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. Net deferred loan costs were $3.2 million and $1.6 million at December 31, 2018 and 2017, respectively. The unamortized discount on purchased loans from acquisitions was $49.3 million at December 31, 2018, including $9.7 million related to FTSB and $23.4 million related to FFKT, and $21.9 million at December 31, 2017. December 31, December 31, (in thousands) 2018 2017 Commercial real estate: Land and construction $ 528,072 $ 392,597 Improved property 3,325,623 2,601,851 Total commercial real estate 3,853,695 2,994,448 Commercial and industrial 1,265,460 1,125,327 Residential real estate 1,611,607 1,353,301 Home equity 599,331 529,196 Consumer 326,188 339,169 Total portfolio loans 7,656,281 6,341,441 Loans held for sale 8,994 20,320 Total loans $ 7,665,275 $ 6,361,761 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, 2018 (in thousands) Commercial Commercial Commercial Residential Home Consumer Deposit Total Balance at beginning of year: 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 650 (521 ) 3,430 1,612 138 1,142 1,146 7,597 Provision for loan commitments 50 7 89 5 14 2 — 167 Total provision for credit losses 700 (514 ) 3,519 1,617 152 1,144 1,146 7,764 Charge-offs (137 ) (1,090 ) (1,830 ) (1,435 ) (1,193 ) (3,508 ) (1,374 ) (10,567 ) Recoveries 409 1,293 1,100 439 914 2,100 379 6,634 Net recoveries (charge-offs) 272 203 (730 ) (996 ) (279 ) (1,408 ) (995 ) (3,933 ) Balance at end of period: Allowance for loan losses 4,039 20,848 12,114 3,822 4,356 2,797 972 48,948 Allowance for loan commitments 169 33 262 12 226 39 — 741 Total ending allowance for credit losses $ 4,208 $ 20,881 $ 12,376 $ 3,834 $ 4,582 $ 2,836 $ 972 $ 49,689 For the Year Ended December 31, 2017 (in thousands) Commercial Commercial 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 recoveries (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 Real Estate- Land and Construction 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 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, 2018 Allowance for credit losses: Allowance for loans individually evaluated for impairment $ — $ — $ — $ — $ — $ — $ — $ — Allowance for loans collectively evaluated for impairment 4,039 20,848 12,114 3,822 4,356 2,797 972 48,948 Allowance for loan commitments 169 33 262 12 226 39 — 741 Total allowance for credit losses $ 4,208 $ 20,881 $ 12,376 $ 3,834 $ 4,582 $ 2,836 $ 972 $ 49,689 Portfolio loans: Individually evaluated for impairment (1) $ — $ — $ — $ — $ — $ — $ — $ — Collectively evaluated for impairment 527,737 3,319,672 1,264,560 1,609,177 599,331 326,063 — 7,646,540 Acquired with deteriorated credit quality 335 5,951 900 2,430 — 125 — 9,741 Total portfolio loans $ 528,072 $ 3,325,623 $ 1,265,460 $ 1,611,607 $ 599,331 $ 326,188 $ — $ 7,656,281 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 (“C&I”) 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 C&I 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. 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, 2018 Pass $ 523,707 $ 3,267,304 $ 1,245,190 $ 5,036,201 Criticized—compromised 2,297 35,566 13,847 51,710 Classified—substandard 2,068 22,753 6,423 31,244 Classified—doubtful — — — — Total $ 528,072 $ 3,325,623 $ 1,265,460 $ 5,119,155 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 were $22.9 million at December 31, 2018 and $22.8 million at December 31, 2017, of which $3.9 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 FTSB Loans 310-20 Loans acquired with deteriorated credit quality with a book value of $5.1 million were recorded at the preliminary fair value of $2.3 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 December 31, 2018 was $1.8 million, while the outstanding customer balance was $4.7 million. At December 31, 2018, no allowance for loan losses has been recognized related to the FTSB-acquired impaired loans. Certain acquired underperforming loans with an acquired book value of $21.7 million were sold during the second and fourth quarters of 2018 for $15.7 million. The acquisition date fair value of the acquired loans was adjusted to the sale price resulting in no recognized gain or loss. 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 December 31, 2018 was $1.7 million, while the outstanding customer balance was $2.0 million. At December 31, 2018, no allowance for loan losses has been recognized related to the FFKT-acquired impaired loans. Certain acquired underperforming loans with an acquired book value of $45.2 million were sold during the fourth quarter of 2018 for $32.9 million. The acquisition date fair value of the acquired loans was adjusted to the sale price resulting in no recognized gain or loss. The following table provides changes in accretable yield for all loans acquired from prior acquisitions with deteriorated credit quality: For the Years Ended (in thousands) December 31, December 31, Balance at beginning of period $ 1,724 $ 1,717 Acquisitions 885 — Reduction due to change in projected cash flows (776 ) — Reclass from non-accretable 7,052 1,719 Transfers — (216 ) Accretion (2,682 ) (1,496 ) Balance at end of period $ 6,203 $ 1,724 