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 (costs) and fees were $(0.1) million and $0.3 million at June 30, 2017 and December 31, 2016, respectively. The unamortized discount on purchased loans from acquisitions was $25.0 million, including $12.7 million related to YCB, and $24.1 million at June 30, 2017 and December 31, 2016, respectively. (unaudited, in thousands) June 30, December 31, Commercial real estate: Land and construction $ 615,881 $ 496,539 Improved property 2,397,846 2,376,972 Total commercial real estate 3,013,727 2,873,511 Commercial and industrial 1,136,195 1,088,118 Residential real estate 1,363,579 1,383,390 Home equity 516,612 508,359 Consumer 360,304 396,058 Total portfolio loans 6,390,417 6,249,436 Loans held for sale 21,677 17,315 Total loans $ 6,412,094 $ 6,266,751 The following tables summarize changes in the allowance for credit losses applicable to each category of the loan portfolio: Allowance for Credit Losses By Category For the Six Months Ended June 30, 2017 and 2016 (unaudited, in thousands) Commercial Commercial Commercial Residential Home Consumer Deposit Total Balance at December 31, 2016: 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 beginning allowance for credit losses 4,499 18,645 8,600 4,115 3,584 4,042 760 44,245 Provision for credit losses: Provision for loan losses 1,039 558 1,552 39 466 970 444 5,068 Provision for loan commitments 14 1 (9 ) 1 17 2 — 26 Total provision for credit losses 1,053 559 1,543 40 483 972 444 5,094 Charge-offs — (1,574 ) (1,205 ) (592 ) (293 ) (1,965 ) (611 ) (6,240 ) Recoveries 70 376 475 164 151 990 181 2,407 Net charge-offs 70 (1,198 ) (730 ) (428 ) (142 ) (975 ) (430 ) (3,833 ) Balance at June 30, 2017: Allowance for loan losses 5,457 17,988 9,234 3,717 3,746 3,993 774 44,909 Allowance for loan commitments 165 18 179 10 179 46 — 597 Total ending allowance for credit losses $ 5,622 $ 18,006 $ 9,413 $ 3,727 $ 3,925 $ 4,039 $ 774 $ 45,506 Balance at December 31, 2015: 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 1,252 (559 ) 1,999 (172 ) 164 898 581 4,163 Provision for loan commitments (10 ) (13 ) (16 ) 1 10 — — (28 ) Total provision for credit losses 1,242 (572 ) 1,983 (171 ) 174 898 581 4,135 Charge-offs — (1,328 ) (765 ) (386 ) (216 ) (2,089 ) (362 ) (5,146 ) Recoveries 3 1,168 139 306 77 790 118 2,601 Net charge-offs 3 (160 ) (626 ) (80 ) (139 ) (1,299 ) (244 ) (2,545 ) Balance at June 30, 2016: Allowance for loan losses 5,645 14,029 11,375 4,330 2,908 4,362 679 43,328 Allowance for loan commitments 147 13 244 8 127 46 — 585 Total ending allowance for credit losses $ 5,792 $ 14,042 $ 11,619 $ 4,338 $ 3,035 $ 4,408 $ 679 $ 43,913 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 (unaudited, in thousands) Commercial Commercial Commercial and Residential Estate Home Consumer Deposit Total June 30, 2017 Allowance for credit losses: Allowance for loans individually evaluated for impairment $ — $ 897 $ — $ — $ — $ — $ — $ 897 Allowance for loans collectively evaluated for impairment 5,457 17,091 9,234 3,717 3,746 3,993 774 44,012 Allowance for loan commitments 165 18 179 10 179 46 — 597 Total allowance for credit losses $ 5,622 $ 18,006 $ 9,413 $ 3,727 $ 3,925 $ 4,039 $ 774 $ 45,506 Portfolio loans: Individually evaluated for impairment (1) $ — $ 5,156 $ — $ — $ — $ — $ — $ 5,156 Collectively evaluated for impairment 614,353 2,385,876 1,135,243 1,362,813 516,612 360,297 — 6,375,194 Acquired with deteriorated credit quality 1,528 6,814 952 766 — 7 — 10,067 Total portfolio loans $ 615,881 $ 2,397,846 $ 1,136,195 $ 1,363,579 $ 516,612 $ 360,304 $ — $ 6,390,417 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 (1) Commercial loans greater than $1 million that are reported as non-accrual or as a troubled debt restructuring (“TDR”) are individually evaluated for impairment. 