||||||
| Interest-bearing deposits with other banks |
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| Federal funds sold |
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| Total cash and cash equivalents |
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| Securities available for sale at estimated fair value (amortized cost-$ |
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| Securities held to maturity, net of allowance for credit losses of $ |
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| Equity securities at estimated fair value |
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| Other investment securities |
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| Loans held for sale measured using fair value option |
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| Loans and leases |
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| Less: Unearned income |
( |
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| Loans and leases, net of unearned income |
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| Less: Allowance for loan and lease losses |
( |
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| Net loans and leases |
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| Bank premises and equipment |
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| Operating lease right-of-use |
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| Goodwill |
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| Mortgage servicing rights, net of valuation allowance of $ |
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| Bank-owned life insurance (“BOLI”) |
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| Accrued interest receivable, net of allowance for credit losses of $ |
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| Other assets |
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| TOTAL ASSETS |
$ | $ | ||||||
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| Liabilities |
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| Deposits: |
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| Noninterest-bearing |
$ | $ | ||||||
| Interest-bearing |
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| Total deposits |
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| Borrowings: |
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| Securities sold under agreements to repurchase |
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| Federal Home Loan Bank (“FHLB”) borrowings |
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| Other long-term borrowings |
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| Reserve for lending-related commitments |
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| Operating lease liabilities |
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| Accrued expenses and other liabilities |
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| TOTAL LIABILITIES |
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| Shareholders’ Equity |
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| Preferred stock, $ Authorized- shares, |
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| Common stock, $ Authorized- shares; issued- and |
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| Surplus |
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| Retained earnings |
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| Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
| Treasury stock, at cost |
( |
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) | ||||
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| TOTAL SHAREHOLDERS’ EQUITY |
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| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | $ | ||||||
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See notes to consolidated unaudited financial statements.
4
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data) |
Three Months Ended June 30 |
Six Months Ended June 30 |
||||||||||||||
2022 |
2021 |
2022 |
2021 |
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| Interest income |
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| Interest and fees on loans |
$ | $ | $ | $ | ||||||||||||
| Interest on federal funds sold and other short-term investments |
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| Interest and dividends on securities: |
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| Taxable |
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| Tax-exempt |
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| Total interest income |
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| Interest expense |
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| Interest on deposits |
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| Interest on short-term borrowings |
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| Interest on long-term borrowings |
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| Total interest expense |
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| Net interest income |
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| Provision for credit losses |
( |
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| Net interest income after provision for credit losses |
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| Other income |
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| Fees from trust services |
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| Fees from brokerage services |
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| Fees from deposit services |
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| Bankcard fees and merchant discounts |
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| Other service charges, commissions, and fees |
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| Income from bank-owned life insurance |
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| Income from mortgage banking activities |
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| Mortgage loan servicing income |
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| Net investment securities gains |
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| Other income |
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| Total other income |
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| Other expense |
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| Employee compensation |
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| Employee benefits |
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| Net occupancy expense |
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| Other real estate owned (“OREO”) expense |
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| Net gains on the sales of OREO properties |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Equipment expense |
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| Data processing expense |
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| Mortgage loan servicing expense and impairment |
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| Bankcard processing expense |
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| FDIC insurance expense |
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| Other expense |
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| Total other expense |
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| Income before income taxes |
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| Income taxes |
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| Net income |
$ | $ | $ | $ | ||||||||||||
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5
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) - continued
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data) |
Three Months Ended June 30 |
Six Months Ended June 30 |
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2022 |
2021 |
2022 |
2021 |
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| Earnings per common share: |
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| Basic |
$ | $ | $ |
$ | ||||||||||||
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| Diluted |
$ | $ | $ | $ | ||||||||||||
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| Average outstanding shares: |
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| Basic |
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| Diluted |
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See notes to consolidated unaudited financial statements
6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands) |
Three Months Ended June 30 |
Six Months Ended June 30 |
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2022 |
2021 |
2022 |
2021 |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Change in net unrealized (loss) gain on available-for-sale |
( |
) | ( |
) | ( |
) | ||||||||||
| Change in net unrealized gain (loss) on cash flow hedge, net of tax |
( |
) | ||||||||||||||
| Change in pension plan assets, net of tax |
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| Comprehensive (loss) income, net of tax |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
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See notes to consolidated unaudited financial statements
7
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data) |
Six Months Ended June 30, 2022 |
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Common Stock |
Accumulated Other Comprehensive Income (Loss) |
Total Shareholders’ Equity |
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Shares |
Par Value |
Surplus |
Retained Earnings |
Treasury Stock |
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| Balance at January 1, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
| Comprehensive income: |
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| Net income |
0 | |||||||||||||||||||||||||||
| Other comprehensive loss, net of tax |
0 | ( |
) | ( |
) | |||||||||||||||||||||||
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| Total comprehensive loss, net of tax |
( |
) | ||||||||||||||||||||||||||
| Stock based compensation expense |
0 | |||||||||||||||||||||||||||
| Stock grant forfeiture ( |
0 | ( |
) | |||||||||||||||||||||||||
| Purchase of treasury stock ( |
0 | ( |
) | ( |
) | |||||||||||||||||||||||
| Cash dividends ($ |
0 | ( |
) | ( |
) | |||||||||||||||||||||||
| Net issuance of common stock under stock-based compensation plans ( |
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| Balance at March 31, 2022 |
( |
) | ( |
) | ||||||||||||||||||||||||
| Comprehensive income: |
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| Net income |
0 | |||||||||||||||||||||||||||
| Other comprehensive loss , net of tax |
0 | ( |
) | ( |
) | |||||||||||||||||||||||
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| Total comprehensive loss , net of tax |
( |
) | ||||||||||||||||||||||||||
| Stock based compensation expense |
0 | 3 | ||||||||||||||||||||||||||
| Purchase of treasury stock ( |
0 | ( |
) | ( |
) | |||||||||||||||||||||||
| Cash dividends ($ |
0 | ( |
) | ( |
) | |||||||||||||||||||||||
| Stock grant forfeiture ( |
0 | ( |
) | |||||||||||||||||||||||||
| Net issuance of common stock under stock-based compensation plans ( |
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| Balance at June 30, 2022 |
$ | $ |
$ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||
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See notes to consolidated unaudited financial statements.
8
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data) |
Six Months Ended June 30, 2021 |
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Common Stock |
Accumulated Other Comprehensive Income (Loss) |
Total Shareholders’ Equity |
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Shares |
Par Value |
Surplus |
Retained Earnings |
Treasury Stock |
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| Balance at January 1, 2021 |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||
| Comprehensive income: |
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| Net income |
0 | |||||||||||||||||||||||||||
| Other comprehensive income, net of tax |
0 | ( |
) | ( |
) | |||||||||||||||||||||||
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| Total comprehensive income, net of tax |
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| Stock based compensation expense |
0 | |||||||||||||||||||||||||||
| Purchase of treasury stock ( |
0 | ( |
) | ( |
) | |||||||||||||||||||||||
| Cash dividends ($ |
0 | ( |
) | ( |
) | |||||||||||||||||||||||
| Net issuance of common stock under stock-based compensation plans ( |
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| Balance at March 31, 2021 |
( |
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| Comprehensive income: |
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| Net income |
0 | |||||||||||||||||||||||||||
| Other comprehensive income, net of tax |
0 | |||||||||||||||||||||||||||
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| Total comprehensive income, net of tax |
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| Stock based compensation expense |
0 | |||||||||||||||||||||||||||
| Cash dividends ($ |
0 | ( |
) | ( |
) | |||||||||||||||||||||||
| Stock grant forfeiture ( |
0 | ( |
) | |||||||||||||||||||||||||
| Net issuance of common stock under stock-based compensation plans ( |
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| Balance at June 30, 2021 |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||
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See notes to consolidated unaudited financial statements.
9
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
Six Months Ended |
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June 30 |
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2022 |
2021 |
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| NET CASH PROVIDED BY OPERATING ACTIVITIES |
$ | $ | ||||||
| INVESTING ACTIVITIES |
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| Proceeds from maturities and calls of securities held to maturity |
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| Proceeds from sales of securities available for sale |
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| Proceeds from maturities and calls of securities available for sale |
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| Purchases of securities available for sale |
( |
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| Proceeds from sales of equity securities |
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| Purchases of equity securities |
( |
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| Proceeds from sales and redemptions of other investment securities |
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| Purchases of other investment securities |
( |
) | ( |
) | ||||
| Purchases of bank-owned life insurance policies |
( |
) | ||||||
| Redemption of bank-owned life insurance policies |
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| Purchases of bank premises and equipment |
( |
) | ( |
) | ||||
| Proceeds from sales of bank premises and equipment |
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| Proceeds from the sales of OREO properties |
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| Net change in loans |
( |
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| NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES |
( |
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| FINANCING ACTIVITIES |
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| Cash dividends paid |
( |
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| Acquisition of treasury stock |
( |
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| Proceeds from exercise of stock options |
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| Repayment of long-term Federal Home Loan Bank borrowings |
( |
) | ( |
) | ||||
| Proceeds from issuance of long-term Federal Home Loan Bank borrowings |
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| Changes in: |
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| Deposits |
( |
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| Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings |
( |
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| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
( |
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| (Decrease) Increase in cash and cash equivalents |
( |
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| Cash and cash equivalents at beginning of year |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
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| Supplemental information |
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| Noncash investing activities: |
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| Transfers of loans to OREO |
$ | $ | ||||||
| Transfers of loans to bank premises and equipment |
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| Acquisitions: |
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| Assets acquired, net of cash |
( |
) | ( |
) | ||||
| Liabilities assumed |
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| Goodwill |
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See notes to consolidated unaudited financial statements
.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated interim financial statements of United Bankshares, Inc. and Subsidiaries (“United” or “the Company”) have been prepared in accordance with accounting principles for interim financial information generally accepted in the United States (“GAAP”) and with the instructions for Form
10-Q
and Article 10 of Regulation S-X.
Accordingly, the financial statements do not contain all of the information and footnotes required by accounting principles generally accepted in the United States. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The financial statements presented as of June 30, 2022 and 2021 and for the three-month and six-month
periods then ended have not been audited. The Notes to Consolidated Financial Statements appearing in United’s 2021 Annual Report on Form 10-K,
which includes descriptions of significant accounting policies, should be read in conjunction with these interim financial statements. In the opinion of management, any adjustments necessary for a fair presentation of financial position and results of operations for the interim periods have been made. Such adjustments are of a normal and recurring nature. The accompanying consolidated interim financial statements include the accounts of United and its wholly-owned subsidiaries. United operates in two business segments: community banking and mortgage banking. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Information is presented in these notes to the unaudited consolidated interim financial statements with dollars expressed in thousands, except per share or unless otherwise noted.
New Accounting Standards
In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 202203, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.”
-
ASU 2022-03
clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03
also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction and requires certain new disclosures for equity securities subject to contractual sale restrictions. ASU 2022-03
will be effective for United on January 1, 2024 though early adoption is permitted. The adoption of ASU 2022-03
is not expected to have a material impact on the Company’s financial condition or results of operations. In March 2022, the FASB issued ASU
No. 2022-02,
“Troubled Debt Restructurings and Vintage Disclosures”. ASU 2022-02
updates the requirements for accounting for credit losses under ASC 326, eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310-40,
and enhances creditors’ disclosure requirements related to loan refinancings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02
also amends the guidance on “vintage disclosures” to require disclosure of gross write-offs by year of origination. ASU No. 2022-02
is effective for public business entities that have adopted Topic 326 for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption of the amendment is permitted. The Company is assessing the impact ASU No. 2022-02
will have on the Company’s disclosures, financial condition or results of operations. In March 2022, the FASB issued ASU method, which was first introduced in ASU
No. 2022-01,
“Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method”. ASU 2022-01
further aligns risk management objectives with hedge accounting results on the application of the last-of-layer
No. 2017-12.
The enhanced guidance further improves the 11
last-of-layer
2022-01
also provides guidance on the relationship between the portfolio layer method requirements and other areas of GAAP. ASU No. 2022-01
is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption of the amendment is permitted if an entity has adopted ASU 2017-12
for the corresponding period. ASU No. 2022-01
is not expected to have a material impact on the Company’s financial condition or results of operations. In October 2021, the FASB issued ASU
No. 2021-08,
“Business Combinations (Topic 805): Accounting for contract assets and contract liabilities from contracts with customers”. ASU 2021-08
amends ASC 805 to add contract assets and contract liabilities to the list of exceptions to the recognition and measurement principles that apply to business combinations and to require that an entity acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. As a result of these amendments, it is expected that an acquirer will generally recognize and measure acquired contract assets and contract liabilities in a manner consistent with how the acquiree recognized and measured them in its preacquisition financial statements. ASU No. 2021-08
is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted. ASU No. 2021-08
is not expected to have a material impact on the Company’s financial condition or results of operations. In July 2021, the FASB issued ASU and the lessor would not derecognize the underlying asset over its useful life. ASU
No. 2021-05,
“Leases (Topic 842): Lessors-Certain Leases with Variable Lease Payments (Topic 848)”. This new guidance requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease at lease commencement if the lease would have been classified as a sales-type lease or direct financing lease in accordance with the classification criteria in ASC 842-10-25-2
25-3,
respectively and if the lessor would have recognized a selling loss at lease commencement. When applying the guidance in ASC 842-10-24-3A,
No. 2021-05
is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Entities may elect to adopt the amendments through either a retrospective application to leases that commenced or were modified after the beginning of the period in which ASC 842 was adopted or a prospective application to leases that commence or are modified subsequent to the date the amendments in ASU 2021-05
are first applied. ASU No. 2021-05
was adopted by United on January 1, 2022 on a prospective basis. The adoption did not have a material impact on the Company’s financial condition or results of operations. In January 2021, the FASB issued ASU
No. 2021-01,
“Reference Rate Reform (Topic 848).” This update to ASU No. 2020-04,
“Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” refines the scope of ASC Topic 848 and permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by change in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities under way in global financial markets. ASU No. 2021-01
is effective for public business entities upon issuance through December 31, 2022. United is implementing a transition plan to identify and modify its loans and other financial instruments with attributes that are either directly or indirectly influenced by LIBOR. In addition, United took steps to ensure that no new contracts using LIBOR are originated after December 31, 2021. At this time, United is prioritizing the Secured Overnight Financing Rate (“SOFR”) and Prime as the preferred alternatives to LIBOR; however, these preferred alternatives could change over time based on market developments. In August 2020, the FASB issued
No. 2020-06,
“Debt – Debt with Conversion and Other Options (Subtopic 470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40).”
The amendments in the ASU remove certain separation models for convertible debt instruments and convertible preferred stock that require the separation of a convertible debt instrument into a debt component and an equity or derivative component. The ASU also amends the derivative scope exception guidance for contracts in an entity’s own equity. The amendments remove three settlement conditions that are required for equity contracts to qualify for the derivative scope exception. In addition, the ASU expands 12
disclosure requirements for convertible instruments and simplifies areas of the guidance for diluted calculations that are impacted by the amendments. ASU
earnings-per-share
No. 2020-06
is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Entities may elect to adopt the amendments through either a modified retrospective method of transition or a fully retrospective method of transition. ASU No. 2020-06
was adopted by United on January 1, 2022. The adoption did not have a material impact on the Company’s financial condition or results of operations. In March 2020, the FASB issued ASU
No. 2020-04,
“Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides “optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.” ASU No. 2020-04
is effective for public business entities on March 12, 2020 through December 31, 2022. See information above under ASU No. 2021-01
for an update on the steps United has taken to transition away from LIBOR for its loan and other financial instruments. 2. MERGERS AND ACQUISITIONS
On December 3, 2021 (the “Acquisition Date”), United completed its acquisition of Community Bankers Trust Corporation (“Community Bankers Trust”). Community Bankers Trust was merged with and into United (the “Merger”), pursuant to the terms of the Agreement and Plan of Reorganization, dated June 2, 2021, by and between United and Community Bankers Trust (the “Agreement”).
Under the terms of the Agreement, each outstanding share of common stock of Community Bankers Trust was converted into the right to receive 0.3173 shares of United common stock, par value $2.50 per share. Also, pursuant to the Agreement, at the effective time of the Merger, each outstanding Community Bankers Trust stock option granted under a Community Bankers Trust stock plan, whether vested or unvested as of the date of the Merger, vested as provided pursuant to the terms of such Community Bankers Trust stock plan and converted into an option to acquire United common stock adjusted based on the 0.3173 exchange ratio. Also, at the effective time of the Merger, each restricted stock unit granted under a Community Bankers Trust stock plan that was outstanding immediately prior to the effective time of the Merger vested in accordance with the formula and other terms of the Community Bankers Trust stock plan and converted into the right to receive shares of United common stock based on the 0.3173 exchange ratio.
Immediately following the Merger, Essex Bank, a wholly-owned subsidiary of Community Bankers Trust, merged with and into United Bank, a wholly-owned subsidiary of United (the “Bank Merger”) pursuant to an Agreement and Plan of Merger, dated June 2, 2021. United Bank survived the Bank Merger and continues to exist as a Virginia banking corporation.
The Merger was accounted for under the acquisition method of accounting. The results of operations of Community Bankers Trust are included in the consolidated results of operations from the Acquisition Date. The acquisition of Community Bankers Trust enhanced United’s existing presence in the DC Metro MSA and took United into new markets including Baltimore, Annapolis, Lynchburg, Richmond, and the Northern Neck of Virginia. It also strategically connected our 1,788,013 in total assets, $1,282,997 in loans and leases, net of unearned income and $1,517,502 in deposits.
Mid-Atlantic
and Southeast footprints. As of the Acquisition Date, Community Bankers Trust had $The aggregate purchase price was $260,304 , including common stock valued at $252,321 , stock options assumed valued at $7,958 , and cash paid for fractional shares of $25 . The number of shares issued in the transaction was 7,135,771 , which were valued based on the closing market price of $35.36 for United’s common shares on December 3, 2021. The preliminary purchase price has been allocated to the identifiable tangible and intangible assets resulting in preliminary additions to goodwill and core deposit intangibles of $78,849 and $3,398 , respectively. The goodwill recognized results from the expected synergies and potential earnings from the combination of United and Community Bankers Trust. The core deposit intangible is expected to be amortized on an accelerated basis over ten years.
13
acquired split between $12,788 for purchased credit deteriorated (“PCD”) loans which is part of the acquisition date fair value, and $13,132 for non-PCD loans recorded to the provision for credit losses. The discounts and premium amounts, except for discount on the land, OREO and FHLB advances acquired, are being accreted or amortized on an accelerated or straight-line basis, based on the type of asset or liability, over each asset’s or liability’s estimated remaining life at the time of acquisition. The FHLB advances acquired were subsequently repaid prior to year-end. At June 30, 2022, the discount on the trust preferred issuance had an estimated remaining life of 11.75 years and the premiums on the buildings, and interest-bearing deposits each had an average estimated remaining life of 30.75 years, and 4.75 years, respectively.
Portfolio
loans and leases acquired from Community Bankers Trust were recorded at their fair value at the Acquisition Date based on a discounted cash flow methodology. The estimated fair value incorporates adjustments related to market loss assumptions and prevailing market interest rates for comparable assets and other market factors such as liquidity from the perspective of a market participant. Also, acquired portfolio loans and leases were evaluated upon acquisition and classified as either PCD, which indicates that the loan has experienced a more-than-insignificant deterioration in credit quality since origination, or
non-PCD.
United considered a variety of factors in evaluating the acquired loans and leases for a more-than-insignificant deterioration in credit quality, including but not limited to risk grades, delinquency, nonperforming status, current or previous troubled debt restructurings or bankruptcies, watch list credits and other qualitative factors that indicated a deterioration in credit quality since origination. For PCD loans and leases, an initial allowance is determined based on the same methodology as other portfolio loans and leases. This initial allowance for credit losses is allocated to individual PCD loans and leases and added to the acquisition date fair values to establish the initial amortized cost basis for the PCD loans and leases. The difference between the unpaid principal balance (“UPB”), or par value, of PCD loans and leases and the amortized cost basis is considered to relate to noncredit factors and resulted in a discount of $
at the Acquisition Date. This discount will be recognized through interest income on a level-yield method over the life of the loans which is estimated to be a weighted-average of
years. For
non-PCD
acquired loans and leases, the differences between the initial fair value and the UPB, or par value, are recognized as interest income on a level-yield basis over the lives of the related loans and leases which is estimated to be a weighted-average of
years. The total fair value mark on the
non-PCD
loans and leases at the Acquisition Date was $
. At the Acquisition Date, an initial allowance for expected credit losses of $
was recorded with a corresponding charge to the provision for credit losses in the Consolidated Statements of Income. Subsequent changes in the allowance for credit losses related to PCD and
non-PCD
loans and leases are recognized in the provision for credit losses.
The following table provides a reconciliation of the difference between the purchase price and the par value of portfolio PCD loans and leases acquired from Community Bankers Trust as of the Acquisition Date:
Purchase price of PCD loans and leases at acquisition |
$ | |||
Allowance for credit losses at acquisition |
||||
Non-credit discount at acquisition |
||||
Par value (UPB) of acquired PCD loans and leases at acquisition |
$ | |||
14
The consideration paid for Community Bankers Trust’s common equity and the preliminary amounts of acquired identifiable assets and liabilities assumed as of the Acquisition Date were as follows:
Purchase price: |
||||
Value of common shares issued ( |
$ | |||
Fair value of stock options assumed |
||||
Cash for fractional shares |
||||
Total purchase price |
||||
Identifiable assets: |
||||
Cash and cash equivalents |
||||
Investment securities |
||||
Net loans and leases |
||||
Premises and equipment |
||||
Operating lease right-of-use |
||||
Core deposit intangible |
||||
Other assets |
||||
Total identifiable assets |
$ | |||
Identifiable liabilities : |
||||
Deposits |
$ | |||
Short-term borrowings |
||||
Long-term borrowings |
||||
Operating lease liability |
||||
Other liabilities |
||||
Total identifiable liabilities |
||||
Preliminary fair value of net assets acquired including identifiable intangible assets |
||||
Preliminary resulting goodwill |
$ | |||
The following table presents certain unaudited pro forma information for the results of operations for the first six months of 2021, as if the Merger had occurred on January 1, 2021. These results combine the historical results of Community Bankers Trust into United’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on the indicated date nor are they intended to represent or be indicative of future results of operations. In particular, no adjustments have been made to eliminate the amount of Community Bankers Trust’s provision for credit losses for the first six months of 2021 that may not have been necessary had the acquired loans and leases been recorded at fair value as of the beginning of 2021. Additionally, United expects to achieve operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts.
Proforma Six Months Ended June 30, 2021 |
||||
Total Revenues (1) |
$ | |||
Net Income |
||||
(1) |
Represents net interest income plus other income |
15
3. INVESTMENT SECURITIES
Securities Available for Sale
Securities held for indefinite periods of time are classified as available for sale and carried at estimated fair value. The amortized cost, estimated fair values, and allowance for credit losses of securities available for sale are summarized as follows.
June 30, 2022 |
||||||||||||||||||||
Gross |
Gross |
Allowance |
Estimated |
|||||||||||||||||
Amortized |
Unrealized |
Unrealized |
For Credit |
Fair |
||||||||||||||||
Cost |
Gains |
Losses |
Losses |
Value |
||||||||||||||||
| U.S. Treasury securities and obligations of U.S. Government corporations and agencies |
$ | $ | $ | $ | $ | |||||||||||||||
| State and political subdivisions |
||||||||||||||||||||
| Residential mortgage-backed securities |
||||||||||||||||||||
| Agency |
||||||||||||||||||||
| Non-agency |
||||||||||||||||||||
| Commercial mortgage-backed securities |
||||||||||||||||||||
| Agency |
||||||||||||||||||||
| Asset-backed securities |
||||||||||||||||||||
| Single issue trust preferred securities |
||||||||||||||||||||
| Other corporate securities |
||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | $ | $ | $ | $ | |||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2021 |
||||||||||||||||||||
Gross |
Gross |
Allowance |
Estimated |
|||||||||||||||||
Amortized |
Unrealized |
Unrealized |
For Credit |
Fair |
||||||||||||||||
Cost |
Gains |
Losses |
Losses |
Value |
||||||||||||||||
| U.S. Treasury securities and obligations of U.S. Government corporations and agencies |
$ | $ | $ | $ | $ | |||||||||||||||
| State and political subdivisions |
||||||||||||||||||||
| Residential mortgage-backed securities |
||||||||||||||||||||
| Agency |
||||||||||||||||||||
| Non-agency |
||||||||||||||||||||
| Commercial mortgage-backed securities |
||||||||||||||||||||
| Agency |
||||||||||||||||||||
| Asset-backed securities |
||||||||||||||||||||
| Single issue trust preferred securities |
||||||||||||||||||||
| Other corporate securities |
||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | $ | $ | $ | $ | |||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
United excludes accrued interest from the amortized cost basis of debt securities and report accrued interest separately in “Accrued interest receivable” in the consolidated balance sheets. debt securities are placed on debt securities. The table above excludes accrued interest receivable of $20,039 and $15,353 at June 30, 2022 and December 31, 2021, respectively, that is recorded in “Accrued interest receivable.”
available-for-sale
Available-for-sale
non-accrual
status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on non-accrual
status. Accordingly, United does not currently recognize an allowance for credit loss against accrued interest receivable on available-for-sale
16
The following is a summary of securities available for sale which were in an unrealized loss position at June 30, 2022 and December 31, 2021.
Less than 12 months |
12 months or longer |
Total |
||||||||||||||||||||||
Fair |
Unrealized |
Fair |
Unrealized |
Fair |
Unrealized |
|||||||||||||||||||
Value |
Losses |
Value |
Losses |
Value |
Losses |
|||||||||||||||||||
| June 30, 2022 |
||||||||||||||||||||||||
| U.S. Treasury securities and obligations of U.S. Government corporations and agencies |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| State and political subdivisions |
||||||||||||||||||||||||
| Residential mortgage-backed securities |
||||||||||||||||||||||||
| Agency |
||||||||||||||||||||||||
| Non-agency |
||||||||||||||||||||||||
| Commercial mortgage-backed securities |
||||||||||||||||||||||||
| Agency |
||||||||||||||||||||||||
| Asset-backed securities |
||||||||||||||||||||||||
| Single issue trust preferred securities |
||||||||||||||||||||||||
| Other corporate securities |
||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Less than 12 months |
12 months or longer |
Total |
||||||||||||||||||||||
Fair |
Unrealized |
Fair |
Unrealized |
Fair |
Unrealized |
|||||||||||||||||||
Value |
Losses |
Value |
Losses |
Value |
Losses |
|||||||||||||||||||
| December 31, 2021 |
||||||||||||||||||||||||
| U.S. Treasury securities and obligations of U.S. Government corporations and agencies |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| State and political subdivisions |
||||||||||||||||||||||||
| Residential mortgage-backed securities |
||||||||||||||||||||||||
| Agency |
||||||||||||||||||||||||
| Non-agency |
||||||||||||||||||||||||
| Commercial mortgage-backed securities |
||||||||||||||||||||||||
| Agency |
||||||||||||||||||||||||
| Asset-backed securities |
||||||||||||||||||||||||
| Single issue trust preferred securities |
||||||||||||||||||||||||
| Other corporate securities |
||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The following table shows the proceeds from maturities, sales and calls of available for sale securities and the gross realized gains and losses on sales and calls of those securities that have been included in earnings as a result of any sales and calls. Gains or losses on sales and calls of available for sale securities were recognized by the specific identification method.
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Proceeds from sales and calls |
$ | $ | $ | $ | ||||||||||||
| Gross realized gains |
||||||||||||||||
| Gross realized losses |
||||||||||||||||
17
At June 30, 2022, gross unrealized losses on available for sale securities were $341,906 on 1,374 securities of a total portfolio of 1,543 available for sale securities. Securities with the most significant gross unrealized losses at June 30, 2022 consisted primarily of agency residential mortgage-backed securities, state and political subdivision securities, agency commercial mortgage-backed securities, asset-backed securities and other corporate securities.
