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 $4.5 million and $3.2 million at September 30, 2019 and December 31, 2018, respectively. The unamortized discount on purchased loans from acquisitions was $36.8 million at September 30, 2019, including $16.9 million related to FFKT, and $49.3 million at December 31, 2018, including $23.4 million related to FFKT. September 30, December 31, (unaudited, in thousands) 2019 2018 Commercial real estate: Land and construction $ 510,404 $ 528,072 Improved property 3,344,249 3,325,623 Total commercial real estate 3,854,653 3,853,695 Commercial and industrial 1,332,275 1,265,460 Residential real estate 1,638,574 1,611,607 Home equity 587,745 599,331 Consumer 343,505 326,188 Total portfolio loans 7,756,752 7,656,281 Loans held for sale 20,715 8,994 Total loans $ 7,777,467 $ 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 Nine Months Ended September 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 Overdrafts 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 (207 ) 2,939 2,549 561 727 405 1,503 8,477 Provision for loan commitments 26 (9 ) 842 3 37 (1 ) — 898 Total provision for credit losses (181 ) 2,930 3,391 564 764 404 1,503 9,375 Charge-offs (45 ) (515 ) (1,420 ) (870 ) (859 ) (1,886 ) (1,273 ) (6,868 ) Recoveries 255 621 545 272 341 1,432 294 3,760 Net charge-offs 210 106 (875 ) (598 ) (518 ) (454 ) (979 ) (3,108 ) Balance at September 30, 2019 Allowance for loan losses 4,042 23,893 13,788 3,785 4,565 2,748 1,496 54,317 Allowance for loan commitments 195 24 1,104 15 263 38 — 1,639 Total ending allowance for credit losses $ 4,237 $ 23,917 $ 14,892 $ 3,800 $ 4,828 $ 2,786 $ 1,496 $ 55,956 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 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- drafts Total September 30, 2019 Allowance for credit losses: Allowance for loans individually evaluated for impairment $ — $ 1,471 $ 10 $ 12 $ 7 $ 1 $ — $ 1,501 Allowance for loans collectively evaluated for impairment 4,042 22,422 13,778 3,773 4,558 2,747 1,496 52,816 Allowance for loan commitments 195 24 1,104 15 263 38 — 1,639 Total allowance for credit losses $ 4,237 $ 23,917 $ 14,892 $ 3,800 $ 4,828 $ 2,786 $ 1,496 $ 55,956 Portfolio loans: Individually evaluated for impairment (1) $ — $ 5,388 $ 185 $ 4,662 $ 746 $ 61 $ — $ 11,042 Collectively evaluated for impairment 510,162 3,330,959 1,331,248 1,632,348 586,999 343,444 — 7,735,160 Acquired with deteriorated credit quality 242 7,902 842 1,564 — — — 10,550 Total portfolio loans $ 510,404 $ 3,344,249 $ 1,332,275 $ 1,638,574 $ 587,745 $ 343,505 $ — $ 7,756,752 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 is transitioning to a more objective 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 inception 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 sufficiency, reliability and sustainability of the primary source of repayment and overall financial strength of the borrower. The rating system more heavily weights the debt service coverage, leverage and loan to value factors to derive the risk grade. Other factors that are considered at a lesser weighting include management, industry or property type risks, payment history, collateral or guarantees. 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 the net operating income generated by the property to service the debt, the loan to appraised value, the type, quality, industry and mix of tenants, and the terms of leases. The risk grade assigned to owner-occupied commercial real estate is based primarily on global debt service coverage and the leverage of the business, but may also consider the industry in which the business operates, the business’ specific competitive advantages or disadvantages, collateral margins and the quality and experience of management 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 . 