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 for residential housing construction or pre-leases for commercial investment property. The risk grade assigned to commercial investment property loans is based primarily on the adequacy of net rental income generated by the property to service the debt, the type, quality, industry and mix of tenants, and the terms of leases, but also considers the overall financial capacity of the investors and their experience in owning and managing investment property. The risk grade assigned to owner-occupied commercial real estate and commercial and industrial loans is based primarily on historical and projected earnings, the adequacy of operating cash flow to service all of the business’ debt, and the capital resources, liquidity and leverage of the business, but also considers the industry in which the business operates, the business’ specific competitive advantages or disadvantages, the quality and experience of management, and external influences on the business such as economic conditions. Other factors that are considered for commercial and industrial loans include the type, quality and marketability of non-real estate collateral and whether the structure of the loan increases or reduces its risk. The type, age, condition, location and any environmental risks associated with a property are also considered for all types of commercial real estate. The overall financial condition and repayment capacity of any guarantors is also evaluated to determine the extent to which they mitigate other risks of the loan. The following paragraphs provide descriptions of risk grades that are applicable to commercial real estate and commercial and industrial loans. 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. Doubtful loans have all the weaknesses inherent to a substandard loan with the added characteristic that full repayment is highly questionable or improbable on the basis of currently existing facts, conditions and collateral values. However, recognition of loss may be deferred if there are reasonably specific pending factors that will reduce the risk if they occur. The following tables summarize commercial loans by their assigned risk grade: Commerical Loans by Internally Assigned Risk Grade (unaudited, in thousands) Commercial Commercial Commercial Total Commercial As of June 30, 2017 Pass $ 609,309 $ 2,341,928 $ 1,118,983 $ 4,070,220 Criticized - compromised 3,910 26,046 9,278 39,234 Classified - substandard 2,662 29,872 7,934 40,468 Classified - doubtful — — — — Total $ 615,881 $ 2,397,846 $ 1,136,195 $ 4,149,922 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 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 $20.4 million at June 30, 2017 and $20.6 million at December 31, 2016, of which $3.4 million were accruing, for each period. 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 Acquired ESB Loans The following table provides changes in accretable yield for loans acquired with deteriorated credit quality: For the Six Months Ended (unaudited, in thousands) June 30, June 30, Balance at beginning of period $ 1,717 $ 1,206 Acquisitions — — Reclass from non-accretable difference 738 1,064 Transfers (216 ) (328 ) Accretion (279 ) (266 ) Balance at end of period $ 1,960 $ 1,676 The following tables summarize the age analysis of all categories of loans: Age Analysis of Loans (unaudited, in thousands) Current 30-59 Days 60-89 Days 90 Days Total Total Loans 90 Days (1) As of June 30, 2017 Commercial real estate: Land and construction $ 611,756 $ 3,817 $ 27 $ 281 $ 4,125 $ 615,881 $ — Improved property 2,385,823 777 1,499 9,747 12,023 2,397,846 808 Total commercial real estate 2,997,579 4,594 1,526 10,028 16,148 3,013,727 808 Commercial and industrial 1,131,611 979 847 2,758 4,584 1,136,195 30 Residential real estate 1,350,915 1,568 3,176 7,920 12,664 1,363,579 1,472 Home equity 509,747 2,478 419 