Loans and Leases and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2020

Loans and Leases and Allowance for Credit Losses

Major classifications of the loan and lease portfolio (collectively referred to as the “loan portfolio” or “loans”) are summarized as of the dates indicated as follows (in thousands).



	March 31, 2020			December 31, 2019
Owner occupied commercial real estate	$	1,702,984		$	1,720,227
Income producing commercial real estate	2,064,502			2,007,950
Commercial & industrial	1,310,112			1,220,657
Commercial construction	959,318			976,215
Equipment financing	760,952			744,544
Total commercial	6,797,868			6,669,593
Residential mortgage	1,127,988			1,117,616
Home equity lines of credit	668,382			660,675
Residential construction	215,996			236,437
Consumer	125,190			128,232
Total loans	8,935,424			8,812,553
Less allowance for credit losses - loans	(81,905		)	(62,089		)
Loans, net	$	8,853,519		$	8,750,464

At March 31, 2020 and December 31, 2019, loans totaling $4.15 billion and $4.06 billion, respectively, were pledged as collateral to secure contingent funding sources.

During the first quarter of 2020 United sold $4.03 million of United States Small Business Administration / United States Department of Agriculture (“SBA/USDA”) guaranteed loans and $22.2 million of equipment financing receivables. During the first quarter of 2019, United sold $17.1 million of SBA/USDA guaranteed loans. The gains and losses on these loan sales were included in noninterest income on the consolidated statements of income.

At March 31, 2020 and December 31, 2019, equipment financing assets included leases of $37.6 million and $37.4 million, respectively. The components of the net investment in leases, which included both sales-type and direct financing, are presented below (in thousands).



	March 31, 2020			December 31, 2019
Minimum future lease payments receivable	$	39,725		$	39,709
Estimated residual value of leased equipment	3,575			3,631
Initial direct costs	788			842
Security deposits	(918		)	(989		)
Purchase accounting premium	238			273
Unearned income	(5,848		)	(6,088		)
Net investment in leases	$	37,560		$	37,378

Minimum future lease payments expected to be received from equipment financing lease contracts as of March 31, 2020 were as follows (in thousands):



Year
Remainder of 2020	$	11,653
2021	12,387
2022	8,683
2023	4,937
2024	1,700
Thereafter	365
Total	$	39,725

At December 31, 2019, the carrying value and outstanding balance of PCI loans were $58.6 million and $83.1 million, respectively. The following table presents changes in the balance of the accretable yield for PCI loans for the period indicated (in thousands):



	Three Months Ended March 31, 2019
Balance at beginning of period	$	26,868
Accretion	(4,813		)
Reclassification from nonaccretable difference	2,706
Changes in expected cash flows that do not affect nonaccretable difference	1,863
Balance at end of period	$	26,624

Nonaccrual and Past Due Loans

The following table presents the aging of the amortized cost basis in loans by aging category and accrual status as of March 31, 2020 (in thousands).



	Accruing
	Current Loans		Loans Past Due
	Current Loans		30 - 59 Days		60 - 89 Days		> 90 Days		Nonaccrual Loans		Total Loans
Owner occupied commercial real estate	$	1,686,758	$	4,364	$	1,457	$	—	$	10,405	$	1,702,984
Income producing commercial real estate	2,057,775		4,482		10		—		2,235		2,064,502
Commercial & industrial	1,304,689		2,004		250		—		3,169		1,310,112
Commercial construction	956,397		791		406		—		1,724		959,318
Equipment financing	753,741		4,019		753		—		2,439		760,952
Total commercial	6,759,360		15,660		2,876		—		19,972		6,797,868
Residential mortgage	1,110,031		4,882		617		—		12,458		1,127,988
Home equity lines of credit	661,857		3,223		292		—		3,010		668,382
Residential construction	214,568		836		52		—		540		215,996
Consumer	123,720		982		260		—		228		125,190
Total loans	$	8,869,536	$	25,583	$	4,097	$	—	$	36,208	$	8,935,424

The following table presents the aging of recorded investment in loans, including accruing and nonaccrual loans, as of December 31, 2019 (in thousands).



