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 of $0.6 million and $1.0 million at June 30, 2016 and December 31, 2015, respectively and discounts on purchased loans from prior transactions of $14.4 million and $15.7 million at June 30, 2016 and December 31, 2015, respectively.


*(unaudited, in thousands)*	June 30, 2016		December 31, 2015
Commercial real estate:
Land and construction	$	432,663	$	344,748
Improved property		1,850,535		1,911,633

Total commercial real estate		2,283,198		2,256,381

Commercial and industrial		814,055		737,878
Residential real estate		1,242,015		1,247,800
Home equity		435,187		416,889
Consumer		395,377		406,894

Total portfolio loans		5,169,832		5,065,842

Loans held for sale		9,974		7,899

Total loans	$	5,179,806	$	5,073,741

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, 2016 and 2015
*(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, 2015:
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		1,252			(559	)		1,999			(172	)		164			898			581			4,163
Provision for loan commitments		(10	)		(13	)		(16	)		1			10			—			—			(28	)

Total provision for credit losses		1,242			(572	)		1,983			(171	)		174			898			581			4,135

Charge-offs		—			(1,328	)		(765	)		(386	)		(216	)		(2,089	)		(362	)		(5,146	)
Recoveries		3			1,168			139			306			77			790			118			2,601

Net charge-offs		3			(160	)		(626	)		(80	)		(139	)		(1,299	)		(244	)		(2,545	)

Balance at June 30, 2016:
Allowance for loan losses		5,645			14,029			11,375			4,330			2,908			4,362			679			43,328
Allowance for loan commitments		147			13			244			8			127			46			—			585

Total ending allowance for credit losses	$	5,792		$	14,042		$	11,619		$	4,338		$	3,035		$	4,408		$	679		$	43,913

Balance at December 31, 2014:
Allowance for loan losses	$	5,654		$	17,573		$	9,063		$	5,382		$	2,329		$	4,078		$	575		$	44,654
Allowance for loan commitments		194			10			112			9			90			40			—			455

Total beginning allowance for credit losses		5,848			17,583			9,175			5,391			2,419			4,118			575			45,109

Provision for credit losses:
Provision for loan losses		(551	)		633			1,448			25			1,254			580			231			3,620
Provision for loan commitments		13			10			301			3			23			—			—			350

Total provision for credit losses		(538	)		643			1,749			28			1,277			580			231			3,970

Charge-offs		—			(1,234	)		(1,430	)		(944	)		(948	)		(1,414	)		(381	)		(6,351	)
Recoveries		—			256			110			301			53			658			118			1,496

Net charge-offs		—			(978	)		(1,320	)		(643	)		(895	)		(756	)		(263	)		(4,855	)

Balance at June 30, 2015:
Allowance for loan losses		5,103			17,228			9,191			4,764			2,688			3,902			543			43,419
Allowance for loan commitments		207			20			413			12			113			40			—			805

Total ending allowance for credit losses	$	5,310		$	17,248		$	9,604		$	4,776		$	2,801		$	3,942		$	543		$	44,224

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
	Land and		Improved		and		Real		Home
*(unaudited, in thousands)*	Construction		Property		Industrial		Estate		Equity		Consumer		Over-draft		Total
June 30, 2016
Allowance for credit losses:
Allowance for loans individually evaluated for impairment	$	—	$	504	$	894	$	—	$	—	$	—	$	—	$	1,398
Allowance for loans collectively evaluated for impairment		5,645		13,525		10,481		4,330		2,908		4,362		679		41,930
Allowance for loan commitments		147		13		244		8		127		46		—		585

Total allowance for credit losses	$	5,792	$	14,042	$	11,619	$	4,338	$	3,035	$	4,408	$	679	$	43,913

Portfolio loans:
Individually evaluated for impairment⁽¹⁾	$	—	$	3,012	$	4,049	$	—	$	—	$	—	$	—	$	7,061
Collectively evaluated for impairment		432,663		1,840,005		810,006		1,242,015		435,187		395,377		—		5,155,253
Acquired with deteriorated credit quality		—		7,518		—		—		—		—		—		7,518

