Loans and the Allowance for Credit Losses | NOTE 5. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES The recorded investment in loans is presented in the Consolidated Balance Sheets net of deferred loan fees and costs and discounts on purchased loans. The deferred loan fees and costs were $0.3 million and $1.0 million at December 31, 2016 and 2015, respectively. The discounts on purchased loans from acquisitions were $24.1 million, including $11.0 million related to YCB, and $15.7 million at December 31, 2016 and 2015, respectively. December 31, December 31, (in thousands) 2016 2015 Commercial real estate: Land and construction $ 496,539 $ 344,748 Improved property 2,376,972 1,911,633 Total commercial real estate 2,873,511 2,256,381 Commercial and industrial 1,088,118 737,878 Residential real estate 1,383,390 1,247,800 Home equity 508,359 416,889 Consumer 396,058 406,894 Total portfolio loans 6,249,436 5,065,842 Loans held for sale 17,315 7,899 Total loans $ 6,266,751 $ 5,073,741 The following tables summarize changes in the allowance for credit losses applicable to each category of the loan portfolio: For the Year Ended December 31, 2016 (in thousands) Commercial Commercial Commercial Residential Home Consumer Deposit Total Balance at beginning of year: Allowance for loan losses $ 4,390 $ 14,748 $ 10,002 $ 4,582 $ 2,883 $ 4,763 $ 342 $ 41,710 Allowance for loan commitments 157 26 260 7 117 46 — 613 Total beginning allowance for credit losses 4,547 14,774 10,262 4,589 3,000 4,809 342 42,323 Provision for credit losses: Provision for loan losses 26 4,223 1,160 16 662 1,356 1,077 8,520 Provision for loan commitments (6 ) (9 ) (72 ) 2 45 (2 ) — (42 ) Total provision for credit losses 20 4,214 1,088 18 707 1,354 1,077 8,478 Charge-offs (73 ) (1,886 ) (3,070 ) (937 ) (397 ) (3,606 ) (884 ) (10,853 ) Recoveries 5 1,543 320 445 274 1,485 225 4,297 Net charge-offs (68 ) (343 ) (2,750 ) (492 ) (123 ) (2,121 ) (659 ) (6,556 ) Balance at end of period: Allowance for loan losses 4,348 18,628 8,412 4,106 3,422 3,998 760 43,674 Allowance for loan commitments 151 17 188 9 162 44 — 571 Total ending allowance for credit losses $ 4,499 $ 18,645 $ 8,600 $ 4,115 $ 3,584 $ 4,042 $ 760 $ 44,245 For the Year Ended December 31, 2015 (in thousands) Commercial Commercial Commercial Residential Home Consumer Deposit Total Balance at beginning of year: Allowance for loan losses $ 5,654 $ 17,573 $ 9,063 $ 5,382 $ 2,329 $ 4,078 $ 575 $ 44,654 Allowance for loan commitments 194 10 112 9 90 40 — 455 Total beginning allowance for credit losses 5,848 17,583 9,175 5,391 2,419 4,118 575 45,109 Provision for credit losses: Provision for loan losses (1,265 ) 1,250 3,289 399 1,794 2,337 391 8,195 Provision for loan commitments (37 ) 16 148 (2 ) 27 6 — 158 Total provision for credit losses (1,302 ) 1,266 3,437 397 1,821 2,343 391 8,353 Charge-offs — (4,915 ) (2,785 ) (1,803 ) (1,502 ) (2,892 ) (846 ) (14,743 ) Recoveries 1 840 435 604 262 1,240 222 3,604 Net charge-offs 1 (4,075 ) (2,350 ) (1,199 ) (1,240 ) (1,652 ) (624 ) (11,139 ) Balance at end of period: Allowance for loan losses 4,390 14,748 10,002 4,582 2,883 4,763 342 41,710 Allowance for loan commitments 157 26 260 7 117 46 — 613 Total ending allowance for credit losses $ 4,547 $ 14,774 $ 10,262 $ 4,589 $ 3,000 $ 4,809 $ 342 $ 42,323 For the Year Ended December 31, 2014 (in thousands) Commercial Commercial Commercial Residential Home Consumer Deposit Total Balance at beginning of year: Allowance for loan losses $ 6,056 $ 18,157 $ 9,925 $ 5,673 $ 2,017 $ 5,020 $ 520 $ 47,368 Allowance for loan commitments 301 62 130 5 85 19 — 602 Total beginning allowance for credit losses 6,357 18,219 10,055 5,678 2,102 5,039 520 47,970 Provision for credit losses: Provision for loan losses (402 ) 1,239 1,429 1,692 849 1,144 601 6,552 Provision for loan commitments (107 ) (52 ) (18 ) 4 5 21 — (147 ) Total provision for credit losses (509 ) 1,187 1,411 1,696 854 1,165 601 6,405 Charge-offs — (2,426 ) (3,485 ) (2,437 ) (652 ) (3,120 ) (779 ) (12,899 ) Recoveries — 603 1,194 454 115 1,034 233 3,633 Net charge-offs — (1,823 ) (2,291 ) (1,983 ) (537 ) (2,086 ) (546 ) (9,266 ) Balance at end of period: Allowance for loan losses 5,654 17,573 9,063 5,382 2,329 4,078 575 44,654 Allowance for loan commitments 194 10 112 9 90 40 — 455 Total ending allowance for credit losses $ 5,848 $ 17,583 $ 9,175 $ 5,391 $ 2,419 $ 4,118 $ 575 $ 45,109 The following tables present the allowance for credit losses and recorded investments in loans by category: Allowance for Credit Losses and Recorded Investment in Loans (in thousands) Commercial Commercial Commercial Residential Home Consumer Deposit Total December 31, 2016 Allowance for credit losses: Allowance for loans individually evaluated for impairment $ — $ 470 $ 407 $ — $ — $ — $ — $ 877 Allowance for loans collectively evaluated for impairment 4,348 18,158 8,005 4,106 3,422 3,998 760 42,797 Allowance for loan commitments 151 17 188 9 162 44 — 571 Total allowance for credit losses $ 4,499 $ 18,645 $ 8,600 $ 4,115 $ 3,584 $ 4,042 $ 760 $ 44,245 Portfolio loans: Individually evaluated for impairment (1) $ — $ 3,012 $ 1,270 $ — $ — $ — $ — $ 4,282 Collectively evaluated for impairment 494,928 2,364,067 1,086,445 1,382,447 508,359 396,049 — 6,232,295 Acquired with deteriorated credit quality 1,611 9,893 403 943 — 9 — 12,859 Total portfolio loans $ 496,539 $ 2,376,972 $ 1,088,118 $ 1,383,390 $ 508,359 $ 396,058 $ — $ 6,249,436 December 31, 2015 Allowance for credit losses: Allowance for loans individually evaluated for impairment $ — $ 668 $ 853 $ — $ — $ — $ — $ 1,521 Allowance for loans collectively evaluated for impairment 4,390 14,080 9,149 4,582 2,883 4,763 342 40,189 Allowance for loan commitments 157 26 260 7 117 46 — 613 Total allowance for credit losses $ 4,547 $ 14,774 $ 10,262 $ 4,589 $ 3,000 $ 4,809 $ 342 $ 42,323 Portfolio loans: Individually evaluated for impairment (1) $ — $ 4,031 $ 4,872 $ — $ — $ — $ — $ 8,903 Collectively evaluated for impairment 343,832 1,899,738 732,957 1,247,639 416,862 406,622 — 5,047,650 Acquired with deteriorated credit quality 916 7,864 49 161 27 272 — 9,289 Total portfolio loans $ 344,748 $ 1,911,633 $ 737,878 $ 1,247,800 $ 416,889 $ 406,894 $ — $ 5,065,842 (1) Commercial loans greater than $1 million that are reported as non-accrual WesBanco maintains an internal loan grading system to reflect the credit quality of commercial loans. Commercial loan risk grades are determined based on an evaluation of the relevant characteristics of each loan, assigned at the inception of each loan and adjusted thereafter at any time to reflect changes in the risk profile throughout the life of each loan. The primary factors used to determine the risk grade are the reliability and sustainability of the primary source of repayment and overall financial strength of the borrower. This includes an analysis of cash flow available to repay debt, profitability, liquidity, leverage, and overall financial trends. Other factors include management, industry or property type risks, an assessment of secondary sources of repayment such as collateral or guarantees, other terms and conditions of the loan that may increase or reduce its risk, and economic conditions and other external factors that may influence repayment capacity and financial condition. Commercial real estate—land and construction consists of loans to finance investments in vacant land, land development, construction of residential housing, and construction of commercial buildings. Commercial real estate—improved property consists of loans for the purchase or refinance of all types of improved owner-occupied and investment properties. Factors that are considered in assigning the risk grade vary depending on the type of property financed. The risk grade assigned to construction and development loans is based on the overall viability of the project, the experience and financial capacity of the developer or builder to successfully complete the project, project specific and market absorption rates and comparable