	Loans Past Due - Accruing and Nonaccrual
	30 - 59 Days		60 - 89 Days		> 90 Days ⁽¹⁾		Total		Current Loans		PCI Loans		Total
Owner occupied commercial real estate	$	2,913	$	2,007	$	6,079	$	10,999	$	1,700,682	$	8,546	$	1,720,227
Income producing commercial real estate	562		706		401		1,669		1,979,053		27,228		2,007,950
Commercial & industrial	2,140		491		2,119		4,750		1,215,581		326		1,220,657
Commercial construction	1,867		557		96		2,520		966,833		6,862		976,215
Equipment financing	2,065		923		3,045		6,033		734,526		3,985		744,544
Total commercial	9,547		4,684		11,740		25,971		6,596,675		46,947		6,669,593
Residential mortgage	5,655		2,212		2,171		10,038		1,097,999		9,579		1,117,616
Home equity lines of credit	1,697		421		1,385		3,503		655,762		1,410		660,675
Residential construction	325		125		402		852		235,211		374		236,437
Consumer	668		181		27		876		127,020		336		128,232
Total loans	$	17,892	$	7,623	$	15,725	$	41,240	$	8,712,667	$	58,646	$	8,812,553

⁽¹⁾Excluding PCI loans, substantially all loans more than 90 days past due were on nonaccrual status at December 31, 2019.

The following table presents nonaccrual loans by loan class for the periods indicated (in thousands).



	CECL						Incurred Loss
	March 31, 2020						December 31, 2019
	Nonaccrual loans with no allowance		Nonaccrual loans with an allowance		Total Nonaccrual Loans		Nonaccrual Loans
Owner occupied commercial real estate	$	6,889	$	3,516	$	10,405	$	10,544
Income producing commercial real estate	1,039		1,196		2,235		1,996
Commercial & industrial	1,332		1,837		3,169		2,545
Commercial construction	1,235		489		1,724		2,277
Equipment financing	43		2,396		2,439		3,141
Total commercial	10,538		9,434		19,972		20,503
Residential mortgage	3,163		9,295		12,458		10,567
Home equity lines of credit	962		2,048		3,010		3,173
Residential construction	130		410		540		939
Consumer	8		220		228		159
Total	$	14,801	$	21,407	$	36,208	$	35,341

The gross additional interest revenue that would have been earned if the loans classified as nonaccrual had performed in accordance with the original terms was approximately $468,000 and $378,000 for the three months ended March 31, 2020 and 2019, respectively.

Risk Ratings

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

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

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

Doubtful. Specific weaknesses characterized as Substandard that are severe enough to make collection in full highly questionable and improbable. There is no reliable secondary source of full repayment.

Loss. Loans categorized as Loss have the same characteristics as Doubtful; however, probability of loss is certain. Loans classified as Loss are charged off.

Equipment Financing Receivables and Consumer Purpose Loans. United applies a pass / fail grading system to all equipment financing receivables and consumer purpose loans. Under the pass / fail grading system, loans that are on nonaccrual status, become past due 90 days, or are in bankruptcy are classified as “fail” and all other loans are classified as “pass”. For purposes of the table below, loans in these categories that are classified as “fail” are reported as substandard and all other loans are reported as pass.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

Based on the most recent analysis performed, the amortized cost of loans by risk category by vintage year as of the date indicated is as follows (in thousands).



