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 $4.2 million and $3.2 million at June 30, 2019 and December 31, 2018, respectively. The unamortized discount on purchased loans from acquisitions was $40.1 million at June 30, 2019, including $19.0 million related to FFKT, and $49.3 million at December 31, 2018. June 30, December 31, (unaudited, in thousands) 2019 2018 Commercial real estate: Land and construction $ 483,046 $ 528,072 Improved property 3,394,587 3,325,623 Total commercial real estate 3,877,633 3,853,695 Commercial and industrial 1,300,577 1,265,460 Residential real estate 1,633,613 1,611,607 Home equity 590,303 599,331 Consumer 335,728 326,188 Total portfolio loans 7,737,854 7,656,281 Loans held for sale 18,649 8,994 Total loans $ 7,756,503 $ 7,665,275 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, 2019 and 2018 (unaudited, in thousands) Commercial Real Estate - Land and Construction Commercial Real Estate -Improved Property Commercial & Industrial Residential Real Estate Home Equity Consumer Deposit Overdraft Total Balance at December 31, 2018 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 beginning allowance for credit losses 4,208 20,881 12,376 3,834 4,582 2,836 972 49,689 Provision for credit losses: Provision for loan losses (538 ) 1,459 1,309 124 423 333 1,119 4,229 Provision for loan commitments 18 (9 ) 995 1 23 (3 ) — 1,025 Total provision for credit losses (520 ) 1,450 2,304 125 446 330 1,119 5,254 Charge-offs — (285 ) (1,025 ) (679 ) (673 ) (1,344 ) (860 ) (4,866 ) Recoveries 200 345 489 188 215 896 215 2,548 Net charge-offs 200 60 (536 ) (491 ) (458 ) (448 ) (645 ) (2,318 ) Balance at June 30, 2019 Allowance for loan losses 3,701 22,367 12,887 3,455 4,321 2,682 1,446 50,859 Allowance for loan commitments 187 24 1,257 13 249 36 — 1,766 Total ending allowance for credit losses $ 3,888 $ 22,391 $ 14,144 $ 3,468 $ 4,570 $ 2,718 $ 1,446 $ 52,625 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 1,465 (1,774 ) 2,100 944 54 615 439 3,843 Provision for loan commitments 44 (8 ) 2 2 (7 ) — — 33 Total provision for credit losses 1,509 (1,782 ) 2,102 946 47 615 439 3,876 Charge-offs (136 ) (692 ) (616 ) (509 ) (672 ) (1,793 ) (541 ) (4,959 ) Recoveries 264 776 636 252 279 1,066 197 3,470 Net charge-offs 128 84 20 (257 ) (393 ) (727 ) (344 ) (1,489 ) Balance at June 30, 2018 Allowance for loan losses 4,710 19,476 11,534 3,893 4,158 2,951 916 47,638 Allowance for loan commitments 163 18 175 9 205 37 — 607 Total ending allowance for credit losses $ 4,873 $ 19,494 $ 11,709 $ 3,902 $ 4,363 $ 2,988 $ 916 $ 48,245 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 (unaudited, in thousands) Commercial Real Estate- Land and Construction Commercial Real Estate- Improved Property Commercial and Industrial Residential Real Estate Home Equity Consumer Deposit Over- draft Total June 30, 2019 Allowance for credit losses: Allowance for loans individually evaluated for impairment $ — $ 1,479 $ 11 $ 12 $ 8 $ 1 $ — $ 1,511 Allowance for loans collectively evaluated for impairment 3,701 20,888 12,876 3,443 4,313 2,681 1,446 49,348 Allowance for loan commitments 187 24 1,257 13 249 36 — 1,766 Total allowance for credit losses $ 3,888 $ 22,391 $ 14,144 $ 3,468 $ 4,570 $ 2,718 $ 1,446 $ 52,625 Portfolio loans: Individually evaluated for impairment (1) $ — $ 5,157 $ 192 $ 4,922 $ 922 $ 74 $ — $ 11,267 Collectively evaluated for impairment 482,804 3,381,541 1,299,528 1,627,047 589,381 335,654 — 7,715,955 Acquired with deteriorated credit quality 242 7,889 857 1,644 — — — 10,632 Total portfolio loans $ 483,046 $ 3,394,587 $ 1,300,577 $ 1,633,613 $ 590,303 $ 335,728 $ — $ 7,737,854 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 (1 ) 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. The type, age, condition, location and any environmental risks associated with a property are also considered for all types of commercial real estate. 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 estate collateral and whether the structure of the loan increases or reduces its risk. 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, and are considered non-accrual. 