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 net deferred loan costs were $2.8 million and $1.6 million at September 30, 2018 and December 31, 2017, respectively. The unamortized discount on purchased portfolio loans from acquisitions was $54.3 million, including $6.7 million related to FTSB and $25.9 million related to FFKT, and $21.9 million at September 30, 2018 and December 31, 2017, respectively. (unaudited, in thousands) September 30, December 31, Commercial real estate: Land and construction $ 538,922 $ 392,597 Improved property 3,367,299 2,601,851 Total commercial real estate 3,906,221 2,994,448 Commercial and industrial 1,292,073 1,125,327 Residential real estate 1,598,477 1,353,301 Home equity 604,106 529,196 Consumer 325,546 339,169 Total portfolio loans 7,726,423 6,341,441 Loans held for sale 55,913 20,320 Total loans $ 7,782,336 $ 6,361,761 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, 2018 and 2017 (unaudited, in thousands) Commercial Commercial Real Estate - Commercial Residential Home Consumer Deposit Total Balance at December 31, 2017: 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 beginning allowance for credit losses 3,236 21,192 9,587 3,213 4,709 3,100 821 45,858 Provision for credit losses: Provision for loan losses 789 (721 ) 2,538 1,106 (292 ) 541 840 4,801 Provision for loan commitments 67 (3 ) 32 2 9 3 — 110 Total provision for credit losses 856 (724 ) 2,570 1,108 (283 ) 544 840 4,911 Charge-offs (137 ) (719 ) (871 ) (873 ) (745 ) (2,465 ) (941 ) (6,751 ) Recoveries 400 1,098 970 336 830 1,657 277 5,568 Net charge-offs 263 379 99 (537 ) 85 (808 ) (664 ) (1,183 ) Balance at September 30, 2018: Allowance for loan losses 4,169 20,824 12,051 3,775 4,290 2,796 997 48,902 Allowance for loan commitments 186 23 205 9 221 40 — 684 Total ending allowance for credit losses $ 4,355 $ 20,847 $ 12,256 $ 3,784 $ 4,511 $ 2,836 $ 997 $ 49,586 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 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 Residential Estate Home Consumer Deposit Total September 30, 2018 Allowance for credit losses: Allowance for loans individually evaluated for impairment $ — $ — $ — $ — $ — $ — $ — $ — Allowance for loans collectively evaluated for impairment 4,169 20,824 12,051 3,775 4,290 2,796 997 48,902 Allowance for loan commitments 186 23 205 9 221 40 — 684 Total allowance for credit losses $ 4,355 $ 20,847 $ 12,256 $ 3,784 $ 4,511 $ 2,836 $ 997 $ 49,586 Portfolio loans: Individually evaluated for impairment (1) $ — $ — $ — $ — $ — $ — $ — $ — Collectively evaluated for impairment 537,699 3,361,315 1,291,296 1,595,547 604,106 325,419 — 7,715,382 Acquired with deteriorated credit quality 1,223 5,984 777 2,930 — 127 — 11,041 Total portfolio loans $ 538,922 $ 3,367,299 $ 1,292,073 $ 1,598,477 $ 604,106 $ 325,546 $ — $ 7,726,423 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 (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 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 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 (unaudited, in thousands) Commercial Commercial Commercial Total As of September 30, 2018 Pass $ 533,982 $ 3,314,324 $ 1,272,181 $ 5,120,487 Criticized—compromised 2,909 31,399 12,062 46,370 Classified—substandard 2,031 21,576 7,830 31,437 Classified—doubtful — — — — Total $ 538,922 $ 3,367,299 $ 1,292,073 $ 5,198,294 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 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 $20.6 million at September 30, 2018 and $22.8 million at December 31, 2017, of which $2.2 million and $2.5 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 FFKT Loans 310-20 Loans acquired with deteriorated credit quality with a book value of $2.7 million were recorded at the preliminary fair value of $2.4 million, of which all were accounted for under the cost recovery method