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 $(1.0) million and $0.3 million at September 30, 2017 and December 31, 2016, respectively. The unamortized discount on purchased loans from acquisitions was $23.0 million, including $11.1 million related to YCB, and $24.1 million at September 30, 2017 and December 31, 2016, respectively. (unaudited, in thousands) September 30, December 31, Commercial real estate: Land and construction $ 606,593 $ 496,539 Improved property 2,407,819 2,376,972 Total commercial real estate 3,014,412 2,873,511 Commercial and industrial 1,125,693 1,088,118 Residential real estate 1,356,580 1,383,390 Home equity 527,216 508,359 Consumer 349,148 396,058 Total portfolio loans 6,373,049 6,249,436 Loans held for sale 26,888 17,315 Total loans $ 6,399,937 $ 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 Nine Months Ended September 30, 2017 and 2016 Commercial Commercial Real Estate- Real Estate- Land and Improved Commercial Residential Home Deposit (unaudited, in thousands) Construction Property & Industrial Real Estate Equity Consumer Overdraft 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 415 1,619 2,842 (203 ) 1,259 922 680 7,534 Provision for loan commitments (18 ) 4 45 — 49 (4 ) — 76 Total provision for credit losses 397 1,623 2,887 (203 ) 1,308 918 680 7,610 Charge-offs — (1,752 ) (2,255 ) (797 ) (372 ) (2,877 ) (947 ) (9,000 ) Recoveries 89 492 649 266 180 1,336 267 3,279 Net charge-offs 89 (1,260 ) (1,606 ) (531 ) (192 ) (1,541 ) (680 ) (5,721 ) Balance at September 30, 2017: Allowance for loan losses 4,852 18,987 9,648 3,372 4,489 3,379 760 45,487 Allowance for loan commitments 133 21 233 9 211 40 — 647 Total ending allowance for credit losses $ 4,985 $ 19,008 $ 9,881 $ 3,381 $ 4,700 $ 3,419 $ 760 $ 46,134 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 498 1,351 2,827 (67 ) 301 918 559 6,387 Provision for loan commitments (5 ) — (40 ) 2 8 (2 ) — (37 ) Total provision for credit losses 493 1,351 2,787 (65 ) 309 916 559 6,350 Charge-offs (73 ) (1,732 ) (2,883 ) (529 ) (345 ) (2,733 ) (585 ) (8,880 ) Recoveries 3 1,406 241 351 171 1,199 167 3,538 Net charge-offs (70 ) (326 ) (2,642 ) (178 ) (174 ) (1,534 ) (418 ) (5,342 ) Balance at September 30, 2016: Allowance for loan losses 4,818 15,773 10,187 4,337 3,010 4,147 483 42,755 Allowance for loan commitments 152 26 220 9 125 44 — 576 Total ending allowance for credit losses $ 4,970 $ 15,799 $ 10,407 $ 4,346 $ 3,135 $ 4,191 $ 483 $ 43,331 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 Commercial Commercial Real Estate- Real Estate- Commercial Residential Deposit Land and Improved and Real Home Over- (unaudited, in thousands) Construction Property Industrial Estate Equity Consumer draft Total September 30, 2017 Allowance for credit losses: Allowance for loans individually evaluated for impairment $ — $ 579 $ — $ — $ — $ — $ — $ 579 Allowance for loans collectively evaluated for impairment 4,852 18,408 9,648 3,372 4,489 3,379 760 44,908 Allowance for loan commitments 133 21 233 9 211 40 — 647 Total allowance for credit losses $ 4,985 $ 19,008 $ 9,881 $ 3,381 $ 4,700 $ 3,419 $ 760 $ 46,134 Portfolio loans: Individually evaluated for impairment (1) $ — $ 5,117 $ — $ — $ — $ — $ — $ 5,117 Collectively evaluated for impairment 605,100 2,397,278 1,124,824 1,355,829 527,216 349,141 — 6,359,388 Acquired with deteriorated credit quality 1,493 5,424 869 751 — 7 — 8,544 Total portfolio loans $ 606,593 $ 2,407,819 $ 1,125,693 $ 1,356,580 $ 527,216 $ 349,148 $ — $ 6,373,049 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 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: Commerical Loans by Internally Assigned Risk Grade (unaudited, in thousands) Commercial Real Estate- Land and Construction Commercial Real Estate- Improved Property Commercial & Industrial Total Commercial Loans As of September 30, 2017 Pass $ 600,325 $ 2,350,919 $ 1,109,774 $ 4,061,018 Criticized - compromised 2,971 24,550 7,263 34,784 Classified - substandard 3,297 32,350 8,656 44,303 Classified - doubtful — — — — Total $ 606,593 $ 2,407,819 $ 1,125,693 $ 4,140,105 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 was $22.4 million at September 30, 2017 and $20.6 million at December 31, 2016, of which $4.6 million and $3.4 million were accruing, 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 310-30, non-accrual. Acquired ESB Loans 310-30, non-accrual. The following table provides changes in accretable yield for loans acquired with deteriorated credit quality: For the Nine Months Ended (unaudited, in thousands) September 30, 2017 September 30, 2016 Balance at beginning of period $ 1,717 $ 1,206 Acquisitions — 669 Reduction due to change in projected cash flows — (324 ) Reclass from non-accretable difference 1,490 1,065 Transfers (216 ) (328 ) Accretion (1,384 ) (398 ) Balance at end of period $ 1,607 $ 1,890 The following tables summarize the age analysis of all categories of loans: Age Analysis of Loans (unaudited, in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Total Loans 90 Days or More Past Due and Accruing (1) As of September 30, 2017 Commercial real estate: Land and construction $ 606,122 $ — $ — $ 471 $ 471 $ 606,593 $ — Improved property 2,391,693 2,235 617 13,274 16,126 2,407,819 542 Total commercial real estate 2,997,815 2,235 617 13,745 16,597 3,014,412 542 Commercial and industrial 1,121,307 1,363 497 2,526 4,386 1,125,693 20 Residential real estate 1,341,924 4,831 759 9,066 14,656 1,356,580 2,418 Home equity 519,110 3,354 808 3,944 8,106 527,216 1,289 Consumer 344,241 3,134 901 872 4,907 349,148 587 Total portfolio loans 6,324,397 14,917 3,582 30,153 48,652 6,373,049 4,856 Loans held for sale 26,888 — — — — 26,888 — Total loans $ 6,351,285 $ 14,917 $ 3,582 $ 30,153 $ 48,652 $ 6,399,937 $ 4,856 Impaired loans included above are as follows: Non-accrual $ 9,360 $ 873 $ 226 $ 24,999 $ 26,098 $ 35,458 TDRs accruing interest (1) 6,232 108 — 298 406 6,638 Total impaired $ 15,592 $ 981 $ 226 $ 25,297 $ 26,504 $ 42,096 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 (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 September 30, 2017 December 31, 2016 Unpaid Principal Balance (1 Recorded Investment Related Allowance Unpaid Principal Balance (1) Recorded Investment Related Allowance (unaudited, in thousands) With no related specific allowance recorded: Commercial real estate: Land and construction $ 666 $ 474 $ — $ 1,212 $ 766 $ — Improved property 15,981 10,709 — 9,826 8,141 — Commercial and industrial 3,884 3,083 — 4,456 3,181 — Residential real estate 18,925 17,094 — 20,152 18,305 — Home equity 5,528 4,845 — 4,589 4,011 — Consumer 934 774 — 884 744 — Total impaired loans without a specific allowance 45,918 36,979 — 41,119 35,148 — With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — Improved property 5,117 5,117 579 3,012 3,012 470 Commercial and industrial — — — 4,875 1,270 407 Total impaired loans with a specific allowance 5,117 5,117 579 7,887 4,282 877 Total impaired loans $ 51,035 $ 42,096 $ 579 $ 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 Impaired Loans For the Three Months Ended For the Nine Months Ended September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (unaudited, in thousands) With no related specific allowance recorded: Commercial real estate: Land and construction $ 444 $ — $ 701 $ — $ 516 $ — $ 1,062 $ — Improved Property 10,923 31 8,403 28 10,271 400 9,408 86 Commercial and industrial 3,588 2 3,172 2 3,700 6 3,246 7 Residential real estate 17,039 57 17,013 81 17,743 192 16,882 256 Home equity 4,727 4 3,613 4 4,456 14 3,381 16 Consumer 731 2 814 — 746 5 953 6 Total impaired loans without a specific allowance 37,452 96 33,716 115 37,432 617 34,932 371 With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — — — Improved Property 5,137 — 3,012 — 5,032 — 3,012 — Commercial and industrial — — 2,678 — 318 — 3,700 — Total impaired loans with a specific allowance 5,137 — 5,690 — 5,350 — 6,712 — Total