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 a ssets have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank's credit position at some future date. Criticized assets are not adversely classified and do not expose the bank to sufficient risk to warrant adverse classification. Substandard and doubtful loans are equivalent to the classifications used by banking regulators. Substandard loa ns are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the will sustain some loss if the deficiencies are not corrected. oans have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. 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 September 30, 2019 Pass $ 503,021 $ 3,217,475 $ 1,292,481 $ 5,012,977 Criticized - compromised 5,742 54,441 18,697 78,880 Classified - substandard 1,641 72,333 21,097 95,071 Classified - doubtful — — — — Total $ 510,404 $ 3,344,249 $ 1,332,275 $ 5,186,928 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 $23.3 million at September 30, 2019 and $22.9 million at December 31, 2018, of which $3.5 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 September 30, 2019 was $3.0 million, while the outstanding customer balance was $3.5 million. At September 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 Nine Months Ended September 30, September 30, (unaudited, in thousands) 2019 2018 Balance at beginning of period $ 6,203 $ 1,724 Acquisitions 1,300 695 Reduction due to change in projected cash flows (979 ) (86 ) Reclass from non-accretable difference 839 6,287 Transfers out — — Accretion (2,475 ) (902 ) Balance at end of period $ 4,888 $ 7,718 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 Accruing (1) As of September 30, 2019 Commercial real estate: Land and construction $ 509,062 $ 127 $ 84 $ 1,131 $ 1,342 $ 510,404 $ 834 Improved property 3,326,426 3,901 2,032 11,890 17,823 3,344,249 935 Total commercial real estate 3,835,488 4,028 2,116 13,021 19,165 3,854,653 1,769 Commercial and industrial 1,329,043 675 215 2,342 3,232 1,332,275 229 Residential real estate 1,620,684 3,560 3,789 10,541 17,890 1,638,574 2,724 Home equity 580,598 2,328 748 4,071 7,147 587,745 420 Consumer 340,640 1,678 805 382 2,865 343,505 283 Total portfolio loans 7,706,453 12,269 7,673 30,357 50,299 7,756,752 5,425 Loans held for sale 20,715 — — — — 20,715 — Total loans $ 7,727,168 $ 12,269 $ 7,673 $ 30,357 $ 50,299 $ 7,777,467 $ 5,425 Impaired loans included above are as follows: Non-accrual loans $ 8,107 $ 656 $ 1,156 $ 24,882 26,694 $ 34,801 TDRs accruing interest (1) 5,566 64 160 50 274 5,840 Total impaired $ 13,673 $ 720 $ 1,316 $ 24,932 $ 26,968 $ 40,641 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 September 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 $ 606 $ 554 $ — $ — $ — $ — Improved property 14,162 7,982 — 14,038 9,293 — Commercial and industrial 3,724 2,374 — 4,610 3,428 — Residential real estate 15,090 13,303 — 20,270 18,016 — Home equity 5,866 5,030 — 5,924 5,036 — Consumer 442 356 — 846 671 — Total impaired loans without a specific allowance 39,890 29,599 — 45,688 36,444 — With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — Improved property 5,435 5,388 1,471 — — — Commercial and industrial 187 185 10 — — — Residential real estate 5,096 4,662 12 — — — Home equity 774 746 7 — — — Consumer 99 61 1 — — — Total impaired loans with a specific allowance 11,591 11,042 1,501 — — — Total impaired loans $ 51,481 $ 40,641 $ 1,501 $ 45,688 $ 36,444 $ — (1) Impaired Loans For the Three Months Ended For the Nine Months Ended September 30, 2019 September 30, 2018 September 30, 2019 September 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 $ 425 $ — $ — $ — $ 284 $ — $ 260 $ — Improved property 7,647 — 10,409 15 7,962 — 11,000 383 Commercial and industrial 2,614 — 3,181 5 2,931 — 2,985 9 Residential real estate 12,600 — 18,336 68 13,752 — 18,207 195 Home equity 