in accordance with ASC 310-30 non-accrual. The carrying amount of loans acquired with deteriorated credit quality at September 30, 2018 was $2.1 million, while the outstanding customer balance was $2.4 million. At September 30, 2018 no allowance for loan losses has been recognized related to the acquired impaired loans. Certain acquired underperforming loans with a book value of $45.2 million were transferred to loans held for sale prior to September 30, 2018 at the preliminary fair value of $35.2 million. Acquired FTSB Loans 310-20 Loans acquired with deteriorated credit quality with a book value of $4.1 million were recorded at the preliminary fair value of $2.0 million, of which $0.7 million were accounted for under the cost recovery method in accordance with ASC 310-30 non-accrual. The carrying amount of loans acquired with deteriorated credit quality at September 30, 2018 was $1.7 million, while the outstanding customer balance was $3.8 million. At September 30, 2018, no allowance for loan losses has been recognized related to the acquired impaired loans. Certain acquired underperforming loans with a book value of $4.0 million were transferred to loans held for sale prior to September 30, 2018 at the preliminary fair value of $2.8 million. Certain acquired underperforming loans with a book value of $17.7 million were sold in the second quarter of 2018 for $12.9 million. The acquisition date fair value of the acquired loans was adjusted to the sale price resulting in no gain or loss. 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, September 30, Balance at beginning of period $ 1,724 $ 1,717 Acquisitions 695 — Reduction due to change in projected cash flows (86 ) — Reclass from non-accretable difference 6,287 1,490 Transfers out — (216 ) Accretion (902 ) (1,384 ) Balance at end of period $ 7,718 $ 1,607 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 As of September 30, 2018 Commercial real estate: Land and construction $ 538,181 $ 643 $ 98 $ — $ 741 $ 538,922 $ — Improved property 3,357,883 1,657 352 7,407 9,416 3,367,299 88 Total commercial real estate 3,896,064 2,300 450 7,407 10,157 3,906,221 88 Commercial and industrial 1,287,693 776 462 3,142 4,380 1,292,073 114 Residential real estate 1,579,164 8,100 2,708 8,505 19,313 1,598,477 1,225 Home equity 596,477 2,871 1,002 3,756 7,629 604,106 646 Consumer 322,093 2,291 605 557 3,453 325,546 378 Total portfolio loans 7,681,491 16,338 5,227 23,367 44,932 7,726,423 2,451 Loans held for sale 55,913 — — — — 55,913 — Total loans $ 7,737,404 $ 16,338 $ 5,227 $ 23,367 $ 44,932 $ 7,782,336 $ 2,451 Impaired loans included above are as follows: Non-accrual $ 7,480 $ 1,653 $ 1,225 $ 20,916 $ 23,794 $ 31,274 TDRs accruing interest (1) 5,667 314 357 — 671 6,338 Total impaired $ 13,147 $ 1,967 $ 1,582 $ 20,916 $ 24,465 $ 37,612 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 $ 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 (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, 2018 December 31, 2017 (unaudited, in thousands) Unpaid Recorded Related Unpaid Recorded Related With no related specific allowance recorded: Commercial real estate: Land and construction $ — $ $ — $ 412 $ 239 $ — Improved property 14,639 9,928 — 18,229 12,863 — Commercial and industrial 3,886 3,327 — 3,745 3,086 — Residential real estate 21,226 18,944 — 20,821 18,982 — Home equity 5,550 4,728 — 5,833 5,169 — Consumer 857 685 — 1,084 952 — Total impaired loans without a specific allowance 46,158 37,612 — 50,124 41,291 — With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — Improved property — — — 2,105 2,105 388 Commercial and industrial — — — — — — Total impaired loans with a specific allowance — — — 2,105 2,105 388 Total impaired loans $ 46,158 $ 37,612 $ — $ 52,229 $ 43,396 $ 388 (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, 2018 September 30, 2017 