Loans

Peoples' loan portfolio consists of various types of loans originated primarily as a result of lending opportunities within Peoples' primary market areas of central and southeastern Ohio, west central West Virginia, and northeastern Kentucky markets. The major classifications of loan balances, excluding loans held for sale, were as follows:



	June 30,		December 31,
(Dollars in thousands)	2011		2010
Commercial real estate	$	430,832	$	452,875
Commercial and industrial	148,254		153,192
Real estate construction	28,136		22,478
Residential real estate	196,428		200,275
Home equity lines of credit	47,784		48,130
Consumer	86,540		81,567
Deposit account overdrafts	2,145		2,201
Total loans	$	940,119	$	960,718

Peoples has acquired various loans through business combinations for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected. The carrying amounts of these loans included in the loan balances above are summarized as follows:



	June 30,		December 31,
(Dollars in thousands)	2011		2010
Commercial real estate	$	3,245	$	3,616
Commercial and industrial	201		200
Residential real estate	16,371		17,893
Consumer	123		123
Total outstanding balance	$	19,940	$	21,832
Net carrying amount	$	19,431	$	21,229

Peoples has pledged certain loans secured by 1-4 family and multifamily residential mortgages under a blanket collateral agreement to secure borrowings from the FHLB. The amount of such pledged loans totaled $185.6 million and $181.8 million at June 30, 2011 and December 31, 2010, respectively. Peoples also had pledged commercial loans to secure borrowings with the Federal Reserve Bank of Cleveland. The outstanding balances of these loans totaled $138.1 million and $195.6 million at June 30, 2011 and December 31, 2010, respectively.

Nonaccrual and Past Due Loans

A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. A loan may be placed on nonaccrual status regardless of whether or not such loan is considered past due. The recorded investments in loans on nonaccrual status and accruing loans delinquent for 90 days or more were as follows:



					Accruing Loans
	Nonaccrual Loans				90+ Days Past Due
	June 30,		December 31,		June 30,		December 31,
(Dollars in thousands)	2011		2010		2011		2010
Commercial real estate	$	27,455	$	34,392	$	—	$	—
Commercial and industrial	1,325		1,714		—		—
Real estate construction	—		—		—		—
Residential real estate	2,358		3,790		124		27
Home equity lines of credit	283		554		—		—
Consumer	—		—		—		—
Total	$	31,421	$	40,450	$	124	$	27

At December 31, 2010, nonaccrual commercial real estate loans with an aggregate carrying amount of $951,000 were classified as held-for-sale and thus excluded for the table above. During the second quarter of 2011, one loan with a carrying value of $379,000 was sold for a gain of $371,000, while the remaining loans were transferred to OREO.

The following table presents the aging of the recorded investment in past due loans and leases:



	Loans Past Due								Current		Total
(Dollars in thousands)	30 - 59 days		60 - 89 days		90 + Days		Total		Loans		Loans
June 30, 2011
Commercial real estate	$	3,242	$	277	$	12,369	$	15,888	$	414,944	$	430,832
Commercial and industrial	370		668		—		1,038		147,216		148,254
Real estate construction	—		—		400		400		27,736		28,136
Residential real estate	4,020		1,266		2,083		7,369		189,059		196,428
Home equity lines of credit	477		46		—		523		47,261		47,784
Consumer	33		57		283		373		86,167		86,540
Deposit account overdrafts	69		—		—		69		2,076		2,145
Total	$	8,211	$	2,314	$	15,135	$	25,660	$	914,459	$	940,119
December 31, 2010
Commercial real estate	$	3,208	$	5,378	$	14,652	$	23,238	$	429,637	$	452,875
Commercial and industrial	563		11		247		821		152,371		153,192
Real estate construction	4		—		815		819		21,659		22,478
Residential real estate	4,321		2,022		1,959		8,302		191,973		200,275
Home equity lines of credit	725		119		—		844		47,286		48,130
Consumer	186		58		458		702		80,865		81,567
Deposit account overdrafts	—		—		—		—		2,201		2,201
Total	$	9,007	$	7,588	$	18,131	$	34,726	$	925,992	$	960,718

Credit Quality Indicators

As discussed in Note 1 of Peoples' 2010 Form 10-K, Peoples categorizes the majority of its loans into risk categories based upon an established risk grading matrix using a scale of 1 to 8. A description of the general characteristics of the risk grades used by Peoples is as follows:

“Pass” (grades 1 through 4): Loans in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan obligations. Loans in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the debt if required, for any weakness that may exist.

“Watch” (grade 5): Loans in this risk grade are the equivalent of the regulatory definition of “Other Assets Especially Mentioned” classification. Loans in this category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and /or reliance on the secondary source of repayment. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in Peoples' credit position.

“Substandard” (grade 6): Loans in this risk grade are inadequately protected by the borrower's current financial condition and payment capability or of the collateral pledged, if any. Loans so classified have one or more well-defined weaknesses that jeopardizes the orderly repayment of debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

“Doubtful” (grade 7): Loans in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimate loss is deferred until its more exact status may be determined.

“Loss” (grade 8): Loans in this risk grade are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Charge-offs against the allowance for loan losses are taken in the period in which the loan becomes uncollectible. Consequently, Peoples typically does not maintain a recorded investment in loans within this category.