In determining whether or not a security is impaired, management considered the severity of the loss in conjunction with United’s positive intent and the more likely than not ability to hold these securities to recovery of their cost basis or maturity. Management believes the significant amount of gross unrealized losses on available for sale securities at June 30, 2022 was primarily the result of rising interest rates and does not reflect any expected credit losses.
State and political subdivisions
United’s state and political subdivisions portfolio relates to securities issued by various municipalities located throughout the United States. The total amortized cost of available for sale state and political subdivision securities was $836,622 at June 30, 2022. As of June 30, 2022, approximately 53 % of the portfolio was supported by the general obligation of the issuing municipality, which allows for the securities to be repaid by any means available to the municipality. The majority of the portfolio was rated AA or higher, and no securities within the portfolio were rated below investment grade as of June 30, 2022. In addition to monitoring the credit ratings of these securities, management also evaluates the financial performance of the underlying issuers on an ongoing basis. Based upon management’s analysis and judgment, it was determined that none of the state and political subdivision securities had credit losses at June 30, 2022.
Agency mortgage-backed securities
United’s agency mortgage-backed securities portfolio relates to securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae. The total amortized cost of available for sale agency mortgage-backed securities was $2,111,407 at June 30, 2022. Of the $2,111,407 amount, $686,470 was related to agency commercial mortgage-backed securities and $1,424,937 was related to agency residential mortgage-backed securities. Each of the agency mortgage-backed securities provides a guarantee of full and timely payments of principal and interest by the issuing agency. Based upon management’s analysis and judgment, it was determined that none of the agency mortgage-backed securities had credit losses at June 30, 2022.
Non-agency
residential mortgage-backed securities United’s 114,692 at June 30, 2022. Of the $114,692 , 100 % was rated AAA. Based upon management’s analysis and judgment, it was determined that no ne of the
non-agency
residential mortgage-backed securities portfolio relates to securities of various private label issuers. The total amortized cost of available for sale non-agency
residential mortgage-backed securities was $non-agency
residential mortgage-backed securities had credit losses at June 30, 2022. Asset-backed securities
As of June 30, 2022, United’s asset-backed securities portfolio had a total amortized cost balance of $953,347 . 100 % of the portfolio was investment grade rated as of June 30, 2022. Approximately 31 % of the portfolio relates to securities that are backed by Federal Family Education Loan Program (“FFELP”) student loan collateral which includes a minimum of a 97 % government repayment guaranty, as well as additional credit support and subordination in excess of the government guaranteed portion. Approximately 69 % of the portfolio relates to collateralized loan obligation securities that are all AAA rated. Upon reviewing this portfolio for the second quarter of 2022, it was determined that no ne of the asset-backed securities had credit losses.
18
Single issue trust preferred securities
The majority of United’s single issue trust preferred portfolio consists of obligations from large cap banks (i.e. banks with market capitalization in excess of $10 billion). All single issue trust preferred securities are currently receiving interest payments. The amortized cost of available for sale single issue trust preferred securities as of June 30, 2022 consisted of $8,461 in investment grade bonds, $3,078 in split rated bonds, and $5,777 in unrated bonds. Management reviews each issuer’s current and projected earnings trends, asset quality, capitalization levels, and other key factors. Upon completing the review for the second quarter of 2022, it was determined that none of the single issue trust preferred securities had credit losses.
Other corporate securities
As of June 30, 2022, United’s other corporate securities portfolio had a total amortized cost balance of $617,171 . The majority of the portfolio consisted of debt issuances of corporations representing a variety of industries, including financial institutions. Of the $617,171 total amortized cost balance, 96 % was investment grade rated, 2 % was below investment grade rated, 1 % was split rated, and 1 % was unrated. For corporate securities, management has evaluated the near-term prospects of the investment in relation to the severity of any unrealized loss. Based upon management’s analysis and judgment, it was determined that none of the corporate securities had credit losses at June 30, 2022.
The amortized cost and estimated fair value of securities available for sale at June 30, 2022 and December 31, 2021 by contractual maturity are shown as follows. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations without penalties.
June 30, 2022 |
December 31, 2021 |
|||||||||||||||
Estimated |
Estimated |
|||||||||||||||
Amortized |
Fair |
Amortized |
Fair |
|||||||||||||
Cost |
Value |
Cost |
Value |
|||||||||||||
| Due in one year or less |
$ | $ | $ | $ | ||||||||||||
| Due after one year through five years |
||||||||||||||||
| Due after five years through ten years |
||||||||||||||||
| Due after ten years |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ | $ | $ | $ | 4,042,699 | |||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Equity securities at fair value
Equity securities consist mainly of equity securities of financial institutions and mutual funds within a rabbi trust for the payment of benefits under a deferred compensation plan for certain key officers of United and its subsidiaries. The fair value of United’s equity securities was $13,513 at June 30, 2022 and $12,404 at December 31, 2021.
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Net gains recognized during the period on equity securities sold |
$ | $ | $ | $ | ||||||||||||
| Unrealized gains recognized during the period on equity securities still held at period end |
||||||||||||||||
| Unrealized losses recognized during the period on equity securities still held at period end |
( |
) | ( |
) | ( |
) | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net (losses) gains recognized during the period |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
Other investment securities
During the second quarter of 2022, United evaluated all of its cost method investments to determine if certain events or changes in circumstances during the second quarter of 2022 had a significant adverse effect on the fair value of any of its cost method securities. United determined that there was no individual security that experienced an adverse event during the second quarter. There were no other events or changes in circumstances during the second quarter which would have an adverse effect on the fair value of its cost method securities
19
4. LOANS AND LEASES
Major classes of loans and leases are as follows:
June 30, 2022 |
December 31, 2021 |
|||||||
| Commercial, financial and agricultural: |
||||||||
| Owner-occupied commercial real estate |
$ | $ | ||||||
| Nonowner-occupied commercial real estate |
||||||||
| Other commercial |
||||||||
| |
|
|
|
|||||
| Total commercial, financial agricultural |
||||||||
| Residential real estate |
||||||||
| Construction land development |
||||||||
| Consumer: |
||||||||
| Bankcard |
||||||||
| Other consumer |
||||||||
| Less: Unearned income |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total gross loans |
$ | $ | ||||||
| |
|
|
|
|||||
The table above does not include loans held for sale of $220,689 and $504,416 at June 30, 2022 and December 31, 2021, respectively. Loans held for sale consist of single-family residential real estate loans originated for sale in the secondary market.
United’s subsidiary bank has made loans to the directors and officers of United and its subsidiaries, and to their affiliates. The aggregate dollar amount of these loans was $25,430 and $32,990 at June 30, 2022 and December 31, 2021, respectively.
5. CREDIT QUALITY
Management monitors the credit quality of its loans and leases on an ongoing basis. Measurement of delinquency and past due status are based on the contractual terms of each loan. United considers a loan to be past due when it is 30 days or more past its contractual payment due date.
For all loan classes, past due loans and leases are reviewed on a monthly basis to identify loans and leases for nonaccrual status. Generally, when collection in full of the principal and interest is jeopardized, the loan is placed on nonaccrual status. The accrual of interest income on commercial and most consumer loans generally is discontinued when a loan becomes 90 to 120 days past due as to principal or interest. However, regardless of delinquency status, if a loan is fully secured and in the process of collection and resolution of collection is expected in the near term (generally less than 90 days), then the loan will not be placed on nonaccrual status. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and unpaid interest accrued in prior years is charged to the allowance for credit losses. United’s method of income recognition for loans and leases that are classified as nonaccrual is to recognize interest income on a cash basis or apply the cash receipt to principal when the ultimate collectibility of principal is in doubt. Nonaccrual loans and leases will not normally be returned to accrual status unless all past due principal and interest has been paid and the borrower has evidenced their ability to meet the contractual provisions of the note. Generally, a loan is categorized as a TDR if a concession is granted and there is deterioration in the financial condition of the borrower. The portfolio of TDR loans is monitored monthly.
20
A loan is categorized as a troubled debt restructuring (“TDR”) if a concession is granted and there is deterioration in the financial condition of the borrower. A loan classified as a TDR will generally retain such classification until the loan is paid in full. However, a residential mortgage TDR loan that yields a market rate and demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally one year, is removed from the TDR classification. Interest income on TDRs is accrued at the reduced rate and the loan is returned to performing status once the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally six months. TDRs can take the form of a reduction of the stated interest rate, splitting a loan into separate loans and leases with market terms on one loan and concessionary terms on the other loan, receipts of assets from a debtor in partial or full satisfaction of a loan, the extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk, the reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, or the reduction of accrued interest or any other concessionary type of renegotiated debt. Under United’s current loan policy, a loan is not recognized as a TDR until it becomes probable that the loan will be a TDR.
one-to-four-family
In response to the coronavirus This program ended on January 1, 2022. As provided for under the CARES Act, these loan modifications are exempt by law from classification as a TDR as defined by GAAP. As of June 30, 2022, United has 40 eligible loan modifications in deferral under section 4013, “Temporary Relief from Troubled Debt Restructurings,” of the CARES Act on $2,031 of loans outstanding, compared to 188 eligible loan modifications in deferral on $18,039 of loans outstanding at December 31, 2021.
(“COVID-19”)
pandemic and its economic impact on our customers, United implemented a short-term modification program that complied with the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act to provide temporary payment relief , primarily deferral of payments, to those borrowers directly impacted by COVID-19
who were not more than 30 days past due as of December 31, 2019. As of June 30, 2022, United had TDRs of $25,504 as compared to $35,856 as of December 31, 2021. Of the $25,504 aggregate balance of TDRs at June 30, 2022, $11,298 was on nonaccrual, $3,162 was 90 days or more past due and $140 was 30 -89 days past due. Of the $35,856 aggregate balance of TDRs at December 31, 2021, $22,421 was on nonaccrual and $102 was 90 days or more days past due. All these amounts are included in the appropriate categories in the “Age Analysis of Past Due Loans” table on a subsequent page. As of June 30, 2022, there was a commitment to lend additional funds of $49 to a debtor owing a receivable whose terms have been modified in a TDR. During the first six months of 2022, advances of $65 were made to this debtor under a loan that had been previously modified.
The following tables sets forth the balances of TDRs at June 30, 2022 and December 31, 2021 and the reasons for modification:
| Reason for modification |
June 30, 2022 |
December 31, 2021 |
||||||
| Interest rate reduction |
$ | $ | ||||||
| Interest rate reduction and change in terms |
||||||||
| Concession of principal and term |
||||||||
| Extended maturity |
||||||||
| Transfer of asset |
||||||||
| Change in terms |
||||||||
| |
|
|
|
|||||
| Total |
$ | $ | ||||||
| |
|
|
|
|||||
21
The following table sets forth United’s troubled debt restructurings that have been restructured during the three months ended June 30, 2022 and 2021, segregated by class of loans:
Troubled Debt Restructurings For the Three Months Ended |
||||||||||||||||||||||||
June 30, 2022 |
June 30, 2021 |
|||||||||||||||||||||||
Number of Contracts |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
Number of Contracts |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
|||||||||||||||||||
| Commercial real estate: |
||||||||||||||||||||||||
| Owner-occupied |
$ | $ | $ | $ | ||||||||||||||||||||
| Nonowner-occupied |
||||||||||||||||||||||||
| Other commercial |
||||||||||||||||||||||||
| Residential real estate |
||||||||||||||||||||||||
| Construction land development |
||||||||||||||||||||||||
| Consumer: |
||||||||||||||||||||||||
| Bankcard |
||||||||||||||||||||||||
| Other consumer |
||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The following table sets forth United’s troubled debt restructurings that have been restructured during the six months ended June 30, 2022 and 2021, segregated by class of loans: |
| |||||||||||||||||||||||
Troubled Debt Restructurings For the Six Months Ended |
||||||||||||||||||||||||
June 30, 2022 |
June 30, 2021 |
|||||||||||||||||||||||
Number of Contracts |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
Number of Contracts |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
|||||||||||||||||||
| Commercial real estate: |
||||||||||||||||||||||||
| Owner-occupied |
$ | $ | $ | $ | |
|||||||||||||||||||
| Nonowner-occupied |
||||||||||||||||||||||||
| Other commercial |
||||||||||||||||||||||||
| Residential real estate |
||||||||||||||||||||||||
| Construction land development |
||||||||||||||||||||||||
| Consumer: |
||||||||||||||||||||||||
| Bankcard |
||||||||||||||||||||||||
| Other consumer |
||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
22
The following table sets forth United’s troubled debt restructurings, based on their post-modification outstanding recorded balance, that have been restructured during the three and six months ended June 30, 2022 and 2021, segregated by the reason for modification:
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
| Reason for modification |
2022 |
2021 |
2022 |
2021 |
||||||||||||
| Interest rate reduction |
$ | $ | |
$ | $ | |
||||||||||
| Interest rate reduction and change in terms |
||||||||||||||||
| Forgiveness of principal |
||||||||||||||||
| Concession of principal and termp |
||||||||||||||||
| Transfer of asset |
||||||||||||||||
| Extended maturity |
||||||||||||||||
| Change in terms |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
The following table presents troubled debt restructurings, by class of loan, that were restructured during the twelve-month period ended June 30, 2022 and had charge-offs during the six months ended June 30, 2022. No charge-offs were recorded during the three months ended June 30, 2022. The recorded investment amounts presented were as of the June 30, 2022 balance sheet date.
Six Months Ended June 30, 2022 |
||||||||
Number of Contracts |
Recorded Investment |
|||||||
| Troubled Debt Restructurings |
||||||||
| Commercial real estate: |
||||||||
| Owner-occupied |
$ | |||||||
| Nonowner-occupied |
||||||||
| Other commercial |
||||||||
| Residential real estate |
||||||||
| Construction land development |
||||||||
| Consumer: |
||||||||
| Bankcard |
||||||||
| Other consumer |
||||||||
| |
|
|
|
|||||
| Total |
$ | |||||||
| |
|
|
|
|||||
The following table presents troubled debt restructurings, by class of loan, that were restructured during the twelve-month period ended June 30, 2021 and had charge-offs during the three and six months ended June 30, 2021. The recorded investment amounts presented were as of the June 30, 2021 balance sheet date.
Three Months Ended June 30, 2021 |
Six Months Ended June 30, 2021 |
|||||||||||||||
Number of Contracts |
Recorded Investment |
Number of Contracts |
Recorded Investment |
|||||||||||||
| Troubled Debt Restructurings |
||||||||||||||||
| Commercial real estate: |
||||||||||||||||
| Owner-occupied |
$ | |
$ | |
||||||||||||
| Nonowner-occupied |
||||||||||||||||
| Other commercial |
||||||||||||||||
| Residential real estate |
||||||||||||||||
| Construction land development |
||||||||||||||||
| Consumer: |
||||||||||||||||
| Bankcard |
||||||||||||||||
| Other consumer |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
23
The following table sets forth United’s age analysis of its past due loans and leases, segregated by class of loans:
| Age Analysis of Past Due Loans and Leases As of June 30, 2022 |
||||||||||||||||||||||||
30-89 Days Past Due |
90 Days or more Past Due |
Total Past Due |
Current Other |
Total Financing Receivables |
90 Days or More Past Due Accruing |
|||||||||||||||||||
| Commercial real estate: |
||||||||||||||||||||||||
| Owner-occupied |
$ | $ | |
$ | $ | $ | $ | |||||||||||||||||
| Nonowner-occupied |
||||||||||||||||||||||||
| Other commercial |
||||||||||||||||||||||||
| Residential real estate |
||||||||||||||||||||||||
| Construction land development |
||||||||||||||||||||||||
| Consumer: |
||||||||||||||||||||||||
| Bankcard |
||||||||||||||||||||||||
| Other consumer |
||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Age Analysis of Past Due Loans and Leases As of December 31, 2021 |
||||||||||||||||||||||||
30-89 Days Past Due |
90 Days or more Past Due |
Total Past Due |
Current Other |
Total Financing Receivables |
90 Days or More Past Due Accruing |
|||||||||||||||||||
| Commercial real estate: |
||||||||||||||||||||||||
| Owner-occupied |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Nonowner-occupied |
||||||||||||||||||||||||
| Other commercial |
||||||||||||||||||||||||
| Residential real estate |
||||||||||||||||||||||||
| Construction land development |
||||||||||||||||||||||||
| Consumer: |
||||||||||||||||||||||||
| Bankcard |
||||||||||||||||||||||||
| Other consumer |
||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The following table sets forth United’s nonaccrual loans and leases, segregated by class of loans:
At June 30, 2022 |
At December 31, 2021 |
|||||||||||||||||||||||
Nonaccruals |
With No Related Allowance for Credit Losses |
90 Days or More Past Due Accruing |
Nonaccruals |
With No Related Allowance for Credit Losses |
90 Days or More Past Due Accruing |
|||||||||||||||||||
| Commercial Real Estate: |
||||||||||||||||||||||||
| Owner-occupied |
$ | $ | $ | $ | $ | |
$ | |||||||||||||||||
| Nonowner-occupied |
||||||||||||||||||||||||
| Other Commercial |
||||||||||||||||||||||||
| Residential Real Estate |
||||||||||||||||||||||||
| Construction |
||||||||||||||||||||||||
| Consumer: |
||||||||||||||||||||||||
| Bankcard |
||||||||||||||||||||||||
| Other consumer |
||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
24
Interest income recognized on nonaccrual loans was insignificant during the three and six months ended June 30, 2022 and 2021.
Collateral Dependent Loans and Leases |
||||||||||||||||||||||||
At June 30, 2022 |
||||||||||||||||||||||||
Residential Property |
Business Assets |
Land |
Commercial Property |
Other |
Total |
|||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Owner-occupied |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Nonowner-occupied |
||||||||||||||||||||||||
Other commercial |
||||||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||
Construction land development |
||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Bankcard |
||||||||||||||||||||||||
Other consumer |
||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ |
||||||||||||||||||
Collateral Dependent Loans and Leases |
||||||||||||||||||||||||
At December 31, 2021 |
||||||||||||||||||||||||
Residential Property |
Business Assets |
Land |
Commercial Property |
Other |
Total |
|||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Owner-occupied |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Nonowner-occupied |
||||||||||||||||||||||||
Other commercial |
||||||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||
Construction land development |
||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Bankcard |
||||||||||||||||||||||||
Other consumer |
||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
United categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt: current financial information, historical payment experience, credit documentation, underlying collateral (if any), public information and current economic trends, among other factors.
United uses the following definitions for risk ratings:
| • | Pass |
| • | Special Mention |
| • | Substandard |
| • | Doubtful |
25
Special mention loans, with a corporate credit exposure, have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or in the Company’s credit position at some future date. Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a special mention rating. Nonfinancial reasons for rating a credit exposure special mention include management problems, pending litigation, an ineffective loan agreement or other material structural weakness, and any other significant deviation from prudent lending practices. For loans with a consumer credit exposure, loans that are past due 30 -89 days are generally considered special mention.
A substandard loan with a corporate credit exposure is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt by the borrower. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. They require more intensive supervision by management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. For some substandard loans, the likelihood of full collection of interest and principal may be in doubt and thus, placed on nonaccrual. For loans with a consumer credit exposure, loans that are 90 days or more past due or that have been placed on nonaccrual are considered substandard.
A loan with corporate credit exposure is classified as doubtful if it has all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, highly questionable. A doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the loan, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral, and refinancing. Generally, there are not any loans with a consumer credit exposure that are classified as doubtful. Usually, they are
charged-off
prior to such a classification. Based on the most recent analysis performed, the risk category of loans and leases by class of loans is as follows:
Commercial Real Estate – Owner-occupied |
||||||||||||||||||||||||||||||||||||
As of June 30, 2022 |
Term Loans Origination Year |
Revolving loans amortized cost basis |
Revolving loans converted to term loans |
Total |
||||||||||||||||||||||||||||||||
2022 |
2021 |
2020 |
2019 |
2018 |
Prior |
|||||||||||||||||||||||||||||||
Internal Risk Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ | |
$ | |
$ | |
$ | |
$ | |
$ | |
$ | |
$ | |
$ | |
||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Current-period charge-offs |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
Current-period recoveries |
||||||||||||||||||||||||||||||||||||
Current-period net charge-offs |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
26
Term Loans Origination Year |
Revolving loans amortized cost basis |
Revolving loans and leases converted to term loans |
Total |
|||||||||||||||||||||||||||||||||
As of December 31, 2021 |
2021 |
2020 |
2019 |
2018 |
2017 |
Prior |
||||||||||||||||||||||||||||||
Internal Risk Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
YTD charge-offs |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
YTD recoveries |
||||||||||||||||||||||||||||||||||||
YTD net charge-offs |
$ | $ | $ | $ | $ | ( |
$ | $ | $ | $ | ||||||||||||||||||||||||||
Commercial Real Estate – Nonowner-occupied
Term Loans Origination Year |
Revolving loans amortized cost basis |
Revolving loans converted to term loans |
Total |
|||||||||||||||||||||||||||||||||
As of June 30, 2022 |
2022 |
2021 |
2020 |
2019 |
2018 |
Prior |
||||||||||||||||||||||||||||||
Internal Risk Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Current-period charge-offs |
||||||||||||||||||||||||||||||||||||
Current-period recoveries |
||||||||||||||||||||||||||||||||||||
Current-period net charge-offs |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Term Loans Origination Year |
Revolving loans amortized cost basis |
Revolving loans and leases converted to term loans |
Total |
|||||||||||||||||||||||||||||||||
As of December 31, 2021 |
2021 |
2020 |
2019 |
2018 |
2017 |
Prior |
||||||||||||||||||||||||||||||
Internal Risk Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | |
$ | ||||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
YTD charge-offs |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
YTD recoveries |
||||||||||||||||||||||||||||||||||||
YTD net charge-offs |
$ | $ | $ | $ | $ | $ | ( |
$ | $ | $ | ( |
|||||||||||||||||||||||||
Other commercial
Term Loans and leases Origination Year |
Revolving loans and leases amortized cost basis |
Revolving loans and leases converted to term loans |
Total |
|||||||||||||||||||||||||||||||||
As of June 30, 2022 |
2022 |
2021 |
2020 |
2019 |
2018 |
Prior |
||||||||||||||||||||||||||||||
Internal Risk Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Current-period charge-offs |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
Current-period recoveries |
||||||||||||||||||||||||||||||||||||
Current-period net charge-offs |
$ | $ | ( |
$ | $ | ( |
$ | $ | $ | $ | $ | |||||||||||||||||||||||||
27
Term Loans and leases |
Revolving loans and leases amortized cost basis |
Revolving loans and leases converted to term loans |
Total |
|||||||||||||||||||||||||||||||||
Origination Year |
||||||||||||||||||||||||||||||||||||
As of December 31, 2021 |
2021 |
2020 |
2019 |
2018 |
2017 |
Prior |
||||||||||||||||||||||||||||||
Internal Risk Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
YTD charge-offs |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
YTD recoveries |
||||||||||||||||||||||||||||||||||||
YTD net charge-offs |
$ | $ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | $ | ( |
||||||||||||||||||||
Residential Real Estate
Term Loans |
Revolving loans amortized cost basis |
Revolving loans converted to term loans |
Total |
|||||||||||||||||||||||||||||||||
Origination Year |
||||||||||||||||||||||||||||||||||||
As of June 30, 2022 |
2022 |
2021 |
2020 |
2019 |
2018 |
Prior |
||||||||||||||||||||||||||||||
Internal Risk Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Current-period charge-offs |
( |
) |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
Current-period recoveries |
||||||||||||||||||||||||||||||||||||
Current-period net charge-offs |
$ | $ | ( |
$ | $ | $ | ( |
$ | $ | $ | $ | ( |
||||||||||||||||||||||||
Term Loans |
Revolving loans amortized cost basis |
Revolving loans converted to term loans |
Total |
|||||||||||||||||||||||||||||||||
Origination Year |
||||||||||||||||||||||||||||||||||||
As of December 31, 2021 |
2021 |
2020 |
2019 |
2018 |
2017 |
Prior |
||||||||||||||||||||||||||||||
Internal Risk Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
YTD charge-offs |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
YTD recoveries |
||||||||||||||||||||||||||||||||||||
YTD net charge-offs |
$ | $ | $ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | $ | $ | ( |
||||||||||||||||||||||
Construction and Land Development
Term Loans |
Revolving loans amortized cost basis |
Revolving loans converted to term loans |
Total |
|||||||||||||||||||||||||||||||||
Origination Year |
||||||||||||||||||||||||||||||||||||
As of June 30, 2022 |
2022 |
2021 |
2020 |
2019 |
2018 |
Prior |
||||||||||||||||||||||||||||||
Internal Risk Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Current-period charge-offs |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
Current-period recoveries |
||||||||||||||||||||||||||||||||||||
Current-period net charge-offs |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
28
Term Loans |
Revolving loans amortized cost basis |
Revolving loans converted to term loans |
Total |
|||||||||||||||||||||||||||||||||
Origination Year |
||||||||||||||||||||||||||||||||||||
As of December 31, 2021 |
2021 |
2020 |
2019 |
2018 |
2017 |
Prior |
||||||||||||||||||||||||||||||
Internal Risk Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
YTD charge-offs |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
YTD recoveries |
||||||||||||||||||||||||||||||||||||
YTD net charge-offs |
$ | $ | $ | $ | $ | ( |
) | $ | $ | $ | $ | |||||||||||||||||||||||||
Bankcard |
||||||||||||||||||||||||||||||||||||
Term Loans |
Revolving loans amortized cost basis |
Revolving loans converted to term loans |
Total |
|||||||||||||||||||||||||||||||||
Origination Year |
||||||||||||||||||||||||||||||||||||
As of June 30, 2022 |
2022 |
2021 |
2020 |
2019 |
2018 |
Prior |
||||||||||||||||||||||||||||||
Internal Risk Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | $ | |
$ | |
$ | |
||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Current-period charge-offs |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
Current-period recoveries |
||||||||||||||||||||||||||||||||||||
Current-period net charge-offs |
$ | $ | $ | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||
Term Loans |
Revolving loans amortized cost basis |
Revolving loans converted to term loans |
Total |
|||||||||||||||||||||||||||||||||
Origination Year |
||||||||||||||||||||||||||||||||||||
As of December 31, 2021 |
2021 |
2020 |
2019 |
2018 |
2017 |
Prior |
||||||||||||||||||||||||||||||
Internal Risk Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
YTD charge-offs |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||
YTD recoveries |
||||||||||||||||||||||||||||||||||||
YTD net charge-offs |
$ | $ | $ | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||
Other Consumer |
||||||||||||||||||||||||||||||||||||
Term Loans |
Revolving loans amortized cost basis |
Revolving loans converted to term loans |
Total |
|||||||||||||||||||||||||||||||||
Origination Year |
||||||||||||||||||||||||||||||||||||
As of June 30, 2022 |
2022 |
2021 |
2020 |
2019 |
2018 |
Prior |
||||||||||||||||||||||||||||||
Internal Risk Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | |
$ | ||||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Current-period charge-offs |
( |
) | ( |
) |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
Current-period recoveries |
||||||||||||||||||||||||||||||||||||
Current-period net charge-offs |
$ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | $ | $ | $ | ( |
|||||||||||||||||||||
29
Term Loans |
Revolving loans amortized cost basis |
Revolving loans converted to term loans |
Total |
|||||||||||||||||||||||||||||||||
Origination Year |
||||||||||||||||||||||||||||||||||||
As of December 31, 2021 |
2021 |
2020 |
2019 |
2018 |
2017 |
Prior |
||||||||||||||||||||||||||||||
Internal Risk Grade: |
||||||||||||||||||||||||||||||||||||
Pass |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Special Mention |
||||||||||||||||||||||||||||||||||||
Substandard |
||||||||||||||||||||||||||||||||||||
Doubtful |
||||||||||||||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
YTD charge-offs |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
YTD recoveries |
||||||||||||||||||||||||||||||||||||
YTD net charge-offs |
$ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | ( |
$ | $ | ( |
|||||||||||||||||||
At June 30, 2022 and December 31, 2021, other real estate owned (“OREO”) included in other assets in the Consolidated Balance Sheets was $13,847 and $14,823 , respectively. OREO consists of real estate acquired in foreclosure or other settlement of loans. Such assets are carried at the lower of the investment in the assets or the fair value of the assets less estimated selling costs. Any adjustment to the fair value at the date of transfer is charged against the allowance for loan losses. Any subsequent valuation adjustments as well as any costs relating to operating, holding or disposing of the property are recorded in other expense in the period incurred. At June 30, 2022, there were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process as compared to $13 at December 31, 2021.