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, 2018 Commercial real estate: Land and construction $ 526,660 $ 62 $ 1,350 $ — $ 1,412 $ 528,072 $ — Improved property 3,314,765 2,266 2,250 6,342 10,858 3,325,623 175 Total commercial real estate 3,841,425 2,328 3,600 6,342 12,270 3,853,695 175 Commercial and industrial 1,261,536 323 594 3,007 3,924 1,265,460 13 Residential real estate 1,593,519 2,717 5,001 10,370 18,088 1,611,607 2,820 Home equity 591,623 2,500 1,273 3,935 7,708 599,331 705 Consumer 322,584 2,084 1,007 513 3,604 326,188 364 Total portfolio loans 7,610,687 9,952 11,475 24,167 45,594 7,656,281 4,077 Loans held for sale 8,994 — — — — 8,994 — Total loans $ 7,619,681 $ 9,952 $ 11,475 $ 24,167 $ 45,594 $ 7,665,275 $ 4,077 Impaired loans included above are as follows: Non-accrual $ 8,910 $ 337 $ 1,370 $ 20,083 21,790 $ 30,700 TDRs accruing interest (1) 5,586 59 92 7 158 5,744 Total impaired $ 14,496 $ 396 $ 1,462 $ 20,090 $ 21,948 $ 36,444 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 December 31, 2018 December 31, 2017 (in thousands) Unpaid Recorded Related Unpaid Recorded Related With no related specific allowance recorded: Commercial real estate: Land and construction $ — $ — $ — $ 412 $ 239 $ — Improved property 14,038 9,293 — 18,229 12,863 — Commercial and industrial 4,610 3,428 — 3,745 3,086 — Residential real estate 20,270 18,016 — 20,821 18,982 — Home equity 5,924 5,036 — 5,833 5,169 — Consumer 846 671 — 1,084 952 — Total impaired loans without a specific allowance 45,688 36,444 — 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 $ 45,688 $ 36,444 $ — $ 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 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 $ 208 $ — $ 460 $ — $ 993 $ — Improved property 10,658 381 10,790 436 9,128 115 Commercial and industrial 3,076 12 3,577 8 3,188 9 Residential real estate 19,026 240 17,991 252 17,021 308 Home equity 5,005 25 4,599 19 3,502 20 Consumer 808 7 787 7 909 8 Total impaired loans without a specific allowance 38,781 665 38,204 722 34,741 460 With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — Improved property 842 — 4,446 — 3,012 — Commercial and industrial — — 254 — 3,214 — Total impaired loans with a specific allowance 842 — 4,700 — 6,226 — Total impaired loans $ 39,623 $ 665 $ 42,904 $ 722 $ 40,967 $ 460 The following tables present the recorded investment in non-accrual Non-accrual (in thousands) December 31, December 31, Commercial real estate: Land and construction $ — $ 239 Improved property 8,413 13,318 Total commercial real estate 8,413 13,557 Commercial and industrial 3,260 2,958 Residential real estate 13,831 14,661 Home equity 4,610 4,762 Consumer 586 887 Total $ 30,700 $ 36,825 (1) At December 31, 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 December 31, 2018 December 31, 2017 (in thousands) Accruing Non-Accrual Total Accruing Non-Accrual Total Commercial real estate: Land and construction $ — $ — $ — $ — $ 3 $ 3 Improved property 880 1,529 2,409 1,650 428 2,078 Total commercial real estate 880 1,529 2,409 1,650 431 2,081 Commercial and industrial 168 169 337 128 97 225 Residential real estate 4,185 921 5,106 4,321 1,880 6,201 Home equity 426 198 624 407 337 744 Consumer 85 38 123 65 120 185 Total $ 5,744 $ 2,855 $ 8,599 $ 6,571 $ 2,865 $ 9,436 As of December 31, 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 table presents details related to loans identified as TDRs during the years ended December 31, 2018 and 2017: New TDRs (1) For the Year Ended December 31, 2018 New TDRs (1) For the Year Ended December 31, 2017 (dollars in thousands) Number of Pre- Post- Number of Pre- Post- Commercial real estate: Land and construction — $ — $ — — $ — $ — Improved property 2 837 805 2 345 331 Total commercial real estate 2 837 805 2 345 331 Commercial and industrial 4 240 188 1 64 58 Residential real estate 4 218 190 3 144 137 Home equity 2 91 84 2 68 61 Consumer 5 69 49 5 43 30 Total 17 $ 1,455 $ 1,316 13 $ 664 $ 617 (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, 2018 and 2017 that were restructured within the last twelve months prior to December 31, 2018 and 2017: 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 2 109 2 128 Home equity — — 1 7 Consumer — — — — Total 2 $ 109 3 $ 135 (1) Excludes loans that were either charged-off TDRs that default 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) 2018 2017 2016 Average impaired loans $ 39,623 $ 42,904 $ 40,967 Amount of contractual interest income on impaired loans 2,631 3,089 2,747 Amount of interest income recognized on impaired loans 665 722 460 The following table summarizes other real estate owned and repossessed assets included in other assets: December 31, (in thousands) 2018 2017 Other real estate owned $ 7,173 $ 5,195 Repossessed assets 92 102 Total other real estate owned and repossessed assets $ 7,265 $ 5,297 Residential real estate included in other real estate owned at December 31, 2018 and December 31, 2017 was $1.3 million and $1.5 million, respectively. At December 31, 2018 and 2017, formal foreclosure proceedings were in process on residential real estate loans totaling $6.0 million and $3.5 million, respectively. |