Total portfolio loans	$	432,663	$	1,850,535	$	814,055	$	1,242,015	$	435,187	$	395,377	$	—	$	5,169,832

December 31, 2015
Allowance for credit losses:
Allowance for loans individually evaluated for impairment	$	—	$	668	$	853	$	—	$	—	$	—	$	—	$	1,521
Allowance for loans collectively evaluated for impairment		4,390		14,080		9,149		4,582		2,883		4,763		342		40,189
Allowance for loan commitments		157		26		260		7		117		46		—		613

Total allowance for credit losses	$	4,547	$	14,774	$	10,262	$	4,589	$	3,000	$	4,809	$	342	$	42,323

Portfolio loans:
Individually evaluated for impairment⁽¹⁾	$	—	$	4,031	$	4,872	$	—	$	—	$	—	$	—	$	8,903
Collectively evaluated for impairment		343,832		1,899,738		732,957		1,247,639		416,862		406,622		—		5,047,650
Acquired with deteriorated credit quality		916		7,864		49		161		27		272		—		9,289

Total portfolio loans	$	344,748	$	1,911,633	$	737,878	$	1,247,800	$	416,889	$	406,894	$	—	$	5,065,842

⁽¹⁾	Commercial loans greater than $1 million that are reported as non-accrual or as a troubled debt restructuring (“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. Other 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:


	Commercial Loans by Internally Assigned Risk Grade
	Commercial		Commercial
	Real Estate-		Real Estate-				Total
	Land and		Improved		Commercial		Commercial
*(unaudited, in thousands)*	Construction		Property		& Industrial		Loans
As of June 30, 2016
Pass	$	425,647	$	1,805,673	$	786,601	$	3,017,921
Criticized - compromised		5,007		11,998		9,538		26,543
Classified - substandard		2,009		32,864		17,916		52,789
Classified - doubtful		—		—		—		—

Total	$	432,663	$	1,850,535	$	814,055	$	3,097,253

As of December 31, 2015
Pass	$	335,989	$	1,864,986	$	713,578	$	2,914,553
Criticized - compromised		5,527		10,911		9,860		26,298
Classified - substandard		3,232		35,736		14,440		53,408
Classified - doubtful		—		—		—		—

Total	$	344,748	$	1,911,633	$	737,878	$	2,994,259

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 $16.4 million at June 30, 2016 and $15.8 million at December 31, 2015, of which $2.2 and $3.1 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 Loans — Carrying amount of loans acquired with deteriorated credit quality at June 30, 2016 and December 31, 2015 were $7.5 million and $9.3 million, respectively, while the outstanding balance was $12.5 million and $15.0 million, respectively. At June 30, 2016 and December 31, 2015 no allowance for loan losses has been recognized related to the acquired impaired loans, as estimates of future cash flows on these loans have not been negatively impacted.

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)*	2016			2015
Balance at beginning of period	$	1,206		$	—
Acquisitions		—			1,815
Reclass from non-accretable difference		1,064			—
Transfers		(328	)		—
Accretion		(266	)		(267	)

Balance at end of period	$	1,676		$	1,548

The following tables summarize the age analysis of all categories of loans:


	Age Analysis of Loans
													90 Days
							90 Days						or More
			30-59 Days		60-89 Days		or More		Total		Total		Past Due and
*(unaudited, in thousands)*	Current		Past Due		Past Due		Past Due		Past Due		Loans		Accruing ⁽¹⁾
As of June 30, 2016
Commercial real estate:
Land and construction	$	432,241	$	—	$	—	$	422	$	422	$	432,663	$	—
Improved property		1,840,665		1,616		592		7,662		9,870		1,850,535		—

Total commercial real estate		2,272,906		1,616		592		8,084		10,292		2,283,198		—
Commercial and industrial		811,320		251		743		1,741		2,735		814,055		56
Residential real estate		1,229,843		1,153		3,319		7,700		12,172		1,242,015		1,261
Home equity		431,147		1,276		373		2,391		4,040		435,187		378
Consumer		391,096		2,665		803		813		4,281		395,377		568

Total portfolio loans		5,136,312		6,961		5,830		20,729		33,520		5,169,832		2,263
Loans held for sale		9,974		—		—		—		—		9,974		—