6. ALLOWANCE FOR CREDIT LOSSES
United adopted the CECL methodology for measuring credit losses as of January 1, 2020. All disclosures as of June 30, 2022 and December 31, 2021 and for the three and six months ended June 30, 2022 and 2021 are presented in accordance with ASC Topic 326.
The allowance for loan losses is an estimate of the expected credit losses on financial assets measured at amortized cost to present the net amount expected to be collected as of the balance sheet date. Such allowance is based on the credit losses expected to arise over the life of the asset (contractual term). Assets are charged off when United determines that such financial assets are deemed uncollectible or based on regulatory requirements, whichever is earlier. Charge-offs are recognized as a deduction from the allowance for credit losses. Expected recoveries of amounts previously
charged-off,
not to exceed the aggregate of the amount previously charged-off,
are included in determining the necessary reserve at the balance sheet date. United made a policy election to present the accrued interest receivable balance separately in its consolidated balance sheets from the amortized cost of a loan. Accrued interest receivable was $50,847 (no allowance for credit losses) and $49,029 (net of an allowance for credit losses of $8
) at June 30, 2022 and December 31, 2021, respectively, related to loans and leases are included separately in “Accrued interest receivable” in the consolidated balance sheets. Due to loan interest payment deferrals granted by United under the CARES Act, United assessed the collectability of the accrued interest receivables on these deferring loans and leases. As a result of this assessment, United did not record an allowance for credit losses for accrued interest receivables not expected to be collected as of June 30, 2022 as compared to an allowance for credit losses of
$8 as of December 31, 2021. For all classes of loans and leases receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due, unless the loan is well secured and in the process of collection. Interest received on nonaccrual loans and leases, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal.
30
The following table represents the accrued interest receivable as of June 30, 2022 and December 31, 2021:
Accrued Interest Receivable |
||||||||
At June 30, 2022 |
At December 31, 2021 |
|||||||
| Commercial Real Estate: |
||||||||
| Owner-occupied |
$ | $ | ||||||
| Nonowner-occupied |
||||||||
| Other Commercial |
||||||||
| Residential Real Estate |
||||||||
| Construction |
||||||||
| Consumer: |
||||||||
| Bankcard |
||||||||
| Other consumer |
||||||||
| |
|
|
|
|||||
| $ | $ | |||||||
| Less: Allowance for credit losses |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total |
$ | $ | ||||||
| |
|
|
|
|||||
The following table represents the accrued interest receivables written off by reversing interest income for the three months and six months ended June 30, 2022 and 2021:
Accrued Interest Receivables Written Off by Reversing Interest Income |
||||||||||||||||
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Commercial real estate: |
||||||||||||||||
| Owner-occupied |
$ | $ | $ | $ | ||||||||||||
| Nonowner-occupied |
||||||||||||||||
| Other commercial |
||||||||||||||||
| Residential real estate |
||||||||||||||||
| Construction land development |
||||||||||||||||
| Consumer: |
||||||||||||||||
| Bankcard |
||||||||||||||||
| Other consumer |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
United estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values or other relevant factors. A reversion to historical loss data occurs via a straight-line method during the year following the
one-year
reasonable and supportable forecast period. United pools its loans and leases based on similar risk characteristics in estimating expected credit losses. United has identified the following portfolio segments and measures the allowance for credit losses using the following methods:
| • | Method: Probability of Default/Loss Given Default (PD/LGD) |
| • | Commercial Real Estate Owner-Occupied |
| • | Commercial Real Estate Nonowner-Occupied |
| • | Commercial Other |
| • | Method: Cohort |
| • | Residential Real Estate |
| • | Construction Land Development |
| • | Consumer |
| • | Bankcard |
31
Risk characteristics of commercial real estate owner-occupied loans and commercial other loans and leases are similar in that they are normally dependent upon the borrower’s internal cash flow from operations to service debt. Commercial real estate nonowner-occupied loans differ in that cash flow to service debt is normally dependent on external income from third parties for use of the real estate such as rents, leases and room rates. Residential real estate loans are dependent upon individual borrowers who are affected by changes in general economic conditions, demand for housing and resulting residential real estate valuation. Construction and land development loans are impacted mainly by demand whether for new residential housing or for retail, industrial, office and other types of commercial construction within a given area. Consumer loan pool risk characteristics are influenced by general, regional and local economic conditions.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, but may also include other
non-performing
loans or TDRs, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. These individually evaluated loans are removed from their respective pools and typically represent collateral dependent loans. In addition, the Company individually evaluates “reasonably expected” TDRs, which are identified by the Company as a loan expected to be classified as a TDR. Expected credit losses are estimated over the contractual term of the loans and leases, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancelable by United.
At the acquisition date, an initial allowance for expected credit losses for
non-PCD
loans is estimated and recorded as credit loss expense. The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans. For allowance for credit losses under ASC Topic 326 calculation purposes, United includes its acquired loans and leases in their relevant pool unless they meet the criteria for specific review. United maintains an allowance for loan losses and a reserve for lending-related commitments such as unfunded loan commitments and letters of credit. The reserve for lending-related commitments of $42,579 and $31,442 at June 30, 2022 and December 31, 2021, respectively, is separately classified on the balance sheet and is included in other liabilities. The combined allowance for loan losses and reserve for lending-related commitments is considered the allowance for credit losses.
United continuously evaluates any risks which may impact its loan and lease portfolios. Reserves are initially determined based on losses identified from the PD/LGD and Cohort models which utilize the Company’s historical information. Then any qualitative adjustments are applied to account for the Company’s view of the future. If current conditions underlying any qualitative adjustment factor were deemed to be materially different than historical conditions, then an adjustment was made for that factor.
The second quarter of 2022 qualitative adjustments include analyses of the following:
• |
Past events – This includes portfolio trends related to economic and business conditions; past due, nonaccrual, and adversely classified loans and leases; and concentrations of credit. |
32
• |
Current conditions |
• |
Reasonable and supportable forecasts is determined on aportfolio-by-portfolio |
| • | The forecast for real GDP shifted downward in the second quarter, from a projection of mid-March 2022 to mid-June with a level future trendline as compared to the first quarter of 2022. The unemployment rate forecast shifted upward compared to the first quarter of 2022 with an increasing trend expected throughout 2024. |
| • | Reversion to historical loss data occurs via a straight-line method during the year following the one-year reasonable and supportable forecast period. |
A progression of the allowance for loan and lease losses, by portfolio segment, for the periods indicated is summarized as follows:
Allowance for Loan and Lease Losses and Carrying Amount of Loans and Leases |
||||||||||||||||||||||||||||||||
For the Three Months Ended June 30, 2022 |
||||||||||||||||||||||||||||||||
Commercial Real Estate |
Other Commercial |
Residential Real Estate |
Construction Land Development |
Bankcard |
Total |
|||||||||||||||||||||||||||
Owner- occupied |
Nonowner- occupied |
Other Consumer |
||||||||||||||||||||||||||||||
Allowance for Loan and Lease Losses: |
||||||||||||||||||||||||||||||||
Beginning balance |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Charge-offs |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
Recoveries |
||||||||||||||||||||||||||||||||
Provision |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
Ending balance |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Allowance for Loan and Lease Losses and Carrying Amount of Loans and Leases |
||||||||||||||||||||||||||||||||
For the Six Months Ended June 30, 2022 |
||||||||||||||||||||||||||||||||
Commercial Real Estate |
Other Commercial |
Residential Real Estate |
Construction Land Development |
Bankcard |
Total |
|||||||||||||||||||||||||||
Owner- occupied |
Nonowner- occupied |
Other Consumer |
||||||||||||||||||||||||||||||
Allowance for Loan and Lease Losses: |
||||||||||||||||||||||||||||||||
Beginning balance |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Charge-offs |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||
Recoveries |
||||||||||||||||||||||||||||||||
Provision |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
Ending balance |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
33
Allowance for Loan and Lease Losses and Carrying Amount of Loans and Leases |
||||||||||||||||||||||||||||||||
For the Year Ended December 31, 2021 |
||||||||||||||||||||||||||||||||
Commercial Real Estate |
Other Commercial |
Residential Real Estate |
Construction Land Development |
Bankcard |
Total |
|||||||||||||||||||||||||||
Owner- occupied |
Nonowner- occupied |
Other Consumer |
||||||||||||||||||||||||||||||
Allowance for Loan and Lease Losses: |
||||||||||||||||||||||||||||||||
Beginning balance |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Allowance for PCD loans (acquired during the period) |
||||||||||||||||||||||||||||||||
Charge-offs |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
Recoveries |
||||||||||||||||||||||||||||||||
Provision |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
Ending balance |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
7. INTANGIBLE ASSETS
The following is a summary of intangible assets subject to amortization and those not subject to amortization:
June 30, 2022 |
||||||||||||||||||||||||
Community Banking |
Mortgage Banking |
Total |
||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
|||||||||||||||||||
Amortized intangible assets: |
||||||||||||||||||||||||
Core deposit intangible assets |
$ | ($ | ) | $ | $ | $ | ($ | ) | ||||||||||||||||
Non-amortized intangible assets: |
||||||||||||||||||||||||
George Mason trade name |
$ | $ | $ | |||||||||||||||||||||
Crescent trade name |
||||||||||||||||||||||||
Total |
$ | $ | $ | |||||||||||||||||||||
Goodwill not subject to amortization |
$ | $ | $ | |||||||||||||||||||||
December 31, 2021 |
||||||||||||||||||||||||
Community Banking |
Mortgage Banking |
Total |
||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
|||||||||||||||||||
Amortized intangible assets: |
||||||||||||||||||||||||
Core deposit intangible assets |
$ | ($ | ) | $ | $ | $ | ($ | ) | ||||||||||||||||
Non-amortized intangible assets: |
||||||||||||||||||||||||
George Mason trade name |
$ |
$ |
$ |
|||||||||||||||||||||
Crescent trade name |
||||||||||||||||||||||||
Total |
$ |
$ |
$ |
|||||||||||||||||||||
Goodwill not subject to amortization |
$ |
$ |
$ |
|||||||||||||||||||||
34
United incurred amortization expense of $1,379 and $2,758 for the three and six months ended June 30, 2022 as compared to $1,467 and $2,933 for the three and six months ended June 30, 2021, respectively.
The following table provides a reconciliation of goodwill:
Community Banking |
Mortgage Banking |
Total |
||||||||||
Goodwill at December 31, 2021 |
$ | $ | $ | |||||||||
Addition to goodwill from Community Bankers Trust acquisition |
||||||||||||
Goodwill at June 30, 2022 |
$ | $ | $ | |||||||||
The addition during the first six months of 2022 to goodwill from the Community Bankers Trust acquisition was due mainly to a measurement period adjustment to establish a reserve for income tax contingencies that existed at the time of the acquisition.
The following table sets forth the anticipated amortization expense for intangible assets for the years subsequent to 2021:
Year |
Amount |
|||
2022 |
$ | |||
2023 |
||||
2024 |
||||
2025 |
||||
2026 |
||||
2027 and thereafter |
||||
8. MORTGAGE SERVICING RIGHTS
Mortgage loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The value of mortgage servicing rights (“MSRs”) is included on the Company’s Consolidated Balance Sheets.
The Company initially measures servicing assets and liabilities retained related to the sale of residential loans held for sale (“MSRs”) at fair value, if practicable. For subsequent measurement purposes, the Company measures servicing assets and liabilities based on the lower of cost or market using the amortization method. MSRs are amortized in proportion to, and over the period of, estimated net servicing income. The amortization of the MSRs is analyzed periodically and is adjusted to reflect changes in prepayment rates and other estimates.
35
The Company evaluates potential impairment of MSRs based on the difference between the carrying amount and current estimated fair value of the servicing rights. In determining impairment, the Company aggregates all servicing rights and stratifies them into tranches based on predominant risk characteristics. If impairment exists, a valuation allowance is established for any excess of amortized cost over the current estimated fair value by a charge to income. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.
Service fee income is recorded for fees earned for servicing mortgage loans under servicing agreements with the Federal national Mortgage Association (“FNMA”), the Federal home loan Mortgage Corporation (“FHLMC”), Government national Mortgage Association (“GNMA”) and certain private investors. The fees are based on a contractual percentage of the outstanding principal balance of the loans serviced and are recorded in noninterest income. Amortization of MSRs and mortgage servicing costs are charged to expense when incurred.
The unpaid principal balances of loans serviced for others were approximately $3,534,607 at June 30, 2022 and $3,698,998 at December 31, 2021.
The estimated fair value of the mortgage servicing rights was $41,748 and $27,355 at June 30, 2022 and December 31, 2021, respectively. The estimated fair value of servicing rights at June 30, 2022 was determined using a net servicing fee of 0.26 %, average discount rates ranging from 10.50 % to 11.00 % with a weighted average discount rate of 10.61 %, average constant prepayment rates (“CPR”) ranging from 6.66 % to 10.99 % with a weighted average prepayment rate of 7.54 %, depending upon the stratification of the specific servicing right, and a delinquency rate, including loans on forbearance of 2.90 %. The estimated fair value of servicing rights at December 31, 2021 was determined using a net servicing fee of 0.26 %, average discount rates ranging from 10.50 % to 11.71 % with a weighted average discount rate of 10.60 %, average constant prepayment rates (“CPR”) ranging from 12.59 % to 16.56 %, depending upon the stratification of the specific servicing right, and a delinquency rate, including loans on forbearance of 2.09 %. Please refer to Note 15 in these Notes to Consolidated Financial Statements for additional information concerning the fair value of MSRs.
21.20
% with a weighted average prepayment rate of The following presents the activity in mortgage servicing rights, including their valuation allowance for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
MSRs beginning balance |
$ | $ | $ | $ | ||||||||||||
Addition from acquisition of subsidiary |
||||||||||||||||
Amount capitalized |
||||||||||||||||
Amount amortized |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
MSRs ending balance |
$ | $ | $ | $ | ||||||||||||
MSRs valuation allowance beginning balance |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
Aggregate additions charged and recoveries credited to operations |
||||||||||||||||
MSRs impairment |
( |
) | ( |
) | ||||||||||||
MSRs valuation allowance ending balance |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
MSRs, net of valuation allowance |
$ | $ | $ | $ | ||||||||||||
In determining impairment, the Company aggregates all servicing rights and stratifies them into tranches based on predominant risk characteristics. The Company did not record any temporary impairments on mortgage servicing rights for the three and six months ended June 30, 2022. The Company recorded a $250
The estimated amortization expense is based on current information regarding future loan payments and prepayments. Amortization expense could change in future periods based on changes in the volume of prepayments and economic factors.
36
9. LEASES
United determines if an arrangement is a lease at inception. United and certain subsidiaries have entered into various noncancelable-operating leases for branch and loan production offices as well as operating facilities. Operating leases are included in operating lease (“ROU”) assets and operating lease liabilities on the Consolidated Balance Sheets. Operating leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets. Presently, United does not have any finance leases.
right-of-use
United’s operating leases are subject to renewal options under various terms. United’s operating leases have remaining terms of 1 to 16 years, some of which include options to extend leases generally for periods of 5 years. United rents or subleases certain real estate to third parties. Our sublease portfolio generally consists of operating leases to other organizations for former branch offices.
ROU assets represent United’s right to use an underlying asset for the lease term and lease liabilities represent United’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of United’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease terms may include options to extend the lease when it is reasonably certain that United will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The components of lease expense were as follows:
| Classification |
Three Months Ended June 30, 2022 |
Three Months Ended June 30, 2021 |
||||||||
| Operating lease cost |
Net occupancy expense | $ | $ | |||||||
| Sublease income |
Net occupancy expense | ( |
) | ( |
) | |||||
| |
|
|
|
|||||||
| Net lease cost |
$ |
$ | ||||||||
| |
|
|
|
|||||||
| Classification |
Six Months Ended June 30, 2022 |
Six Months Ended June 30, 2021 |
||||||||
| Operating lease cost |
Net occupancy expense | $ | $ | |||||||
| Sublease income |
Net occupancy expense | ( |
) | ( |
) | |||||
| |
|
|
|
|||||||
| Net lease cost |
$ | $ | ||||||||
| |
|
|
|
|||||||
Supplemental balance sheet information related to leases was as follows:
| Classification |
June 30, 2022 |
December 31, 2021 |
||||||||
| Operating lease right-of-use |
Operating lease right-of-use |
$ | $ | |||||||
| Operating lease liabilities |
Operating lease liabilities | $ | $ | |||||||
Other information related to leases was as follows:
June 30, 2022 |
||||
| Weighted-average remaining lease term: |
||||
| Operating leases |
||||
| Weighted-average discount rate: |
||||
| Operating leases |
% | |||
37
Supplemental cash flow information related to leases was as follows:
Three Months Ended |
||||||||
June 30, 2022 |
June 30, 2021 |
|||||||
| Cash paid for amounts in the measurement of lease liabilities: |
||||||||
| Operating cash flows from operating leases |
$ | $ | ||||||
| ROU assets obtained in the exchange for lease liabilities |
||||||||
Six Months Ended |
||||||||
June 30, 2022 |
June 30, 2021 |
|||||||
| Cash paid for amounts in the measurement of lease liabilities: |
||||||||
| Operating cash flows from operating leases |
$ | $ | ||||||
| ROU assets obtained in the exchange for lease liabilities |
||||||||
Maturities of lease liabilities by year and in the aggregate, under operating leases with initial or remaining terms of one year or more, for years subsequent to December 31, 2021, consists of the following as of June 30, 2022:
| Year |
Amount |
|||
| 2022 |
$ | |||
| 2023 |
||||
| 2024 |
||||
| 2025 |
||||
| 2026 |
||||
| Thereafter |
||||
| |
|
|||
| Total lease payments |
||||
| Less: imputed interest |
( |
) | ||
| |
|
|||
| Total |
$ | |||
| |
|
|||
10. SHORT-TERM BORROWINGS
At June 30, 2022 and December 31, 2021, short-term borrowings were as follows:
As of June 30, 2022 |
As of December 31, 2021 |
|||||||
| Federal funds purchased |
$ | $ | ||||||
| Securities sold under agreements to repurchase |
||||||||
| |
|
|
|
|||||
| Total short-term borrowings |
$ | $ | ||||||
| |
|
|
|
|||||
Securities sold under agreements to repurchase have been a significant source of funds for the company. The securities sold under agreements to repurchase were accounted for as collateralized financial transactions. They were recorded at the amounts at which the securities were acquired or sold plus accrued interest.
United has various unused lines of credit available from certain of its correspondent banks in the aggregate amount of $230,000 . These lines of credit, which bear interest at prevailing market rates, permit United to borrow funds in the overnight market, and are renewable annually subject to certain conditions. The securities sold under agreements to repurchase were accounted for as collateralized financial transactions. They were recorded at the amounts at which the securities were acquired or sold plus accrued interest.
United has a $20,000 line of credit with an unrelated financial institution to provide for general liquidity needs. The line is an unsecured, revolving line of credit. The line is renewable on a 360 day basis and carries an indexed, floating-rate of interest. The line requires compliance with various financial and nonfinancial covenants. At June 30, 2022, United had no outstanding balance under this credit.
38
11. LONG-TERM BORROWINGS
United’s subsidiary bank is a member of the Federal Home Loan Bank (“FHLB”). Membership in the FHLB makes available short-term and long-term borrowings from collateralized advances. All FHLB borrowings are collateralized by a mix of single-family residential mortgage loans, commercial loans and investment securities. At June 30, 2022, United had an unused borrowing amount of approximately $7,679,664 available subject to delivery of collateral after certain trigger points. Advances may be called by the FHLB or redeemed by United based on predefined factors and penalties.
At June 30, 2022, $510,918 of FHLB advances with a weighted-average contractual interest rate of 1.29 % and a weighted-average effective interest rate of 0.42 % are scheduled to mature within the next
three
years. The weighted-average effective rate considers the effect of any interest rate swaps designated as cash flow hedges outstanding at June 30, 2022 to manage interest rate risk on its long-term debt. The scheduled maturities of these FHLB borrowings are as follows:
| Year |
Amount |
|||
| 2022 |
$ | |||
| 2023 |
||||
| 2024 |
||||
| 2025 |
||||
| 2026 and thereafter |
||||
| |
|
|||
| Total |
$ | |||
| |
|
|||
At June 30, 2022, United had a total of twenty statutory business trusts that were formed for the purpose of issuing or participating in pools of trust preferred capital securities (“Capital Securities”) with the proceeds invested in junior subordinated debt securities (“Debentures”) of United. The Debentures, which are subordinate and junior in right of payment to all present and future senior indebtedness and certain other financial obligations of United, are the sole assets of the trusts and United’s payment under the Debentures is the sole source of revenue for the trusts. United assumed $4,124 in aggregate principal amount of a LIBOR-indexed floating rate subordinated note in the Community Bankers Trust merger. United also assumed $10,000 in aggregate principal amount of rate subordinated notes in the Carolina Financial Corporation acquisition. At June 30, 2022 and December 31, 2021, the outstanding balance of the subordinated notes was $9,882 and $9,872 , respectively. At June 30, 2022 and December 31, 2021, the outstanding balance of the Debentures was $276,161 and $275,323 , respectively, and was included in the category of long-term debt on the Consolidated Balance Sheets entitled “Other long-term borrowings.” The Capital Securities are not included as a component of shareholders’ equity in the Consolidated Balance Sheets. United fully and unconditionally guarantees each individual trust’s obligations under the Capital Securities.
fixed-to-floating
Under the provisions of the subordinated debt, United has the right to defer payment of interest on the subordinated debt at any time, or from time to time, for periods not exceeding five years . If interest payments on the subordinated debt are deferred, the dividends on the Capital Securities are also deferred. Interest on the subordinated debt is cumulative.
In accordance with the fully-phased in “Basel III Capital Rules” as published by United’s primary federal regulator, the Federal Reserve, United is unable to consider the Capital Securities as Tier 1 capital, but rather the Capital Securities are included as a component of United’s Tier 2 capital. United can include the Capital Securities in its Tier 2 capital on a permanent basis.
39
12. COMMITMENTS AND CONTINGENT LIABILITIES
Lending-related Commitments
United is a party to financial instruments with
off-balance-sheet
risk in the normal course of business to meet the financing needs of its customers and to alter its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby letters of credit, and interest rate swap agreements. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. United’s maximum exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for the loan commitments and standby letters of credit is the contractual or notional amount of those instruments. United uses the same policies in making commitments and conditional obligations as it does for
on-balance
sheet instruments. Collateral may be obtained, if deemed necessary, based on management’s credit evaluation of the counterparty. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily, and historically do not, represent future cash requirements. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on management’s credit evaluation of the counterparty. United had approximately $7,397,308 and $6,847,550 of loan commitments outstanding as of June 30, 2022 and December 31, 2021, respectively, approximately 35% of which contractually expire within one year . Excluded in the June 30, 2022 and December 31, 2021 amounts above are commitments to extend credit of $714,635 and $571,792 , respectively, related to mortgage loan funding commitments of United’s mortgage banking segment which are of a short-term nature.
Commercial and standby letters of credit are agreements used by United’s customers as a means of improving their credit standing in their dealings with others. Under these agreements, United guarantees certain financial commitments of its customers. A commercial letter of credit is issued specifically to facilitate trade or commerce. Typically, under the terms of a commercial letter of credit, a commitment is drawn upon when the underlying transaction is consummated as intended between the customer and a third party. As of June 30, 2022 and December 31, 2021, United had $17,408 and $14,774 of commercial letters of credit outstanding, respectively. A standby letter of credit is generally contingent upon the failure of a customer to perform according to the terms of an underlying contract with a third party. United has issued standby letters of credit of $156,599 and $164,743 as of June 30, 2022 and December 31, 2021, respectively. In accordance with the Contingencies Topic of the FASB Accounting Standards Codification, United has determined that substantially all of its letters of credit are renewed on an annual basis and the fees associated with these letters of credit are immaterial.
Mortgage Repurchase Reserve
United’s mortgage banking segment provides for its estimated exposure to repurchase loans previously sold to investors for which borrowers failed to provide full and accurate information on their loan application or for which appraisals have not been acceptable or where the loan was not underwritten in accordance with the loan program specified by the loan investor, and for other exposure to its investors related to loan sales activities. United evaluates the merits of each claim and estimates its reserve based on actual and expected claims received and considers the historical amounts paid to settle such claims. United’s mortgage banking segment had a reserve of $1,081 and $1,150 as of June 30, 2022 and December 31, 2021.
United has derivative counter-party risk that may arise from the possible inability of United’s mortgage banking segment’s third party investors to meet the terms of their forward sales contracts. United’s mortgage banking segment works with third-party investors that are generally well-capitalized, are investment grade and exhibit strong financial performance to mitigate this risk. United does not expect any third-party investor to fail to meet its obligation.
Legal Proceedings
United and its subsidiaries are currently involved in various legal proceedings in the normal course of business. On at least a quarterly basis, United assesses its liabilities and contingencies in connection with all pending or threatened claims and litigation, utilizing the most recent information available. On a matter-by-matter basis, an accrual for loss is established for those matters which United believes it is probable that a loss may be incurred and that the amount of such loss can be reasonably estimated. Once established, each accrual is adjusted as appropriate to reflect any subsequent developments. Accordingly, management’s estimate will change from time to time, and actual losses may be more or less than the current estimate. For matters where a loss is not probable, or the amount of the loss cannot be estimated, no accrual is established. Management is vigorously pursuing all its legal and factual defenses and, after consultation with legal counsel, believes that all such litigation will be resolved with no material effect on United’s financial position.
40
Regulatory Matters
A variety of consumer products, including mortgage and deposit products, and certain fees and charges related to such products, have come under increased regulatory scrutiny. It is possible that regulatory authorities could bring enforcement actions, including civil money penalties, or take other actions against United in regard to these consumer products. United could also determine of its own accord, or be required by regulators, to refund or otherwise make remediation payments to customers in connection with these products. It is not possible at this time for management to assess the probability of a material adverse outcome or reasonably estimate the amount of any potential loss related to such matters.
13. DERIVATIVE FINANCIAL INSTRUMENTS
United uses derivative instruments to help aid against adverse price changes or interest rate movements on the value of certain assets or liabilities and on future cash flows. These derivatives may consist of interest rate swaps, caps, floors, collars, futures, forward contracts, written and purchased options. United also executes derivative instruments with its commercial banking customers to facilitate its risk management strategies.
Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
United uses derivative instruments to help aid against adverse price changes or interest rate movements on the value of certain assets or liabilities and on future cash flows. These derivatives may consist of interest rate swaps, caps, floors, collars, futures, forward contracts, written and purchased options. United also executes derivative instruments with its commercial banking customers to facilitate its risk management strategies.