	As of March 31, 2020
	Term Loans by Origination Year												Revolvers		Revolvers converted to term loans		Total
	2020		2019		2018		2017		2016		Prior
Owner occupied commercial real estate:
Pass	$	108,385	$	402,541	$	271,646	$	236,178	$	222,321	$	287,441	$	60,479	$	28,008	$	1,616,999
Watch	4,602		8,706		4,166		11,315		7,869		4,634		842		70		42,204
Substandard	3,320		8,582		2,903		12,650		3,739		8,613		3,215		759		43,781
Total owner occupied commercial real estate	116,307		419,829		278,715		260,143		233,929		300,688		64,536		28,837		1,702,984
Income producing commercial real estate:
Pass	206,665		500,411		399,578		284,259		286,601		258,605		37,060		9,820		1,982,999
Watch	6,665		12,955		9,885		4,214		8,775		2,989		—		1,807		47,290
Substandard	10,632		13,890		2,662		4,117		228		2,577		—		107		34,213
Total income producing commercial real estate	223,962		527,256		412,125		292,590		295,604		264,171		37,060		11,734		2,064,502
Commercial & industrial
Pass	87,261		267,166		240,535		125,838		93,442		63,150		361,419		9,674		1,248,485
Watch	1,066		807		2,725		620		883		53		16,140		147		22,441
Substandard	44		9,345		1,554		2,340		2,726		1,606		20,796		775		39,186
Total commercial & industrial	88,371		277,318		244,814		128,798		97,051		64,809		398,355		10,596		1,310,112
Commercial construction
Pass	90,555		246,335		313,984		163,033		91,830		19,976		15,565		7,600		948,878
Watch	306		940		994		181		49		401		—		—		2,871
Substandard	1,205		2,609		550		387		950		438		—		1,430		7,569
Total commercial construction	92,066		249,884		315,528		163,601		92,829		20,815		15,565		9,030		959,318
Equipment financing:
Pass	124,870		353,441		187,366		67,279		21,377		3,510		—		—		757,843
Substandard	—		817		1,421		627		180		64		—		—		3,109
Total equipment financing	124,870		354,258		188,787		67,906		21,557		3,574		—		—		760,952
Residential mortgage:
Pass	86,068		251,157		188,207		164,654		134,189		279,723		11		8,009		1,112,018
Substandard	832		2,103		2,927		1,520		891		7,337		—		360		15,970
Total residential mortgage	86,900		253,260		191,134		166,174		135,080		287,060		11		8,369		1,127,988
Home equity lines of credit
Pass	—		—		—		—		—		—		645,874		18,111		663,985
Substandard	—		—		—		—		—		—		226		4,171		4,397
Total home equity lines of credit	—		—		—		—		—		—		646,100		22,282		668,382
Residential construction
Pass	34,849		137,032		13,603		5,911		5,171		18,480		—		162		215,208
Substandard	—		173		133		25		127		330		—		—		788
Total residential construction	34,849		137,205		13,736		5,936		5,298		18,810		—		162		215,996
Consumer
Pass	16,878		45,895		25,917		10,217		7,199		3,947		14,567		97		124,717
Watch	—		—		—		—		—		—		7		—		7
Substandard	26		71		82		74		69		52		91		1		466
Total consumer	16,904		45,966		25,999		10,291		7,268		3,999		14,665		98		125,190

Total loans
Pass	755,531		2,203,978		1,640,836		1,057,369		862,130		934,832		1,134,975		81,481		8,671,132
Watch	12,639		23,408		17,770		16,330		17,576		8,077		16,989		2,024		114,813
Substandard	16,059		37,590		12,232		21,740		8,910		21,017		24,328		7,603		149,479
Total loans	$	784,229	$	2,264,976	$	1,670,838	$	1,095,439	$	888,616	$	963,926	$	1,176,292	$	91,108	$	8,935,424

Based on the most recent analysis performed, the risk category of loans by class of loans as of the date indicated is as follows (in thousands).



	As of December 31, 2019
	Pass		Watch		Substandard		Doubtful / Loss		Total
Owner occupied commercial real estate	$	1,638,398	$	24,563	$	48,720	$	—	$	1,711,681
Income producing commercial real estate	1,914,524		40,676		25,522		—		1,980,722
Commercial & industrial	1,156,366		16,385		47,580		—		1,220,331
Commercial construction	960,251		2,298		6,804		—		969,353
Equipment financing	737,418		—		3,141		—		740,559
Total commercial	6,406,957		83,922		131,767		—		6,622,646
Residential mortgage	1,093,902		—		14,135		—		1,108,037
Home equity lines of credit	654,619		—		4,646		—		659,265
Residential construction	234,791		—		1,272		—		236,063
Consumer	127,507		8		381		—		127,896
Total loans, excluding PCI loans	8,517,776		83,930		152,201		—		8,753,907

Owner occupied commercial real estate	3,238		2,797		2,511		—		8,546
Income producing commercial real estate	19,648		6,305		1,275		—		27,228
Commercial & industrial	104		81		141		—		326
Commercial construction	3,628		590		2,644		—		6,862
Equipment financing	3,952		—		33		—		3,985
Total commercial	30,570		9,773		6,604		—		46,947
Residential mortgage	8,112		—		1,467		—		9,579
Home equity lines of credit	1,350		—		60		—		1,410
Residential construction	348		—		26		—		374
Consumer	303		—		33		—		336
Total PCI loans	40,683		9,773		8,190		—		58,646

Total loan portfolio	$	8,558,459	$	93,703	$	160,391	$	—	$	8,812,553

Troubled Debt Restructurings

As of March 31, 2020 and December 31, 2019, United had TDRs totaling $53.7 million and $54.2 million, respectively. United allocated $1.51 million and $2.51 million of allowance for TDRs as of March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020 and December 31, 2019, there were no commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs.

Loans modified under the terms of a TDR during the three months ended March 31, 2020 and 2019 are presented in the following table. In addition, the table presents loans modified under the terms of a TDR that defaulted (became 90 days or more delinquent) during the periods presented and were initially restructured within one year prior to default (dollars in thousands).