4,740 — 4,924 8 4,760 — 4,997 19 Consumer 334 — 692 3 425 — 776 8 Total impaired loans without a specific allowance 28,360 — 37,542 99 30,114 — 38,225 614 With a specific allowance recorded: Commercial real estate: Land and construction — — — — — — — — Improved property 5,273 35 — — 3,170 63 1,052 — Commercial and industrial 189 4 — — 171 11 — — Residential real estate 4,792 51 — — 3,666 169 — — Home equity 834 8 — — 616 23 — — Consumer 68 1 — — 60 3 — — Total impaired loans with a specific allowance 11,156 99 — — 7,683 269 1,052 — Total impaired loans $ 39,516 $ 99 $ 37,542 $ 99 $ 37,797 $ 269 $ 39,277 $ 614 The following tables present the recorded investment in non-accrual loans and TDRs: Non-accrual Loans (1) September 30, December 31, (unaudited, in thousands) 2019 2018 Commercial real estate: Land and construction $ 554 $ — Improved property 12,036 8,413 Total commercial real estate 12,590 8,413 Commercial and industrial 2,374 3,260 Residential real estate 14,171 13,831 Home equity 5,299 4,610 Consumer 367 586 Total $ 34,801 $ 30,700 (1) TDRs September 30, 2019 December 31, 2018 (unaudited, in thousands) Accruing Non-Accrual Total Accruing Non-Accrual Total Commercial real estate: Land and construction $ — $ — $ — $ — $ — $ — Improved property 1,334 197 1,531 880 1,529 2,409 Total commercial real estate 1,334 197 1,531 880 1,529 2,409 Commercial and industrial 185 — 185 168 169 337 Residential real estate 3,794 868 4,662 4,185 921 5,106 Home equity 477 269 746 426 198 624 Consumer 50 11 61 85 38 123 Total $ 5,840 $ 1,345 $ 7,185 $ 5,744 $ 2,855 $ 8,599 As of September 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 September 30, 2019 and December 31, 2018, respectively. The following tables present details related to loans identified as TDRs during the three and nine months ended September 30, 2019 and 2018, respectively: New TDRs (1) For the Three Months Ended September 30, 2019 September 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 1 605 604 — — — Total commercial real estate 1 605 604 — — — Commercial and industrial — — — — — — Residential real estate — — — — — — Home equity — — — — — — Consumer — — — 1 19 18 Total 1 $ 605 $ 604 1 $ 19 $ 18 (1) New TDRs (1) For the Nine Months Ended September 30, 2019 September 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 1 610 604 — — — Total commercial real estate 1 610 604 — — — Commercial and industrial 1 44 37 1 10 8 Residential real estate 4 194 183 5 203 176 Home equity 2 187 184 1 20 19 Consumer 1 15 12 4 65 52 Total 9 $ 1,050 $ 1,020 11 $ 298 $ 255 (1) The following table summarizes TDRs which defaulted (defined as past due 90 days) during the nine months ended September 30, 2019 and 2018, respectively, that were restructured within the last twelve months prior to September 30, 2019 and 2018, respectively: Defaulted TDRs (1) For the Nine Months Ended September 30, 2019 September 30, 2018 Number of Recorded Number of Recorded (unaudited, dollars in thousands) Defaults Investment Defaults Investment Commercial real estate: Land and construction — $ — — $ — Improved property — — — — Total commercial real estate — — — — Commercial and industrial — — — — Residential real estate 1 96 2 172 Home equity 1 100 1 6 Consumer 1 12 — — Total 3 $ 208 3 $ 178 (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: September 30, December 31, (unaudited, in thousands) 2019 2018 Other real estate owned $ 3,662 $ 7,173 Repossessed assets 16 92 Total other real estate owned and repossessed assets $ 3,678 $ 7,265 Residential real estate included in other real estate owned at September 30, 2019 and December 31, 2018 was $0.6 million and $1.3 million, respectively. At September 30, 2019 and December 31, 2018, formal foreclosure proceedings were in process on residential real estate loans totaling $4.7 million and $6.0 million, respectively. |