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Assets and Liabilities Measured at Fair Value

3 Months Ended

Mar. 31, 2024

Assets and Liabilities Measured at Fair Value

Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering those assumptions, United uses a fair value hierarchy that distinguishes between assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions (unobservable inputs classified within Level 3 of the hierarchy). United has processes in place to review the significant valuation inputs and to reassess how the instruments are classified in the valuation framework.

Fair Value Hierarchy

Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that United has the ability to access.

Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.

Level 3 Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.

In instances when the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities

AFS debt securities and equity securities with readily determinable fair values are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include MBS issued by GSEs, municipal bonds, corporate debt securities, asset-backed securities and supranational entity securities and are valued based on observable inputs that include: quoted market prices for similar assets, quoted market prices that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the securities. Securities classified as Level 3 include those traded in less liquid markets and are valued based on estimates obtained from broker-dealers that are not directly observable or models which incorporate unobservable inputs.

Deferred Compensation Plan Assets and Liabilities

Included in other assets in the consolidated balance sheet are assets purchased to provide returns mirroring those promised to participants in the employee deferred compensation plan. These assets are mutual funds classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the participant, which mirrors the fair value of the invested assets and is included in other liabilities in the consolidated balance sheet. Deferred compensation plan liabilities are unsecured general obligations of United.

Mortgage Loans Held for Sale

United has elected the fair value option for most of its newly originated mortgage loans held for sale in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the value of derivative instruments used to economically hedge them. The fair value of mortgage loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan, and are classified as Level 2.

Derivative Financial Instruments

United uses derivatives to manage interest rate risk. The valuation of these instruments is typically determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. United also uses best effort and mandatory delivery forward loan sale commitments to hedge risk in its mortgage lending business.

United incorporates CVAs as necessary to appropriately reflect the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, United has considered the effect of netting and any applicable credit enhancements, such as collateral postings, thresholds and guarantees.

Management has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. However, the CVAs associated with these derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. Generally, management’s assessment of the significance of the CVAs has indicated that they are not a significant input to the overall valuation of the derivatives. In cases when management’s assessment indicates that the CVA is a significant input, the related derivative is disclosed as a Level 3 value. In other cases, derivatives are categorized as Level 3 when there is not an observable forward-rate curve available for the duration of the contract.

Other derivatives classified as Level 3 include structured derivatives for which broker quotes, used as a key valuation input, were not observable. Risk participation agreements are classified as Level 3 instruments due to the incorporation of significant Level 3 inputs used to evaluate the probability of funding and the likelihood of customer default. Interest rate lock commitments, which relate to mortgage loan commitments, are categorized as Level 3 instruments as the fair value of these instruments is based on unobservable inputs for commitments that United does not expect to fund.

Servicing Rights for Residential and SBA/USDA Loans

United recognizes servicing rights upon the sale of residential and SBA/USDA loans sold with servicing retained. Management has elected to carry these assets at fair value. Given the nature of these assets, the key valuation inputs are unobservable and management classifies these assets as Level 3.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of the dates indicated, aggregated by the level in the fair value hierarchy within which those measurements fall.


(in thousands)
March 31, 2024	Level 1		Level 2		Level 3		Total
Assets:
AFS debt securities:
U.S. Treasuries	$	398,780	$	—	$	—	$	398,780
U.S. Government agencies & GSEs	—		297,426		—		297,426
State and political subdivisions	—		163,263		—		163,263
Residential MBS	—		1,517,893		—		1,517,893
Commercial MBS	—		673,081		—		673,081
Corporate bonds	—		193,740		2,160		195,900
Asset-backed securities	—		147,056		—		147,056
Equity securities with readily determinable fair values	4,553		1,787		—		6,340
Mortgage loans held for sale	—		38,140		—		38,140
Deferred compensation plan assets	13,124		—		—		13,124
Servicing rights for SBA/USDA loans	—		—		5,507		5,507
Residential mortgage servicing rights	—		—		37,358		37,358
Derivative financial instruments	—		40,391		12,811		53,202
Total assets	$	416,457	$	3,072,777	$	57,836	$	3,547,070

Liabilities:
Deferred compensation plan liability	$	13,119	$	—	$	—	$	13,119
Derivative financial instruments	—		78,228		13,185		91,413

Total liabilities	$	13,119	$	78,228	$	13,185	$	104,532


(in thousands)
December 31, 2023	Level 1		Level 2		Level 3		Total
Assets:
AFS debt securities:
U.S. Treasuries	$	387,349	$	—	$	—	$	387,349
U.S. Government agencies & GSEs	—		267,500		—		267,500
State and political subdivisions	—		164,049		—		164,049
Residential MBS	—		1,507,598		—		1,507,598
Commercial MBS	—		641,654		—		641,654
Corporate bonds	—		199,017		2,205		201,222
Asset-backed securities	—		161,712		—		161,712
Equity securities with readily determinable fair values	5,767		1,628		—		7,395
Mortgage loans held for sale	—		33,008		—		33,008
Deferred compensation plan assets	12,791		—		—		12,791
Servicing rights for SBA/USDA loans	—		—		5,444		5,444
Residential mortgage servicing rights	—		—		35,897		35,897
Derivative financial instruments	—		39,710		10,642		50,352
Total assets	$	405,907	$	3,015,876	$	54,188	$	3,475,971

Liabilities:
Deferred compensation plan liability	$	12,838	$	—	$	—	$	12,838
Derivative financial instruments	—		73,639		11,172		84,811
Total liabilities	$	12,838	$	73,639	$	11,172	$	97,649

The following table shows a reconciliation of the beginning and ending balances for the periods indicated for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values.


	2024										2023
(in thousands)	Derivative Assets		Derivative Liabilities		SBA/USDA loan servicing rights		Residential mortgage servicing rights		Corporate Bonds		Derivative Assets		Derivative Liabilities		SBA/USDA loan servicing rights		Residential mortgage servicing rights		Corporate Bonds










Three Months Ended March 31,
Beginning balance	$	10,642	$	11,172	$	5,444	$	35,897	$	2,205	$	11,513	$	12,840	$	5,188	$	36,559	$	2,212
Business combinations	—		—		—		—		—		—		—		95		—		—
Additions	1,466		—		170		718		—		—		3		460		632		—

Transfers from Level 2	484		925		—		—		—		—		—		—		—		—
Sales and settlements	(923)		—		(241)		(760)		—		(11)		—		(220)		(452)		—
Fair value adjustments included in OCI	—		—		—		—		(45)		—		—		—		—		15
Fair value adjustments included in earnings	1,142		1,088		134		1,503		—		(154)		(1,648)		766		(658)		—
Ending balance	$	12,811	$	13,185	$	5,507	$	37,358	$	2,160	$	11,348	$	11,195	$	6,289	$	36,081	$	2,227

The following table presents quantitative information about significant Level 3 inputs for fair value on a recurring basis as of the dates indicated.


Level 3 Assets and Liabilities	Valuation Technique	Significant Unobservable Inputs	March 31, 2024			December 31, 2023
			Range	Weighted Average		Range	Weighted Average
SBA/USDA loan servicing rights	Discounted cash flow	Discount rate	3.6% - 25.0%	12.7	%	8.4% - 25.0%	16.2	%
		Prepayment rate	2.0 - 38.0	19.3		3.5 - 37.4	18.5
Residential mortgage servicing rights	Discounted cash flow	Discount rate	10.0 - 12.5	10.1		10.0 - 15.0	10.0
		Prepayment rate	6.5 - 30.0	7.9		6.5 - 29.9	8.0
Corporate bonds	Discounted cash flow	Discount rate	6.6 - 7.2	7.0		6.1 - 6.7	6.5


Derivative assets - mortgage	Internal model	Pull through rate	64.0 - 100	90.5		60.0 - 100	90.5
Derivative assets and liabilities - other	Dealer priced	Dealer priced	N/A	N/A		N/A	N/A

Fair Value Option

United generally records mortgage loans held for sale at fair value under the fair value option. Interest income on these loans is calculated based on the note rate of the loan and is recorded in interest revenue. The following tables present the fair value and outstanding principal balance of loans accounted for under the fair value option, as well as the gain or loss recognized from the change in fair value for the periods indicated.


Mortgage Loans Held for Sale
(in thousands)	March 31, 2024		December 31, 2023
Outstanding principal balance	$	36,951	$	31,788
Fair value	38,140		33,008


Gain (Loss) from Change in Fair Value on Mortgage Loans Held for Sale
Location	Three Months Ended March 31,
(in thousands)		2024		2023
Mortgage loan gains and other related fees		$	(31)	$	231

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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of the lower of the amortized cost or fair value accounting or write-downs of individual assets due to impairment. The following table presents the fair value hierarchy and carrying value of assets that were still held as of March 31, 2024 and December 31, 2023, for which a nonrecurring fair value adjustment was recorded during the year-to-date periods presented.


(in thousands)	Level 1		Level 2		Level 3		Total
March 31, 2024
Loans held for investment	$	—	$	—	$	15,579	$	15,579


December 31, 2023
Loans held for investment	$	—	$	—	$	36,984	$	36,984

Loans held for investment that are reported above as being measured at fair value on a nonrecurring basis are generally impaired loans that have either been partially charged off or have specific reserves assigned to them. Nonaccrual loans that are collateral dependent are generally written down to net realizable value, which reflects fair value less the estimated costs to sell. Specific reserves that are established based on appraised value of collateral are considered nonrecurring fair value adjustments as well. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the impaired loan as nonrecurring Level 3.

Assets and Liabilities Not Measured at Fair Value

For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.

Cash and cash equivalents and repurchase agreements have short maturities and therefore the carrying value approximates fair value. Due to the short-term settlement of accrued interest receivable and payable, the carrying amount closely approximates fair value.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings. All estimates are inherently subjective in nature. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Off-balance sheet instruments (commitments to extend credit and standby letters of credit) for which draws can be reasonably predicted are generally short-term in maturity and are priced at variable rates. Therefore, the estimated fair values associated with these instruments are immaterial.

The carrying amount and fair values as of the dates indicated for other financial instruments that are not measured at fair value on a recurring basis are as follows.


			Fair Value Level
(in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Total
March 31, 2024
Assets:
HTM debt securities	$	2,465,133	$	17,779	$	2,025,133	$	—	$	2,042,912
Loans and leases, net	18,163,910		—		—		17,622,063		17,622,063


Liabilities:
Deposits	23,332,009		—		23,320,033		—		23,320,033

Long-term debt	324,854		—		—		310,182		310,182

December 31, 2023
Assets:
HTM debt securities	$	2,490,848	$	17,950	$	2,077,670	$	—	$	2,095,620
Loans and leases, net	18,110,684		—		—		17,585,073		17,585,073

Liabilities:
Deposits	23,310,611		—		23,305,223		—		23,305,223

Long-term debt	324,823		—		—		310,060		310,060

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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