	New TDRs
		Pre-modification Outstanding Amortized Cost		Post-Modification Outstanding Amortized Cost by Type of Modification								TDRs Modified Within the Previous Twelve Months That Have Subsequently Defaulted
	Number of Contracts	Pre-modification Outstanding Amortized Cost		Rate Reduction		Structure		Other		Total		Number of Contracts	Amortized Cost
Three Months Ended March 31, 2020
Owner occupied commercial real estate	1	$	1,008	$	—	$	—	$	990	$	990	—	$	—
Income producing commercial real estate	3	235		—		67		165		232		—	—
Commercial & industrial	—	—		—		—		—		—		1	6
Commercial construction	—	—		—		—		—		—		—	—
Equipment financing	7	434		—		434		—		434		—	—
Total commercial	11	1,677		—		501		1,155		1,656		1	6
Residential mortgage	5	302		—		278		—		278		—	—
Home equity lines of credit	—	—		—		—		—		—		—	—
Residential construction	—	—		—		—		—		—		—	—
Consumer	2	11		—		—		11		11		1	3
Total loans	18	$	1,990	$	—	$	779	$	1,166	$	1,945	2	$	9

Three Months Ended March 31, 2019
Owner occupied commercial real estate	—	$	—	$	—	$	—	$	—	$	—	—	$	—
Income producing commercial real estate	1	169		—		169		—		169		—	—
Commercial & industrial	1	7		—		—		7		7		—	—
Commercial construction	—	—		—		—		—		—		—	—
Equipment financing	—	—		—		—		—		—		—	—
Total commercial	2	176		—		169		7		176		—	—
Residential mortgage	2	345		—		344		—		344		—	—
Home equity lines of credit	—	—		—		—		—		—		—	—
Residential construction	—	—		—		—		—		—		—	—
Consumer direct	—	—		—		—		—		—		—	—
Indirect auto	6	66		—		—		57		57		—	—
Total loans	10	$	587	$	—	$	513	$	64	$	577	—	$	—

As of March 31, 2020, United had granted short-term deferrals related to the COVID-19 crisis for $164 million of loans that were otherwise performing prior to modification. Pursuant to the CARES Act, these loans were not considered TDRs.

Allowance for Credit Losses

Since the adoption of ASC 326, the ACL for loans represents management’s estimate of life of loan credit losses in the portfolio as of the end of the period. The ACL related to unfunded commitments is included in other liabilities in the consolidated balance sheet.

The following table presents the balance and activity in the ACL by portfolio segment for the periods indicated (in thousands).



	CECL																Incurred Loss
	2020																2019
Three Months Ended March 31,
	December 31, 2019 Balance		Adoption of CECL			January 1, 2020 Balance		Charge-Offs			Recoveries		(Release) Provision		Ending Balance		Beginning Balance		Charge- Offs			Recoveries		(Release) Provision			Ending Balance
Owner occupied commercial real estate	$	11,404	$	(1,616	)	$	9,788	$	(6	)	$	1,034	$	184	$	11,000	$	12,207	$	(5	)	$	69	$	(397	)	$	11,874
Income producing commercial real estate	12,306		(30		)	12,276		(411		)	141		4,578		16,584		11,073		(197		)	20		230			11,126
Commercial & industrial	5,266		4,012			9,278		(7,561		)	376		8,738		10,831		4,802		(1,519		)	163		1,449			4,895
Commercial construction	9,668		(2,583		)	7,085		—			141		2,330		9,556		10,337		(69		)	394		(387		)	10,275
Equipment financing	7,384		5,871			13,255		(1,863		)	356		2,990		14,738		5,452		(1,424		)	143		2,060			6,231
Residential mortgage	8,081		1,569			9,650		(284		)	275		1,422		11,063		8,295		(61		)	48		63			8,345
Home equity lines of credit	4,575		1,919			6,494		(20		)	103		310		6,887		4,752		(337		)	122		260			4,797
Residential construction	2,504		(1,771		)	733		(22		)	34		71		816		2,433		(4		)	26		(65		)	2,390
Consumer	901		(491		)	410		(638		)	231		427		430		853		(547		)	207		324			837
Indirect auto	—		—			—		—			—		—		—		999		(197		)	38		32			872
Total allowance for credit losses - loans	62,089		6,880			68,969		(10,805		)	2,691		21,050		81,905		61,203		(4,360		)	1,230		3,569			61,642
Allowance for unfunded commitments	3,458		1,871			5,329		—			—		1,141		6,470		3,410		—			—		(269		)	3,141
Total allowance for credit losses	$	65,547	$	8,751		$	74,298	$	(10,805	)	$	2,691	$	22,191	$	88,375	$	64,613	$	(4,360	)	$	1,230	$	3,300		$	64,783