3,968 6,865 516,612 1,284 Consumer 355,665 2,853 1,002 784 4,639 360,304 616 Total portfolio loans 6,345,517 12,472 6,970 25,458 44,900 6,390,417 4,210 Loans held for sale 21,677 — — — — 21,677 — Total loans $ 6,367,194 $ 12,472 $ 6,970 $ 25,458 $ 44,900 $ 6,412,094 $ 4,210 Impaired loans included above are as follows: Non-accrual loans $ 12,301 $ 352 $ 2,353 $ 21,229 $ 23,934 $ 36,235 TDRs accruing interest (1) 6,690 48 84 19 151 6,841 Total impaired $ 18,991 $ 400 $ 2,437 $ 21,248 $ 24,085 $ 43,076 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 loans $ 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 (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 June 30, 2017 December 31, 2016 (unaudited, in thousands) Unpaid (1) Recorded Related Unpaid (1) Recorded Related With no related specific allowance recorded: Commercial real estate: Land and construction $ 588 $ 413 $ — $ 1,212 $ 766 $ — Improved property 16,234 11,136 — 9,826 8,141 — Commercial and industrial 10,613 4,092 — 4,456 3,181 — Residential real estate 18,645 16,983 — 20,152 18,305 — Home equity 5,247 4,608 — 4,589 4,011 — Consumer 804 688 — 884 744 — Total impaired loans without a specific allowance 52,131 37,920 — 41,119 35,148 — With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — Improved property 5,156 5,156 897 3,012 3,012 470 Commercial and industrial — — — 4,875 1,270 407 Total impaired loans with a specific allowance 5,156 5,156 897 7,887 4,282 877 Total impaired loans $ 57,287 $ 43,076 $ 897 $ 49,006 $ 39,430 $ 877 (1) The difference between the unpaid principal balance and the recorded investment generally reflects amounts that have been previously charged-off and fair market value adjustments on acquired impaired loans. Impaired Loans For the Three Months Ended For the Six Months Ended June 30, 2017 June 30, 2016 June 30, 2017 June 30, 2016 (unaudited, in thousands) Average Interest Average Interest Average Interest Average Interest With no related specific allowance recorded: Commercial real estate: Land and construction $ 411 $ — $ 840 $ 8 $ 529 $ — $ 1,223 $ 14 Improved Property 11,118 23 9,846 96 10,125 369 10,084 180 Commercial and industrial 4,268 2 3,303 52 3,905 4 3,362 93 Residential real estate 17,787 66 16,830 194 17,959 135 16,783 433 Home equity 4,485 5 3,428 28 4,327 10 3,296 52 Consumer 733 1 853 17 737 3 1,000 35 Total impaired loans without a specific allowance 38,802 97 35,100 395 37,582 521 35,748 807 With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — — — Improved Property 5,999 — 3,012 — 5,003 — 3,012 — Commercial and industrial — — 4,312 26 423 — 4,498 58 Total impaired loans with a specific allowance 5,999 — 7,324 26 5,426 — 7,510 58 Total impaired loans $ 44,801 $ 97 $ 42,424 $ 421 $ 43,008 $ 521 $ 43,258 $ 865 The following tables present the recorded investment in non-accrual loans and TDRs: Non-accrual Loans (1) (unaudited, in thousands) June 30, December 31, Commercial real estate: Land and construction $ 413 $ 766 Improved property 14,859 9,535 Total commercial real estate 15,272 10,301 Commercial and industrial 3,955 4,299 Residential real estate 12,225 12,994 Home equity 4,171 3,538 Consumer 612 652 Total $ 36,235 $ 31,784 (1) At June 30, 2017, there were three borrowers with loans greater than $1.0 million totaling $8.7 million, as compared to two borrowers totaling $4.3 million at December 31, 2016. Total non-accrual loans include loans that are also restructured. Such loans are also set forth in the following table as non-accrual TDRs. TDRs June 30, 2017 December 31, 2016 (unaudited, in thousands) Accruing Non-Accrual Total Accruing Non-Accrual Total Commercial real estate: Land and construction $ — $ 6 $ 6 $ — $ 8 $ 8 Improved property 1,433 528 1,961 1,618 688 2,306 Total commercial real estate 1,433 534 1,967 1,618 696 2,314 Commercial and industrial 137 237 374 152 151 303 