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 $(1.6) million and $0.3 million at December 31, 2017 and 2016, respectively. The unamortized discount on purchased loans from acquisitions was $21.9 million, including $10.5 million related to YCB, and $24.1 million at December 31, 2017 and 2016, respectively. December 31, December 31, (in thousands) 2017 2016 Commercial real estate: Land and construction $ 392,597 $ 496,539 Improved property 2,601,851 2,376,972 Total commercial real estate 2,994,448 2,873,511 Commercial and industrial 1,125,327 1,088,118 Residential real estate 1,353,301 1,383,390 Home equity 529,196 508,359 Consumer 339,169 396,058 Total portfolio loans 6,341,441 6,249,436 Loans held for sale 20,320 17,315 Total loans $ 6,361,761 $ 6,266,751 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, 2017 (in thousands) Commercial Commercial Real Estate- Property Commercial Residential Home Consumer Deposit Total Balance at beginning of year: 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 (1,259 ) 4,386 2,733 (175 ) 2,066 1,231 1,001 9,983 Provision for loan commitments (32 ) 9 (15 ) (2 ) 50 (7 ) — 3 Total provision for credit losses (1,291 ) 4,395 2,718 (177 ) 2,116 1,224 1,001 9,986 Charge-offs (72 ) (2,381 ) (2,669 ) (1,064 ) (1,221 ) (3,989 ) (1,293 ) (12,689 ) Recoveries 100 533 938 339 230 1,823 353 4,316 Net charge-offs 28 (1,848 ) (1,731 ) (725 ) (991 ) (2,166 ) (940 ) (8,373 ) Balance at end of period: Allowance for loan losses 3,117 21,166 9,414 3,206 4,497 3,063 821 45,284 Allowance for loan commitments 119 26 173 7 212 37 — 574 Total ending allowance for credit losses $ 3,236 $ 21,192 $ 9,587 $ 3,213 $ 4,709 $ 3,100 $ 821 $ 45,858 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 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, 2017 Allowance for credit losses: Allowance for loans individually evaluated for impairment $ — $ 388 $ — $ — $ — $ — $ — $ 388 Allowance for loans collectively evaluated for impairment 3,117 20,778 9,414 3,206 4,497 3,063 821 44,896 Allowance for loan commitments 119 26 173 7 212 37 — 574 Total allowance for credit losses $ 3,236 $ 21,192 $ 9,587 $ 3,213 $ 4,709 $ 3,100 $ 821 $ 45,858 Portfolio loans: Individually evaluated for impairment (1) $ — $ 3,344 $ — $ — $ — $ — $ — $ 3,344 Collectively evaluated for impairment 391,140 2,593,393 1,124,544 1,352,587 529,196 339,163 — 6,330,023 Acquired with deteriorated credit quality 1,457 5,114 783 714 — 6 — 8,074 Total portfolio loans $ 392,597 $ 2,601,851 $ 1,125,327 $ 1,353,301 $ 529,196 $ 339,169 $ — $ 6,341,441 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 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. Commercial and industrial loans consist of revolving lines of credit to finance accounts receivable, inventory and other general business purposes; term loans to finance fixed assets other than real estate, and letters of credit to support trade, insurance or governmental requirements for a variety of businesses. Most C&I borrowers are privately-held companies with annual sales up to $100 million. 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 (in thousands) Commercial Commercial Commercial Total As of December 31, 2017 Pass $ 386,753 $ 2,548,805 $ 1,110,267 $ 4,045,825 Criticized—compromised 2,984 25,673 7,435 36,092 Classified—substandard 2,860 27,373 7,625 37,858 Classified—doubtful — — — — Total $ 392,597 $ 2,601,851 $ 1,125,327 $ 4,119,775 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 $22.8 million at December 31, 2017 and $20.6 million at December 31, 2016, of which $2.5 and $3.4 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 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 $ 1,717 $ 1,206 Acquisitions — 837 Reduction due to change in projected cash flows — (484 ) Reclass from non-accretable difference 1,719 1,065 Transfers (216 ) (328 ) Accretion (1,496 ) (579 ) Balance at end of period $ 1,724 $ 1,717 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 As of December 31, 2017 Commercial real estate: Land and construction $ 392,189 $ — $ 172 $ 236 $ 408 $ 392,597 $ — Improved property 2,589,704 374 1,200 10,573 12,147 2,601,851 243 Total commercial real estate 2,981,893 374 1,372 10,809 12,555 2,994,448 243 Commercial and industrial 1,121,957 572 196 2,602 3,370 1,125,327 20 Residential real estate 1,338,240 4,487 2,376 8,198 15,061 1,353,301 1,113 Home equity 522,584 2,135 683 3,794 6,612 529,196 742 Consumer 334,723 2,466 842 1,138 4,446 339,169 608 Total portfolio loans 6,299,397 10,034 5,469 26,541 42,044 6,341,441 2,726 Loans held for sale 20,320 — — — — 20,320 — Total loans $ 6,319,717 $ 10,034 $ 5,469 $ 26,541 $ 42,044 $ 6,361,761 $ 2,726 Impaired loans included above are as follows: Non-accrual loans $ 9,195 $ 1,782 $ 2,033 $ 23,815 27,630 $ 36,825 TDRs accruing interest (1) 6,055 348 168 — 516 6,571 Total impaired $ 15,250 $ 2,130 $ 2,201 $ 23,815 $ 28,146 $ 43,396 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 December 31, 2017 December 31, 2016 (in thousands) Unpaid Recorded Related Unpaid Recorded Related With no related specific allowance recorded: Commercial real estate: Land and construction $ 412 $ 239 $ — $ 1,212 $ 766 $ — Improved property 18,229 12,863 — 9,826 8,141 — Commercial and industrial 3,745 3,086 — 4,456 3,181 — Residential real estate 20,821 18,982 — 20,152 18,305 — Home equity 5,833 5,169 — 4,589 4,011 — Consumer 1,084 952 — 884 744 — Total impaired loans without a specific allowance 50,124 41,291 — 41,119 35,148 — With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — Improved property 2,105 2,105 388 3,012 3,012 470 Commercial and industrial — — — 4,875 1,270 407 Total impaired loans with a specific allowance 2,105 2,105 388 7,887 4,282 877 Total impaired loans $ 52,229 $ 43,396 $ 388 $ 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 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 $ 460 $ — $ 993 $ — $ 2,156 $ 41 Improved property 10,790 436 9,128 115 17,192 437 Commercial and industrial 3,577 8 3,188 9 2,979 170 Residential real estate 17,991 252 17,021 308 17,876 862 Home equity 4,599 19 3,502 20 2,924 90 Consumer 787 7 909 8 1,199 105 Total impaired loans without a specific allowance 38,204 722 34,741 460 44,326 1,705 With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — Improved property 4,446 — 3,012 — 5,896 — Commercial and industrial 254 — 3,214 — 3,579 292 Total impaired loans with a specific allowance 4,700 — 6,226 — 9,475 292 Total impaired loans $ 42,904 $ 722 $ 40,967 $ 460 $ 53,801 $ 1,997 The following tables present the recorded investment in non-accrual loans and TDRs: Non-accrual Loans (1) (in thousands) December 31, December 31, Commercial real estate: Land and construction $ 239 $ 766 Improved property 13,318 9,535 Total commercial real estate 13,557 10,301 Commercial and industrial 2,958 4,299 Residential real estate 14,661 12,994 Home equity 4,762 3,538 Consumer 887 652 Total $ 36,825 $ 31,784 (1) At December 31, 2017, there were three borrowers with loans greater than $1.0 million totaling $6.8 million, as compared to two borrowers with loans greater than $1.0 million 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 December 31, 2017 December 31, 2016 (in thousands) Accruing Non-Accrual Total Accruing Non-Accrual Total Commercial real estate: Land and construction $ — $ 3 $ 3 $ — $ 8 $ 8 Improved property 1,650 428 2,078 1,618 688 2,306 Total commercial real estate 1,650 431 2,081 1,618 696 2,314 Commercial and industrial 128 97 225 152 151 303 Residential real estate 4,321 1,880 6,201 5,311 2,212 7,523 Home equity 407 337 744 473 297 770 Consumer 65 120 185 92 190 282 Total $ 6,571 $ 2,865 $ 9,436 $ 7,646 $ 3,546 $ 11,192 As of December 31, 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 months. WesBanco had unfunded commitments to debtors whose loans were classified as impaired of $0.1 million and $0 as of December 31, 2017 and 2016, respectively. The following table presents details related to loans identified as TDRs during the years ended December 31, 2017 and 2016: For the Year Ended December 31, 2017 For the Year Ended December 31, 2016 (dollars in thousands) Number of Pre- Post- Number of Pre- Post- Commercial real estate: Land and construction — $ — $ — — $ — $ — Improved property 2 345 331 — — — Total commercial real estate 2 345 331 — — — Commercial and industrial 1 64 58 2 125 120 Residential real estate 3 144 137 4 178 166 Home equity 2 68 61 1 44 40 Consumer 5 43 30 14 98 74 Total 13 $ 664 $ 617 21 $ 445 $ 400 (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 years ended December 31, 2017 and 2016 that were restructured within the last twelve months prior to December 31, 2017 and 2016: 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 — — — — Total commercial real estate — — — — Commercial and industrial — — — — Residential real estate 2 128 — — Home equity 1 7 — — Consumer — — 1 16 Total 3 $ 135 1 $ 16 (1) Excludes loans that were either charged-off or cured by period end. The recorded investment is as of December 31, 2017 and 2016. TDRs that default are placed on non-accrual status unless they are both well-secured and in the process of collection. The loans in the table above were not accruing interest. The following table summarizes the recognition of interest income on impaired loans: For the years ended December 31, (in thousands) 2017 2016 2015 Average impaired loans $ 42,904 $ 40,967 $ 53,801 Amount of contractual interest income on impaired loans 3,089 2,747 3,061 Amount of interest income recognized on impaired loans 722 460 1,997 The following table summarizes other real estate owned and repossessed assets included in other assets: December 31, (in thousands) 2017 2016 Other real estate owned $ 5,195 $ 8,206 Repossessed assets 102 140 Total other real estate owned and repossessed assets $ 5,297 $ 8,346 At December 31, 2017, other real estate owned included $0.4 million from the YCB acquisition. Residential real estate included in other real estate owned at December 31, 2017 and December 31, 2016 was $1.5 million and $1.6 million, respectively. At December 31, 2017, formal foreclosure proceedings were in process on residential real estate loans totaling $3.5 million. |