As of March 31, 2020, United used a one-year reasonable and supportable forecast period. The changes in loss rates used as the basis for the estimate of credit losses during this period were modeled using historical data from peer banks and macroeconomic forecast data obtained from a third party vendor, which were then applied to United’s recent default experience as a starting point. At March 31, 2020, the forecast indicated that the markets in which United operates will experience a decline in economic conditions and an increase in the unemployment rate over the next year, primarily as a result of the COVID-19 pandemic. The increase in the ACL compared to January 1, 2020 was primarily attributable to the worsening trends in the forecast at March 31, 2020 compared to the forecast used at adoption, with the primary economic forecast driver being the change in the unemployment rate.

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

Disaggregation of Incurred Loss Impairment Methodology

The following tables represent the recorded investment in loans by portfolio segment and the balance of the allowance assigned to each segment based on the method of evaluating the loans for impairment as of December 31, 2019 (in thousands).



	Loans Outstanding								Allowance for Credit Losses
	Individually evaluated for impairment		Collectively evaluated for impairment		PCI		Ending Balance		Individually evaluated for impairment		Collectively evaluated for impairment		PCI		Ending Balance
Owner occupied commercial real estate	$	19,233	$	1,692,448	$	8,546	$	1,720,227	$	816	$	10,483	$	105	$	11,404
Income producing commercial real estate	18,134		1,962,588		27,228		2,007,950		770		11,507		29		12,306
Commercial & industrial	1,449		1,218,882		326		1,220,657		21		5,193		52		5,266
Commercial construction	3,675		965,678		6,862		976,215		55		9,613		—		9,668
Equipment financing	1,027		739,532		3,985		744,544		—		7,240		144		7,384
Residential mortgage	15,991		1,092,046		9,579		1,117,616		782		7,296		3		8,081
Home equity lines of credit	992		658,273		1,410		660,675		16		4,541		18		4,575
Residential construction	1,256		234,807		374		236,437		47		2,456		1		2,504
Consumer	214		127,682		336		128,232		5		885		11		901
Total	$	61,971	$	8,691,936	$	58,646	$	8,812,553	2,512		59,214		363		62,089
Allowance for unfunded commitments									—		3,458		—		3,458
Total allowance for credit losses									$	2,512	$	62,672	$	363	$	65,547

The following table presents additional detail on loans individually evaluated for impairment under Incurred Loss by class as of December 31, 2019 (in thousands).



	December 31, 2019
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Owner occupied commercial real estate	$	9,527	$	8,118	$	—
Income producing commercial real estate	5,159		4,956		—
Commercial & industrial	1,144		890		—
Commercial construction	2,458		2,140		—
Equipment financing	1,027		1,027		—
Total commercial	19,315		17,131		—
Residential mortgage	7,362		6,436		—
Home equity lines of credit	1,116		861		—
Residential construction	731		626		—
Consumer	66		53		—
Total with no related allowance recorded	28,590		25,107		—

With an allowance recorded:
Owner occupied commercial real estate	11,136		11,115		816
Income producing commercial real estate	13,591		13,178		770
Commercial & industrial	559		559		21
Commercial construction	1,535		1,535		55
Equipment financing	—		—		—
Total commercial	26,821		26,387		1,662
Residential mortgage	9,624		9,555		782
Home equity lines of credit	146		131		16
Residential construction	643		630		47
Consumer	161		161		5
Total with an allowance recorded	37,395		36,864		2,512
Total	$	65,985	$	61,971	$	2,512

The average balances of impaired loans and income recognized on impaired loans while they were considered impaired under Incurred Loss are presented below for the period indicated (in thousands).



	Three Months Ended March 31, 2019
	Average Balance		Interest Revenue Recognized During Impairment		Cash Basis Interest Revenue Received
Owner occupied commercial real estate	$	17,410	$	285	$	284
Income producing commercial real estate	14,237		193		207
Commercial & industrial	1,716		19		19
Commercial construction	2,402		34		33
Equipment financing	—		—		—
Total commercial	35,765		531		543
Residential mortgage	15,502		168		174
Home equity lines of credit	258		4		3
Residential construction	1,408		24		23
Consumer	205		4		4
Indirect auto	1,190		14		14
Total	$	54,328	$	745	$	761