impaired loans $ 42,589 $ 96 $ 39,406 $ 115 $ 42,782 $ 617 $ 41,644 $ 371 The following tables present the recorded investment in non-accrual Non-accrual (1) (unaudited, in thousands) September 30, 2017 December 31, 2016 Commercial real estate: Land and construction $ 474 $ 766 Improved property 14,263 9,535 Total commercial real estate 14,737 10,301 Commercial and industrial 2,950 4,299 Residential real estate 12,641 12,994 Home equity 4,426 3,538 Consumer 704 652 Total $ 35,458 $ 31,784 (1) At September 30, 2017, there were three borrowers with loans greater than $1.0 million totaling $8.6 million, as compared to two borrowers with loans greater than $1.0 million totaling $4.3 million at December 31, 2016. Total non-accrual non-accrual TDRs September 30, 2017 December 31, 2016 (unaudited, in thousands) Accruing Non-Accrual Total Accruing Non-Accrual Total Commercial real estate: Land and construction $ — $ 4 $ 4 $ — $ 8 $ 8 Improved property 1,563 446 2,009 1,618 688 2,306 Total commercial real estate 1,563 450 2,013 1,618 696 2,314 Commercial and industrial 133 164 297 152 151 303 Residential real estate 4,453 1,810 6,263 5,311 2,212 7,523 Home equity 419 419 838 473 297 770 Consumer 70 139 209 92 190 282 Total $ 6,638 $ 2,982 $ 9,620 $ 7,646 $ 3,546 $ 11,192 As of September 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 The following tables present details related to loans identified as TDRs during the three and nine months ended September 30, 2017 and 2016, respectively: New TDRs (1) For the Three Months Ended September 30, 2017 September 30, 2016 Pre- Post- Pre- Post- Modification Modification Modification Modification Outstanding Outstanding Outstanding Outstanding Number of Recorded Recorded Number of Recorded Recorded (unaudited, dollars in thousands) Modifications Investment Investment Modifications Investment Investment Commercial real estate: Land and construction — $ — $ — — $ — $ — Improved Property 1 190 185 — — — Total commercial real estate 1 190 185 — — — Commercial and industrial — — — 2 125 122 Residential real estate — — — 2 124 122 Home equity 2 94 88 — — — Consumer 1 7 6 4 26 23 Total 4 $ 291 $ 279 8 $ 275 $ 267 (1) Excludes loans that were either paid off or charged-off pre-modification New TDRs (1) For the Nine Months Ended September 30, 2017 September 30, 2016 (unaudited, dollars in thousands) Number of Pre- Post- Number of Pre- Post- Commercial real estate: Land and construction — $ — $ — — $ — $ — Improved Property 1 190 185 — — — Total commercial real estate 1 190 185 — — — Commercial and industrial 1 64 59 2 125 122 Residential real estate 2 22 17 3 150 143 Home equity 3 141 132 1 44 41 Consumer 4 42 33 10 70 54 Total 11 $ 459 $ 426 16 $ 389 $ 360 (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 nine months ended September 30, 2017 and 2016, respectively, that were restructured within the last twelve months prior to September 30, 2017 and 2016, respectively: Defaulted TDRs (1) For the Nine Months Ended September 30, 2017 September 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 1 7 — — Home equity — — — — Consumer 1 7 — — Total 2 $ 14 1 $ 40 (1) Excludes loans that were either charged-off TDRs that default are placed on non-accrual The following table summarizes other real estate owned and repossessed assets included in other assets: (unaudited, in thousands) September 30, December 31, Other real estate owned $ 5,636 $ 8,206 Repossessed assets 146 140 Total other real estate owned and repossessed assets $ 5,782 $ 8,346 At September 30, 2017, other real estate owned includes $1.1 million from the YCB acquisition and $3.1 million at December 31, 2016. Residential real estate included in other real estate owned at September 30, 2017 and December 31, 2016 was $1.7 million and $1.6 million, respectively. At September 30, 2017 and December 31, 2016, formal foreclosure proceedings were in process on residential real estate loans totaling $3.3 million and $4.1 million, respectively. |