During the second quarter of 2020, United entered into a new interest rate swap derivative designated as a cash flow hedge. The notional amount of the cash flow hedge derivative totaled $250,000 . The derivative is intended to hedge the changes in cash flows associated with floating rate FHLB borrowings. United is required to 0.59 % and receive-variable 10 years with an expiration date in June 2030. During the third quarter of 2020, United entered into an additional interest rate swap derivative designated as a cash flow hedge. The notional amount of the cash flow hedge derivative totaled $250,000 . The derivative is intended to hedge the changes in cash flows associated with floating rate FHLB borrowings. United is required to 0.19 % and receive-variable 4 years with an expiration date in August 2024. As of June 30, 2022, United has determined that no forecasted transactions related to its cash flow hedges resulted in gains or losses pertaining to cash flow hedge reclassification from AOCI to income because the forecasted transactions became probable of not occurring. United estimates that $13,114
pay-fixed
1-month
LIBOR with monthly resets. The tenor of the interest rate swap derivative is pay-fixed
1-month
LIBOR with monthly resets. The tenor of the interest rate swap derivative is will be reclassified from AOCI as a decrease to interest expense over the next
12-months
following June 30, 2022 related to the cash flow hedges. As of June 30, 2022, the maximum length of time over which forecasted transactions are hedged is eight years. At inception of a hedge relationship, United formally documents the hedged item, the particular risk management objective, the nature of the risk being hedged, the derivative being used, how effectiveness of the hedge will be assessed and how the ineffectiveness of the hedge will be measured. United also assesses hedge effectiveness at inception and on an ongoing basis using regression analysis. Hedge ineffectiveness is measured by using the change in fair value method. The change in fair value method compares the change in the fair value of the hedging derivative to the change in the fair value of the hedged exposure, attributable to changes in the benchmark rate.
United through its mortgage banking subsidiaries enters into interest rate lock commitments to finance residential mortgage loans with its customers. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by United. Interest
41
rate risk arises on these commitments and subsequently closed loans if interest rates change between the time of the interest rate lock and the delivery of the loan to the investor. Market risk on interest rate lock commitments and mortgage loans held for sale is managed using corresponding forward mortgage loan sales contracts. United is a party to these forward mortgage loan sales contracts to sell loans servicing released and short sales of mortgage-backed securities. When the interest rate is locked with the borrower, the rate lock commitment, forward sale agreement, and mortgage-backed security position are undesignated derivatives and marked to fair value through earnings. The fair value of the rate lock derivative includes the servicing premium and the interest spread for the difference between retail and wholesale mortgage rates. Income from mortgage banking activities includes the gain recognized for the period presented and associated elements of fair value.
United is subject to the Dodd-Frank Act clearing requirement for eligible derivatives. United has executed and cleared eligible derivatives through the London Clearing House (“LCH”). Variation margin at the LCH is distinguished as and settled daily based on the prior day value, rather than The total notional amount of interest rate swap derivatives cleared through the LCH include $500,000 for asset derivatives as of June 30, 2022. The related fair value on a net basis approximate zero .
settled-to-market
collateralized-to-market.
The following tables disclose the derivative instruments’ location on the Company’s Consolidated Balance Sheets and the notional amount and fair value of those instruments at June 30, 2022 and December 31, 2021.
Asset Derivatives |
||||||||||||||||||||||||
June 30, 2022 |
December 31, 2021 |
|||||||||||||||||||||||
Balance Sheet Location |
Notional Amount |
Fair Value |
Balance Sheet Location |
Notional Amount |
Fair Value |
|||||||||||||||||||
| Derivatives designated as hedging instruments |
||||||||||||||||||||||||
| Fair Value Hedges: |
||||||||||||||||||||||||
| Interest rate swap contracts |
Other assets | $ | $ | Other assets | $ | $ | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
| Total Fair Value Hedges |
$ | $ | $ | $ | ||||||||||||||||||||
| Cash Flow Hedges: |
||||||||||||||||||||||||
| Interest rate swap contracts |
Other assets | $ | $ | Other assets | $ | $ | |
|||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
| Total Cash Flow Hedges |
$ | $ | |
$ | $ | |||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
| Total derivatives designated as hedging instruments |
$ | $ | $ | $ | ||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
| Derivatives not designated as hedging instruments |
||||||||||||||||||||||||
| Forward loan sales commitments |
Other assets | $ | $ | Other assets | $ | $ | ||||||||||||||||||
| TBA mortgage-backed securities |
Other assets | Other assets | ||||||||||||||||||||||
| Interest rate lock commitments |
Other assets | Other assets | ||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
| Total derivatives not designated as hedging instruments |
$ | $ | $ | $ | ||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
| Total asset derivatives |
$ | $ | $ | $ | ||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
42
Liability Derivatives |
||||||||||||||||||||||||
June 30, 2022 |
December 31, 2021 |
|||||||||||||||||||||||
Balance Sheet Location |
Notional Amount |
Fair Value |
Balance Sheet Location |
Notional Amount |
Fair Value |
|||||||||||||||||||
| Derivatives designated as hedging instruments |
||||||||||||||||||||||||
| Fair Value Hedges: |
||||||||||||||||||||||||
| Interest rate swap contracts (hedging commercial loans) |
Other liabilities |
$ |
$ |
Other liabilities |
$ |
$ |
||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
| Total Fair Value Hedges |
$ |
$ |
$ |
$ |
||||||||||||||||||||
| Total derivatives designated as hedging instruments |
$ |
$ |
$ |
$ |
||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
| Derivatives not designated as hedging instruments |
||||||||||||||||||||||||
| Forward loan sales commitments |
Other liabilities | $ | $ | Other liabilities | $ | $ | ||||||||||||||||||
| TBA mortgage-backed securities |
Other liabilities | Other liabilities | ||||||||||||||||||||||
| Interest rate lock commitments |
Other liabilities | Other liabilities | ||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
| Total derivatives not designated as hedging instruments |
$ | $ | $ | $ | ||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
| Total liability derivatives |
$ | $ | $ | $ | ||||||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
The following table represents the carrying amount of the hedged assets/(liabilities) and the cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets/(liabilities) that are designated as a fair value accounting relationship as of June 30, 2022 and December 31, 2021.
| Derivatives in Fair Value Hedging Relationships |
Location in the Statement of Condition |
June 30, 2022 |
||||||||||||
Carrying Amount of the Hedged Assets/(Liabilities) |
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities) |
Cumulative Amount of Fair Value Hedging Adjustment Remaining for any Hedged Assets/ (Liabilities) for which Hedge Accounting has been Discontinued |
||||||||||||
| Interest rate swaps |
Loans, net of unearned income | $ | $ | $ | ||||||||||
| Derivatives in Fair Value Hedging Relationships |
Location in the Statement of Condition |
December 31, 2021 |
||||||||||||
Carrying Amount of the Hedged Assets/ (Liabilities) |
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities) |
Cumulative Amount of Fair Value Hedging Adjustment Remaining for any Hedged Assets/ (Liabilities) for which Hedge Accounting has been Discontinued |
||||||||||||
| Interest rate swaps |
Loans, net of unearned income | $ | |
$ | |
$ | |
|||||||
Derivative contracts involve the risk of dealing with both bank customers and institutional derivative counterparties and their ability to meet contractual terms. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. United’s exposure is limited to the replacement value of the contracts rather than the notional amount of the contract. The Company’s agreements generally contain provisions that limit the unsecured exposure up to an agreed upon threshold. Additionally, the Company attempts to minimize credit risk through certain approval processes established by management.
43
The effect of United’s derivative financial instruments on its unaudited Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021 are presented as
follows:
Three Months Ended |
||||||||||
| Income Statement Location |
June 30, 2022 |
June 30, 2021 |
||||||||
| Derivatives in hedging relationships |
||||||||||
| Cash flow Hedges: |
||||||||||
| Interest rate swap contracts |
Interest on long-term borrowings | $ | $ | ( |
||||||
| Fair Value Hedges: |
||||||||||
| Interest rate swap contracts |
Interest and fees on loans | $ | ( |
$ | ( |
|||||
| |
|
|
|
|||||||
| Total derivatives in hedging relationships |
$ | $ | ( |
|||||||
| |
|
|
|
|||||||
| Derivatives not designated as hedging instruments |
||||||||||
| Forward loan sales commitments |
Income from Mortgage Banking Activities | $ | $ | |||||||
| TBA mortgage-backed securities |
Income from Mortgage Banking Activities | ( |
( |
|||||||
| Interest rate lock commitments |
Income from Mortgage Banking Activities | ( |
( |
|||||||
| |
|
|
|
|||||||
| Total derivatives not designated as hedging instruments |
$ | ( |
$ | ( |
||||||
| |
|
|
|
|||||||
| Total derivatives |
$ | ( |
$ | ( |
||||||
| |
|
|
|
|||||||
Six Months Ended |
||||||||||
| Income Statement Location |
June 30, 2022 |
June 30, 2021 |
||||||||
| Derivatives in hedging relationships |
||||||||||
| Cash flow Hedges: |
||||||||||
| Interest rate swap contracts |
Interest on long-term borrowings | $ | ( |
$ | ( |
|||||
| Fair Value Hedges: |
||||||||||
| Interest rate swap contracts |
Interest and fees on loans | $ | ( |
$ |
( |
|||||
| |
|
|
|
|||||||
| Total derivatives in hedging relationships |
$ | ( |
$ | ( |
||||||
| |
|
|
|
|||||||
| Derivatives not designated as hedging instruments |
||||||||||
| Forward loan sales commitments |
Income from Mortgage Banking Activities | $ | ( |
$ | ( |
|||||
| TBA mortgage-backed securities |
Income from Mortgage Banking Activities | |||||||||
| Interest rate lock commitments |
Income from Mortgage Banking Activities | ( |
( |
|||||||
| |
|
|
|
|||||||
| Total derivatives not designated as hedging instruments |
$ | ( |
$ | ( |
||||||
| |
|
|
|
|||||||
| Total derivatives |
$ | ( |
$ | ( |
||||||
| |
|
|
|
|||||||
14. FAIR VALUE MEASUREMENTS
United determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which also clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
ASC Topic 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect United’s market assumptions.
44
The three levels of the fair value hierarchy based on these two types of inputs are as follows:
Level 1 |
- |
Valuation is based on quoted prices in active markets for identical assets and liabilities. | ||
Level 2 |
- |
Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market. | ||
Level 3 |
- |
Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. | ||
When
determining the fair value measurements for assets and liabilities, United looks to active and observable markets to price identical assets or liabilities whenever possible and classifies such items in Level 1. When identical assets and liabilities are no t traded in active markets, United looks to market observable data for similar assets and liabilities and classifies such items as Level 2. Nevertheless, certain assets and liabilities are no t actively traded in observable markets and United must use alternative valuation techniques using unobservable inputs to determine a fair value and classifies such items as Level 3. For assets and liabilities that are no t actively traded, the fair value measurement is based primarily upon estimates that require significant judgment. Therefore, the results may no t be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there are inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. The level within the fair value hierarchy is based on the lowest level of input that is significant in the fair value measurement.
In accordance with ASC Topic 820, the following describes the valuation techniques used by United to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements.
Securities available for sale and equity securities
: Securities available for sale and equity securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (“Level 1”). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Using a market approach valuation methodology, third party vendors compile prices based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, and “To Be Announced” prices (“Level 2”). Management internally reviews the fair values provided by third party vendors on a monthly basis. Management also performs a quarterly price testing analysis at the individual security level which compares the pricing provided by the third party vendors to an independent pricing source’s valuation of the same securities. Variances that are deemed to be material are reviewed by management. Additionally, to further assess the reliability of the information received from third party vendors, management obtains documentation from third party vendors related to the sources, methodologies, and inputs utilized in valuing securities classified as Level 2. Management analyzes this information to ensure the underlying assumptions appear reasonable. Management also obtains an independent service auditor’s report from third party vendors to provide reasonable assurance that appropriate controls are in place over the valuation process. Upon completing its review of the pricing from third party vendors at June 30, 2022, management determined that the prices provided by its third party pricing sources were reasonable and in line with management’s expectations for the market values of these securities. Therefore, prices obtained from third party vendors that did not reflect forced liquidation or distressed sales were not adjusted materially by management at June 30, 2022. Management utilizes a number of factors to determine if a market is inactive, all of which may require a significant level of judgment. Factors that management considers include: a significant widening of the bid-ask
spread, a considerable decline in the volume and level of trading activity in the instrument, a significant variance in prices among market participants, and a significant reduction in the level of observable inputs. Any securities available for sale not valued based upon quoted market prices or third party pricing models that consider observable market data are considered Level 3. Currently, United does not have any available-for-sale
45
Loans held for sale
: For residential mortgage loans sold in the mortgage banking segment, the loans closed are recorded at fair value using the fair value option which is measured using valuations from investors for loans with similar characteristics (“Level 2”) with some adjusted for the Company’s actual sales experience versus the investor’s indicated pricing (“Level 3”). The unobservable input for Level 3 valuations is the Company’s historical sales prices. For June 30, 2022, the range of historical sales prices increased the investor’s indicated pricing by a range of 0.07 % to 0.65 % with a weighted average increase of 0.13 %.
Derivatives
: United utilizes interest rate swaps to hedge exposure to interest rate risk and variability of cash flows associated to changes in the underlying interest rate of the hedged item. These hedging interest rate swaps are classified as either a fair value hedge or a cash flow hedge. United utilizes third-party vendors for derivative valuation purposes. These vendors determine the appropriate fair value based on a net present value calculation of the cash flows related to the interest rate swaps using primarily observable market inputs such as interest rate yield curves (“Level 2”). Valuation adjustments to derivative fair values for liquidity and credit risk are also taken into consideration, as well as the likelihood of default by United and derivative counterparties, the net counterparty exposure and the remaining maturities of the positions. Values obtained from third party vendors are typically not adjusted by management. Management internally reviews the derivative values provided by third party vendors on a quarterly basis. All derivative values are tested for reasonableness by management utilizing a net present value calculation. For a fair value hedge, the fair value of the interest rate swap is recognized on the balance sheet as either a freestanding asset or liability with a corresponding adjustment to the hedged financial instrument. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a fair value hedge are offset in current period earnings either in interest income or interest expense depending on the nature of the hedged financial instrument. For a cash flow hedge, the fair value of the interest rate swap is recognized on the balance sheet as either a freestanding asset or liability with a corresponding adjustment to accumulated other comprehensive income within shareholders’ equity, net of tax. Subsequent adjustments due to changes in the fair value of a derivative that qualifies as a cash flow hedge are offset to accumulated other comprehensive income, net of tax and reclassified into earnings in the same line associated with the forecasted transaction when the forecasted transaction affects earnings.
The Company records its interest rate lock commitments and forward loan sales commitments at fair value determined as the amount that would be required to settle each of these derivative financial instruments at the balance sheet date. In the normal course of business, United’s mortgage banking subsidiaries enter into contractual interest rate lock commitments to extend credit to borrowers with fixed expiration dates. The commitments become effective when the borrowers
of “lock-in”
a specified interest rate within the timeframes established by the mortgage companies. All borrowers are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to the investor. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, United’s mortgage banking subsidiaries enter into either a forward sales contract to sell loans to investors when using best efforts or a TBA mortgage-backed security under mandatory delivery. Fair values of TBA mortgage-backed securities are measured using valuations from investors for mortgage-backed securities with similar characteristics (“Level 2”). The forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments. Under the Company’s best efforts model, the rate lock commitments to borrowers and the forward sales contracts to investors through to the date the loan closes are undesignated derivatives and accordingly, are marked to fair value through earnings. These valuations fall into a Level 2 category. For residential mortgage loans sold in the mortgage banking segment, the interest rate lock commitments are recorded at fair value which is measured using valuations from investors for loans with similar characteristics as well as considering the probability of the loan closing (i.e. the “pull-through” rate) (“Level 2”) with some adjusted for the Company’s actual sales experience versus the investor’s indicated pricing (“Level 3”). The unobservable input for Level 3 valuations is the Company’s historical sales prices. For June 30, 2022, the range of historical sales prices increased the investor’s indicated pricing by a range For interest rate swap derivatives that are not designated in a hedge relationship, changes in the fair value of the derivatives are recognized in earnings in the same period as the change in the fair value. Unrealized gains and losses due to changes in the fair value of other derivative financial instruments not in hedge relationship are included in noninterest income and noninterest expense, respectively.
46
The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021, segregated by the level of the valuation inputs within the fair value hierarchy.
Fair Value at June 30, 2022 Using |
||||||||||||||||
| Description |
Balance as of June 30, 2022 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
| Assets |
||||||||||||||||
| Available for sale debt securities: |
||||||||||||||||
| U.S. Treasury securities and obligations of U.S. Government corporations and agencies |
$ | $ | $ | $ | ||||||||||||
| State and political subdivisions |
||||||||||||||||
| Residential mortgage-backed securities |
||||||||||||||||
| Agency |
||||||||||||||||
| Non-agency |
||||||||||||||||
| Commercial mortgage-backed securities |
||||||||||||||||
| Agency |
||||||||||||||||
| Asset-backed securities |
||||||||||||||||
| Single issue trust preferred securities |
||||||||||||||||
| Other corporate securities |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total available for sale securities |
||||||||||||||||
| Equity securities: |
||||||||||||||||
| Financial services industry |
||||||||||||||||
| Equity mutual funds (1) |
||||||||||||||||
| Other equity securities |
||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total equity securities |
||||||||||||||||
| Loans held for sale |
||||||||||||||||
| Derivative financial assets: |
||||||||||||||||
| Interest rate swap contracts |
||||||||||||||||
| Forward sales commitments |
||||||||||||||||
| TBA mortgage-backed securities |
||||||||||||||||
| Interest rate lock commitments |
||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total derivative financial assets |
||||||||||||||||
| Liabilities |
||||||||||||||||
| Derivative financial liabilities: |
||||||||||||||||
| Forward sales commitments |
||||||||||||||||
| Interest rate lock commitments |
||||||||||||||||
| |
|
|
|
|
|
|
|
|
||||||||
| Total derivative financial liabilities |
||||||||||||||||
47
Fair Value at December 31, 2021 Using |
||||||||||||||||
| Description |
Balance as of December 31, 2021 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
| Assets |
||||||||||||||||
| Available for sale debt securities: |
||||||||||||||||
| U.S. Treasury securities and obligations of U.S. Government corporations and agencies |
$ | $ | $ | $ | ||||||||||||
| State and political subdivisions |
||||||||||||||||
| Residential mortgage-backed securities |
||||||||||||||||
| Agency |
||||||||||||||||
| Non-agency |
||||||||||||||||
| Commercial mortgage-backed securities |
||||||||||||||||
| Agency |
||||||||||||||||
| Asset-backed securities |
||||||||||||||||
| Single issue trust preferred securities |
||||||||||||||||
| Other corporate securities |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total available for sale securities |
||||||||||||||||
| Equity securities: |
||||||||||||||||
| Financial services industry |
||||||||||||||||
| Equity mutual funds (1) |
||||||||||||||||
| Other equity securities |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total equity securities |
||||||||||||||||
| Loans held for sale |
||||||||||||||||
| Derivative financial assets: |
||||||||||||||||
| Interest rate swap contracts |
||||||||||||||||
| Forward sales commitments |
||||||||||||||||
| TBA mortgage-backed securities |
||||||||||||||||
| Interest rate lock commitments |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total derivative financial assets |
||||||||||||||||
| Liabilities |
||||||||||||||||
| Derivative financial liabilities: |
||||||||||||||||
| Interest rate swap contracts |
||||||||||||||||
| Forward sales commitments |
||||||||||||||||
| TBA mortgage-backed securities |
||||||||||||||||
| Interest rate lock commitments |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total derivative financial liabilities |
||||||||||||||||
There were no
The following tables present additional information about financial assets and liabilities measured at fair value at June 30, 2022 and December 31, 2021 on a recurring basis and for which United has utilized Level 3 inputs to determine fair value. The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses related to assets still held at the reporting date are recorded in Income from mortgage banking activities in the Consolidated Statements of
Income.
Loans held for sale |
||||||||
June 30, 2022 |
December 31, 2021 |
|||||||
| Balance, beginning of period |
$ | $ | ||||||
| Originations |
||||||||
| Sales |
( |
) | ( |
) | ||||
| Total gains or losses during the period recognized in earnings |
||||||||
48
Loans held for sale |
||||||||
June 30, 2022 |
December 31, 2021 |
|||||||
Balance, end of period |
$ |
$ |
||||||
The amount of total (losses) gains for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at reporting date |
$ |
$ |
||||||
Derivative Financial Assets TBA Securities |
||||||||
June 30, 2022 |
December 31, 2021 |
|||||||
Balance, beginning of period |
$ | $ | ||||||
Transfers other |
||||||||
Balance, end of period |
$ | $ | ||||||
The amount of total gains for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at reporting date |
$ | $ | ||||||
Derivative Financial Assets Interest Rate Lock Commitments |
||||||||
June 30, 2022 |
December 31, 2021 |
|||||||
Balance, beginning of period |
$ | $ | ||||||
Transfers other |
( |
) | ( |
) | ||||
Balance, end of period |
$ | $ | ||||||
The amount of total gains for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at reporting date |
$ | $ | ||||||
Derivative Financial Liabilities Forward Sales Commitments |
||||||||
June 30, 2022 |
December 31, 2021 |
|||||||
Balance, beginning of period |
$ | $ | ||||||
Transfers other |
||||||||
Balance, end of period |
$ | $ | ||||||
The amount of total gains for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at reporting date |
$ | $ | ||||||
Derivative Financial Liabilities TBA Securities |
||||||||
June 30, 2022 |
December 31, 2021 |
|||||||
Balance, beginning of period |
$ | $ | ||||||
Transfers other |
( |
) | ||||||
Balance, end of period |
$ | $ | ||||||
Derivative Financial Liabilities TBA Securities |
||||||||
June 30, 2022 |
December 31, 2021 |
|||||||
The amount of total gains for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at reporting date |
$ | $ | ||||||
49
Derivative Financial Liabilities Interest Rate Lock |
||||||||
June 30, 2022 |
December 31, 2021 |
|||||||
Balance, beginning of period |
$ | $ | ||||||
Transfers other |
||||||||
Balance, end of period |
$ | $ | ||||||
The amount of total gains for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at reporting date |
$ | $ | ||||||
Fair Value Option
The following table reflects the change in fair value included in earnings of financial instruments for which the fair value option has been elected:
Description |
Three Months Ended June 30, 2022 |
Three Months Ended June 30, 2021 |
||||||
Income from mortgage banking activities |
$ | $ | ||||||
Description |
Six Months Ended June 30, 2022 |
Six Months Ended June 30, 2021 |
||||||
Income from mortgage banking activities |
$ | ( |
) | $ | ( |
) | ||
The following table reflects the difference between the aggregate fair value and the remaining contractual principal outstanding for financial instruments for which the fair value option has been elected:
June 30, 2022 |
December 31, 2021 |
|||||||||||||||||||||||
Description |
Unpaid Principal Balance |
Fair Value |
Fair Value Over/(Under) Unpaid Principal Balance |
Unpaid Principal Balance |
Fair Value |
Fair Value Over/(Under) Unpaid Principal Balance |
||||||||||||||||||
Loans held for sale |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of accounting or write-downs of individual assets.
lower-of-cost-or-market
The following describes the valuation techniques used by United to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements.
50
Loans held for sale
: Loans held for sale within the community banking segment that are delivered on a best efforts basis are carried at the lower of cost or fair value. The fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (“Level 2”). As such, United records any fair value adjustments for these loans held for sale on a nonrecurring basis. Individually assessed loans
: In the determination of the allowance for loan losses, loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. Fair value is measured using a market approach based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an appraisal conducted by an independent, licensed appraiser outside of the Company using comparable property sales (“Level 2”). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (“Level 3”). For individually assessed loans, a specific reserve is established through the allowance for loan losses, if necessary, by estimating the fair value of the underlying collateral on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for credit losses expense on the Consolidated Statements of Income. OREO
: OREO consists of real estate acquired in foreclosure or other settlement of loans. Such assets are carried on the balance sheet at the lower of the investment in the assets or the fair value of the assets less estimated selling costs. Fair value is determined by one of two market approach methods depending on whether the property has been vacated and an appraisal can be conducted. If the property has yet to be vacated and thus an appraisal cannot be performed, a Brokers Price Opinion (i.e. BPO), is obtained. A BPO represents a best estimate valuation performed by a realtor based on knowledge of current property values and a visual examination of the exterior condition of the property. Once the property is subsequently vacated, a formal appraisal is obtained and the recorded asset value appropriately adjusted. On the other hand, if the OREO property has been vacated and an appraisal can be conducted, the fair value of the property is determined based upon the appraisal using a market approach. An authorized independent appraiser conducts appraisals for United. Appraisals for property other than ongoing construction are based on consideration of comparable property sales (“Level 2”). In contrast, valuation of ongoing construction assets requires some degree of professional judgment. In conducting an appraisal for ongoing construction property, the appraiser develops two appraised amounts: an “as is” appraised value and a “completed” value. Based on professional judgment and their knowledge of the particular situation, management determines the appropriate fair value to be utilized for such property (“Level 3”). As a matter of policy, valuations are reviewed at least annually and appraisals are generally updated on a bi-annual
basis with values lowered as necessary. Intangible Assets
: For United, intangible assets consist of goodwill and core deposit intangibles. Goodwill is tested for impairment at least annually or sooner if indicators of impairment exist. United may elect to perform a qualitative analysis to determine whether or not it is more-likely-than not that the fair value of a reporting unit is less than its carrying amount. If United elects to bypass this qualitative analysis, or concludes via qualitative analysis that it is more-likely-than-not
that the fair value of a reporting unit is less than its carrying value, United may use either a market or income quantitative approach to determine the fair value of the reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment charge would be recorded for the difference, not to exceed the amount of goodwill allocated to the reporting unit. At each reporting date, the Company considers potential indicators of impairment. United performed its annual goodwill impairment test on the Company’s reporting units as of September 30, 2021. The goodwill impairment test did not 51
and
volatility surrounding COVID-19
and the performance of the Company’s stock as well as possible other impairment indicators could cause us to perform a goodwill impairment test which could result in an impairment charge being recorded for that period if the carrying value of goodwill was found to exceed fair value. Core deposit intangibles relate to the estimated value of the deposit base of acquired institutions. Management reviews core deposit intangible assets on an annual basis, or sooner if indicators of impairment exist, and evaluates changes in facts and circumstances that may indicate impairment in the carrying value. Mortgage Servicing Rights (“MSRs”):
A mortgage servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans are expected to more than adequately compensate the Company for performing the servicing. The Company initially measures servicing assets and liabilities retained related to the sale of residential loans held for sale (“mortgage servicing rights”) at fair value. For subsequent measurement purposes, the Company measures servicing assets and liabilities using the amortization method on a quarterly basis. The quarterly determination of fair value of servicing rights is provided by a third party and is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy. The unobservable inputs for Level 3 valuations are market discount rates, anticipated prepayment speeds, projected delinquency rates, and ancillary fee income net of servicing costs. For the unobservable inputs used in the valuation of mortgage servicing rights at June 30, 2022 and December 31, 2021, refer to Note 8 of these Notes to Consolidated Financial Statements. The Company did no 250
on mortgage servicing rights in the second quarter and first six months ended June 30, 2021.
