NOTE 4. 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 $1.9 million and $1.6 million at March 31, 2018 and December 31, 2017, respectively. The unamortized discount on purchased loans from acquisitions was $20.8 million, including $10.0 million related to YCB, and $21.9 million at March 31, 2018 and December 31, 2017, respectively.

 

(unaudited, in thousands)		March 31, 2018				December 31, 2017
Commercial real estate:
Land and construction		$	440,896			$	392,597
Improved property			2,574,330				2,601,851
Total commercial real estate			3,015,226				2,994,448
Commercial and industrial			1,118,333				1,125,327
Residential real estate			1,345,993				1,353,301
Home equity			523,425				529,196
Consumer			319,561				339,169
Total portfolio loans			6,322,538				6,341,441
Loans held for sale			12,962				20,320
Total loans		$	6,335,500			$	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 Three Months Ended March 31, 2018 and 2017
		Commercial				Commercial
		Real Estate-				Real Estate-
		Land and				Improved				Commercial				Residential				Home								Deposit
(unaudited, in thousands)		Construction				Property				& Industrial				Real Estate				Equity				Consumer				Overdraft				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			1,090				(895	)			919				202				262				583				(48	)			2,113
Provision for loan commitments			57				(5	)			3				—				(4	)			4				—				55
Total provision for credit losses			1,147				(900	)			922				202				258				587				(48	)			2,168
Charge-offs			—				(279	)			(109	)			(287	)			(576	)			(1,125	)			(267	)			(2,643	)
Recoveries			117				287				270				131				120				546				109				1,580
Net charge-offs			117				8				161				(156	)			(456	)			(579	)			(158	)			(1,063	)
Balance at March 31, 2018:
Allowance for loan losses			4,324				20,279				10,494				3,252				4,303				3,067				615				46,334
Allowance for loan commitments			176				21				176				7				208				41				—				629
Total ending allowance for credit losses		$	4,500			$	20,300			$	10,670			$	3,259			$	4,511			$	3,108			$	615			$	46,963
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			(425	)			983				832				330				365				583				66				2,734
Provision for loan commitments			(8	)			—				(31	)			1				17				(2	)			—				(23	)
Total provision for credit losses			(433	)			983				801				331				382				581				66				2,711
Charge-offs			—				(602	)			(880	)			(404	)			(108	)			(1,287	)			(338	)			(3,619	)
Recoveries			52				251				376				78				48				369				98				1,272
Net charge-offs			52				(351	)			(504	)			(326	)			(60	)			(918	)			(240	)			(2,347	)
Balance at March 31, 2017:
Allowance for loan losses			3,975				19,260				8,740				4,110				3,727				3,663				586				44,061
Allowance for loan commitments			143				17				157				10				179				42				—				548
Total ending allowance for credit losses		$	4,118			$	19,277			$	8,897			$	4,120			$	3,906			$	3,705			$	586			$	44,609

 

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
		Commercial				Commercial
		Real Estate-				Real Estate-				Commercial				Residential												Deposit
		Land and				Improved				and				Real				Home								Over-
(unaudited, in thousands)		Construction				Property				Industrial				Estate				Equity				Consumer				draft				Total
March 31, 2018
Allowance for credit losses:
Allowance for loans individually evaluated for impairment		$	—			$	387			$	—			$	—			$	—			$	—			$	—			$	387
Allowance for loans collectively evaluated for impairment			4,324				19,892				10,494				3,252				4,303				3,067				615				45,947
Allowance for loan commitments			176				21				176				7				208				41				—				629
Total allowance for credit losses		$	4,500			$	20,300			$	10,670			$	3,259			$	4,511			$	3,108			$	615			$	46,963
Portfolio loans:
Individually evaluated for impairment (1)		$	—			$	2,104			$	—			$	—			$	—			$	—			$	—			$	2,104
Collectively evaluated for impairment			439,480				2,567,367				1,117,607				1,345,290				523,425				319,561				—				6,312,730
Acquired with deteriorated credit quality			1,416				4,859				726				703				—				—				—				7,704
Total portfolio loans		$	440,896			$	2,574,330			$	1,118,333			$	1,345,993			$	523,425			$	319,561			$	—			$	6,322,538
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 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
(unaudited, in thousands)		Commercial Real Estate- Land and Construction				Commercial Real Estate- Improved Property				Commercial & Industrial				Total Commercial Loans
As of March 31, 2018
Pass		$	434,665			$	2,526,334			$	1,104,209			$	4,065,208
Criticized - compromised			3,384				24,807				5,594				33,785
Classified - substandard			2,847				23,189				8,530				34,566
Classified - doubtful			—				—				—				—
Total		$	440,896			$	2,574,330			$	1,118,333			$	4,133,559
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 $19.4 million at March 31, 2018 and $22.8 million at December 31, 2017, of which $1.0 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 YCB Loans — The carrying amount of loans acquired from YCB with deteriorated credit quality at March 31, 2018 and December 31, 2017 was $4.2 million and $4.3 million, respectively, of which $0.7 million and $0.8 million, respectively, were accounted for under the cost recovery method in accordance with ASC 310-30 as cash flows cannot be reasonably estimated, and therefore are categorized as non-accrual. At March 31, 2018, the accretable yield was $1.3 million. At March 31, 2018 and December 31, 2017, an allowance for loan loss of $0.2 million and $0, respectively, has been recognized related to the YCB acquired impaired loans, as the estimates for future cash flows on these loans have been negatively impacted.