property values, and the amount of pre-sales pre-leases non-real Pass loans are those that exhibit a history of positive financial results that are at least comparable to the average for their industry or type of real estate. The primary source of repayment is acceptable and these loans are expected to perform satisfactorily during most economic cycles. Pass loans typically have no significant external factors that are expected to adversely affect these borrowers more than others in the same industry or property type. Any minor unfavorable characteristics of these loans are outweighed or mitigated by other positive factors including but not limited to adequate secondary or tertiary sources of repayment. Criticized or compromised loans are currently protected but have weaknesses, which, if not corrected, may be inadequately protected at some future date. These loans represent an unwarranted credit risk and would generally not be extended in the normal course of lending. Specific issues which may warrant this grade include declining financial results, increased reliance on secondary sources of repayment or guarantor support and adverse external influences that may negatively impact the business or property. Substandard and doubtful loans are equivalent to the classifications used by banking regulators. Substandard loans are inadequately protected by the current repayment capacity and equity of the borrower or collateral pledged, if any. Substandard loans have one or more well-defined weaknesses that jeopardize their repayment or collection in full. These loans may or may not be reported as non-accrual. The following tables summarize commercial loans by their assigned risk grade: Commercial Loans by Internally Assigned Risk Grade (in thousands) Commercial Commercial Commercial Total As of December 31, 2016 Pass $ 489,380 $ 2,324,755 $ 1,072,751 $ 3,886,886 Criticized—compromised 4,405 15,295 5,078 24,778 Classified—substandard 2,754 36,922 10,289 49,965 Classified—doubtful — — — — Total $ 496,539 $ 2,376,972 $ 1,088,118 $ 3,961,629 As of December 31, 2015 Pass $ 335,989 $ 1,864,986 $ 713,578 $ 2,914,553 Criticized—compromised 5,527 10,911 9,860 26,298 Classified—substandard 3,232 35,736 14,440 53,408 Classified—doubtful — — — — Total $ 344,748 $ 1,911,633 $ 737,878 $ 2,994,259 Residential real estate, home equity and consumer loans are not assigned internal risk grades other than as required by regulatory guidelines that are based primarily on the age of past due loans. WesBanco primarily evaluates the credit quality of residential real estate, home equity and consumer loans based on repayment performance and historical loss rates. The aggregate amount of residential real estate, home equity and consumer loans classified as substandard in accordance with regulatory guidelines were $20.6 million at December 31, 2016 and $15.8 million at December 31, 2015, of which $3.4 and $3.1 million were accruing, for each period, respectively. The aggregate amount of residential real estate, home equity and consumer loans classified as substandard are not included in the tables above. Acquired YCB Loans 310-20 Loans acquired with deteriorated credit quality with a book value of $11.1 million and contractually required payments of $13.3 million were recorded at their estimated fair value of $7.1 million, of which $2.7 million were accounted for under the cost recovery method in accordance with ASC 310-30 non-accrual. non-accretable At December 31, 2016, the carrying amount of loans acquired with deteriorated credit quality was $5.7 million, while the outstanding customer balance was $9.2 million. At December 31, 2016, no allowance for loan losses has been recognized related to the acquired impaired loans. Acquired ESB Loans The following table provides changes in accretable yield for all loans acquired with deteriorated credit quality: For the Years Ended (in thousands) December 31, December 31, Balance at beginning of period $ 1,206 $ — Acquisitions 837 1,815 Reduction due to