The following table summarizes United’s financial assets that were measured at fair value on a nonrecurring basis during the period:
Fair value at June 30, 2022 |
||||||||||||||||||||
Description |
Balance as of June 30, 2022 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
YTD Gains (Losses) |
|||||||||||||||
Assets |
||||||||||||||||||||
Individually assessed loans |
$ | $ | |
$ | $ | |
$ | ( |
||||||||||||
OREO |
( |
|||||||||||||||||||
Mortgage servicing rights |
||||||||||||||||||||
Fair value at December 31, 2021 |
||||||||||||||||||||
Description |
Balance as of December 31, 2021 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
YTD Gains (Losses) |
|||||||||||||||
Assets |
||||||||||||||||||||
Individually assessed loans |
$ | |
$ | |
$ | |
$ | |
$ | ( |
||||||||||
OREO |
( |
|||||||||||||||||||
Mortgage servicing rights |
( |
|||||||||||||||||||
52
Fair Value of Other Financial Instruments
The following methods and assumptions were used by United in estimating its fair value disclosures for other financial instruments:
Cash and Cash Equivalents:
The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values. Securities held to maturity and other securities
: The estimated fair values of securities held to maturity are based on quoted market prices, where available. If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data. Any securities held to maturity, not valued based upon the methods above, are valued based on a discounted cash flow methodology using appropriately adjusted discount rates reflecting nonperformance and liquidity risks. Other securities consist mainly of shares of Federal Home Loan Bank and Federal Reserve Bank stock that do not have readily determinable fair values and are carried at cost. Loans and leases
: The fair values of certain mortgage loans (e.g., one-to-four
Deposits
: The fair values of demand deposits (e.g., interest and noninterest checking, regular savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-term Borrowings:
The carrying amounts of federal funds purchased, borrowings under repurchase agreements and any other short-term borrowings approximate their fair values. Long-term Borrowings:
The fair values of United’s Federal Home Loan Bank borrowings and trust preferred securities are estimated using discounted cash flow analyses, based on United’s current incremental borrowing rates for similar types of borrowing arrangements. 53
Summary of Fair Values for All Financial Instruments
The estimated fair values of United’s financial instruments are summarized below:
Fair Value Measurements |
||||||||||||||||||||
Carrying Amount |
Fair Value |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||||||
June 30, 2022 |
||||||||||||||||||||
Cash and cash equivalents |
$ | $ | $ | $ | $ | |||||||||||||||
Securities available for sale |
||||||||||||||||||||
Securities held to maturity |
||||||||||||||||||||
Equity securities |
||||||||||||||||||||
Other securities |
||||||||||||||||||||
Loans held for sale |
||||||||||||||||||||
Net loans |
||||||||||||||||||||
Derivative financial assets |
||||||||||||||||||||
Mortgage servicing rights |
||||||||||||||||||||
Deposits |
||||||||||||||||||||
Short-term borrowings |
||||||||||||||||||||
Long-term borrowings |
||||||||||||||||||||
Derivative financial liabilities |
||||||||||||||||||||
December 31, 2021 |
||||||||||||||||||||
Cash and cash equivalents |
$ | $ | $ | $ | $ | |||||||||||||||
Securities available for sale |
||||||||||||||||||||
Securities held to maturity |
||||||||||||||||||||
Equity securities |
||||||||||||||||||||
Other securities |
||||||||||||||||||||
Loans held for sale |
||||||||||||||||||||
Net loans |
||||||||||||||||||||
Derivative financial assets |
||||||||||||||||||||
Mortgage servicing rights |
||||||||||||||||||||
Deposits |
||||||||||||||||||||
Short-term borrowings |
||||||||||||||||||||
Long-term borrowings |
||||||||||||||||||||
Derivative financial liabilities |
||||||||||||||||||||
15. STOCK BASED COMPENSATION
On May 12, 2020, United’s shareholders approved the 2020 Long-Term Incentive Plan (“2020 LTI Plan”). The 2020 LTI Plan became effective May 13, 2020. An award granted under the 2020 LTI Plan may consist of any 2,300,000 . The 2020 LTI Plan will be administered by a board committee appointed by United’s Board of Directors (the “Board”). Unless otherwise determined by the Board, the Compensation Committee of the Board (the “Committee”) shall administer the 2020 LTI Plan. The maximum number of options and stock appreciation rights, in the aggregate, which may be awarded to any individual key employee during any calendar year is 100,000 . The maximum number of options and stock appreciation rights, in the aggregate, which may be awarded to any 10,000 or, if such Award is payable in cash, the Fair Market Value equivalent thereof. The maximum number of shares of restricted stock or shares
non-qualified
stock options or incentive stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units, performance units or other-stock-based award. These awards all relate to the common stock of United. The maximum number of shares of United common stock which may be issued under the 2020 LTI Plan is non-employee
director during any calendar year is 54
subject to a restricted stock units award that may be granted during any calendar year is 225,000 shares to any individual key employee and 10,000 shares to any individual 1/3 per year over the first three anniversaries of the award. United adopted a clawback policy that applies to named executive officers and other executive officers and permits the Committee to cancel certain awards and to recoup gains realized from previous awards should United be required to prepare an accounting restatement due to materially inaccurate performance metrics. A Form
non-employee
director. Subject to certain change in control provisions, the 2020 LTI Plan provides that all awards of will vest as the Committee determines in the award agreement, provided that no awards will vest sooner than S-8
was filed on May 29, 2020 with the Securities and Exchange Commission to register all the shares which were available for the 2020 LTI Plan. The 2020 LTI Plan replaces the 2016 LTI Plan. Compensation expense of $2,543 and $4,604 related to the nonvested awards under United’s Long-Term Incentive Plans was incurred for the second quarter and first six months of 2022, respectively, as compared to the compensation expense of $1,892 and $3,580 related to the nonvested awards under United’s Long-Term Incentive Plans incurred for the second quarter and first six months of 2021, respectively. Compensation expense was included in employee compensation in the unaudited Consolidated Statements of Income.
Stock Options
United currently has options outstanding from various option plans other than the 2020 LTI Plan (the “Prior Plans”); however, no common shares of United stock are available for grants under the Prior Plans as these plans have expired. Awards outstanding under the Prior Plans will remain in effect in accordance with their respective terms. The maximum term for options granted under the plans is ten (10 ) years.
A summary of activity under United’s stock option plans as of June 30, 2022, and the changes during the first six months of 2022 are presented below:
Six Months Ended June 30, 2022 |
||||||||||||||||
Weighted Average |
||||||||||||||||
Shares |
Aggregate Intrinsic Value |
Remaining Contractual Term (Yrs.) |
Exercise Price |
|||||||||||||
Outstanding at January 1, 2022 |
$ | |
||||||||||||||
Granted |
||||||||||||||||
Exercised |
( |
) | ||||||||||||||
Forfeited or expired |
( |
) | ||||||||||||||
Outstanding at June 30, 2022 |
$ | |
$ | |||||||||||||
Exercisable at June 30, 2022 |
$ | $ | ||||||||||||||
The following table summarizes the status of United’s nonvested stock option awards during the first six months of 2022:
Shares |
Weighted-Average Grant Date Fair Value Per Share |
|||||||
Nonvested at January 1, 2022 |
$ | |||||||
Granted |
||||||||
Vested |
( |
) | ||||||
Forfeited or expired |
( |
) | ||||||
Nonvested at June 30, 2022 |
$ | |||||||
During the six months ended June 30, 2022 and 2021, 319,573 and 173,945 shares, respectively, were issued in connection with stock option exercises. All shares issued in connection with stock option exercises for the six months ended June 30, 2022 and 2021 were issued from authorized and unissued stock. The total intrinsic value of options exercised under the Plans during the six months ended June 30, 2022 and 2021 was $4,619 and $1,644 respectively.
55
As of June 30, 2022, the total unrecognized compensation cost related to nonvested stock option awards was $753 with a weighted-average expense recognition period of 1.0 years.
Restricted Stock
Under the 2020 LTI Plan, United may award restricted common shares to key employees and 10,388 with a weighted-average expense recognition period of 1.3 years.
non-employee
directors. Restricted shares granted to participants will vest no sooner than 1/3 per year over the first three anniversaries of the award. Unless determined by the Committee or the Board and provided in the award agreement, recipients of restricted shares do not pay any consideration to United for the shares, have the right to vote all shares subject to such grant and receive all dividends with respect to such shares, whether or not the shares have vested. Presently, these nonvested participating securities have an immaterial impact on diluted earnings per share. As of June 30, 2022, the total unrecognized compensation cost related to nonvested restricted stock awards was $The following summarizes the changes to United’s nonvested restricted common shares for the period ended June 30, 2022:
Shares |
Weighted-Average Grant Date Fair Value Per Share |
|||||||
Nonvested at January 1, 2022 |
$ | |
||||||
Granted |
||||||||
Vested |
( |
) | ||||||
Forfeited |
( |
) | ||||||
Nonvested at June 30, 2022 |
$ | |||||||
Restricted Stock Units
Under the 2020 LTI Plan, United may grant restricted stock units (“RSUs”) to key employees. These awards help align the interests of these employees with the interests of the shareholders of United by providing economic value directly related to the performance of the Company. These RSU grants could be time-vested RSUs, performance-vested RSUs, or a combination of both. Currently, time-vested RSUs vest ratably over three years from the date of grant. Performance-vested RSUs cliff-vest after assessment of the Company’s performance over a period of three years. The number of performance-vested RSUs that vest is determined by two metrics measured relative to peers: Return on Average Tangible Common Equity (“ROATCE”) and Total Shareholder Return (“TSR”). Based on ASC Topic 718, the ROATCE comparison is considered a performance condition while the TSR comparison is considered a market condition. There will be no payout of the performance-vested awards if the threshold performance is not achieved. United communicates the specific threshold, target, and maximum performance-vested RSU awards and performance targets to the applicable key employees at the beginning of a performance period. Dividends are accrued but not paid in respect to the awards until the RSUs vest. The holder does not have the right to vote the shares during the time and performance periods. The value of the time-vested RSUs and the performance-vested, based on the performance condition, RSUs awarded is established as the fair market value of the stock at the time of the grant. The value of the performance-vested, based on the market condition, RSUs awarded is estimated through the use of a Monte Carlo valuation model as of the grant date. The Company recognizes expense on the RSUs in accordance with ASC Topic 718.
The following table summarizes the status of United’s nonvested RSUs during the first six months of
2022:
Shares |
Weighted-Average Grant Date Fair Value Per Share |
|||||||
Nonvested at January 1, 2022 |
$ | |
||||||
Granted |
||||||||
Vested |
( |
) |
||||||
Forfeited or expired |
||||||||
Nonvested at June 30, 2022 |
$ | |||||||
56
As of June 30, 2022, the total unrecognized compensation cost related to nonvested restricted stock units was $6,810 with a weighted-average expense recognition period of 1.4 years.
16. EMPLOYEE BENEFIT PLANS
United has a defined benefit retirement plan covering qualified employees hired prior to October 1, 2007. Pension benefits are based on years of service and the average of the employee’s highest five consecutive plan years of basic compensation paid during the ten plan years preceding the date of determination. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. No discretionary contributions were made during the first six months of 2022 and 2021.
Included in accumulated other comprehensive income at December 31, 2021 are unrecognized actuarial losses of $44,370 ($34,032 net of tax) that have not yet been recognized in net periodic pension cost.
Net periodic pension cost for the three and six months ended June 30, 2022 and 2021 included the following
components:
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Service cost |
$ | $ | $ | $ | ||||||||||||
Interest cost |
||||||||||||||||
Expected return on plan assets |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Recognized net actuarial loss |
||||||||||||||||
Net periodic pension cost |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
Weighted-average assumptions: |
||||||||||||||||
Discount rate |
% | % | % | % | ||||||||||||
Expected return on assets |
% | % | % | % | ||||||||||||
Rate of compensation increase (prior to age 40) |
% | % | % | % | ||||||||||||
Rate of compensation increase (ages 40-54) |
% | % | % | % | ||||||||||||
Rate of compensation increase (otherwise) |
% | % | % | % | ||||||||||||
17. INCOME TAXES
United records a liability for uncertain income tax positions based on a recognition threshold of
more-likely-than-not,
and a measurement attribute for all tax positions taken on a tax return, in order for those tax positions to be recognized in the financial statements. As of June 30, 2022 and 2021, the total amount of accrued interest related to uncertain tax positions was $780 and $722 , respectively. United accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes.
United is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2018, 2019 and 2020 and certain State Taxing authorities for the years ended December 31, 2018 through 2020.
United’s effective tax rate was 19.75 20.50
57
18. COMPREHENSIVE INCOME
The components of total comprehensive income for the three and six months ended June 30, 2022 and 2021 are as
follows:
Three Months Ended |
Six Months Ended |
|||||||||||||||
June 30 |
June 30 |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Net Income |
$ |
$ |
$ |
$ |
||||||||||||
Available for sale (“AFS”) securities: |
||||||||||||||||
Change in net unrealized (loss) gain on AFS securities arising during the period |
( |
) | ( |
) | ( |
) | ||||||||||
Related income tax effect |
( |
) | ||||||||||||||
Net reclassification adjustment for gains included in net income |
( |
) | ||||||||||||||
Related income tax expense |
||||||||||||||||
Net effect of AFS securities on other comprehensive income |
( |
) |
( |
) |
( |
) | ||||||||||
Cash flow hedge derivatives: |
||||||||||||||||
Unrealized gain (loss) on cash flow hedge before reclassification to interest expense |
( |
) | ||||||||||||||
Related income tax effect |
( |
) | ( |
) | ( |
) | ||||||||||
Net reclassification adjustment for (gains) losses included in net income |
( |
) | ||||||||||||||
Related income tax effect |
( |
) | ( |
) | ( |
) | ||||||||||
Net effect of cash flow hedge derivatives on other comprehensive income |
( |
) |
||||||||||||||
Pension plan: |
||||||||||||||||
Recognized net actuarial loss |
||||||||||||||||
Related income tax benefit |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Net effect of change in pension plan asset on other comprehensive income |
||||||||||||||||
Total change in other comprehensive income |
( |
) |
( |
) |
( |
) | ||||||||||
Total Comprehensive (Loss) Income |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||
The components of accumulated other comprehensive income for the six months ended June 30, 2022 are as
follows:
Changes in Accumulated Other Comprehensive Income (AOCI) by Component (a) For the Six Months Ended June 30, 2022 |
||||||||||||||||
Unrealized Gains/Losses on AFS Securities |
Unrealized Gains/Losses on Cash Flow Hedges |
Defined Benefit Pension Items |
Total |
|||||||||||||
Balance at January 1, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
Other comprehensive income before reclassification |
( |
) | ( |
) | ||||||||||||
Amounts reclassified from accumulated other comprehensive income |
||||||||||||||||
Net current-period other comprehensive income, net of tax |
( |
) | ( |
) | ||||||||||||
Balance at June 30, 2022 |
$ | ( |
) | $ | $ | ( |
) | $ | ( |
) | ||||||
| (a) | All amounts are net-of-tax. |
Reclassifications out of Accumulated Other Comprehensive Income (AOCI) For the Six Months Ended June 30, 2022 | ||||||
Details about AOCI Components |
Amount Reclassified from AOCI |
Affected Line Item in the Statement Where Net Income is Presented | ||||
Available for sale (“AFS”) securities: |
||||||
Net reclassification adjustment for gains included in net income |
$ | Net investment securities gains | ||||
58
Reclassifications out of Accumulated Other Comprehensive Income (AOCI) For the Six Months Ended June 30, 2022 | ||||||
Details about AOCI Components |
Amount Reclassified from AOCI |
Affected Line Item in the Statement Where Net Income is Presented | ||||
| Total before tax | ||||||
Related income tax effect |
Tax expense | |||||
| Net of tax | ||||||
Cash flow hedge: |
||||||
Net reclassification adjustment for losses included in net income |
$ | Interest expense | ||||
| Total before tax | ||||||
Related income tax effect |
( |
) | Tax expense | |||
| Net of tax | ||||||
Pension plan: |
||||||
Recognized net actuarial loss |
(a) | |||||
| Total before tax | ||||||
Related income tax effect |
( |
) | Tax expense | |||
| Net of tax | ||||||
Total reclassifications for the period |
$ | |
||||
| (a) | This AOCI component is included in the computation of changes in plan assets (see Note 16, Employee Benefit Plans) |
19. EARNINGS PER SHARE
The reconciliation of the numerator and denominator of basic earnings per share with that of diluted earnings per share is presented as follows:
Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
Distributed earnings allocated to common stock |
$ | $ | $ | $ | ||||||||||||
Undistributed earnings allocated to common stock |
||||||||||||||||
Net earnings allocated to common shareholders |
$ | $ | $ | $ | ||||||||||||
Average common shares outstanding |
||||||||||||||||
Equivalents from stock options |
||||||||||||||||
Average diluted shares outstanding |
||||||||||||||||
Earnings per basic common share |
$ | $ | $ | $ | ||||||||||||
Earnings per diluted common share |
$ | $ | $ | $ | ||||||||||||
Antidilutive stock options and restricted stock outstanding of 847,758 and 1,144,734 for the three months and six months ended June 30, 2022, respectively, were excluded from the earnings per diluted common share calculation as compared to 468,892 and 978,095 for the three months and six months ended June 30, 2021, respectively.
20. VARIABLE INTEREST ENTITIES
Variable interest entities (“VIEs”) are entities that either have a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest (i.e., ability to make significant decisions, through voting rights, right to receive the expected residual returns of the entity, and obligation to absorb the expected losses of the entity). VIEs can be structured as corporations, trusts, partnerships, or other legal entities. United’s business practices include relationships with certain VIEs. For United, the business purpose of these relationships primarily consists of funding activities in the form of issuing trust preferred securities.
59
United currently sponsors twenty statutory business trusts that were created for the purpose of raising funds that originally qualified for Tier I regulatory capital. As previously discussed, these trusts now are considered Tier II regulatory capital. These trusts, of which several were acquired through bank acquisitions, issued or participated in pools of trust preferred capital securities to third-party investors with the proceeds invested in junior subordinated debt securities of United. The Company, through a small capital contribution, owns 100 % of the voting equity shares of each trust. The assets, liabilities, operations, and cash flows of each trust are solely related to the issuance, administration, and repayment of the preferred equity securities held by third-party investors. United fully and unconditionally guarantees the obligations of each trust and is obligated to redeem the junior subordinated debentures upon maturity.
United does not consolidate these trusts as it is not the primary beneficiary of these entities because United’s wholly-owned and indirect wholly-owned statutory trust subsidiaries do not have a controlling financial interest in the VIEs. A controlling financial interest is present when an enterprise has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE.
Information related to United’s statutory trusts is presented in the table
below:
Description |
Issuance Date |
Amount of Capital Securities Issued |
Stated Interest Rate |
Maturity Date | ||||||
United Statutory Trust III |
$ | |||||||||
United Statutory Trust IV |
$ | |||||||||
United Statutory Trust V |
$ | |||||||||
United Statutory Trust VI |
$ | |||||||||
Premier Statutory Trust II |
$ | |||||||||
Premier Statutory Trust III |
$ | |||||||||
Premier Statutory Trust IV |
$ | |||||||||
Premier Statutory Trust V |
$ | |||||||||
Centra Statutory Trust I |
$ | |||||||||
Centra Statutory Trust II |
$ | |||||||||
Virginia Commerce Trust II |
$ | |||||||||
Virginia Commerce Trust III |
$ | |||||||||
Cardinal Statutory Trust I |
$ | |||||||||
UFBC Capital Trust I |
$ | |||||||||
Carolina Financial Capital Trust I |
$ | |||||||||
Carolina Financial Capital Trust II |
$ | |||||||||
Greer Capital Trust I |
$ | |||||||||
Greer Capital Trust II |
$ | |||||||||
First South Preferred Trust I |
$ | |||||||||
BOE Statutory Trust I |
$ | |||||||||
United, through its banking subsidiary, also makes limited partner equity investments in various low income housing and community development partnerships sponsored by independent third-parties. United invests in these partnerships to either realize tax credits on its consolidated federal income tax return or for purposes of earning a return on its investment. These partnerships are considered VIEs as the limited partners lack a controlling financial interest in the entities through their inability to make decisions that have a significant effect on the operations and success of the partnerships. United’s limited partner interests in these entities is immaterial, however; these partnerships are not consolidated as United is not deemed to be the primary beneficiary.
60
The following table summarizes quantitative information about United’s significant involvement in unconsolidated VIEs:
As of June 30, 2022 |
As of December 31, 2021 |
|||||||||||||||||||||||
Aggregate Assets |
Aggregate Liabilities |
Risk Of Loss (1) |
Aggregate Assets |
Aggregate Liabilities |
Risk Of Loss (1) |
|||||||||||||||||||
| Trust preferred securities |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (1) | Represents investment in VIEs. |
21. SEGMENT INFORMATION
United operates in two business segments: community banking and mortgage banking. Through its community banking segment, United offers a full range of products and services through various delivery channels. In particular, the community banking segment includes both commercial and consumer lending and provides customers with such products as commercial loans, real estate loans, business financing and consumer loans. In addition, this segment provides customers with several choices of deposit products including demand deposit accounts, savings accounts and certificates of deposit as well as investment and financial advisory services to businesses and individuals, including financial planning, retirement/estate planning, and investment management. The mortgage banking segment engages primarily in the origination and acquisition of residential mortgages for sale into the secondary market though United’s mortgage banking subsidiaries, George Mason and Crescent. Crescent may retain servicing rights on their mortgage loans sold. At certain times, Crescent may purchase rights to service loans from third parties. These rights, which are known as mortgage servicing rights, provide the owner with the contractual right to receive a stream of cash flows in exchange for performing specified mortgage servicing functions.
The community banking segment provides the mortgage banking segment (George Mason and Crescent) with short-term funds to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest based on the
30-day
LIBOR rate. These transactions are eliminated in the consolidation process. The Company does not have any operating segments other than those reported. The “Other” category consists of financial information not directly attributable to a specific segment, including interest income from investments and net securities gains or losses of parent companies and their
non-banking
subsidiaries, interest expense related to subordinated notes of unconsolidated subsidiaries as well as the elimination of non-segment
related intercompany transactions such as management fees. The “Other” represents an overhead function rather than an operating segment. Information about the reportable segments and reconciliation of this information to the consolidated financial statements at and for the three and six months ended June 30, 2022 and 2021 is as follows:
At and For the Three Months Ended June 30, 2022 |
||||||||||||||||||||
Community Banking |
Mortgage Banking |
Other |
Intersegment Eliminations |
Consolidated |
||||||||||||||||
| Net interest income |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||
| Provision for credit losses |
( |
) | ( |
) | ||||||||||||||||
| Other income |
( |
) | ||||||||||||||||||
| Other expense |
( |
) | ||||||||||||||||||
| Income taxes |
( |
) | ( |
) | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income (loss) |
$ | $ | ( |
$ | ( |
$ | $ | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total assets (liabilities) |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||
| Average assets (liabilities) |
( |
) | ||||||||||||||||||
61
At and For the Three Months Ended June 30, 2021 |
||||||||||||||||||||
Community Banking |
Mortgage Banking |
Other |
Intersegment Eliminations |
Consolidated |
||||||||||||||||
| Net interest income |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||
| Provision for credit losses |
( |
) | ( |
) | ||||||||||||||||
| Other income |
( |
) | ||||||||||||||||||
| Other expense |
( |
) | ||||||||||||||||||
| Income taxes |
||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income (loss) |
$ | $ | $ | $ | $ | |||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total assets (liabilities) |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||
| Average assets (liabilities) |
( |
) | ||||||||||||||||||
At and For the Six Months Ended June 30, 2022 |
||||||||||||||||||||
Community Banking |
Mortgage Banking |
Other |
Intersegment Eliminations |
Consolidated |
||||||||||||||||
| Net interest income |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||
| Provision for credit losses |
( |
) | ( |
) | ||||||||||||||||
| Other income |
( |
) | ||||||||||||||||||
| Other expense |
( |
) | ( |
) | ||||||||||||||||
| Income taxes |
( |
) | ( |
) | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income (loss) |
$ | $ | ( |
$ | ( |
) | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total assets (liabilities) |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||
| Average assets (liabilities) |
( |
) | ||||||||||||||||||
At and For the Six Months Ended June 30, 2021 |
||||||||||||||||||||
Community Banking |
Mortgage Banking |
Other |
Intersegment Eliminations |
Consolidated |
||||||||||||||||
| Net interest income |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||
| Provision for credit losses |
( |
) | ( |
) | ||||||||||||||||
| Other income |
( |
) | ||||||||||||||||||
| Other expense |
( |
) | ||||||||||||||||||
| Income taxes |
||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income (loss) |
$ | $ | $ | $ | $ | |||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total assets (liabilities) |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||
| Average assets (liabilities) |
( |
) | ||||||||||||||||||
Item 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD-LOOKING STATEMENTS
Congress passed the Private Securities Litigation Act of 1995 to encourage corporations to provide investors with information about the company’s anticipated future financial performance, goals, and strategies. The act provides a safe haven for such disclosure; in other words, protection from unwarranted litigation if actual results are not the same as management expectations.
United desires to provide its shareholders with sound information about past performance and future trends. Consequently, any forward-looking statements contained in this report, in a report incorporated by reference to this report, or made by management of United in this report, in any other reports and filings, in press releases and in oral statements, involve numerous assumptions, risks and uncertainties. Forward-looking statements can be identified by the use of the words “expect,” “may,” “could,” “intend,” “project,” “estimate,” “believe,” “anticipate,” and other words of similar meaning. Such forward-looking statements are based on assumptions and estimates, which although believed to be reasonable, may turn out to be incorrect, such as statements about the potential impacts of the
COVID-19
pandemic. Therefore, undue reliance62
should not be placed upon these estimates and statements. United cannot assure that any of these statements, estimates, or beliefs will be realized and actual results may differ from those contemplated in these “forward-looking statements.” United undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.
RECENT DEVELOPMENTS
United Bank (the “Bank”), the wholly-owned bank subsidiary of United, has received a Community Reinvestment Act (“CRA”) Performance Evaluation from the Federal Reserve Bank of Richmond (the “FRB”) with a rating of “Needs to Improve.” Based on its performance on the individual components of the CRA exam, the Bank received a rating of “Satisfactory.” These individual components were a “High Satisfactory” rating for the Lending Test, an “Outstanding” rating for the Investment Test and a “High Satisfactory” rating for the Service Test. The Bank’s final overall rating, however, was downgraded to “Needs to Improve” as a result of a Fair Housing Act violation cited in the Washington DC Metropolitan Statistical Area following a FRB fair lending examination of the Bank and its wholly-owned subsidiary, George Mason Mortgage, LLC. This matter is also the subject of an investigation by the Department of Justice. The FRB Performance Evaluation states that “Bank management has taken action to address the deficiencies and committed to taking further voluntary corrective actions to prevent further violations.”
A “Needs to Improve” rating results in restrictions on certain expansionary activities, including certain mergers and acquisitions and the establishment of bank branches.
These restrictions will remain in place until the FRB issues a higher CRA rating following a subsequent CRA examination. The next CRA examination is expected to commence in October 2022. The precise timing of the completion of that examination and any results therefrom will not be known until later.