Total loans	$	5,146,286	$	6,961	$	5,830	$	20,729	$	33,520	$	5,179,806	$	2,263

Impaired loans included above are as follows:
Non-accrual loans	$	12,374	$	1,261	$	763	$	18,057	$	20,081	$	32,455
TDRs accruing interest ⁽¹⁾		8,195		204		171		409		784		8,979

Total impaired	$	20,569	$	1,465	$	934	$	18,466	$	20,865	$	41,434

As of December 31, 2015
Commercial real estate:
Land and construction	$	344,184	$	—	$	—	$	564	$	564	$	344,748	$	—
Improved property		1,901,466		909		1,097		8,161		10,167		1,911,633		—

Total commercial real estate		2,245,650		909		1,097		8,725		10,731		2,256,381		—
Commercial and industrial		734,660		298		714		2,206		3,218		737,878		33
Residential real estate		1,234,839		1,389		2,871		8,701		12,961		1,247,800		2,159
Home equity		412,450		2,252		314		1,873		4,439		416,889		407
Consumer		401,242		4,115		764		773		5,652		406,894		527

Total portfolio loans		5,028,841		8,963		5,760		22,278		37,001		5,065,842		3,126
Loans held for sale		7,899		—		—		—		—		7,899		—

Total loans	$	5,036,740	$	8,963	$	5,760	$	22,278	$	37,001	$	5,073,741	$	3,126

Impaired loans included above are as follows:
Non-accrual loans	$	11,349	$	943	$	2,147	$	18,942	$	22,032	$	33,381
TDRs accruing interest ⁽¹⁾		10,710		390		238		210		838		11,548

Total impaired	$	22,059	$	1,333	$	2,385	$	19,152	$	22,870	$	44,929

⁽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
	June 30, 2016						December 31, 2015
*(unaudited, in thousands)*	Unpaid Principal Balance ⁽¹⁾		Recorded Investment		Related Allowance		Unpaid Principal Balance ⁽¹⁾		Recorded Investment		Related Allowance
With no related specific allowance recorded:
Commercial real estate:
Land and construction	$	905	$	801	$	—	$	2,126	$	1,990	$	—
Improved property		12,762		9,360		—		14,817		10,559		—
Commercial and industrial		6,113		3,339		—		4,263		3,481		—
Residential real estate		18,328		16,491		—		18,560		16,688		—
Home equity		4,092		3,574		—		3,562		3,033		—
Consumer		964		808		—		1,603		1,294		—

Total impaired loans without a specific allowance		43,164		34,373		—		44,931		37,045		—

With a specific allowance recorded:
Commercial real estate:
Land and construction		—		—		—		—		—		—
Improved property		3,012		3,012		504		3,012		3,012		668
Commercial and industrial		5,853		4,049		894		6,176		4,872		853

Total impaired loans with a specific allowance		8,865		7,061		1,398		9,188		7,884		1,521

Total impaired loans	$	52,029	$	41,434	$	1,398	$	54,119	$	44,929	$	1,521

⁽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								For the Six Months Ended
	June 30, 2016				June 30, 2015				June 30, 2016				June 30, 2015
*(unaudited, in thousands)*	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related specific allowance recorded:
Commercial real estate:
Land and construction	$	840	$	8	$	2,493	$	2	$	1,223	$	14	$	2,158	$	18
Improved Property		9,846		96		21,741		240		10,084		180		19,389		463
Commercial and industrial		3,303		52		2,947		49		3,362		93		2,830		62
Residential real estate		16,830		194		18,550		235		16,783		433		18,548		465
Home equity		3,428		28		2,806		21		3,296		52		2,758		41
Consumer		853		17		1,261		26		1,000		35		1,202		46

Total impaired loans without a specific allowance		35,100		395		49,798		573		35,748		807		46,885		1,095

With a specific allowance recorded:
Commercial real estate:
Land and construction		—		—		—		—		—		—		—		—
Improved Property		3,012		—		6,989		56		3,012		—		7,319		56
Commercial and industrial		4,312		26		3,149		118		4,498		58		2,713		137

Total impaired loans with a specific allowance		7,324		26		10,138		174		7,510		58		10,032		193