September 30, 2018 September 30, 2017 (unaudited, in thousands) Average Interest Average Interest Average Interest Average Interest With no related specific allowance recorded: Commercial real estate: Land and construction $ — $ — $ 444 $ — $ 260 $ — $ 516 $ — Improved Property 10,409 15 10,923 31 11,000 383 10,271 400 Commercial and industrial 3,181 5 3,588 2 2,985 9 3,700 6 Residential real estate 18,336 68 17,039 57 18,207 195 17,743 192 Home equity 4,924 8 4,727 4 4,997 19 4,456 14 Consumer 692 3 731 2 776 8 746 5 Total impaired loans without a specific allowance 37,542 99 37,452 96 38,225 614 37,432 617 With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — — — Improved Property — — 5,137 — 1,052 — 5,032 — Commercial and industrial — — — — — — 318 — Total impaired loans with a specific allowance — — 5,137 — 1,052 — 5,350 — Total impaired loans $ 37,542 $ 99 $ 42,589 $ 96 $ 39,277 $ 614 $ 42,782 $ 617 The following tables present the recorded investment in non-accrual Non-accrual (unaudited, in thousands) September 30, December 31, Commercial real estate: Land and construction $ — $ 239 Improved property 8,757 13,318 Total commercial real estate 8,757 13,557 Commercial and industrial 3,165 2,958 Residential real estate 14,475 14,661 Home equity 4,283 4,762 Consumer 594 887 Total $ 31,274 $ 36,825 (1) At September 30, 2018, there was one borrower with a loan greater than $1.0 million totaling $3.4 million, as compared to three borrowers with loans greater than $1.0 million totaling $6.8 million at December 31, 2017. Total non-accrual non-accrual TDRs September 30, 2018 December 31, 2017 (unaudited, in thousands) Accruing Non-Accrual Total Accruing Non-Accrual Total Commercial real estate: Land and construction $ — $ — $ — $ — $ 3 $ 3 Improved property 1,171 640 1,811 1,650 428 2,078 Total commercial real estate 1,171 640 1,811 1,650 431 2,081 Commercial and industrial 162 — 162 128 97 225 Residential real estate 4,469 1,182 5,651 4,321 1,880 6,201 Home equity 445 167 612 407 337 744 Consumer 91 47 138 65 120 185 Total $ 6,338 $ 2,036 $ 8,374 $ 6,571 $ 2,865 $ 9,436 As of September 30, 2018 and December 31, 2017, 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, 2018 and 2017, respectively: New TDRs (1) For the Three Months Ended September 30, 2018 September 30, 2017 (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 — — — — — — Residential real estate — — — — — — Home equity — — — 2 94 88 Consumer 1 19 18 1 7 6 Total 1 $ 19 $ 18 4 $ 291 $ 279 (1) Excludes loans that were either paid off or charged-off pre-modification New TDRs (1) For the Nine Months Ended September 30, 2018 September 30, 2017 (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 10 8 1 64 59 Residential real estate 5 203 176 2 22 17 Home equity 1 20 19 3 141 132 Consumer 4 65 52 4 42 33 Total 11 $ 298 $ 255 11 $ 459 $ 426 (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, 2018 and 2017, respectively, that were restructured within the last twelve months prior to September, 2018 and 2017, respectively: Defaulted TDRs (1) For the Nine Months Ended September 30, 2018 September 30, 2017 (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 — — — — Residential real estate 2 172 1 7 Home equity 1 6 — — Consumer — — 1 7 Total 3 $ 178 2 $ 14 (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: September 30, 2018 December 31, 2017 (unaudited, in thousands) Other real estate owned $ 6,836 $ 5,195 Repossessed assets 41 102 Total other real estate owned and repossessed assets $ 6,877 $ 5,297 Residential real estate included in other real estate owned at September 30, 2018 and December 31, 2017 was $0.7 million and $1.5 million, respectively. At September 30, 2018 and December 31, 2017, formal foreclosure proceedings were in process on residential real estate loans totaling $6.0 million and $3.5 million, respectively. |