CORONAVIRUS
(“COVID-19”)
PANDEMIC During 2020, and to a lesser extent in 2021, the
COVID-19
pandemic had a severe disruptive impact on the U.S. and global economy. As the pandemic is ongoing and dynamic in nature, there are many uncertainties related to COVID-19
including, among other things, the ongoing impact to our customers, employees and vendors; the impact to the financial services and banking industry; and the impact to the economy as a whole as well as the effect of actions taken, or that may yet be taken, or inaction by governmental authorities to contain the outbreak or to mitigate its impact (both economic and health-related). Refer to our 2021 Form 10-K
for further information regarding (i) the impact of the COVID-19
pandemic on our operations and our results thereof, as well as the impact on our financial position and (ii) legislative and regulatory actions taken related to the COVID-19
pandemic, particularly as they relate to the banking and financial services industry. As the
COVID-19
pandemic continues to be on-going,
there continues to be uncertainties related to its magnitude, duration and persistent effects. This is particularly the case with the emergence, contagiousness and threat of new and different strains of the virus as well as the availability, acceptance and effectiveness of vaccines. However, United is currently unable to fully assess or predict the extent of the effects of COVID-19
on its operations and results in the future as the ultimate impact will depend on factors that are currently unknown and/or beyond our control. ACQUISITION
On December 3, 2021, United acquired 100% of the outstanding common stock of Community Bankers Trust Corporation (“Community Bankers Trust”), a Virginia corporation headquartered in Richmond, Virginia. Immediately following the Merger, Essex Bank, a wholly-owned subsidiary of Community Bankers Trust, merged with and into United Bank, a wholly-owned subsidiary of United. United Bank survived the Bank Merger and continues to exist as a Virginia banking corporation. The acquisition of Community Bankers Trust enhanced United’s existing presence in the DC Metro MSA and took United into new markets including Baltimore, Annapolis, Lynchburg, Richmond, and the Northern Neck of Virginia. It also strategically connected our
Mid-Atlantic
and Southeast footprints. The Community Bankers Trust merger was accounted for under the acquisition method of accounting. At consummation, Community Bankers Trust had assets of $1.79 billion, loans and leases, net of unearned income of $1.28 billion and deposits of $1.52 billion. The results of operations of Community Bankers Trust are included in the consolidated results of operations from its date of acquisition. As a result of the Community Bankers Trust acquisitions, the second quarter and first six months of 2022 were impacted by increased levels of average balances, income, and expense as compared to the second quarter and first six months of 2021.
TRANSITION FROM THE LONDON INTERBANK OFFERED RATE (LIBOR)
In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced its intention to stop persuading or compelling banks to submit the rates used to calculate LIBOR after 2021. ICE Benchmark Administration (the publisher of LIBOR) discontinued publication of the
one-week
and two-month
U.S. Dollar LIBOR settings on December 31, 2021, and plans to discontinue publication of overnight, one-month,
three-month, six-month,
and twelve-month U.S. Dollar LIBOR settings on June 30, 2023. It is assumed that LIBOR will either cease to be provided by any administrator or will no longer be representative of an acceptable market benchmark after these respective dates. Additionally, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation have issued joint supervisory guidance encouraging banks to cease entering into any new contracts using LIBOR by December 31, 2021. Accordingly, United took steps to ensure compliance with the joint supervisory guidance, and no new contracts using LIBOR have been originated after December 31, 2021. 63
Working groups comprised of various regulators and other industry groups have been formed in the United States and other countries in order to provide guidance on this topic. In particular, the Alternative Reference Rates Committee (“ARRC”) has been formed in the United States by the Federal Reserve Board and the Federal Reserve Bank of New York. The ARRC has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative reference rate for U.S. Dollar LIBOR. The ARRC has also published recommended fall-back language for LIBOR-linked financial instruments, among numerous other areas of guidance. At this time, however, it is unclear to what extent these recommendations will be broadly accepted by industry participants, whether they will continue to evolve, and what other alternatives may be adopted by the broader markets that utilize LIBOR as a reference rate. United has formed a project team comprised of individuals across various lines of business throughout the company to identify risks, monitor market developments, evaluate replacement benchmark alternatives, and manage the company’s transition away from LIBOR. At this time, United is prioritizing SOFR and Prime as the preferred alternatives to LIBOR; however, these preferred alternatives could change over time based on market developments.
United has loans, derivative contracts, borrowings, and other financial instruments that are directly or indirectly dependent on LIBOR. The transition from LIBOR will cause changes to payment calculations for existing contracts that use LIBOR as the reference rate. These changes will create various risks surrounding the financial, operational, compliance and legal aspects associated with changing certain elements of existing contracts. United will also be subject to risks surrounding changes to models and systems that currently use LIBOR reference rates, as well as market and strategic risks that could arise from the use of alternative reference rates. Additionally, United could face reputational risks if this transition is not managed appropriately with its customers. While the full impact of the transition is not yet known, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.
INTRODUCTION
The following discussion and analysis presents the significant changes in financial condition and the results of operations of United and its subsidiaries for the periods indicated below. This discussion and the unaudited consolidated financial statements and the notes to unaudited Consolidated Financial Statements include the accounts of United Bankshares, Inc. and its wholly-owned subsidiaries, unless otherwise indicated. Management has evaluated all significant events and transactions that occurred after June 30, 2022, but prior to the date these financial statements were issued, for potential recognition or disclosure required in these financial statements.
This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and accompanying notes thereto, which are included elsewhere in this document.
USE OF
NON-GAAP
FINANCIAL MEASURES This discussion and analysis contains certain financial measures that are not recognized under GAAP. Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each
“non-GAAP”
financial measure, certain additional information, including a reconciliation of the non-GAAP
financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP
financial measure. Generally, United has presented a
non-GAAP
financial measure because it believes that this measure provides meaningful additional information to assist in the evaluation of United’s results of operations or financial position. Presentation of a non-GAAP
financial measure is consistent with how United’s management evaluates its performance internally and this non-GAAP
financial measure is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the banking industry. Specifically, this discussion contains certain references to financial measures identified as tax-equivalent
(“FTE”) net interest income and return on average tangible equity. Management believes these non-GAAP
financial measures to be helpful in understanding United’s results of operations or financial position. 64
Net interest income is presented in this discussion on a
tax-equivalent
basis. The tax-equivalent
basis adjusts for the tax-favored
status of income from certain loans and investments. Although this is a non-GAAP
measure, United’s management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and tax-exempt
sources. United uses this measure to monitor net interest income performance and to manage its balance sheet composition. Average tangible equity is calculated as GAAP total shareholders’ equity minus total intangible assets. Tangible equity can thus be considered a more conservative valuation of the company. When considering net income, a return on average tangible equity can be calculated. Management provides a return on average equity to facilitate the understanding of as well as to assess the quality and composition of United’s capital structure. This measure, along with others, is used by management to analyze capital adequacy and performance.
However, this
non-GAAP
information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP. Where the non-GAAP
financial measure is used, the comparable GAAP financial measure, as well as reconciliation to that comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP
financial measure, can be found within this discussion and analysis. Investors should recognize that United’s presentation of this non-GAAP
financial measure might not be comparable to a similarly titled measure at other companies. APPLICATION OF CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of United conform with U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments, which are reviewed with the Audit Committee of the Board of Directors, are based on information available as of the date of the financial statements. Actual results could differ from these estimates. These policies, along with the disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan and lease losses, the calculation of the income tax provision, and the use of fair value measurements to account for certain financial instruments to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
United’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2022 were unchanged from the policies disclosed in United’s Annual Report on Form
10-K
for the year ended December 31, 2021 within the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” FINANCIAL CONDITION
United’s total assets as of June 30, 2022 were $28.78 billion, which was a decrease of $551.01 million or 1.88% from December 31, 2021. This decrease was mainly due to a decrease of $2.10 billion or 55.87% in cash and cash equivalents and a decrease of $283.73 million or 56.25% in loans held for sale. These decreases in assets were partially offset by an increase of $777.87 million or 18.11% in investment securities and an increase of $946.75 million or 5.25% in portfolio loans and leases. Total liabilities decreased $319.43 million or 1.30% from
year-end
2021. Deposits decreased $323.61 million or 1.39% and borrowings decreased $21.04 million or 2.22%. Accrued expenses and other liabilities increased $21.00 million or 10.73% and the allowance for lending-related commitments increased $11.14 million or 35.42%. Shareholders’ equity decreased $231.58 million or 4.91%. 65
The following discussion explains in more detail the changes in financial condition by major category.
Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2022 decreased $2.10 billion or 55.87% from
year-end
2021. In particular, interest-bearing deposits with other banks decreased $2.17 billion or 62.45% as United placed less cash in an interest-bearing account with the Federal Reserve. Partially offsetting this decrease in cash and cash equivalents was a $69.91 million or 24.71% increase in cash and due from banks. Federal funds sold increased $120 thousand or 12.94%. During the first six months of 2022, net cash of $490.02 million was provided by operating activities while net cash of $2.08 billion and $511.46 million were used in investing and financing activities, respectively. See the unaudited Consolidated Statements of Cash Flows for data on cash and cash equivalents provided and used in operating, investing and financing activities for the first six months of 2022 and 2021. Securities
Total investment securities at June 30, 2022 increased $777.87 million or 18.11%. Securities available for sale increased $770.01 million or 19.05%. This change in securities available for sale reflects $1.43 billion in purchases, $302.54 million in sales, maturities and calls of securities and a decrease of $351.79 million in market value. The majority of the purchase activity was related to securities of the U.S. Treasury and obligations of U.S. Government corporations and agencies, mortgage-backed securities, and asset-backed securities. Securities held to maturity were flat from
year-end
2021. Equity securities were $13.51 million at June 30, 2022, an increase of $1.11 million or 8.94% due mainly to purchases. Other investment securities increased $6.75 million or 2.82% from year-end
2021 due to purchases of Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stock as well as investment tax credits. The following table summarizes the changes in the available for sale securities since
year-end
2021: June 30 |
December 31 |
|||||||||||||||
(Dollars in thousands) |
2022 |
2021 |
$ Change |
% Change |
||||||||||||
| U.S. Treasury securities and obligations of U.S. Government corporations and agencies |
$ | 493,256 | $ | 81,850 | $ | 411,406 | 502.63 | % | ||||||||
| State and political subdivisions |
751,077 | 847,298 | (96,221 | ) | (11.36 | %) | ||||||||||
| Mortgage-backed securities |
2,045,229 | 1,828,244 | 216,985 | 11.87 | % | |||||||||||
| Asset-backed securities |
917,624 | 656,572 | 261,052 | 39.76 | % | |||||||||||
| Single issue trust preferred securities |
16,203 | 16,811 | (608 | ) | (3.62 | %) | ||||||||||
| Corporate securities |
589,315 | 611,924 | (22,609 | ) | (3.69 | %) | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total available for sale securities, at fair value |
$ | 4,812,704 | $ | 4,042,699 | $ | 770,005 | 19.05 | % | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
The following table summarizes the changes in the held to maturity securities since
year-end
2021: June 30 |
December 31 |
|||||||||||||||
(Dollars in thousands) |
2022 |
2021 |
$ Change |
% Change |
||||||||||||
| State and political subdivisions |
$ | 982 | (1) | $ | 981 | (2) | $ | 1 | 0.10 | % | ||||||
| Other corporate securities |
20 | 20 | 0 | 0.00 | % | |||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total held to maturity securities, at amortized cost |
$ | 1,002 | $ | 1,001 | $ | 1 | 0.10 | % | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| (1) | net of allowance for credit losses of $18 thousand. |
| (2) | net of allowance for credit losses of $19 thousand. |
At June 30, 2022, gross unrealized losses on available for sale securities were $341.91 million. Securities with the most significant gross unrealized losses at June 30, 2022 consisted primarily of agency residential mortgage-backed securities, state and political subdivision securities, agency commercial mortgage-backed securities, asset-backed securities and other corporate securities.
66
As of June 30, 2022, United’s available for sale mortgage-backed securities had an amortized cost of $2.23 billion, with an estimated fair value of $2.05 billion. The portfolio consisted primarily of $1.42 billion in agency residential mortgage-backed securities with a fair value of $1.30 billion, $114.69 million in
non-agency
residential mortgage-backed securities with an estimated fair value of $108.64 million, and $686.47 million in commercial agency mortgage-backed securities with an estimated fair value of $641.59 million. As of June 30, 2022, United’s available for sale state and political subdivisions securities had an amortized cost of $836.62 million, with an estimated fair value of $751.08 million. The portfolio relates to securities issued by various municipalities located throughout the United States, and no securities within the portfolio were rated below investment grade as of June 30, 2022.
As of June 30, 2022, United’s available for sale corporate securities had an amortized cost of $1.59 billion, with an estimated fair value of $1.52 billion. The portfolio consisted of $17.32 million in single issue trust preferred securities with an estimated fair value of $16.20 million. In addition to the single issue trust preferred securities, the Company held positions in various other corporate securities, including asset-backed securities with an amortized cost of $953.35 million and a fair value of $917.62 million and other corporate securities, with an amortized cost of $617.17 million and a fair value of $589.32 million.
United’s available for sale single issue trust preferred securities had a fair value of $16.20 million as of June 30, 2022. Of the $16.20 million, $7.73 million or 47.71% were investment grade; $3.08 million or 19.01% were split rated; and $5.39 million or 33.28% were unrated. The two largest exposures accounted for 76.23% of the $16.20 million. These included Truist Bank at $6.96 million and Emigrant Bank at $5.39 million. All single issue trust preferred securities are currently receiving full scheduled principal and interest payments.
During the second quarter of 2022, United did not recognize any credit losses on its available for sale investment securities. Management does not believe that any individual security with an unrealized loss as of June 30, 2022 is impaired. United believes the decline in value resulted from changes in market interest rates, credit spreads and liquidity, not a deterioration of credit. Based on a review of each of the securities in the available for sale investment portfolio, management concluded that it was more likely than not that it would be able to realize the cost basis investment and appropriate interest payments on such securities. United has the intent and the ability to hold these securities until such time as the value recovers or the securities mature. As of June 30, 2022, there was no allowance for credit losses related to the Company’s available for sale securities. However, United acknowledges that any securities in an unrealized loss position may be sold in future periods in response to significant, unanticipated changes in asset/liability management decisions, unanticipated future market movements or business plan changes.
Further information regarding the amortized cost and estimated fair value of investment securities, including remaining maturities as well as a more detailed discussion of management’s impairment analysis, is presented in Note 3 to the unaudited Notes to Consolidated Financial Statements.
Loans held for sale
Loans held for sale were $220.69 million at June 30, 2022, a decrease of $283.73 million or 56.25% from
year-end
2021. Loan sales in the secondary market exceeded originations during the first six months of 2022. Loan originations for the first six months of 2022 were $1.49 billion while loans sales were $1.78 billion. Portfolio Loans
Loans, net of unearned income, increased $946.75 million or 5.25%. Since
year-end
2021, commercial, financial and agricultural loans were flat, decreasing $1.86 million or less than 1%. In particular, commercial real estate loans decreased $20.65 million or less than 1% while commercial loans (not secured by real estate) increased $18.80 million or less than 1%. Construction and land development loans increased $381.12 million or 18.92%, residential real estate loans increased $413.29 million or 11.20%, and consumer loans increased $150.27 million or 12.60% due to an increase in indirect automobile financing. 67
The following table summarizes the changes in the major loan classes since
year-end
2021: June 30 |
December 31 |
|||||||||||||||
(Dollars in thousands) |
2022 |
2021 |
$ Change |
% Change |
||||||||||||
| Loans held for sale |
$ | 220,689 | $ | 504,416 | $ | (283,727 | ) | (56.25 | %) | |||||||
| |
|
|
|
|
|
|
|
|||||||||
| Commercial, financial, and agricultural: |
||||||||||||||||
| Owner-occupied commercial real estate |
$ | 1,713,972 | $ | 1,733,176 | $ | (19,204 | ) | (1.11 | %) | |||||||
| Nonowner-occupied commercial real estate |
5,955,839 | 5,957,288 | (1,449 | ) | (0.02 | %) | ||||||||||
| Other commercial loans |
3,481,156 | 3,462,361 | 18,795 | 0.54 | % | |||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total commercial, financial, and agricultural |
$ | 11,150,967 | $ | 11,152,825 | $ | (1,858) | (0.02 | %) | ||||||||
| Residential real estate |
4,104,848 | 3,691,560 | 413,288 | 11.20 | % | |||||||||||
| Construction land development |
2,395,284 | 2,014,165 | 381,119 | 18.92 | % | |||||||||||
| Consumer: |
||||||||||||||||
| Bankcard |
8,651 | 8,913 | (262 | ) | (2.94 | %) | ||||||||||
| Other consumer |
1,334,375 | 1,183,844 | 150,531 | 12.72 | % | |||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total gross loans |
$ | 18,994,125 | $ | 18,051,307 | $ | 942,818 | 5.22 | % | ||||||||
| Less: Unearned income |
(23,730 | ) | (27,659 | ) | 3,929 | (14.21 | %) | |||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total Loans, net of unearned income |
$ | 18,970,395 | $ | 18,023,648 | $ | 946,747 | 5.25 | % | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
For a further discussion of loans see Note 4 to the unaudited Notes to Consolidated Financial Statements.
Other Assets
Other assets increased $108.12 million or 46.69% from securities. Partially offsetting these increases were decreases of $786 thousand in income tax receivable due to timing differences, $976 thousand in other real estate owned properties (“OREO”) due to sales and write downs, and $2.76 million in core deposit intangibles due to amortization.
year-end
2021. Derivative assets increased $30.00 million due to an increase in fair value and deferred tax assets increased $76.23 million due to a decrease in the fair value of available-for-sale
Deposits
Deposits represent United’s primary source of funding. Total deposits at June 30, 2022 decreased $323.61 million or 1.39%. In terms of composition, noninterest-bearing deposits were flat, increasing $50.39 million or less than 1% while interest-bearing deposits decreased $374.01 million or 2.60% from December 31, 2021.
Noninterest-bearing deposits, which consist of demand deposit and noninterest bearing money market (“MMDA”) account balances, were flat from
year-end
2021, increasing $50.39 million due to an increase in commercial noninterest-bearing deposits. Interest-bearing deposits consist of interest-bearing checking (“NOW”), regular savings, interest-bearing MMDA, and time deposit account balances. NOW accounts increased $123.86 million or 3.32% since
year-end
2021 as the result of increases of $65.50 million in commercial NOW accounts and $86.24 million in public funds NOW accounts. Regular savings accounts increased $81.82 million or 4.98% mainly as a result of a $72.06 million increase in personal savings accounts and a $9.45 million increase in commercial savings accounts. Interest-bearing MMDAs decreased $114.49 million or 1.80%. In particular, commercial MMDAs decreased $186.60 million, brokered MMDAs decreased $31.37 million, and public funds MMDAs decreased $11.22 million while personal MMDAs increased $114.70 million. 68
Time deposits under $100,000 decreased $94.44 million or 9.16% from
year-end
2021. This decrease in time deposits under $100,000 was the result of a $90.47 million decrease in fixed rate Certificates of Deposits (“CDs”) under $100,000, a $3.61 million decrease in Certificate of Deposit Account Registry Service (“CDARS”) under $100,000, and a $4.32 million decrease in CDs under $100,000 obtained through the use of deposit listing services. Since
year-end
2021, time deposits over $100,000 decreased $370.75 million or 23.16% as fixed rate CDs decreased $246.06 million, CDARS over $100,000 decreased $59.16 million, public funds CDs over $100,000 decreased $58.24 million, and brokered certificates of deposits decreased $7.06 million. The table below summarizes the changes by deposit category since
year-end
2021: June 30 |
December 31 |
|||||||||||||||
(Dollars in thousands) |
2022 |
2021 |
$ Change |
% Change |
||||||||||||
| Demand deposits |
$ | 9,030,939 | $ | 8,980,547 | $ | 50,392 | 0.56 | % | ||||||||
| Interest-bearing checking |
3,858,216 | 3,734,355 | 123,861 | 3.32 | % | |||||||||||
| Regular savings |
1,723,223 | 1,641,404 | 81,819 | 4.98 | % | |||||||||||
| Money market accounts |
6,247,394 | 6,361,887 | (114,493 | ) | (1.80 | %) | ||||||||||
| Time deposits under $100,000 |
936,569 | 1,031,008 | (94,439 | ) | (9.16 | %) | ||||||||||
| Time deposits over $100,000 (1) |
1,230,308 | 1,601,062 | (370,754 | ) | (23.16 | %) | ||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total deposits |
$ | 23,026,649 | $ | 23,350,263 | $ | (323,614 | ) | (1.39 | %) | |||||||
| |
|
|
|
|
|
|
|
|||||||||
| (1) | Includes time deposits of $250,000 or more of $446,584 and $640,752 at June 30, 2022 and December 31, 2021, respectively. |
Borrowings
Total borrowings at June 30, 2022 decreased $21.04 million or 2.22% since
year-end
2021. During the first six months of 2022, short-term borrowings were flat, decreasing $602 thousand or less than 1% due to a decrease in securities sold under agreements to repurchase. Long-term borrowings decreased $20.43 million or 2.50% from year-end
2021 due to a decrease in long-term advances of $21.28 million. The table below summarizes the change in the borrowing categories since
year-end
2021: June 30 |
December 31 |
|||||||||||||||
(Dollars in thousands) |
2022 |
2021 |
$ Change |
% Change |
||||||||||||
| Short-term securities sold under agreements to repurchase |
$ | 128,242 | $ | 128,844 | $ | (602) | (0.47 | %) | ||||||||
| Long-term FHLB advances |
510,918 | 532,199 | (21,281 | ) | (4.00 | %) | ||||||||||
| Subordinated debt |
9,882 | 9,872 | 10 | 0.10 | % | |||||||||||
| Issuances of trust preferred capital securities |
276,161 | 275,323 | 838 | 0.30 | % | |||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total borrowings |
$ | 925,203 | $ | 946,238 | $ | (21,035 | ) | (2.22 | %) | |||||||
| |
|
|
|
|
|
|
|
|||||||||
For a further discussion of borrowings see Notes 10 and 11 to the unaudited Notes to Consolidated Financial Statements.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at June 30, 2022 increased $21.00 million or 10.73% from
year-end
2021. In particular, a $36.49 million liability related to clearing house variation margin cash collateral on FHLB swaps was recorded during the first six months of 2022 while accrued mortgage escrow liabilities increased $8.46 million. Partially offsetting these increases was a $5.41 million decrease in business franchise taxes, a $2.63 million decrease in income tax payable, both due to timing differences, and a $5.80 million decrease in incentives payables due to payments.
69
Shareholders’ Equity
Shareholders’ equity at June 30, 2022 was $4.49 billion, which was a decrease of $231.58 million or 4.91% from
year-end
2021. Retained earnings increased $79.47 million or 5.71% from
year-end
2021. Earnings net of dividends for the first six months of 2022 were $79.47 million. Accumulated other comprehensive income decreased $242.47 million or 4,960.50% from
year-end
2021 due to a decrease of $269.82 million in United’s available for sale investment portfolio, net of deferred income taxes primarily the result of an increase in market interest rates. Partially offsetting this decrease was a $26.07 million increase in the fair value of cash flow hedges, net of deferred income taxes. The after-tax
accretion of pension costs was $1.28 million for the first six months of 2022. Treasury stock increased $79.76 million or 46.75% from
year-end
2021. During the first six months of 2022, United repurchased 2,259,546 shares of its common stock on the open market under repurchase plans approved by United’s Board of Directors at a cost of $78.37 million or an average price per share of $34.69. RESULTS OF OPERATIONS
Overview
Below is a summary of United’s consolidated results of operations for the time periods presented:
Three Months Ended |
Six Months Ended |
|||||||||||||||||||
(Dollars in thousands except per share amounts) |
June 2022 |
June 2021 |
March 2022 |
June 2022 |
June 2021 |
|||||||||||||||
| Interest income |
$ | 227,771 | $ | 200,186 | $ | 202,795 | $ | 430,566 | $ | 405,843 | ||||||||||
| Interest expense |
12,868 | 13,669 | 11,293 | 24,161 | 28,366 | |||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Net interest income |
214,903 | 186,517 | 191,502 | 406,405 | 377,477 | |||||||||||||||
| Provision for credit losses |
(1,807 | ) | (8,879 | ) | (3,410 | ) | (5,217 | ) | (8,736 | ) | ||||||||||
| Noninterest income |
43,608 | 62,864 | 46,025 | 89,633 | 155,444 | |||||||||||||||
| Noninterest expense |
141,174 | 138,969 | 139,175 | 280,349 | 287,903 | |||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Income before income taxes |
119,144 | 119,291 | 101,762 | 220,906 | 253,754 | |||||||||||||||
| Income taxes |
23,531 | 24,455 | 20,098 | 43,629 | 52,020 | |||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income |
$ | 95,613 | $ | 94,836 | $ | 81,664 | $ | 177,277 | $ | 201,734 | ||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| PER COMMON SHARE: |
||||||||||||||||||||
| Net income: |
||||||||||||||||||||
| Basic |
$ | 0.71 | $ | 0.73 | $ | 0.60 | $ | 1.31 | $ | 1.56 | ||||||||||
| Diluted |
0.71 | 0.73 | 0.60 | 1.30 | 1.56 | |||||||||||||||
Net income for the second quarter of 2022 was $95.61 million or $0.71 per diluted share, as compared to $94.84 million or $0.73 per diluted share for the prior year second quarter. Net income for the first quarter of 2022 was $81.66 million or $0.60 per diluted share. Net income for the first six months of 2022 was $177.28 million or $1.30 per diluted share compared to $201.73 million or $1.56 per share for the first six months of 2021.
Earnings for the second quarter and first half of 2022, as compared to the second quarter and first half of 2021 decreased primarily due to lower income from mortgage banking activities primarily as a result of a rising rate environment partially offset by increased net interest income due primarily to the acquisition of Community Bankers Trust Corporation (“Community Bankers Trust”). The increase in earnings for the second quarter of 2022 from the first quarter of 2022 was due mainly to loan growth and net interest margin expansion.
70
For the second quarter of 2022, United’s annualized return on average assets was 1.32% and return on average shareholders’ equity was 8.33% as compared to 1.41% and 8.69% for the second quarter of 2021. United’s annualized return on average assets was 1.13% and return on average shareholders’ equity was 6.96% for the first quarter of 2022. United’s annualized return on average assets for the first six months of 2022 was 1.23% and return on average shareholders’ equity was 7.63% as compared to 1.52% and 9.32% for the first six months of 2021. For the second quarter and first half of 2022, United’s annualized return on average tangible equity was 14.23% and 12.90%, respectively, as compared to 14.95% and 16.06% for the second quarter and first half of 2021, respectively. United’s annualized return on average tangible equity was 11.63% for the first quarter of 2022.
Three Months Ended |
Six Months Ended |
|||||||||||||||||||
(Dollars in thousands) |
June 30, 2022 |
June 30, 2021 |
March 31, 2022 |
June 30, 2022 |
June 30, 2021 |
|||||||||||||||
| Return on Average Tangible Equity: |
||||||||||||||||||||
| (a) Net Income (GAAP) |
$ | 95,613 | $ | 94,836 | $ | 81,664 | $ | 177,277 | $ | 201,734 | ||||||||||
| (b) Number of Days |
91 | 91 | 90 | 181 | 181 | |||||||||||||||
| Average Total Shareholders’ Equity (GAAP) |
$ | 4,606,186 | $ | 4,378,898 | $ | 4,759,780 | $ | 4,682,991 | $ | 4,363,053 | ||||||||||
| Less: Average Total Intangibles |
(1,911,705 | ) | (1,834,920 | ) | (1,911,125 | ) | (1,911,416 | ) | (1,830,305 | ) | ||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| (c) Average Tangible Equity (non-GAAP) |
$ | 2,694,481 | $ | 2,543,978 | $ | 2,848,655 | $ | 2,771,575 | $ | 2,532,748 | ||||||||||
| Return on Average Tangible Equity (non-GAAP) [(a) / (b)] x 365/ (c) |
14.23 | % | 14.95 | % | 11.63 | % | 12.90 | % | 16.06 | % | ||||||||||
Net interest income for the second quarter of 2022 was $214.90 million, which was an increase of $28.39 million, or 15.22%, from the second quarter of 2021. Net interest income for the first half of 2022 was $406.41 million, an increase of $28.93 million or 7.66% from the first half of 2021. Mainly, these increases in net interest income for 2022 compared to 2021 were due to the impact of higher average earning assets driven primarily by the Community Bankers Trust acquisition. Net interest income for the second quarter of 2022 increased $23.40 million, or 12.22%, from the first quarter of 2022. This increase in net interest income was primarily due to higher interest income on earning assets driven by rising market interest rates and a change in the asset mix to higher earning assets.