Acquired ESB Loans — The carrying amount of loans acquired from ESB with deteriorated credit quality at March 31, 2018 and December 31, 2017 was $3.5 million and $3.7 million, respectively, of which $3.5 million for both periods was accounted for under the cost recovery method in accordance with ASC 310-30 as cash flows cannot be reasonably estimated, and therefore were categorized as non-accrual. At March 31, 2018, the accretable yield was $2.9 million. At March 31, 2018 and December 31, 2017 an allowance for loan loss of $2.0 million has been recognized related to the ESB acquired impaired loans, as the estimates for future cash flows on these loans have been negatively impacted.

 

The following table provides changes in accretable yield for loans acquired with deteriorated credit quality:

 

		For the Three Months Ended
(unaudited, in thousands)		March 31, 2018				March 31, 2017
Balance at beginning of period		$	1,724			$	1,717
Acquisitions			—				—
Reduction due to change in projected cash flows			(86	)			(200	)
Reclass from non-accretable difference			2,841				174
Transfers out			—				—
Accretion			(268	)			(151	)
Balance at end of period		$	4,211			$	1,540

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 March 31, 2018
Commercial real estate:
Land and construction		$	439,926			$	—			$	—			$	970			$	970			$	440,896			$	172
Improved property			2,559,491				4,431				528				9,880				14,839				2,574,330				364
Total commercial real estate			2,999,417				4,431				528				10,850				15,809				3,015,226				536
Commercial and industrial			1,115,453				667				201				2,012				2,880				1,118,333				21
Residential real estate			1,333,175				3,860				1,618				7,340				12,818				1,345,993				561
Home equity			517,172				2,654				682				2,917				6,253				523,425				251
Consumer			316,517				1,950				432				662				3,044				319,561				210
Total portfolio loans			6,281,734				13,562				3,461				23,781				40,804				6,322,538				1,579
Loans held for sale			12,962				—				—				—				—				12,962				—
Total loans		$	6,294,696			$	13,562			$	3,461			$	23,781			$	40,804			$	6,335,500			$	1,579
Impaired loans included above are as follows:
Non-accrual loans		$	8,120			$	1,310			$	754			$	22,202			$	24,266			$	32,386
TDRs accruing interest (1)			6,435				230				193				—				423				6,858
Total impaired		$	14,555			$	1,540			$	947			$	22,202			$	24,689			$	39,244
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

 

(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
		March 31, 2018												December 31, 2017
		Unpaid Principal Balance (1)				Recorded Investment				Related Allowance				Unpaid Principal Balance (1)				Recorded Investment				Related Allowance
(unaudited, in thousands)
With no related specific allowance recorded:
Commercial real estate:
Land and construction		$	873			$	800			$	—			$	412			$	239			$	—
Improved property			14,554				10,319				—				18,229				12,863				—
Commercial and industrial			3,045				2,496				—				3,745				3,086				—
Residential real estate			19,601				17,751				—				20,821				18,982				—
Home equity			5,771				4,971				—				5,833				5,169				—
Consumer			918				803				—				1,084				952				—
Total impaired loans without a specific allowance			44,762				37,140				—				50,124				41,291				—
With a specific allowance recorded:
Commercial real estate:
Land and construction			—				—				—				—				—				—
Improved property			2,104				2,104				387				2,105				2,105				388
Commercial and industrial			—				—				—				—				—				—
Total impaired loans with a specific allowance			2,104				2,104				387				2,105				2,105				388
Total impaired loans		$	46,866			$	39,244			$	387			$	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 and fair market value adjustments on acquired impaired loans.