change in projected cash flows (484 ) — Reclass from non-accretable 1,065 — Transfers out (328 ) — Accretion (579 ) (609 ) Balance at end of period $ 1,717 $ 1,206 The following tables summarize the age analysis of all categories of loans. Age Analysis of Loans (in thousands) Current 30-59 Days 60-89 Days 90 Days Total Total 90 Days or More As of December 31, 2016 Commercial real estate: Land and construction $ 496,245 $ — $ — $ 294 $ 294 $ 496,539 $ — Improved property 2,367,790 1,154 363 7,665 9,182 2,376,972 318 Total commercial real estate 2,864,035 1,154 363 7,959 9,476 2,873,511 318 Commercial and industrial 1,082,390 2,508 1,011 2,209 5,728 1,088,118 229 Residential real estate 1,365,956 6,701 1,043 9,690 17,434 1,383,390 1,922 Home equity 502,087 2,358 862 3,052 6,272 508,359 626 Consumer 390,354 3,674 1,149 881 5,704 396,058 644 Total portfolio loans 6,204,822 16,395 4,428 23,791 44,614 6,249,436 3,739 Loans held for sale 17,315 — — — — 17,315 — Total loans $ 6,222,137 $ 16,395 $ 4,428 $ 23,791 $ 44,614 $ 6,266,751 $ 3,739 Impaired loans included above are as follows: Non-accrual $ 7,570 $ 3,479 $ 923 $ 19,812 24,214 $ 31,784 TDRs accruing interest (1) 7,014 342 50 240 632 7,646 Total impaired $ 14,584 $ 3,821 $ 973 $ 20,052 $ 24,846 $ 39,430 As of December 31, 2015 Commercial real estate: Land and construction $ 344,184 $ — $ — $ 564 $ 564 $ 344,748 $ — Improved property 1,901,466 909 1,097 8,161 10,167 1,911,633 — Total commercial real estate 2,245,650 909 1,097 8,725 10,731 2,256,381 — Commercial and industrial 734,660 298 714 2,206 3,218 737,878 33 Residential real estate 1,234,839 1,389 2,871 8,701 12,961 1,247,800 2,159 Home equity 412,450 2,252 314 1,873 4,439 416,889 407 Consumer 401,242 4,115 764 773 5,652 406,894 527 Total portfolio loans 5,028,841 8,963 5,760 22,278 37,001 5,065,842 3,126 Loans held for sale 7,899 — — — — 7,899 — Total loans $ 5,036,740 $ 8,963 $ 5,760 $ 22,278 $ 37,001 $ 5,073,741 $ 3,126 Impaired loans included above are as follows: Non-accrual $ 11,349 $ 943 $ 2,147 $ 18,942 $ 22,032 $ 33,381 TDRs accruing interest (1) 10,710 390 238 210 838 11,548 Total impaired $ 22,059 $ 1,333 $ 2,385 $ 19,152 $ 22,870 $ 44,929 (1) Loans 90 days or more past due and accruing interest exclude TDRs 90 days or more past due and accruing interest. The following tables summarize impaired loans: Impaired Loans December 31, 2016 December 31, 2015 (in thousands) Unpaid Recorded Related Unpaid Recorded Related With no related specific allowance recorded: Commercial real estate: Land and construction $ 1,212 $ 766 $ — $ 2,126 $ 1,990 $ — Improved property 9,826 8,141 — 14,817 10,559 — Commercial and industrial 4,456 3,181 — 4,263 3,481 — Residential real estate 20,152 18,305 — 18,560 16,688 — Home equity 4,589 4,011 — 3,562 3,033 — Consumer 884 744 — 1,603 1,294 — Total impaired loans without a specific allowance 41,119 35,148 — 44,931 37,045 — With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — Improved property 3,012 3,012 470 3,012 3,012 668 Commercial and industrial 4,875 1,270 407 6,176 4,872 853 Total impaired loans with a specific allowance 7,887 4,282 877 9,188 7,884 1,521 Total impaired loans $ 49,006 $ 39,430 $ 877 $ 54,119 $ 44,929 $ 1,521 (1) The difference between the unpaid principal balance and the recorded investment generally reflects amounts that have been previously charged-off Impaired Loans For the Year Ended For the Year Ended For the Year Ended (in thousands) Average Interest Average Interest Average Interest With no related specific allowance recorded: Commercial real estate: Land and construction $ 993 $ — $ 2,156 $ 41 $ 1,977 $ 35 Improved property 9,128 115 17,192 437 17,669 441 Commercial and industrial 3,188 9 2,979 170 3,561 103 Residential real estate 17,021 308 17,876 862 18,829 855 Home equity 3,502 20 2,924 90 2,356 75 Consumer 909 8 1,199 105 1,122 97 Total impaired loans without a specific allowance 34,741 460 44,326 1,705 45,514 1,606 With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — Improved