The provision for credit losses was a net benefit of $1.81 million and $5.22 million for the second quarter and first half of 2022, respectively, while the provision for credit losses was a net benefit of $8.88 million and $8.74 million for the second quarter and first half of 2021. The provision for credit losses was a net benefit of $3.41 million for the first quarter of 2022. The lower net benefit amounts for 2022 compared to 2021 were mainly due to an increase in total loans outstanding.
For the second quarter of 2022, noninterest income was $43.61 million, which was a decrease of $19.26 million or 30.63% from the second quarter of 2021. Noninterest income for the first six months of 2022 was $89.63 million which was a decrease of $65.81 million or 42.34% from the first six months of 2021. Noninterest income for the second quarter of 2022 decreased $2.42 million, or 5.25%, from the first quarter of 2022. These decreases in noninterest income were primarily due to decreased income from mortgage banking activities due to a lower volume of mortgage loan originations and sales in the secondary market mainly the result of a rising interest rate environment.
For the second quarter of 2022, noninterest expense increased $2.21 million or 1.59% from the second quarter of 2021 due mainly to an increase in the expense for the reserve for unfunded loan commitments as well as higher amounts of certain general operating expenses. For the first six months of 2022, noninterest expense decreased $7.55 million or 2.62% from the first six months of 2021 mainly due to lower employee compensation expense as a result of lower employee commissions, incentives and overtime related to mortgage banking production. Noninterest expense for the second quarter of 2022 increased $2.00 million, or 1.44%, from the first quarter of 2022 due mainly to higher amounts of certain general operating expenses including an increase in the expense for reserve for unfunded loan commitments.
71
Income taxes for the second quarter of 2022 were $23.53 million as compared to $24.46 million for the second quarter of 2021. Income tax expense was $20.10 million for the first quarter of 2022. For the first six months of 2022 and 2021 income tax expense was $43.63 million and $52.02 million, respectively. For the quarters ended June 30, 2022 and March 31, 2022, United’s effective tax rate was 19.75%. For the quarter ended June 30, 2021, United’s effective tax rate was 20.50%. The effective tax rate for the first six months of 2022 and 2021 was 19.75% and 20.50%, respectively.
Business Segments
United operates in two business segments: community banking and mortgage banking.
Community Banking
Net income attributable to the community banking segment for the second quarter of 2022 was $97.14 million compared to net income of $89.77 million for the second quarter of 2021. Net income attributable to the community banking segment for the first half of 2022 was $180.17 million compared to net income of $172.00 million for the first half of 2021. The higher net income within the community banking segment in 2022 was due primarily to the impact of the Community Bankers Trust acquisition. On a linked quarter basis, net income attributable to the community banking segment for the second quarter of 2022 increased $14.12 million from the first quarter of 2022 primarily due to loan growth and net interest margin expansion.
Net interest income increased $28.19 million to $211.59 million for the second quarter of 2022, compared to $183.40 million for the same period of 2021. Net interest income increased $30.68 million to $401.27 million for the first half of 2022, compared to $370.60 million for the same period of 2021. Generally, net interest income for the second quarter and first six months of 2022 increased from the second quarter and first six months of 2021 due to an increase in average earning assets as a result of the Community Bankers Trust acquisition as well as lower interest expense on deposits driven by rate repricing. On a linked quarter basis, net interest income for the second quarter of 2022 increased $21.91 million from the first quarter of 2022 primarily due to higher interest income on earning assets driven by rising market interest rates and a change in the asset mix to higher earning assets.
Provision for credit losses was a net benefit of $1.81 million for the three months ended June 30, 2022 compared to a net benefit of $8.88 million for the three months ended June 30, 2021. Provision for credit losses was a net benefit of $5.22 million for the six months ended June 30, 2022, compared to a net benefit of $8.74 million for the six months ended June 30, 2021. As previously mentioned, the reduced net benefit amounts for the second quarter and first half of 2022 were due mainly to loan growth. The provision for credit losses was a net benefit of $3.41 million for the first quarter of 2022.
Noninterest income increased $2.81 million for the second quarter of 2022 to $26.90 million as compared to $24.09 million for the second quarter of 2021. Noninterest income for the first half of 2022 increased $1.32 million to $51.80 million for the first half of 2022 as compared to $50.49 million for the first half of 2021. On a linked quarter basis, noninterest income for the second quarter of 2022 increased $2.00 million from the first quarter of 2022. All of these increases were due mainly to increases in fees from deposit services and income from bank-owned life insurance policies (“BOLI”).
Noninterest expense was $119.25 million for the second quarter of 2022, compared to $103.45 million for the same period of 2021. Noninterest expense was $233.79 million for the six months ended June 30, 2022, compared to $213.47 million for the same period of 2021. These increases in noninterest expense for the first six months of 2022 were primarily attributable to the additional employees and branch offices from the Community Bankers Trust acquisition as most major categories of noninterest expense showed increases. On a linked quarter basis, noninterest expense for the second quarter of 2022 increased $4.71 million from the first quarter of 2022 due mainly to higher amounts of certain general operating expenses including an increase in the expense for reserve for unfunded loan commitments.
72
Mortgage Banking
The mortgage banking segment reported net losses of $1.15 million and $944 thousand for the second quarter and the first half of 2022, respectively, as compared to net income of $4.97 million and $28.00 million for the second quarter and first half of 2021. The mortgage banking segment reported net income of $209 thousand in the first quarter of 2022. Noninterest income, which consists mainly of realized and unrealized gains associated with the fair value of commitments and loans held for sale, was $21.47 million for the second quarter of 2022 as compared to $39.77 million for the second quarter of 2021. Noninterest income for the first half of 2022 was $44.87 million as compared to $107.27 million for the first half of 2021. On a linked quarter basis, noninterest income for the second quarter of 2022 decreased $1.93 million from the first quarter of 2022. All of these decreases in noninterest income were due mainly to decreased sales of mortgage loans in the secondary market primarily as a result of a rising interest rate environment. Noninterest expense was $25.78 million and $51.22 million for the second quarter and first half of 2022 as compared to $36.39 million and $77.57 million for the second quarter and first half of 2021. Noninterest expense consists mainly of salaries, commissions and benefits of mortgage segment employees. The decreases in 2022 were due mainly to lower employee commissions, incentives and overtime related to the decreased mortgage banking production. On a linked quarter basis, noninterest expense for the second quarter of 2022 increased $328 thousand from the first quarter of 2022 due mainly to higher amounts of certain general operating expenses.
The following discussion explains in more detail the consolidated results of operations by major category.
Net Interest Income
Net interest income represents the primary component of United’s earnings. It is the difference between interest income from earning assets and interest expense incurred to fund these assets. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in market interest rates. Such changes, and their impact on net interest income in 2022 and 2021, are presented below.
Net interest income for the second quarter of 2022 was $214.90 million, which was an increase of $28.39 million or 15.22% from the second quarter of 2021. The $28.39 million increase in net interest income occurred because total interest income increased $27.59 million while total interest expense decreased $801 thousand from the second quarter of 2021. Net interest income for the first half of 2022 was $406.41 million, which was an increase of $28.93 million or 7.66% from the first half of 2021. The $28.93 million increase in net interest income occurred because total interest income increased $24.72 million while total interest expense decreased $4.21 million from the first half of 2021. On a linked-quarter basis, net interest income for the second quarter of 2022 increased $23.40 million or 12.22% from the first quarter of 2022. The $23.40 million increase in net interest income occurred because total interest income increased $24.98 million while total interest expense increased $1.58 million from the first quarter of 2022.
For the purpose of this remaining discussion, net interest income is presented on a
tax-equivalent
basis to provide a comparison among all types of interest earning assets. The tax-equivalent
basis adjusts for the tax-favored
status of income from certain loans and investments. Although this is a non-GAAP
measure, United’s management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and tax-exempt
sources. United uses this measure to monitor net interest income performance and to manage its balance sheet composition. Tax-equivalent
net interest income for the second quarter of 2022 was $216.01 million, an increase of $28.42 million or 15.15% from the second quarter of 2021. The increase in net interest income and tax-equivalent
net interest income was primarily due to the impact of higher average earnings assets, driven by the Community Bankers Trust acquisition, as well as the impact of rising market interest rates on earning assets and a change in the asset mix to higher earning assets. These increases were mostly offset by lower accretion on acquired loans, lower fee income from Paycheck Protection Program (“PPP”) loans and higher average interest-bearing deposit balances as a result of the Community Bankers Trust acquisition. 73
Average earning assets for the second quarter of 2022 increased $1.66 billion or 6.92% from the second quarter of 2021 due to a $1.62 billion increase in average investment securities and a $1.21 billion increase in average net loans and loans held for sale, partially offset by a $1.17 billion decrease in average short-term investments. The interest rate spread for the second quarter of 2022 increased 26 basis points from the second quarter of 2021 to 3.24% due to a 21 basis point increase in the average yield on earning assets and a 5 basis point decrease in the average cost of funds. Net PPP loan fee income was $3.56 million and $9.02 million for the second quarter of 2022 and 2021, respectively, a decrease of $5.46 million. The decline was driven primarily by loan forgiveness by the SBA. Loan accretion on acquired loans and leases was $5.40 million and $9.67 million for the second quarter of 2022 and 2021, respectively, a decrease of $4.27 million. Average interest-bearing liabilities for the second quarter of 2022 increased $914.13 million, or 6.45%, from the second quarter of 2021. The net interest margin of 3.38% for the second quarter of 2022 was an increase of 24 basis points from the net interest margin of 3.14% for the second quarter of 2021.
Tax-equivalent
net interest income for the first six months of 2022 was $408.62 million, an increase of $29.02 million or 7.64% from the first six months of 2021. The increase in net interest income and tax-equivalent
net interest income was primarily due to the impact of higher average earnings assets, driven by the Community Bankers Trust acquisition, as well as the impact of rising market interest rates on earning assets and lower interest expense on deposits. These increases were mostly offset by lower accretion on acquired loans, lower fee income from Paycheck Protection Program (“PPP”) loans and higher average interest-bearing deposit balances as a result of the Community Bankers Trust acquisition. Average earning assets increased $2.10 billion or 8.84% from the first six months of 2021 due to a $1.56 billion increase in average investment securities and a $763.75 million or 4.29% increase in average net loans and loans held for sale partially offset by a $219.86 million decrease in average short-term investments. Average interest-bearing liabilities for the first six months of 2022 increased $1.04 billion, or 7.37% from the first six months of 2021; however, the average cost of funds decreased 8 basis points from the six months of 2021 to 0.32% for the first six months of 2022. The interest rate spread for the first six months of 2022 decreased a basis point from the first six months of 2021 to 3.05% due to a 9 basis point decrease in the average yield on earning assets partially offset by the 8 basis point decrease in the average cost of funds. Loan accretion on acquired loans was $9.54 million and $19.47 million for the first half of 2022 and 2021, respectively, a decrease of $9.93 million. Net PPP loan fee income of $7.66 million was recognized in the first half of 2022 driven primarily by loan forgiveness, as compared to $20.33 million for the first half of 2021. The net interest margin of 3.18% for the first half of 2022 was a decrease of 4 basis points from the net interest margin of 3.22% for the first half of 2021. On a linked-quarter basis, net interest income for the second quarter of 2022 increased $23.40 million, or 12.22%, from the first quarter of 2022.
Tax-equivalent
net interest income for the second quarter of 2022 increased $23.40 million, or 12.15% from the first quarter of 2022. The increase in net interest income and tax-equivalent
net interest income was primarily due to higher interest income on earning assets driven by rising market interest rates and a change in the asset mix to higher earning assets. The interest rate spread of 3.24% for the second quarter of 2022 increased 38 basis points from the first quarter of 2022 due to a 42 basis point increase in the average yield on earning assets partially offset by a 4 basis point increase in the average cost of funds. A decrease in average earning assets of $425.99 million, or 1.64%, from the first quarter of 2022 driven by a decrease of $1.29 billion in short-term investments was partially offset by increases in higher yielding average net loans and loans held for sale of $489.88 million and average investment securities of $375.81 million. Acquired loan accretion income increased $1.26 million to $5.40 million for the second quarter of 2022. Net PPP loan fee income decreased $542 thousand to $3.56 million for the second quarter of 2022. The net interest margin of 3.38% for the second quarter of 2022 was an increase of 39 basis points from the net interest margin of 2.99% for the first quarter of 2022. 74
United’s
tax-equivalent
net interest income also includes the impact of acquisition accounting fair value adjustments. The following table provides the discount/premium and net accretion impact to tax-equivalent
net interest income for the three months ended June 30, 2022, June 30, 2021 and March 31, 2022 and the six months ended June 30, 2022 and June 30, 2021: Three Months Ended |
||||||||||||
(Dollars in thousands) |
June 30 2022 |
June 30 2021 |
March 31 2022 |
|||||||||
| Loan accretion |
$ | 5,398 | $ | 9,669 | $ | 4,139 | ||||||
| Certificates of deposit |
738 | 1,050 | 1,038 | |||||||||
| Long-term borrowings |
274 | 174 | 159 | |||||||||
| |
|
|
|
|
|
|||||||
| Total |
$ | 6,410 | $ | 10,893 | $ | 5,336 | ||||||
| |
|
|
|
|
|
|||||||
Six Months Ended |
||||||||
(Dollars in thousands) |
June 30 2022 |
June 30 2021 |
||||||
| Loan accretion |
$ | 9,537 | $ | 19,469 | ||||
| Certificates of deposit |
1,776 | 2,499 | ||||||
| Long-term borrowings |
433 | 348 | ||||||
| |
|
|
|
|||||
| Tax-equivalent net interest income |
$ | 11,746 | $ | 22,316 | ||||
| |
|
|
|
|||||
The following tables reconcile the difference between net interest income and
tax-equivalent
net interest income for the three months ended June 30, 2022, June 30, 2021 and March 31, 2022 and the six months ended June 30, 2022 and June 30, 2021. Three Months Ended |
||||||||||||
(Dollars in thousands) |
June 30 2022 |
June 30 2021 |
March 31 2022 |
|||||||||
| Net interest income, GAAP basis |
$ | 214,903 | $ | 186,517 | $ | 191,502 | ||||||
| Tax-equivalent adjustment (1) |
1,104 | 1,075 | 1,109 | |||||||||
| |
|
|
|
|
|
|||||||
| Tax-equivalent net interest income |
$ | 216,007 | $ | 187,592 | $ | 192,611 | ||||||
| |
|
|
|
|
|
|||||||
Six Months Ended |
||||||||
(Dollars in thousands) |
June 30 2022 |
June 30 2021 |
||||||
| Net interest income, GAAP basis |
$ | 406,405 | $ | 377,477 | ||||
| Tax-equivalent adjustment (1) |
2,213 | 2,122 | ||||||
| |
|
|
|
|||||
| Tax-equivalent net interest income |
$ | 408,618 | $ | 379,599 | ||||
| |
|
|
|
|||||
| (1) | The tax-equivalent adjustment combines amounts of interest income on federally nontaxable loans and investment securities using the statutory federal income tax rate of 21% for the three months and six months ended June 30, 2022 and 2021 and the three months ended March 31, 2022. All interest income on loans and investment securities was subject to state income taxes. |
The following tables show the unaudited consolidated daily average balance of major categories of assets and liabilities for the three-month and
six-month
periods ended June 30, 2022 and 2021, respectively, with the interest and rate earned or paid on such amount. The interest income and yields on federally nontaxable loans and investment securities are presented on a tax-equivalent
basis using the statutory federal income tax rate of 21% for the three-month and six-month
period ended June 30, 2022 and 2021. Interest income on all loans and investment securities was subject to state income taxes. 75
Three Months Ended June 30, 2022 |
Three Months Ended June 30, 2021 |
|||||||||||||||||||||||
(Dollars in thousands) |
Average Balance |
Interest (1) |
Avg. Rate (1) |
Average Balance |
Interest (1) |
Avg. Rate (1) |
||||||||||||||||||
| ASSETS |
||||||||||||||||||||||||
| Earning Assets: |
||||||||||||||||||||||||
| Federal funds sold and securities purchased under agreements to resell and other short-term investments |
$ | 1,737,146 | $ | 4,841 | 1.12 | % | $ | 2,905,604 | $ | 1,757 | 0.24 | % | ||||||||||||
| Investment Securities: |
||||||||||||||||||||||||
| Taxable |
4,665,307 | 24,558 | 2.11 | % | 3,114,902 | 13,846 | 1.78 | % | ||||||||||||||||
| Tax-exempt |
419,865 | 2,794 | 2.66 | % | 353,223 | 2,331 | 2.64 | % | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Securities |
5,085,172 | 27,352 | 2.15 | % | 3,468,125 | 16,177 | 1.87 | % | ||||||||||||||||
| Loans, net of unearned income (2) |
19,018,717 | 196,682 | 4.15 | % | 17,825,433 | 183,327 | 4.12 | % | ||||||||||||||||
| Allowance for loan losses |
(214,624 | ) | (231,422 | ) | ||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| Net loans |
18,804,093 | 4.19 | % | 17,594,011 | 4.18 | % | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total earning assets |
25,626,411 | $ | 228,875 | 3.58 | % | 23,967,740 | $ | 201,261 | 3.37 | % | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
| Other assets |
3,383,037 | 3,038,218 | ||||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| TOTAL ASSETS |
$ | 29,009,448 | $ | 27,005,958 | ||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| LIABILITIES |
||||||||||||||||||||||||
| Interest-Bearing Liabilities: |
||||||||||||||||||||||||
| Interest-bearing deposits |
$ | 14,136,707 | $ | 9,751 | 0.28 | % | $ | 13,219,572 | $ | 11,012 | 0.33 | % | ||||||||||||
| Short-term borrowings |
136,025 | 237 | 0.70 | % | 136,801 | 182 | 0.54 | % | ||||||||||||||||
| Long-term borrowings |
811,924 | 2,880 | 1.42 | % | 814,151 | 2,475 | 1.22 | % | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Interest-Bearing Liabilities |
15,084,656 | 12,868 | 0.34 | % | 14,170,524 | 13,669 | 0.39 | % | ||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
| Noninterest-bearing deposits |
9,038,947 | 8,227,147 | ||||||||||||||||||||||
| Accrued expenses and other liabilities |
279,659 | 229,389 | ||||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| TOTAL LIABILITIES |
24,403,262 | 22,627,060 | ||||||||||||||||||||||
| SHAREHOLDERS’ EQUITY |
4,606,186 | 4,378,898 | ||||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 29,009,448 | $ | 27,005,958 | ||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| NET INTEREST INCOME |
$ | 216,007 | $ | 187,592 | ||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| INTEREST RATE SPREAD |
3.24 | % | 2.98 | % | ||||||||||||||||||||
| NET INTEREST MARGIN |
3.38 | % | 3.14 | % | ||||||||||||||||||||
| (1) | The interest income and the yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 21%. |
| (2) | Nonaccruing loans are included in the daily average loan amounts outstanding. |
76
Six Months Ended June 30, 2022 |
Six Months Ended June 30, 2021 |
|||||||||||||||||||||||
(Dollars in thousands) |
Average Balance |
Interest (1) |
Avg. Rate (1) |
Average Balance |
Interest (1) |
Avg. Rate (1) |
||||||||||||||||||
| ASSETS |
||||||||||||||||||||||||
| Earning Assets: |
||||||||||||||||||||||||
| Federal funds sold and securities repurchased under agreements to resell and other short-term investments |
$ | 2,379,418 | $ | 7,170 | 0.61 | % | $ | 2,599,276 | $ | 3,650 | 0.28 | % | ||||||||||||
| Investment Securities: |
||||||||||||||||||||||||
| Taxable |
4,466,170 | 42,063 | 1.88 | % | 3,018,633 | 27,372 | 1.81 | % | ||||||||||||||||
| Tax-exempt |
432,135 | 5,483 | 2.54 | % | 324,183 | 4,312 | 2.66 | % | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Securities |
4,898,305 | 47,546 | 1.94 | % | 3,342,816 | 31,684 | 1.90 | % | ||||||||||||||||
| Loans, net of unearned income (2) |
18,775,823 | 378,063 | 4.06 | % | 18,030,354 | 372,631 | 4.16 | % | ||||||||||||||||
| Allowance for loan losses |
(215,316 | ) | (233,597 | ) | ||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| Net loans |
18,560,507 | 4.10 | % | 17,796,757 | 4.22 | % | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total earning assets |
25,838,230 | $ | 432,779 | 3.37 | % | 23,738,849 | $ | 407,965 | 3.46 | % | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
| Other assets |
3,338,261 | 3,011,252 | ||||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| TOTAL ASSETS |
$ | 29,176,491 | $ | 26,750,101 | ||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| LIABILITIES |
||||||||||||||||||||||||
| Interest-Bearing Liabilities: |
||||||||||||||||||||||||
| Interest-bearing deposits |
$ | 14,259,590 | $ | 18,312 | 0.26 | % | $ | 13,202,246 | $ | 22,997 | 0.35 | % | ||||||||||||
| Short-term borrowings |
135,012 | 418 | 0.62 | % | 139,463 | 360 | 0.52 | % | ||||||||||||||||
| Long-term borrowings |
814,628 | 5,431 | 1.34 | % | 823,705 | 5,009 | 1.23 | % | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Interest-Bearing Liabilities |
15,209,230 | 24,161 | 0.32 | % | 14,165,414 | 28,366 | 0.40 | % | ||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||||||||||
| Non-interest bearing deposits |
9,015,171 | 7,982,751 | ||||||||||||||||||||||
| Accrued expenses and other liabilities |
269,099 | 238,883 | ||||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| TOTAL LIABILITIES |
24,493,500 | 22,387,048 | ||||||||||||||||||||||
| SHAREHOLDERS’ EQUITY |
4,682,991 | 4,363,053 | ||||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 29,176,491 | $ | 26,750,101 | ||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| NET INTEREST INCOME |
$ | 408,618 | $ | 379,599 | ||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| INTEREST RATE SPREAD |
3.05 | % | 3.06 | % | ||||||||||||||||||||
| NET INTEREST MARGIN |
3.18 | % | 3.22 | % | ||||||||||||||||||||
| (1) | The interest income and the yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 21%. |
| (2) | Nonaccruing loans are included in the daily average loan amounts outstanding. |
Provision for Credit Losses
United’s provision for credit losses was a net benefit of $1.81 million and $5.22 million for the second quarter and first half of 2022, respectively, while the provision for credit losses was a net benefit of $8.88 million and $8.74 million for the second quarter and first half of 2021. United’s provision for credit losses relates to its portfolio of loans and leases, securities and interest receivable on loans which are discussed in more detail in the following paragraphs.
held-to-maturity
77
For the quarter ended June 30, 2022, the provision for loan and lease losses was a net benefit of $1.81 million as compared to a net benefit of $8.82 million for the quarter ended June 30, 2021. The provision for loan and lease losses for the first six months of 2022 was a net benefit of $5.21 million as compared to a net benefit of $8.52 million for the first six months of 2021. The higher amount of provision expense for 2022 compared to 2021 was mainly due to an increase in overall loans outstanding. Net recoveries were $941 thousand for the second quarter of 2022 as compared to net charge-offs of $5.22 million for the same quarter in 2021. Net recoveries for the first six months of 2022 were $2.92 million as compared to net charge-offs of $9.76 million for the first six months of 2021. The lower amount of net charge-offs for 2022 as compared to 2021 was primarily due to charge-offs recognized on several large commercial credits in the second quarter and first half of 2021. On a linked-quarter basis, the provision for loan and lease losses the provision for loan and lease losses was a net benefit of $3.40 million for the first quarter of 2022. Net recoveries were $1.98 million for the first quarter of 2022. Annualized net recoveries as a percentage of average loans and leases, net of unearned income were (0.02%) and (0.03%) for the second quarter and first half of 2022, respectively, compared to annualized net charge-offs of 0.12% and 0.11% for the second quarter and first half of 2021. Annualized net recoveries as a percentage of average loans were (0.04%) for the first quarter of 2022.
As of June 30, 2022, nonperforming loans and leases were $70.33 million or 0.37% of loans and leases, net of unearned income as compared to $90.76 million or 0.50% of loans, net of unearned income at December 31, 2021. The components of nonperforming loans and leases include: 1) nonaccrual loans and leases, 2) loans and leases which are contractually past due 90 days or more as to interest or principal, but have not been put on a nonaccrual basis and 3) loans and leases whose terms have been restructured for economic or legal reasons due to financial difficulties of the borrowers.
Loans past due 90 days or more were $16.44 million at June 30, 2022, a decrease of $2.44 million or 12.90% from $18.88 million at
year-end
2021. This decrease was primarily due to a large delinquent commercial credit being brought current. At June 30, 2022, nonaccrual loans were $28.39 million, which was a decrease of $7.64 million or 21.21% from $36.03 million at year-end
2021. This decrease was due to the repayment of several mid-sized
commercial nonaccrual loans as well as the return to accrual status for two commercial relationships. Restructured loans were $25.50 million at June 30, 2022, a decrease of $10.35 million or 28.87% from $35.86 million at year-end
2021. The decrease was mainly due to the repayment of four large commercial relationships and removal of TDR status for one commercial relationship during the first half of 2022. The loss potential on these loans has been properly evaluated and allocated within the Company’s allowance for loan losses. Nonperforming assets include nonperforming loans and real estate acquired in foreclosure or other settlement of loans (“OREO”). Total nonperforming assets of $84.18 million, including OREO of $13.85 million at June 30, 2022, represented 0.29% of total assets as compared to
non-performing
assets of $105.59 million, including OREO of $14.82 million, or 0.36% of total assets at December 31, 2021. United maintains an allowance for loan and lease losses and a reserve for lending-related commitments. The combined allowance for loan losses and reserve for lending-related commitments is considered the allowance for credit losses. At June 30, 2022, the allowance for credit losses was $256.31 million as compared to $247.46 million at December 31, 2021.
At June 30, 2022, the allowance for loan and lease losses was $213.73 million as compared to $216.02 million at December 31, 2021. The slight decrease in the allowance for loan and lease losses was due to improved trends within the loan portfolio that included lower historical loss rates and improvements in criticized loan totals. As a percentage of loans and leases, net of unearned income, the allowance for loan losses was 1.13% at June 30, 2022 and 1.20% at December 31, 2021. The ratio of the allowance for loan and lease losses to nonperforming loans and leases or coverage ratio was 303.88% and 238.00% at June 30, 2022 and December 31, 2021, respectively. The increase in this ratio was due mainly to a decline in nonperforming loans.
United continues to evaluate risks which may impact its loan and lease portfolios. Reserves are initially determined based on losses identified from the PD/LGD and Cohort models which utilize the Company’s historical information. Then, any qualitative adjustments are applied to account for the Company’s view of the future. If current conditions underlying any qualitative adjustment factor were deemed to be materially different than historical conditions, an adjustment was made for that factor.
78
The second quarter of 2022 qualitative adjustments include analyses of the following:
| • | Past events – This includes portfolio trends related to economic and business conditions; past due, nonaccrual, and adversely classified loans and leases; and concentrations of credit. |
| • | Current conditions – United considered the impact of inflation, supply chain disruptions, rising interest rates, increased oil and gas prices and the conflict in eastern Europe when making determinations related to factor adjustments, such as changes in economic and business conditions, collateral values and external factors. |
| • | Reasonable and supportable forecasts – The forecast is determined on a portfolio-by-portfolio |
Ø |
The forecast for real GDP shifted downward in the second quarter, from a projection of 2.80% for 2022 as of mid-March 2022 to 1.70% for 2022 as of mid-June with a level future trendline as compared to the first quarter of 2022. The unemployment rate forecast shifted upward compared to the first quarter of 2022 with an increasing trend expected throughout 2024. |
Ø |
Reversion to historical loss data occurs via a straight-line method during the year following the one-year reasonable and supportable forecast period. |
United’s review of the allowance for loan and lease losses at June 30, 2022 produced increased reserves in three of the four loan categories as compared to December 31, 2021. The real estate construction and development loan pool reserve increased $4.44 million. The residential real estate reserve increased $1.72 million. The consumer loan pool reserve increased $1.77 million. Each of these increases were primarily due to increased outstanding balances. The allowance related to the commercial, financial agricultural loan pool decreased $10.22 million. This decrease is due to improvement in historical loss rates and a decrease in allocations established for individually assessed loans.