Residential real estate 4,758 1,902 6,660 5,311 2,212 7,523 Home equity 437 337 774 473 297 770 Consumer 76 148 224 92 190 282 Total $ 6,841 $ 3,158 $ 9,999 $ 7,646 $ 3,546 $ 11,192 As of June 30, 2017 and 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 TDRs are extensions of the maturity date or the amortization period, reductions in the interest rate below the prevailing market rate for loans with comparable characteristics, and/or permitting interest-only payments for longer than three and six months. WesBanco had no unfunded commitments to debtors whose loans were classified as impaired as of June 30, 2017 or December 31, 2016. The following tables present details related to loans identified as TDRs during the three and six months ended June 30, 2017 and 2016, respectively: New TDRs (1) For the Three Months Ended June 30, 2017 June 30, 2016 (unaudited, dollars in thousands) Number of Pre- Post- Number of Pre- Post- Commercial real estate: Land and construction — $ — $ — — $ — $ — Improved Property — — — — — — Total commercial real estate — — — — — — Commercial and industrial — — — — — — Residential real estate 1 11 10 1 23 22 Home equity 1 44 44 1 43 42 Consumer 2 22 20 6 38 34 Total 4 $ 77 $ 74 8 $ 104 $ 98 (1) Excludes loans that were either paid off or charged-off by period end. The pre-modification balance represents the balance outstanding at the beginning of the period. The post-modification balance represents the outstanding balance at period end. New TDRs (1) For the Six Months Ended June 30, 2017 June 30, 2016 (unaudited, dollars in thousands) Number of Pre- Post- Number of Pre- Post- Commercial real estate: Land and construction — $ — $ — — $ — $ — Improved Property — — — — — — Total commercial real estate — — — — — — Commercial and industrial 2 125 120 — — — Residential real estate 2 22 18 1 23 22 Home equity 1 45 44 1 44 42 Consumer 3 34 29 6 41 34 Total 8 $ 226 $ 211 8 $ 108 $ 98 (1) Excludes loans that were either paid off or charged-off by period end. The pre-modification balance represents the balance outstanding at the beginning of the period. The post-modification balance represents the outstanding balance at period end. The following table summarizes TDRs which defaulted (defined as past due 90 days) during the six months ended June 30, 2017 and 2016, respectively, that were restructured within the last twelve months prior to June 30, 2017 and 2016, respectively: Defaulted TDRs (1) For the Six Months Ended June 30, 2017 June 30, 2016 (unaudited, dollars in thousands) Number of Recorded Number of Recorded Commercial real estate: Land and construction — $ — — $ — Improved property — — — — Total commercial real estate — — — — Commercial and industrial — — 1 40 Residential real estate — — — — Home equity — — — — Consumer — — — — Total — $ — 1 $ 40 (1) Excludes loans that were either charged-off or cured by period end. The recorded investment is as of June 30, 2017 and 2016, respectively. TDRs that default are placed on non-accrual status unless they are both well-secured and in the process of collection. The loan in the table above was not accruing interest. The following table summarizes other real estate owned and repossessed assets included in other assets: (unaudited, in thousands) June 30, December 31, Other real estate owned $ 6,654 $ 8,206 Repossessed assets 69 140 Total other real estate owned and repossessed assets $ 6,723 $ 8,346 At June 30, 2017, other real estate owned includes $2.0 million from the YCB acquisition and $3.1 million at December 31, 2016. Residential real estate included in other real estate owned at June 30, 2017 and December 31, 2016 was $1.7 million and $1.6 million, respectively. At June 30, 2017 and December 31, 2016, formal foreclosure proceedings were in process on residential real estate loans totaling $2.3 million and $4.1 million, respectively. |