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: Commercial 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 June 30, 2019 Pass $ 476,109 $ 3,319,270 $ 1,268,591 $ 5,063,970 Criticized - compromised 5,794 52,657 14,785 73,236 Classified - substandard 1,143 22,660 17,201 41,004 Classified - doubtful — — — — Total $ 483,046 $ 3,394,587 $ 1,300,577 $ 5,178,210 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 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 $20.0 million at June 30, 2019 and $22.9 million at December 31, 2018, of which $2.0 and $3.9 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 – In conjunction with the FFKT acquisition, WesBanco acquired loans with a book value of $1,064.8 million as of August 20, 2018. These loans were recorded at the fair value of $1,025.8 million, with $988.3 million categorized as ASC 310-20 loans. The fair market value adjustment on these loans of $26.0 million at the acquisition date is expected to be recognized into interest income on a level yield basis over the remaining expected life of the loans. Loans acquired with deteriorated credit quality with a book value of $5.3 million were recorded at the fair value of $4.6 million, of which $2.4 million were accounted for under the cost recovery method in accordance with ASC 310-30 as cash flows cannot be reasonably estimated, and categorized as non-accrual. The carrying amount of loans acquired with deteriorated credit quality at June 30, 2019 was $3.1 million, while the outstanding customer balance was $3.6 million. At June 30, 2019, 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 loans acquired with deteriorated credit quality: For the Six Months Ended June 30, June 30, (unaudited, in thousands) 2019 2018 Balance at beginning of period $ 6,203 $ 1,724 Acquisitions 1,300 — Reduction due to change in projected cash flows (960 ) (86 ) Reclass from non-accretable difference 839 5,877 Transfers out — — Accretion (2,240 ) (440 ) Balance at end of period $ 5,142 $ 7,075 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 June 30, 2019 Commercial real estate: Land and construction $ 482,016 $ 965 $ 45 $ 20 $ 1,030 $ 483,046 $ — Improved property 3,382,311 2,297 1,486 8,493 12,276 3,394,587 587 Total commercial real estate 3,864,327 3,262 1,531 8,513 13,306 3,877,633 587 Commercial and industrial 1,296,878 922 142 2,635 3,699 1,300,577 97 Residential real estate 1,617,430 5,962 2,449 7,772 16,183 1,633,613 1,173 Home equity 584,058 2,073 412 3,760 6,245 590,303 533 Consumer 333,279 1,682 506 261 2,449 335,728 244 Total portfolio loans 7,695,972 13,901 5,040 22,941 41,882 7,737,854 2,634 Loans held for sale 18,649 — — — — 18,649 — Total loans $ 7,714,621 $ 13,901 $ 5,040 $ 22,941 $ 41,882 $ 7,756,503 $ 2,634 Impaired loans included above are as follows: Non-accrual loans $ 9,310 $ 1,170 $ 2,169 $ 20,249 23,588 $ 32,898 TDRs accruing interest (1) 5,273 10 146 58 214 5,487 Total impaired $ 14,583 $ 1,180 $ 2,315 $ 20,307 $ 23,802 $ 38,385 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 loans $ 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 (1) The following tables summarize impaired loans: Impaired Loans June 30, 2019 December 31, 2018 Unpaid Unpaid Principal Recorded Related Principal Recorded Related (unaudited, in thousands) Balance (1) Investment Allowance Balance (1) Investment Allowance With no related specific allowance recorded: Commercial real estate: Land and construction $ 347 $ 295 $ — $ — $ — $ — Improved property 13,499 7,312 — 14,038 9,293 — Commercial and industrial 4,086 2,854 — 4,610 3,428 — Residential real estate 13,572 11,896 — 20,270 18,016 — Home equity 5,247 4,450 — 5,924 5,036 — Consumer 416 311 — 846 671 — Total impaired loans without a specific allowance 37,167 27,118 — 45,688 36,444 — With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — Improved property 5,211 5,157 1,479 — — — Commercial and industrial 194 192 11 — — — Residential real estate 5,358 4,922 12 — — — Home equity 990 922 8 — — — Consumer 113 74 1 — — — Total impaired loans with a specific allowance 11,866 11,267 1,511 — — — Total impaired loans $ 49,033 $ 38,385 $ 1,511 $ 45,688 $ 36,444 $ — (1) Impaired Loans For the Three Months Ended For the Six Months Ended June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018 Average Interest Average Interest Average Interest Average Interest Recorded Income Recorded Income Recorded Income Recorded Income (unaudited, in