An allowance is established for estimated lifetime losses for loans that are individually assessed. Nonperforming commercial loans and leases are regularly reviewed to identify expected credit losses. A loan is individually assessed for expected credit losses when the loan does not share similar characteristics with other loans in the portfolio. Measuring expected credit losses of a loan requires judgment and estimates, and the eventual outcomes may differ from those estimates. Expected credit losses are measured based upon the present value of expected future cash flows from the loan discounted at the loan’s effective rate or the fair value of collateral if the loan is collateral dependent. When the selected measure is less than the recorded investment in the loan, an expected credit loss has occurred. The allowance for loans and leases that were individually assessed was $2.93 million at June 30, 2022 and $6.53 million at December 31, 2021. In comparison to the prior
year-end,
this element of the allowance decreased $3.61 million primarily due to repayment of individually assessed loans as well as improved collateral valuations. Management believes that the allowance for credit losses of $256.31 million at June 30, 2022 is adequate to provide for expected losses on existing loans and lending-related commitments based on information currently available. United’s loan administration policies are focused on the risk characteristics of the loan portfolio in terms of loan approval and credit quality. The commercial loan portfolio is monitored for possible concentrations of credit in one or more industries. Management has lending limits as a percentage of capital per type of credit concentration in an effort to ensure adequate diversification within the portfolio. Most of United’s commercial loans are secured by real estate located in West Virginia, southeastern Ohio, Pennsylvania, Virginia, Maryland, North Carolina, South Carolina, and the District of Columbia. It is the opinion of management that these commercial loans do not pose any unusual risks and that adequate consideration has been given to these loans in establishing the allowance for credit losses.
79
The provision for credit losses related to held to maturity securities for the second quarter and first half of 2022 and 2021 was immaterial. The allowance for credit losses related to held to maturity securities was $18 thousand as of June 30, 2022 and $19 thousand as December 31, 2021. There was no provision for credit losses recorded on available for sale investment securities for the second quarter and first half of 2022 and 2021 and no allowance for credit losses on available for sale investment securities as of June 30, 2022 and December 31, 2021. Due to loan interest payment deferrals granted by United under the CARES Act, United assessed the collectability of the accrued interest receivables on these deferring loans as of June 30, 2022. As a result of this assessment, United released all of its remaining $8 thousand in reserves for the first half of 2022 as compared to the release of $221 thousand in reserves for the first half of 2021. The allowance for accrued interest receivables not expected to be collected as of December 31, 2021 was $8 thousand.
Management is not aware of any potential problem loans or leases, trends or uncertainties, which it reasonably expects, will materially impact future operating results, liquidity, or capital resources which have not been disclosed. Additionally, management has disclosed all known material credits, which cause management to have serious doubts as to the ability of such borrowers to comply with the loan repayment schedules.
Other Income
Other income consists of all revenues, which are not included in interest and fee income related to earning assets. Noninterest income has been and will continue to be an important factor for improving United’s profitability. Recognizing the importance, management continues to evaluate areas where noninterest income can be enhanced.
Noninterest income for the second quarter of 2022 was $43.61 million, a decrease of $19.26 million or 30.63% from the second quarter of 2021. Noninterest income for the first half of 2022 was $89.63 million, a decrease of $65.81 million or 42.34% from the first half of 2021. Both differences from the second quarter and first half of 2021 were due mainly to a decrease in income from mortgage banking activities primarily as a result of a rising interest rate environment and a lower margin on loans sold in the secondary market.
Income from mortgage banking activities totaled $12.45 million for the second quarter of 2022 compared to $36.94 million for the same period of 2021, a decline of $24.50 million or 66.31%. For the first half of 2022 and 2021, income from mortgage banking activities was $31.65 million and $102.34 million, respectively. The decreases for 2022 as compared to 2021 were due mainly to lower mortgage loan origination and sale volume driven by the rising rate environment and a lower margin on loans sold in the secondary market. For the three months ended June 30, 2022 and 2021, mortgage loan sales were $683.73 million and $1.88 billion, respectively. For the six months ended June 30, 2022 and 2021, mortgage loan sales were $1.78 billion and $3.72 billion, respectively.
Fees from deposit services for the second quarter and first half of 2022 increased $1.43 million or 15.26% and $2.69 million or 14.68%, respectively, from the second quarter and first half of 2021. The increases were due primarily to higher income from overdraft fees and debit card fee income.
Income from bank-owned life insurance (“BOLI”) for the second quarter and first half of 2022 increased $2.46 million and $3.25 million, respectively, from the second quarter and first half of 2021. These increases were due mainly to the purchase of $85 million in policies since June 30, 2021, the addition of approximately $31 million in BOLI from the Community Bankers Trust acquisition and proceeds from death benefits. For the second quarter and first half of 2022, United recognized death benefits from BOLI of $2.48 million and $2.76 million, respectively.
On a linked-quarter basis, noninterest income for the second quarter of 2022 decreased $2.41 million, or 5.25%, from the first quarter of 2022. The decrease in noninterest income was primarily due to a decrease of $6.76 million in income from mortgage banking activities mainly due to lower mortgage loan origination and sale volume driven by the rising rate environment and a lower margin on loans sold in the secondary market. Income from BOLI increased $1.93 million from the first quarter of 2022 due to an increase of $2.19 million in the recognition of death benefits partially offset by a decline in the cash surrender value of policies.
80
Other Expenses
Just as management continues to evaluate areas where noninterest income can be enhanced, it strives to improve the efficiency of its operations to reduce costs. Other expenses include all items of expense other than interest expense, the provision for credit losses, and income taxes. Noninterest expense increased $2.21 million or 1.59% for the second quarter of 2022 compared to the same period in 2021. For the first half of 2022, noninterest expense was $280.35 million, which was a decrease of $7.55 million or 2.62% from the first half of 2021.
Employee compensation for the second quarter and first half of 2022 decreased $5.93 million or 8.64% and $15.72 million or 11.15%, respectively, from the second quarter and first half of 2021. The decreases for 2022 were due mainly to lower employee commissions, incentives and overtime related to a decline in mortgage banking production partially offset by additional employees from the Community Bankers Trust acquisition.
Employee benefits expense for the second quarter of 2022 decreased $2.42 million or 16.74% from the second quarter of 2021. Employee benefits expense for the first half of 2022 decreased $5.02 million or 16.78% as compared to the first half of 2021. These decreases were primarily due to lower amounts of expense for postretirement benefits.
Net occupancy expense for the second quarter and first half of 2022 increased $1.11 million or 10.94% and $1.35 million or 6.42%, respectively, as compared to the same time periods in 2021. The increases were due primarily to increases in building depreciation and maintenance expenses mainly as a result of the offices added in the Community Bankers Trust acquisition.
OREO expense for the first half of 2022 decreased $3.83 million or 94.38% due mainly to fewer declines in the fair value of OREO properties.
Equipment expense increased $1.48 million or 25.39% and $2.77 million or 23.34% for the second quarter and first half of 2022, respectively, as compared to the same time periods in 2021. The increases were due mainly to higher maintenance costs and depreciation expense primarily due to the Community Bankers Trust acquisition.
Mortgage loan servicing expense and impairment for the second quarter and first half of 2022 decreased $1.82 million or 50.46% and $3.35 million or 49.44%, respectively, from the same time periods in 2021 due to the recovery of past temporary impairment and lower amortization expense of mortgage servicing rights.
Federal Deposit Insurance Corporation (“FDIC”) expense for the second quarter and first half of 2022 increased $1.20 million or 66.89% and $1.88 million or 49.39%, respectively, from the second quarter and first half of 2021 due a higher assessment base.
Other expense for the second quarter of 2022 increased $8.78 million or 32.76% from the second quarter of 2021. For the first half of 2022, other expense increased $13.84 million or 25.34% from the first half of 2021. Within other expenses, the most significant increase for second quarter and first half of 2022 as compared to the same time periods in 2021 was in the expense for the reserve for unfunded loan commitments of $5.03 million and $9.49 million, respectively. In addition, consulting and legal expenses as well as advertising expense increased significantly in 2022 from 2021.
On a linked-quarter basis, noninterest expense for the second quarter of 2022 increased $2.00 million, or 1.44% from the first quarter of 2022. The increase in noninterest expense resulted from higher amounts of certain general operating expenses including an increase in the expense for reserve for unfunded loan commitments of $662 thousand.
81
Income Taxes
For the second quarter and first half of 2022, income tax expense was $23.53 million and $43.63 million, respectively, as compared to $24.46 million and $52.02 million, respectively, in the second quarter and first half of 2021. These decreases were due to lower earnings and a lower effective tax rate. On a linked-quarter basis, income tax expense increased $3.43 million due to higher earnings from the first quarter of 2022. United’s effective tax rate was 19.75% for the second quarter of 2022, 20.50% for the second quarter of 2021 and 19.75% for the first quarter of 2022. For the first half of 2022 and 2021, United’s effective tax rate was 19.75% and 20.50%, respectively. For further details related to income taxes, see Note 17 of the unaudited Notes to Consolidated Financial Statements contained within this document.
Liquidity and Capital Resources
In the opinion of management, United maintains liquidity that is sufficient to satisfy its depositors’ requirements and the credit needs of its customers. Like all banks, United depends upon its ability to renew maturing deposits and other liabilities on a daily basis and to acquire new funds in a variety of markets. A significant source of funds available to United is “core deposits”. Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable, and they are the lowest cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase as well as advances from the FHLB. Repurchase agreements represent funds which are obtained as the result of a competitive bidding process.
Liquid assets are cash and those items readily convertible to cash. All banks must maintain sufficient balances of cash and near-cash items to meet the demands of customers and United’s cash needs. Other than cash and due from banks, the available for sale securities portfolio and maturing loans are the primary sources of liquidity.
day-to-day
The goal of liquidity management is to ensure the ability to access funding which enables United to efficiently satisfy the cash flow requirements of depositors and borrowers and meet United’s cash needs. Liquidity is managed by monitoring funds’ availability from a number of primary sources. Substantial funding is available from cash and cash equivalents, unused short-term borrowing and a geographically dispersed network of branches providing access to a diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of outside sources such as correspondent and downstream correspondent federal funds and utilization of Federal Home Loan Bank advances.
Other sources of liquidity available to United to provide long-term as well as short-term funding alternatives, in addition to FHLB advances, are long-term certificates of deposit, lines of credit, borrowings that are secured by bank premises or stock of United’s subsidiaries and issuances of trust preferred securities. In the normal course of business, United through its Asset Liability Committee evaluates these as well as other alternative funding strategies that may be utilized to meet short-term and long-term funding needs.
For the first six months ended June 30, 2022, cash of $490.02 million was provided by operating activities due mainly to net income of $177.28 million. In addition, mortgage banking activities added cash of $283.73 million to the net income amount as sales of mortgage loans in the secondary market exceeded originations. Net cash of $2.08 billion was used in investing activities which was primarily due to purchases of investment securities over proceeds from sales of $1.15 billion and net loan growth of $939.33 million. During the first half of 2022, net cash of $511.46 million was used in financing activities due primarily to a net withdrawal of $321.84 million in deposits, cash dividends paid of $95.94 million, net repurchases of $79.45 million in treasury stock and the net repayment of $20.00 million in FHLB advances. The net effect of the cash flow activities was a decrease in cash and cash equivalents of $2.10 billion for the first six months of 2022.
United anticipates it can meet its obligations over the next 12 months and has no material commitments for capital expenditures. United also has lines of credit available. See Notes 10 and 11 to the accompanying unaudited Notes to Consolidated Financial Statements for more details regarding the amounts available to United under lines of credit.
82
The Asset Liability Committee monitors liquidity to ascertain that a liquidity position within certain prescribed parameters is maintained. No changes are anticipated in the policies of United’s Asset Liability Committee.
United’s capital position is financially sound. United seeks to maintain a proper relationship between capital and total assets to support growth and sustain earnings. United has historically generated attractive returns on shareholders’ equity. United is well-capitalized based upon regulatory guidelines. United’s risk-based capital ratio is 14.75% at June 30, 2022 while its Common Equity Tier 1 capital, Tier 1 capital and leverage ratios are 12.65%, 12.65% and 10.45%, respectively. The June 30, 2022 ratios reflects United’s election of a five-year transition provision, allowed by the Federal Reserve Board and other federal banking agencies in response to the
COVID-19
pandemic, to delay for two years the full impact of CECL on regulatory capital, followed by a three-year transition period. The regulatory requirements for a well-capitalized financial institution are a risk-based capital ratio of 10.0%, a Common Equity Tier 1 capital ratio of 6.5%, a Tier 1 capital ratio of 8.0% and a leverage ratio of 5.0%. Total shareholders’ equity was $4.49 billion at June 30, 2022, which was a decrease of $231.58 million or 4.91% from December 31, 2021. This decrease is primarily due to a decrease of $242.47 million in accumulated other comprehensive income due mainly to an
after-tax
decrease in the fair value of available for sale securities as a result of a rising interest rate environment. In addition, treasury stock increased $79.76 million or 46.75% due to the repurchase of 2,259,546 shares of United common stock under stock repurchase plans approved by United’s Board of Directors. Partially offsetting these decreases was an increase of $79.47 million in retained earnings (net income less dividends declared). United’s equity to assets ratio was 15.59% at June 30, 2022 as compared to 16.09% at December 31, 2021. The primary capital ratio, capital and reserves to total assets and reserves, was 16.34% at June 30, 2022 as compared to 16.79% at December 31, 2021. United’s average equity to average asset ratio was 15.88% for the second quarter of 2022 as compared to 16.21% the second quarter of 2021. United’s average equity to average asset ratio was 16.05% for the first half of 2022 as compared to 16.31% for the first half of 2021. All of these financial measurements reflect a financially sound position.
During the second quarter of 2022, United’s Board of Directors declared a cash dividend of $0.36 per share. Cash dividends were $0.72 per common share for the first six months of 2022. Total cash dividends declared were $48.54 million for the second quarter of 2022 and $97.81 million for the first six months of 2022 as compared to $45.27 million for the second quarter of 2021 and $90.52 million for the first six months of 2021.
Item 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The objective of United’s Asset Liability Management function is to maintain consistent growth in net interest income within United’s policy guidelines. This objective is accomplished through the management of balance sheet liquidity and interest rate risk exposures due to changes in economic conditions, interest rate levels and customer preferences.
Interest Rate Risk
Management considers interest rate risk to be United’s most significant market risk. Interest rate risk is the exposure to adverse changes in United’s net interest income as a result of changes in interest rates. United’s earnings are largely dependent on the effective management of interest rate risk.
Management of interest rate risk focuses on maintaining consistent growth in net interest income within Board-approved policy limits. United’s Asset/Liability Management Committee (“ALCO”), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. Policy established for interest rate risk is stated in terms of the change in net interest income over a
one-year
and two-year
horizon given an immediate and sustained increase or decrease in interest rates. The current limits approved by the Board of Directors are structured on a staged basis with each stage requiring specific actions. 83
United employs a variety of measurement techniques to identify and manage its exposure to changing interest rates. One such technique utilizes an earnings simulation model to analyze the sensitivity of net interest income to movements in interest rates. The model is based on actual cash flows and repricing characteristics for on and
off-balance
sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. The model also includes executive management projections for activity levels in product lines offered by United. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. Rate scenarios could involve parallel or nonparallel shifts in the yield curve, depending on historical, current, and expected conditions, as well as the need to capture any material effects of explicit or embedded options. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management’s strategies. Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or are repriced within a designated time frame. The principal function of managing interest rate risk is to maintain an appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. The difference between rate sensitive assets and rate sensitive liabilities for specified periods of time is known as the “GAP.” Earnings-simulation analysis captures not only the potential of these interest sensitive assets and liabilities to mature or reprice, but also the probability that they will do so. Moreover, earnings-simulation analysis considers the relative sensitivities of these balance sheet items and projects their behavior over an extended period of time. United closely monitors the sensitivity of its assets and liabilities on an
on-going
basis and projects the effect of various interest rate changes on its net interest margin. The following table shows United’s estimated earnings sensitivity profile as of June 30, 2022 and December 31, 2021:
| Change in Interest Rates (basis points) |
Percentage Change in Net Interest Income |
|||||||
June 30, 2022 |
December 31, 2021 |
|||||||
| +200 |
(0.91 | %) | 4.61 | % | ||||
| +100 |
0.21 | % | 2.70 | % | ||||
| -100 |
(0.75 | %) | (0.98 | %) | ||||
| -200 |
(6.92 | %) | (2.42 | %) | ||||
At June 30, 2022, given an immediate, sustained 100 basis point upward shock to the yield curve used in the simulation model, net interest income for United is estimated to increase by 0.21% over one year as compared to an increase by 2.70% at December 31, 2021. A 200 basis point immediate, sustained upward shock in the yield curve would decrease net interest income by an estimated 0.91% over one year as of June 30, 2022, as compared to an increase of 4.61% as of December 31, 2021. A 100 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 0.75% over one year as of June 30, 2022 as compared to a decrease of 0.98%, over one year as of December 31, 2021. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 6.92% over one year as of June 30, 2022 as compared to a decrease of 2.42% over one year as of December 31, 2021.
In addition to the one year earnings sensitivity analysis, a
two-year
analysis is also performed. Compared to the one year analysis, United is projected to show improved performance in year two within the upward rate shock scenarios. Given an immediate, sustained 100 basis point upward shock to the yield curve used in the simulation model, net interest income for United is estimated to increase by 3.05% in year two as of June 30, 2022. A 200 basis point immediate, sustained upward shock in the yield curve would increase net interest income by an estimated 4.40% in year two as of June 30, 2022. A 100 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 5.35% in year two as of June 30, 2022. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 15.92% in year two as of June 30, 2022. 84
This analysis does not include the potential increased refinancing activities, which should lessen the negative impact on net income from falling rates. While it is unlikely market rates would immediately move 100 or 200 basis points upward or downward on a sustained basis, this is another tool used by management and the Board of Directors to gauge interest rate risk. All of these estimated changes in net interest income are and were within the policy guidelines established by the Board of Directors.
To further aid in interest rate management, United’s subsidiary bank is a member of the Federal Home Loan Bank (“FHLB”). The use of FHLB advances provides United with a low risk means of matching maturities of earning assets and interest-bearing funds to achieve a desired interest rate spread over the life of the earning assets. In addition, United uses credit with large regional banks and trust preferred securities to provide funding.
As part of its interest rate risk management strategy, United may use derivative instruments to protect against adverse price or interest rate movements on the value of certain assets or liabilities and on future cash flows. These derivatives commonly consist of interest rate swaps, caps, floors, collars, futures, forward contracts, written and purchased options. Interest rate swaps obligate two parties to exchange one or more payments generally calculated with reference to a fixed or variable rate of interest applied to the notional amount. United accounts for its derivative activities in accordance with the provisions of ASC Topic 815, “Derivatives and Hedging.”
Extension Risk
A key feature of most mortgage loans is the ability of the borrower to repay principal earlier than scheduled. This is called a prepayment. Prepayments arise primarily due to sale of the underlying property, refinancing, or foreclosure. In general, declining interest rates tend to increase prepayments, and rising interest rates tend to slow prepayments. Like other fixed-income securities, when interest rates rise, the value of mortgage- related securities generally declines. The rate of prepayments on underlying mortgages will affect the price and volatility of mortgage-related securities and may shorten or extend the effective maturity of the security beyond what was anticipated at the time of purchase. If interest rates rise, United’s holdings of mortgage-related securities may experience reduced returns if the borrowers of the underlying mortgages pay off their mortgages later than anticipated. This is generally referred to as extension risk.
At June 30, 2022, United’s mortgage related securities portfolio had an amortized cost of $2.2 billion, of which approximately $941.8 million or 42% were fixed rate collateralized mortgage obligations (CMOs). These fixed rate CMOs consisted primarily of planned amortization class (PACs),
sequential-pay
and accretion directed (VADMs) bonds having an average life of approximately 5.9 years and a weighted average yield of 1.95%, under current projected prepayment assumptions. These securities are expected to have moderate extension risk in a rising rate environment. Current models show that an immediate, sustained upward shock of 300 basis points, the average life of these securities would only extend to 7.1 years. The projected price decline of the fixed rate CMO portfolio in rates up 300 basis points would be 16%, or less than the price decline of a 7-
year treasury note. By comparison, the price decline of a 30-year
2.50% coupon mortgage-backed security (MBS) in rates higher by 300 basis points would be approximately 21.1%. United had approximately $651.7 million in fixed rate Commercial mortgage-backed Securities (CMBS) with a projected yield of 2.07% and a projected average life of 4.9 years on June 30, 2022. This portfolio consisted primarily of Freddie Mac Multifamily K securities and Fannie Mae Delegated Underwriting and Servicing (DUS) securities with a weighted average maturity (WAM) of 7.8 years.
United had approximately $30.3 million in
15-year
mortgage-backed securities with a projected yield of 2.03% and a projected average life of 4.9 years as of June 30, 2022. This portfolio consisted of seasoned 15-year
mortgage paper with a weighted average loan age (WALA) of 3.1 years and a weighted average maturity (WAM) of 12.4 years. United had approximately $368.8 million in
20-year
mortgage-backed securities with a projected yield of 1.81% and a projected average life of 7.2 years on June 30, 2022. This portfolio consisted of seasoned 20-year
mortgage paper with a weighted average loan age (WALA) of 1.3 years and a weighted average maturity (WAM) of 18.6 years. 85
United had approximately $172.9 million in
30-year
mortgage-backed securities with a projected yield of 2.47% and a projected average life of 8.4 years on June 30, 2022. This portfolio consisted of seasoned 30-year
mortgage paper with a weighted average loan age (WALA) of 3.3 years and a weighted average maturity (WAM) of 25.1 years. The remaining 3% of the mortgage related securities portfolio on June 30, 2022, included floating rate CMO, CMBS and mortgage-backed securities.
Item 4. |
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of June 30, 2022, an evaluation was performed under the supervision of and with the participation of United’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of United’s disclosure controls and procedures. Based on that evaluation, United’s management, including the CEO and CFO, concluded that United’s disclosure controls and procedures as of June 30, 2022 were effective in ensuring that information required to be disclosed in the Quarterly Report on Form
10-Q
was recorded, processed, summarized and reported within the time period required by the Securities and Exchange Commission’s rules and forms. Limitations on the Effectiveness of Controls
United’s management, including the CEO and CFO, does not expect that United’s disclosure controls and internal controls will prevent all errors and fraud. While United’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objective, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
Changes in Internal Controls
There have been no changes in United’s internal control over financial reporting (as defined in Rules
13a-15(e)
and 15d-15(f)
under the Exchange Act) that occurred during the quarter ended June 30, 2022, or in other factors that have materially affected or are reasonably likely to materially affect United’s internal control over financial reporting. 86
PART II - OTHER INFORMATION
Item 1. |
LEGAL PROCEEDINGS |
United and its subsidiaries are currently involved in various legal proceedings in the normal course of business. Management is vigorously pursuing all its legal and factual defenses and, after consultation with legal counsel, believes that all such litigation will be resolved with no material effect on United’s financial position.
Item 1A. |
RISK FACTORS |
In addition to the other information set forth in this report, please refer to United’s Annual Report on Form
10-K
for the year ended December 31, 2021 for disclosures with respect to United’s risk factors which could materially affect United’s business, financial condition or future results. The risks described in the Annual Report on Form 10-K
are not the only risks facing United. Additional risks and uncertainties not currently known to United or that United currently deems to be immaterial also may materially adversely affect United’s business, financial condition and/or operating results. The following risk factor supplements the “Risk Factors” section in Item 1A of United’s Annual Report on Form
10-K
for the year ended December 31, 2021: Our Needs to Improve rating under The Community Reinvestment Act may restrict our operations and limit our ability to pursue certain strategic opportunities.
As described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading of “Recent Developments,” United Bank (the “Bank”), the wholly-owned bank subsidiary of United, has received a Community Reinvestment Act (“CRA”) Performance Evaluation with a rating from the Federal Reserve Bank of Richmond (the “FRB”) of “Needs to Improve.” A “Needs to Improve” rating results in restrictions on certain expansionary activities, including certain mergers and acquisitions and the establishment of bank branches. These restrictions will remain in place until the FRB issues a higher CRA rating following a subsequent CRA examination. The next CRA examination is expected to commence in October 2022. The precise timing of the completion of that examination and any results therefrom will not be known until later.
87
Item 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
There have been no United equity securities sales during the quarter ended June 30, 2022 that were not registered. The table below includes certain information regarding United’s purchase of its common shares during the quarter ended June 30, 2022:
| Period |
Total Number of Shares Purchased (1) (2) |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans (3) |
Maximum Number of Shares that May Yet be Purchased Under the Plans (3) |
||||||||||||
| 4/01 – 4/30/2022 |
820,000 | $ | 34.34 | 820,000 | 1,503,011 | |||||||||||
| 5/01 – 5/31/2022 |
728,761 | $ | 34.62 | 728,761 | 4,371,239 | |||||||||||
| 6/01 – 6/30/2022 |
6 | $ | 33.82 | 0 | 4,371,239 | |||||||||||
| |
|
|
|
|
|
|||||||||||
| Total |
1,548,767 | $ | 34.47 | 1,548,761 | ||||||||||||
| |
|
|
|
|
|
|||||||||||
| (1) | Includes shares exchanged in connection with the exercise of stock options or the vesting of restricted stock under United’s long-term incentive plans. Shares are purchased pursuant to the terms of the applicable plan and not pursuant to a publicly announced stock repurchase plan. |
| (2) | Includes shares purchased in open market transactions by United for a rabbi trust to provide payment of benefits under a deferred compensation plan for certain key officers of United and its subsidiaries. For the quarter ended June 30, 2022, the following shares were purchased for the deferred compensation plan: June 2022 – 6 shares at an average price of $33.82. |
| (3) | In May of 2022, United’s Board of Directors approved a new repurchase plan to repurchase up to 4,750,000 shares of United’s common stock on the open market (the “2022 Plan”). The timing, price and quantity of purchases under the plans are at the discretion of management and the plan may be discontinued, suspended or restarted at any time depending on the facts and circumstances. The 2022 Plan replaces a repurchase plan approved by United’s Board of Directors in October of 2019. |
Item 3. |
DEFAULTS UPON SENIOR SECURITIES |
None.
Item 4. |
MINE SAFETY DISCLOSURES |
None.
Item 5. |
OTHER INFORMATION |
| (a) | None. |
88
| (b) | No changes were made to the procedures by which security holders may recommend nominees to United’s Board of Directors. |
Item 6. |
EXHIBITS |
Index to exhibits required by Item 601 of Regulation
S-K
89
| Exhibit No. |
Description | |
| 31.2 | Certification as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer (filed herewith) | |
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer (furnished herewith) | |
| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer (furnished herewith) | |
| 101 | Interactive data file (inline XBRL) (filed herewith) | |
| 104 | Cover Page (embedded in inline XBRL and contained in Exhibit 101) | |
90
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 BANKSHARES, INC. | ||||||
| (Registrant) | ||||||
| Date: August 9, 2022 | /s/ Richard M. Adams, Jr. | |||||
| Richard M. Adams, Jr. | ||||||
| Chief Executive Officer | ||||||
| Date: August 9, 2022 | /s/ W. Mark Tatterson | |||||
| W. Mark Tatterson, Executive | ||||||
| Vice President and Chief Financial Officer |
91
TABLE OF CONTENTS
Part I - Financial InformationItem 1. Financial Statements (unaudited)Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits