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Item 1A. Risk Factors

2023-03-01 compared with 2022-03-01 · 111 added, 161 removed, 225 unchanged (55% of the section changed)

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This report is qualified in its entirety by these risk factors.

RISKS RELATED TO THE COVID-19

United’s business, financial condition, liquidity and results of operations have been, and will likely continue to be, adversely affected by the COVID-19

The ongoing COVID-19

pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, United’s business, financial condition, liquidity and results of operations.

The extent to which the COVID-19

pandemic will continue to negatively affect United’s business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the continued effectiveness of United’s business continuity plan, the direct and indirect impact of the pandemic on United’s employees, customers, clients, counterparties and service providers, as well as other market participants, and actions taken, or that may yet be taken, by governmental authorities and other third parties in response to the pandemic, and public acceptance of any vaccines for COVID-19.

Although financial markets have largely rebounded from the significant declines that occurred earlier in the pandemic and global economic conditions showed signs of improvement, many of the circumstances that arose or became more pronounced after the onset of the pandemic persist, including:

Increased unemployment and decreased consumer confidence and business generally, leading to an increased risk of delinquencies, defaults and foreclosures.

Ratings downgrades, credit deterioration and defaults in many industries, including natural resources, hospitality, transportation and commercial real estate.

A sudden and significant reduction in the valuation of the equity, fixed-income and commodity markets and the significant increase in the volatility of those markets.

A decrease in the rates and yields on U.S.

Treasury securities, which may lead to decreased net interest income.

Increased demands on capital and liquidity.

A reduction in the value of the assets that the Company manages or otherwise administers or services for others, affecting related fee income and demand for the Company’s services.

Heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements.

Governmental authorities have taken unprecedented measures to provide economic assistance to individual households and businesses, stabilize the markets and support economic growth.

The success of these measures is unknown and they may not be sufficient to fully mitigate the negative impact of the COVID-19

Additionally, some measures, such as a suspension of mortgage and other loan payments and foreclosures, may have a negative impact on United’s business, financial condition, liquidity and results of operations.

United also faces an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19

on market and economic conditions and actions governmental authorities take in response to those conditions.

The length of the pandemic and the efficacy of the extraordinary measures being put in place to address it are unknown.

Until the pandemic subsides, the Company expects continued draws on lines of credit, reduced revenues in our trust operations and other businesses and increased customer and client defaults, including defaults in unsecured loans.

Even after the pandemic subsides, the U.S.

economy may experience a recession, and United anticipates the Company’s businesses would be materially and adversely affected by a prolonged recession.

As a participating lender in the PPP, United and United Bank are subject to additional risks of litigation from United Bank’s customers or other parties regarding United Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guarantees.

Under the PPP, small businesses and other entities and individuals applied for loans from existing SBA lenders and other approved regulated lenders that enrolled in the program, subject to numerous limitations and eligibility criteria.

United Bank participated as a lender in the PPP.

The PPP opened on April 3, 2020;

however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there was some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposed United and United Bank to risks relating to noncompliance with the PPP.

In addition, United Bank’s participation in the PPP as a lender may adversely affect the Company’s revenue and results of operations depending on the timing and amount of forgiveness, if any, to which borrowers are entitled.

Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees.

United and United Bank may be exposed to the risk of similar litigation, from both customers and non-customers

that approached United Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP, or litigation from agents with respect to agent fees.

If any such litigation is filed against United or United Bank and is not resolved in a manner favorable to United or United Bank, it may result in significant financial liability or adversely affect their reputation.

In addition, litigation can be costly, regardless of outcome.

Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

United Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by United Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP.

In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by United Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from United Bank.

Additionally, if a borrower under the PPP loan fails to qualify for loan forgiveness, United Bank is at the heightened risk of holding the loan at an unfavorable interest rate as compared to loans to customers that United Bank would have otherwise extended credit.

REGULATORY AND LITIGATION RISKS

Our Needs to Improve rating under The Community Reinvestment Act may restrict our operations and limit our ability to pursue certain strategic opportunities.

In the third quarter of 2022, United Bank 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 was also the subject of an investigation by the Department of Justice.

The Department of Justice, however, has advised the Bank in writing that it has completed its review of this matter and determined that the circumstances of this matter do not require enforcement action by the Department of Justice at this time.

The FRB Performance Evaluation states that “United 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 commenced in October 2022 and United Bank is awaiting the results.

The precise timing of any results therefrom will not be known until later.

United is subject to extensive government regulation and supervision.

United is subject to extensive federal and state regulation, supervision and examination which vests significant discretion in the various regulatory authorities.

Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders.

These regulations affect United’s lending practices, capital structure, investment practices, dividend policy, operations and growth, among other things.

These regulations also impose obligations to maintain appropriate policies, procedures and controls, among other things, to detect, prevent and report money laundering and terrorist financing and to verify the identities of United’s customers.

Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes.

The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes.

Other changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect United in substantial and unpredictable ways.

Such changes could subject the Company to additional costs, limit the types of financial services and products United may offer and/or increase the ability of nonbanks to offer competing financial services and products, among other things.

United expends substantial effort and incurs costs to improve its systems, audit capabilities, staffing and training in order to satisfy regulatory requirements, but the regulatory authorities may determine that such efforts are insufficient.

Failure to comply with relevant laws, regulations or policies could result in enforcement and other legal actions, sanctions by regulatory agencies, civil money and criminal penalties, the loss of FDIC insurance, the revocation of a banking charter, significant fines and/or reputation damage, which could have a material adverse effect on United’s business, financial condition and results of operations.

In this regard, government authorities, including the bank regulatory agencies, are pursuing aggressive enforcement actions with respect to compliance and other legal matters involving financial activities, which heightens the risks associated with actual and perceived compliance failures.

Directives issued to enforce such actions may be confidential and thus, in some instances, we are not permitted to publicly disclose these actions.

Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

See the section captioned “Regulation and Supervision” included in Item 1.

While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

In the normal course of business, United and its subsidiaries are routinely subject to examinations and challenges from federal and state tax authorities regarding the amount of taxes due in connection with investments that the Company has made and the businesses in which United has engaged.

Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions.

These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base, apportionment and tax credit planning.

The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions.

If any such challenges are made and are not resolved in the Company’s favor, they could have a material adverse effect on United’s financial condition and results of operations.

The Consumer Financial Protection Bureau (“CFPB”) may reshape the consumer financial laws through rulemaking and enforcement of the prohibitions against unfair, deceptive and abusive business practices.

Compliance with any such change may impact the business operations of depository institutions offering consumer financial products or services, including United Bank .

The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers.

The CFPB has also been directed to write rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.

The concept of what may be considered to be an “abusive” practice is relatively new under the law.

Moreover, United Bank is supervised and examined by the CFPB for compliance with the CFPB’s regulations and policies.

The costs and limitations related to this additional regulatory reporting regimen have yet to be fully determined, although they may be material and the limitations and restrictions that will be placed upon United Bank with respect to its consumer product offering and services may produce significant, material effects on United Bank (and United’s) profitability.

United is subject to higher regulatory capital requirements and failure to comply with these standards may impact dividend payments, equity repurchases and executive compensation.

United and United Bank are each required to comply with applicable capital adequacy standards established by the Federal Reserve Board (the “FRB”).

From time to time, the FRB changes these capital adequacy standards.

In particular, the capital requirements applicable to United under the Basel III rules became fully effective on January 1, 2019.

Under the Basel III rules, United is required to maintain a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8%, and a leverage ratio of 4%.

In addition, United must maintain an additional capital conservation buffer of 2.5% of total risk weighted assets.

Banking institutions that fail to meet the effective minimum ratios including the capital conservation buffer will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation.

The severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (that is, four quarter trailing net income, net of distributions and tax effects not reflected in net income).

The Basel III changes have resulted in generally higher minimum capital ratios than in the past that requires United and its subsidiaries to maintain capital buffers above minimum requirements to avoid restrictions on capital distributions and executive bonus payments.

In addition, the application of more stringent capital requirements for United could, among other things, result in lower returns on invested capital, require the raising of additional capital and result in additional regulatory actions if United were to be unable to comply with such requirements.

Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit United’s ability to make distributions, including paying dividends.

United’s earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies .

The policies of the Federal Reserve impact United significantly.

The Federal Reserve regulates the supply of money and credit in the United States.

Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold.

Those policies determine to a significant extent our cost of funds for lending and investing.

Changes in those policies are beyond our control and are difficult to predict.

Federal Reserve policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans.

For example, a tightening of the money supply by the Federal Reserve could reduce the demand for a borrower’s products and services.

This could adversely affect the borrower’s earnings and ability to repay its loan, which could have a material adverse effect on our financial condition and results of operations.

United may be terminated as a servicer of mortgage loans, be required to repurchase a mortgage loan or reimburse investors for credit losses on a mortgage loan, or incur costs, liabilities, fines and other sanctions if we fail to satisfy our servicing obligations, including our obligations with respect to mortgage loan foreclosure actions .

United, through its mortgage banking subsidiary, Crescent, acts as servicer for approximately $3.4 billion of mortgage loans owned by third parties as of December 31, 2022.

As a servicer for those loans, United has certain contractual obligations, including foreclosing on defaulted mortgage loans or, to the extent applicable, considering alternatives to foreclosure such as loan modifications or short sales.

If United commits a material breach of its obligations as servicer, United may be subject to termination as servicer if the breach is not cured within a specified period of time following notice, causing United to lose servicing income.

In some cases, United may be contractually obligated to repurchase a mortgage loan or reimburse the investor for credit losses incurred on the loan as a remedy for servicing errors with respect to the loan.

If United has increased repurchase obligations because of claims that United did not satisfy our obligations as a servicer, or increased loss severity on such repurchases, United may have a significant reduction to net servicing income within its noninterest income.

United may incur costs if United is required to, or if United elects to, re-execute or re-file documents or take other action in its capacity as a servicer in connection with pending or completed foreclosures.

United may incur litigation costs if the validity of a foreclosure action is challenged by a borrower.

If a court were to overturn a foreclosure because of errors or deficiencies in the foreclosure process, United may have liability to the borrower and/or to any title insurer of the property sold in foreclosure if the required process was not followed.

These costs and liabilities may not be legally or otherwise reimbursable to United.

In addition, if certain documents required for a foreclosure action are missing or defective, United could be obligated to cure the defect or repurchase the loan.

United may incur liability to securitization investors relating to delays or deficiencies in its processing of mortgage assignments or other documents necessary to comply with state law governing foreclosures.

The fair value of United’s mortgage servicing rights may be negatively affected to the extent our servicing costs increase because of higher foreclosure costs.

United may be subject to fines and other sanctions imposed by federal or state regulators as a result of actual or perceived deficiencies in our foreclosure practices or in the foreclosure practices of other mortgage loan servicers.

Any of these actions may harm United’s reputation or negatively affect its home lending or servicing business.

United may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances, which could harm liquidity, results of operations and financial condition .

When mortgage loans are sold, whether as whole loans or pursuant to a securitization, United is required to make customary representations and warranties to purchasers, guarantors and insurers, including the government sponsored enterprises, about the mortgage loans and the manner in which they were originated.

Whole loan sale agreements require repurchase or substitute mortgage loans, or indemnification of buyers against losses, in the event United breaches these representations or warranties.

In addition, United may be required to repurchase mortgage loans as a result of early payment default of the borrower on a mortgage loan.

With respect to loans that are originated through United’s broker or correspondent channels, the remedies available against the originating broker or correspondent, if any, may not be as broad as the remedies available to purchasers, guarantors and insurers of mortgage loans against United.

United faces further risk that the originating broker or correspondent, if any, may not have financial capacity to perform remedies that otherwise may be available.

Therefore, if a purchaser, guarantor or insurer enforces its remedies against United, it may not be able to recover losses from the originating broker or correspondent.

If repurchase and indemnity demands increase and such demands are valid claims and are in excess of United’s provision for potential losses, its liquidity, results of operations and financial condition may be adversely affected.

There are no assurances as to adequacy of the allowance for credit losses.

The FASB’s Accounting Standards Update 2016-13,

effective for United as of January 1, 2020, substantially changes the accounting for credit losses on loans, leases and other financial assets held by banks, financial institutions and other organizations.

The FASB’s Accounting Standards Update 2016-13, effective for United as of January 1, 2020, substantially changes the accounting for credit losses on loans, leases and other financial assets held by banks, financial institutions and other organizations.

The new standard requires the recognition of credit losses on loans, leases and other financial assets based on an entity’s current estimate of expected losses over the lifetime of each loan, lease or other financial asset, referred to as the Current Expected Credit Loss (“CECL”) model as opposed to the previous “incurred loss” model, which required recognition of losses on loans, leases and other financial assets only when those losses had incurred.

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CECL also requires management judgment that is supported by new models and more data elements, including macroeconomic forecasts, than the previous allowance standard.

This is expected to increase the complexity and associated risk, particularly in times of economic uncertainty or other unforeseen circumstances, which could impact United’s results of operations and capital levels as well as place stress on our internal controls over financial reporting.

This increased the complexity and associated risk, particularly in times of economic uncertainty or other unforeseen circumstances, which could impact United’s results of operations and capital levels as well as place stress on our internal controls over financial reporting.

The determination of the appropriate level of allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates related to current and expected future credit risks and trends, all of which may undergo material changes.

Continuing deterioration in economic conditions affecting borrowers and securities issuers;

Deterioration in economic conditions affecting borrowers and securities issuers;

new information regarding existing loans, credit commitments and securities holdings;

the continuation of the COVID-19

pandemic or other global pandemics;

natural disasters and risks related to climate change;

and identification of additional problem loans, ratings down-grades and other factors, both within and outside of our control, may require an increase in the allowances for credit losses on loans, securities and off-balance

sheet credit exposures.

In addition, federal and state regulators, as an integral part of their respective supervisory functions, periodically review

United’s allowance for credit losses on loans, and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management.

In addition, federal and state regulators, as an integral part of their respective supervisory functions, periodically review United’s allowance for credit losses on loans, and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management.

Any increases in the allowance for credit losses on loans will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on United’s business, financial condition and results of operations.

for further discussion related to our process for determining the appropriate level of the allowance for credit losses.

See the section captioned “Provision for Credit Losses” in in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this Form 10-K for further discussion related to our process for determining the appropriate level of the allowance for credit losses.

United is subject to credit risk in its loan portfolio.

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The negative economic effects caused by terrorist attacks, including cyber-attacks, potential attacks and other destabilizing events would likely contribute to the deterioration of the quality of United’s loan portfolio and could reduce its customer base, level of deposits, and demand for its financial products such as loans.

High inflation, natural disasters, acts of terrorism, including cyber-attacks, an escalation of hostilities or other international or domestic occurrences, and other factors could have a negative impact on the economy of the Mid-Atlantic

and Southeast regions in which United operates.

An additional economic downturn in its markets would likely contribute to the deterioration of the quality of United’s loan portfolio by impacting the ability of its customers to repay loans, the value of the collateral securing loans, and may reduce the level of deposits in its bank and the stability of its deposit funding sources.

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Consequently, declines in the economy in our market area could have a material adverse effect on our financial condition and results of operations.

While recent economic conditions have seen improving trends since the onset of the COVID-19

pandemic, there can be no assurance that this improvement will continue.

While recent economic conditions have seen improving trends since the onset of the COVID-19 pandemic, there can be no assurance that this improvement will continue.

Evolving responses from federal and state governments and other regulators, and our customers or our third-party partners or vendors, to new challenges such as climate change have impacted and could continue to impact the economic and political conditions under which we operate.

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There is a risk that aggressive competition could result in United controlling a smaller share of these markets.

A decline in market share could lead to a decline in net income which would have a negative impact on stockholder value.

A decline in market share could lead to a decline in net income which would have a negative impact on shareholder value.

United may be adversely affected by the soundness of other financial institutions.

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United has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, or other institutional clients.

Recent defaults by financial services institutions, and even rumors or questions about a financial institution or the financial services industry in general, have led to market wide liquidity problems and could lead to losses or defaults by United or other institutions.

Defaults by financial services institutions, and even rumors or questions about a financial institution or the financial services industry in general, may lead to market wide liquidity problems and could lead to losses or defaults by United or other institutions.

Any such losses could adversely affect United’s financial condition or results of operations.

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These reforms may cause such benchmarks to perform differently than in the past or have other consequences, which cannot be predicted.

On July 27, 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, publicly announced its intention to stop persuading or compelling banks to submit LIBOR rates after 2021.

Since then, regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fall-back language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate (“SOFR”) as the recommended alternative to U.S.

Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments.

On November 30, 2020, ICE Benchmark Administration Limited (“IBA”), the benchmark administrator for the U.S.

Dollar (“USD”) LIBOR announced a proposal to extend the publication of the most commonly used USD LIBOR settings until June 30, 2023.

The administrator for LIBOR announced on March 5, 2021 that it will permanently cease to publish most LIBOR settings beginning on January 1, 2022 and cease to publish the overnight, one-month,

three-month, six-month

USD LIBOR settings on July 1, 2023.

Accordingly, the FCA has stated that is does not intend to persuade or compel banks to submit to LIBOR after such respective dates.

Until such time, however, FCA panel banks have agreed to continue to support LIBOR.

Banking regulators issued guidance strongly encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021.

Accordingly, United has taken steps to ensure that no new contracts using LIBOR will be originated after December 31, 2021.

The United Kingdom’s Financial Conduct Authority and the administrator of LIBOR have announced that the publication of the most commonly used U.S.

dollar LIBOR settings will cease to be published or cease to be representative after June 30, 2023.

The publication of all other LIBOR settings ceased to be published as of December 31, 2021.

The bank regulatory agencies indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and that they would examine bank practices accordingly.

The Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, provides a statutory framework to replace U.S.

dollar LIBOR with a benchmark rate based on the Secured Overnight Financing Rate (“SOFR”) for contracts governed by U.S.

law that have no or ineffective fallback, and in December 2022, the Federal Reserve Board adopted related implementing rules.

United has taken steps to ensure that no new contracts using LIBOR were originated after December 31, 2021.

At this time, United intends to prioritize SOFR and Prime as the preferred alternatives to LIBOR;

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We cannot reasonably estimate the expected cost.