property 3,012 — 5,896 — 2,795 348 Commercial and industrial 3,214 — 3,579 292 2,075 95 Total impaired loans with a specific allowance 6,226 — 9,475 292 4,870 443 Total impaired loans $ 40,967 $ 460 $ 53,801 $ 1,997 $ 50,384 $ 2,049 The following tables present the recorded investment in non-accrual Non-accrual (in thousands) December 31, December 31, Commercial real estate: Land and construction $ 766 $ 1,023 Improved property 9,535 11,507 Total commercial real estate 10,301 12,530 Commercial and industrial 4,299 8,148 Residential real estate 12,994 9,461 Home equity 3,538 2,391 Consumer 652 851 Total $ 31,784 $ 33,381 (1) At December 31, 2016, there were two borrowers with loans greater than $1.0 million totaling $4.3 million. Total non-accrual non-accrual TDRs December 31, 2016 December 31, 2015 (in thousands) Accruing Non-Accrual Total Accruing Non-Accrual Total Commercial real estate: Land and construction $ — $ 8 $ 8 $ 967 $ 431 $ 1,398 Improved property 1,618 688 2,306 2,064 1,442 3,506 Total commercial real estate 1,618 696 2,314 3,031 1,873 4,904 Commercial and industrial 152 151 303 205 282 487 Residential real estate 5,311 2,212 7,523 7,227 2,060 9,287 Home equity 473 297 770 642 218 860 Consumer 92 190 282 443 184 627 Total $ 7,646 $ 3,546 $ 11,192 $ 11,548 $ 4,617 $ 16,165 As of December 31, 2016, there were no TDRs greater than $1.0 million. The concessions granted in the majority of loans reported as accruing and non-accrual The following table presents details related to loans identified as TDRs during the years ended December 31, 2016 and 2015: New TDRs (1) For the Year Ended December 31, 2016 New TDRs (1) For the Year Ended December 31, 2015 (dollars in thousands) Number of Pre- Post- Number of Pre- Post- Commercial real estate: Land and construction — $ — $ — 3 $ 128 $ 115 Improved property — — — 5 1,084 603 Total commercial real estate — — — 8 1,212 718 Commercial and industrial 2 125 120 1 57 43 Residential real estate 4 178 166 7 456 426 Home equity 1 44 40 1 7 6 Consumer 14 98 74 7 69 58 Total 21 $ 445 $ 400 24 $ 1,801 $ 1,251 (1) Excludes loans that were either paid off or charged-off pre-modification The following table summarizes TDRs which defaulted (defined as past due 90 days) during the years ended December 31, 2016 and 2015 that were restructured within the last twelve months prior to December 31, 2016 and 2015: Defaulted TDRs (1) For the Year Ended Defaulted TDRs (1) For the Year Ended (dollars in thousands) Number of Recorded Number of Recorded Commercial real estate: Land and construction — $ — — $ — Improved property — — 2 370 Total commercial real estate — — 2 370 Commercial and industrial — — — — Residential real estate — — 1 22 Home equity — — — — Consumer 1 16 — — Total 1 $ 16 3 $ 392 (1) Excludes loans that were either charged-off TDRs that defaulted during the twelve month period that were restructured during the twelve months ended December 31, 2016 represented 0.1% of the total TDR balance at December 31, 2016. These loans are placed on non-accrual The following table summarizes the recognition of interest income on impaired loans: For the years ended December 31, (in thousands) 2016 2015 2014 Average impaired loans $ 40,967 $ 53,801 $ 50,384 Amount of contractual interest income on impaired loans 2,747 3,061 3,260 Amount of interest income recognized on impaired loans 460 1,997 2,049 The following table summarizes other real estate owned and repossessed assets included in other assets: December 31, (in thousands) 2016 2015 Other real estate owned $ 8,206 $ 5,669 Repossessed assets 140 156 Total other real estate owned and repossessed assets $ 8,346 $ 5,825 At December 31, 2016, other real estate owned included $3.1 million from the YCB acquisition. Residential real estate included in other real estate owned at December 31, 2016 and December 31, 2015 was $1.6 million and $2.0 million, respectively. At December 31, 2016, formal foreclosure proceedings were in process on residential real estate loans totaling $4.1 million. |