 

		Impaired Loans
		For the Three Months Ended March 31, 2018								For the Three Months Ended March 31, 2017
		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
(unaudited, in thousands)
With no related specific allowance recorded:
Commercial real estate:
Land and construction		$	520			$	—			$	588			$	—
Improved property			11,591				345				9,620				346
Commercial and industrial			2,791				2				3,812				2
Residential real estate			18,367				66				18,448				69
Home equity			5,070				5				4,186				5
Consumer			878				3				761				2
Total impaired loans without a specific allowance			39,217				421				37,415				424
With a specific allowance recorded:
Commercial real estate:
Land and construction			—				—				—				—
Improved property			2,105				—				4,927				—
Commercial and industrial			—				—				635				—
Total impaired loans with a specific allowance			2,105				—				5,562				—
Total impaired loans		$	41,322			$	421			$	42,977			$	424

 

The following tables present the recorded investment in non-accrual loans and TDRs:

 

		Non-accrual Loans (1)
(unaudited, in thousands)		March 31, 2018				December 31, 2017
Commercial real estate:
Land and construction		$	800			$	239
Improved property			10,821				13,318
Total commercial real estate			11,621				13,557
Commercial and industrial			2,373				2,958
Residential real estate			13,149				14,661
Home equity			4,540				4,762
Consumer			703				887
Total		$	32,386			$	36,825

 

(1)

At March 31, 2018, there were 2 borrowers with loans greater than $1.0 million totaling $5.6 million, as compared to three borrowers with loans greater than $1.0 million totaling $6.8 million at December 31, 2017. 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
		March 31, 2018												December 31, 2017
(unaudited, in thousands)		Accruing				Non-Accrual				Total				Accruing				Non-Accrual				Total
Commercial real estate:
Land and construction		$	—			$	2			$	2			$	—			$	3			$	3
Improved property			1,602				490				2,092				1,650				428				2,078
Total commercial real estate			1,602				492				2,094				1,650				431				2,081
Commercial and industrial			123				94				217				128				97				225
Residential real estate			4,602				1,525				6,127				4,321				1,880				6,201
Home equity			431				220				651				407				337				744
Consumer			100				66				166				65				120				185
Total		$	6,858			$	2,397			$	9,255			$	6,571			$	2,865			$	9,436

As of March 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 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 as of March 31, 2018 and December 31, 2017.

The following tables present details related to loans identified as TDRs during the three months ended March 31, 2018 and 2017, respectively:

 

		New TDRs (1) For the Three Months Ended
		March 31, 2018												March 31, 2017
						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			—				—				—				2				126				122
Residential real estate			5				203				195				1				10				9
Home equity			—				—				—				1				44				43
Consumer			2				4				3				2				84				21
Total			7			$	207			$	198				6			$	264			$	195

 

(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 three months ended March 31, 2018 and 2017, respectively, that were restructured within the last twelve months prior to March 31, 2018 and 2017, respectively:

 

		Defaulted TDRs (1)								Defaulted TDRs (1)
		For the Three Months Ended								For the Three Months Ended
		March 31, 2018								March 31, 2017
(unaudited, dollars in thousands)		Number of Defaults				Recorded Investment				Number of Defaults				Recorded Investment
Commercial real estate:
Land and construction			—			$	—				—			$	—
Improved property			—				—				—				—
Total commercial real estate			—				—				—				—
Commercial and industrial			—				—				—				—
Residential real estate			1				122				—				—
Home equity			1				7				—				—
Consumer			—				—				1				9
Total			2			$	129				1			$	9

 

(1)	Excludes loans that were either charged-off or cured by period end. The recorded investment is as of March 31, 2018 and 2017, respectively.

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:

 

(unaudited, in thousands)		March 31, 2018				December 31, 2017
Other real estate owned		$	3,991			$	5,195
Repossessed assets			76				102
Total other real estate owned and repossessed assets		$	4,067			$	5,297

Residential real estate included in other real estate owned at March 31, 2018 and December 31, 2017 was $0.9 million and $1.5 million, respectively. At March 31, 2018 and December 31, 2017, formal foreclosure proceedings were in process on residential real estate loans totaling $4.3 million and $3.5 million, respectively.