Total impaired loans	$	42,424	$	421	$	59,936	$	747	$	43,258	$	865	$	56,917	$	1,288

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


	Non-accrual Loans ⁽¹⁾
*(unaudited, in thousands)*	June 30, 2016		December 31, 2015
Commercial real estate:
Land and construction	$	801	$	1,023
Improved property		10,661		11,507

Total commercial real estate		11,462		12,530

Commercial and industrial		7,250		8,148
Residential real estate		10,071		9,461
Home equity		3,017		2,391
Consumer		655		851

Total	$	32,455	$	33,381

⁽¹⁾	At June 30, 2016, there were two borrowers with loans greater than $1.0 million and three at December 31, 2015. 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
	June 30, 2016						December 31, 2015
*(unaudited, in thousands)*	Accruing		Non-Accrual		Total		Accruing		Non-Accrual		Total
Commercial real estate:
Land and construction	$	—	$	361	$	361	$	967	$	431	$	1,398
Improved property		1,711		952		2,663		2,064		1,442		3,506

Total commercial real estate		1,711		1,313		3,024		3,031		1,873		4,904

Commercial and industrial		138		245		383		205		282		487
Residential real estate		6,420		2,115		8,535		7,227		2,060		9,287
Home equity		557		276		833		642		218		860
Consumer		153		172		325		443		184		627

Total	$	8,979	$	4,121	$	13,100	$	11,548	$	4,617	$	16,165

As of June 30, 2016, 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 no unfunded commitments to debtors whose loans were classified as impaired as of June 30, 2016 and $0.2 million as of December 31, 2015.

The following tables present details related to loans identified as TDRs during the three and six months ended June 30, 2016 and 2015, respectively:


	New TDRs ⁽¹⁾
	For the Three Months Ended
	June 30, 2016						June 30, 2015
*(unaudited, dollars in thousands)*	Number of Modifications		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Modifications		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial real estate:
Land and construction		—	$	—	$	—		—	$	—	$	—
Improved Property		—		—		—		—		—		—

Total commercial real estate		—		—		—		—		—		—

Commercial and industrial		—		—		—		—		—		—
Residential real estate		1		23		22		1		41		39
Home equity		1		43		42		—		—		—
Consumer		6		38		34		—		—		—

Total		8	$	104	$	98		1	$	41	$	39

⁽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.


	New TDRs ⁽¹⁾
	For the Six Months Ended
	June 30, 2016						June 30, 2015
			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		—	$	—	$	—		2	$	115	$	110
Improved Property		—		—		—		2		835		581

Total commercial real estate		—		—		—		4		950		691

Commercial and industrial		—		—		—		—		—		—
Residential real estate		1		23		22		7		454		443
Home equity		1		44		42		1		7		6
Consumer		6		41		34		2		19		16

Total		8	$	108	$	98		14	$	1,430	$	1,156

⁽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 six months ended June 30, 2016 and 2015, respectively, that were restructured within the last twelve months prior to June 30, 2016 and 2015, respectively:


	Defaulted TDRs ⁽¹⁾
	For the Six Months Ended
	June 30, 2016				June 30, 2015
	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		1		40		—		—
Residential real estate		—		—		—		—
Home equity		—		—		1		42
Consumer		—		—		—		—

Total		1	$	40		1	$	42

⁽¹⁾	Excludes loans that were either charged-off or cured by period end. The recorded investment is as of June 30, 2016 and 2015, respectively.

TDRs that default are placed on non-accrual status unless they are both well-secured and in the process of collection. None of the loans in the table above were accruing interest.

The following table summarizes other real estate owned and repossessed assets included in other assets:


	June 30,		December 31,
*(unaudited, in thousands)*	2016		2015
Other real estate owned	$	4,361	$	5,669
Repossessed assets		120		156

Total other real estate owned and repossessed assets	$	4,481	$	5,825

Residential real estate included in other real estate owned at June 30, 2016 and December 31, 2015 was $0.8 million and $2.0 million, respectively. At June 30, 2016 and December 31, 2015, formal foreclosure proceedings were in process on residential real estate loans totaling $3.4 million and $4.1 million, respectively.