thousands) Investment Recognized Investment Recognized Investment Recognized Investment Recognized With no related specific allowance recorded: Commercial real estate: Land and construction $ 290 $ — $ 400 $ — $ 193 $ — $ 346 $ — Improved property 7,287 — 10,604 23 7,955 — 11,357 368 Commercial and industrial 2,961 — 3,036 2 3,116 — 3,008 4 Residential real estate 11,845 — 18,264 61 13,902 — 18,434 127 Home equity 4,487 — 5,068 6 4,670 — 5,098 11 Consumer 337 — 758 2 448 — 823 5 Total impaired loans without a specific allowance 27,207 — 38,130 94 30,284 — 39,066 515 With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — — — Improved property 3,645 14 1,052 — 2,430 28 1,403 — Commercial and industrial 250 4 — — 166 7 — — Residential real estate 5,000 60 — — 3,333 118 — — Home equity 859 7 — — 573 15 — — Consumer 89 1 — — 59 2 — — Total impaired loans with a specific allowance 9,843 86 1,052 — 6,561 170 1,403 — Total impaired loans $ 37,050 $ 86 $ 39,182 $ 94 $ 36,845 $ 170 $ 40,469 $ 515 The following tables present the recorded investment in non-accrual loans and TDRs: Non-accrual Loans (1) June 30, December 31, (unaudited, in thousands) 2019 2018 Commercial real estate: Land and construction $ 295 $ — Improved property 11,726 8,413 Total commercial real estate 12,021 8,413 Commercial and industrial 2,854 3,260 Residential real estate 12,813 13,831 Home equity 4,886 4,610 Consumer 324 586 Total $ 32,898 $ 30,700 (1) TDRs June 30, 2019 December 31, 2018 (unaudited, in thousands) Accruing Non-Accrual Total Accruing Non-Accrual Total Commercial real estate: Land and construction $ — $ — $ — $ — $ — $ — Improved property 743 558 1,301 880 1,529 2,409 Total commercial real estate 743 558 1,301 880 1,529 2,409 Commercial and industrial 192 — 192 168 169 337 Residential real estate 4,005 917 4,922 4,185 921 5,106 Home equity 486 436 922 426 198 624 Consumer 61 13 74 85 38 123 Total $ 5,487 $ 1,924 $ 7,411 $ 5,744 $ 2,855 $ 8,599 As of June 30, 2019 and December 31, 2018, 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 $0.2 million and $0.1 million as of June 30, 2019 and December 31, 2018. The following tables present details related to loans identified as TDRs during the three and six months ended June 30, 2019 and 2018, respectively: New TDRs (1) For the Three Months Ended June 30, 2019 June 30, 2018 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 — — — — — — Total commercial real estate — — — — — — Commercial and industrial 1 44 40 1 9 9 Residential real estate — — — — — — Home equity 1 199 156 1 20 20 Consumer — — — 2 39 36 Total 2 $ 243 $ 196 4 $ 68 $ 65 (1) New TDRs (1) For the Six Months Ended June 30, 2019 June 30, 2018 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 — — — — — — Total commercial real estate — — — — — — Commercial and industrial 1 44 40 1 10 9 Residential real estate 4 194 188 5 203 185 Home equity 3 386 340 1 20 20 Consumer 1 15 13 4 45 38 Total 9 $ 639 $ 581 11 $ 278 $ 252 (1) The following table summarizes TDRs which defaulted (defined as past due 90 days) during the six months ended June 30, 2019 and 2018, respectively, that were restructured within the last twelve months prior to June 30, 2019 and 2018, respectively: Defaulted TDRs (1) For the Six Months Ended June 30, 2019 June 30, 2018 Number of Recorded Number of Recorded (unaudited, dollars in thousands) Defaults Investment Defaults Investment Commercial real estate: Land and construction — $ — — $ — Improved property — — 1 145 Total commercial real estate — — 1 145 Commercial and industrial — — — — Residential real estate 1 97 1 121 Home equity — — 1 7 Consumer 1 13 — — Total 2 $ 110 3 $ 273 (1) 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 other real estate owned and repossessed assets included in other assets: June 30, December 31, (unaudited, in thousands) 2019 2018 Other real estate owned $ 4,891 $ 7,173 Repossessed assets 82 92 Total other real estate owned and repossessed assets $ 4,973 $ 7,265 Residential real estate included in other real estate owned at June 30, 2019 and December 31, 2018 was $1.2 million and $1.3 million, respectively. At June 30, 2019 and December 31, 2018, formal foreclosure proceedings were in process on residential real estate loans totaling $5.8 million and $6.0 million, respectively. |