Consumer loans and other smaller-balance loans are evaluated and categorized as “substandard”, “doubtful” or “loss” based upon the regulatory definition of these classes and consistent with regulatory requirements. All other loans not evaluated individually nor meeting the regulatory conditions to be categorized as describe above would be considered as being “not rated”.

The following table summarizes the risk category of Peoples' loan portfolio based upon the most recent analysis performed:



	Pass Rated		Watch		Substandard		Doubtful		Not		Total
(Dollars in thousands)	(Grades 1 - 4)		(Grade 5)		(Grade 6)		(Grade 7)		Rated		Loans
June 30, 2011
Commercial real estate	$	316,757	$	56,243	$	55,968	$	5	$	1,859	$	430,832
Commercial and industrial	102,192		16,785		8,261		—		21,016		148,254
Real estate construction	21,590		2,981		2,945		—		620		28,136
Residential real estate	4,044		2,308		7,223		40		182,813		196,428
Home equity lines of credit	1,028		521		1,372		—		44,863		47,784
Consumer	93		—		—		—		86,447		86,540
Deposit account overdrafts	—		—		—		—		2,145		2,145
Total	$	445,704	$	78,838	$	75,769	$	45	$	339,763	$	940,119
December 31, 2010
Commercial real estate	$	320,306	$	49,901	$	77,634	$	—	$	5,034	$	452,875
Commercial and industrial	122,874		6,325		9,427		247		14,319		153,192
Real estate construction	14,991		3,017		3,495		—		975		22,478
Residential real estate	5,186		2,135		8,031		—		184,923		200,275
Home equity lines of credit	283		339		2,106		—		45,402		48,130
Consumer	89		—		—		—		81,478		81,567
Deposit account overdrafts	—		—		—		—		2,201		2,201
Total	$	463,729	$	61,717	$	100,693	$	247	$	334,332	$	960,718

Impaired Loans

The following tables summarize loans classified as impaired:



	Unpaid		Recorded Investment				Total				Average		Interest
	Principal		With		Without		Recorded		Related		Recorded		Income
(Dollars in thousands)	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized
June 30, 2011
Commercial real estate	$	54,033	$	1,308	$	25,291	$	26,599	$	523	$	27,060	$	—
Commercial and industrial	2,188		1,318		—		1,318		772		1,433		—
Real estate construction	1,574		—		760		760		—		794		—
Residential real estate	1,115		—		662		662		—		555		—
Home equity lines of credit	424		—		275		275		—		353		—
Total	$	59,334	$	2,626	$	26,988	$	29,614	$	1,295	$	30,195	$	—
December 31, 2010
Commercial real estate	$	58,178	$	6,403	$	27,550	$	33,953	$	1,789	$	21,361	$	10
Commercial and industrial	2,333		1,086		729		1,815		572		1,713		5
Real estate construction	1,755		330		485		815		22		913		—
Residential real estate	1,170		631		506		1,137		320		867		9
Home equity lines of credit	522		520		—		520		254		535		—
Total	$	63,958	$	8,970	$	29,270	$	38,240	$	2,957	$	25,389	$	24

Allowance for Loan Losses

Changes in the allowance for loan losses in the periods ended June 30, were as follows:



(Dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Real Estate Construction			Home Equity Lines of Credit			Consumer			Deposit Account Overdrafts			Total
Balance, January 1, 2011	$	21,806		$	2,160		$	1,400		$	—		$	431		$	721		$	248		$	26,766
Charge-offs	(9,275		)	(937		)	(957		)	—			(330		)	(458		)	(293		)	(12,250		)
Recoveries	1,360			546			569			—			26			390			153			3,044
Net (charge-offs) recoveries	(7,915		)	(391		)	(388		)	—			(304		)	(68		)	(140		)	(9,206		)
Provision for loan losses	5,470			1,300			175			—			425			130			106			7,606
Balance, June 30, 2011	$	19,361		$	3,069		$	1,187		$	—		$	552		$	783		$	214		$	25,166

Period-end amount allocated to:
Loans individually evaluated for impairment	$	523		$	772		$	—		$	—		$	—		$	—		$	—		$	1,295
Loans collectively evaluated for impairment	18,838			2,297			1,187			—			552			783			214			23,871
Ending balance	$	19,361		$	3,069		$	1,187		$	—		$	552		$	783		$	214		$	25,166

Balance, January 1, 2010	$	22,125		$	1,586		$	1,619		$	—		$	528		$	1,074		$	325		$	27,257
Charge-offs	(11,098		)	(1,076		)	(346		)	(68		)	(19		)	(591		)	(453		)	(13,651		)
Recoveries	779			144			86			—			25			389			180			1,603
Net (charge-offs) recoveries	(10,319		)	(932		)	(260		)	(68		)	6			(202		)	(273		)	(12,048		)
Provision for loan losses	8,392			3,300			—			68			—			—			199			11,959
Balance, June 30, 2010	$	20,198		$	3,954		$	1,359		$	—		$	534		$	872		$	251		$	27,168

Period-end amount allocated to:
Loans individually evaluated for impairment	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Loans collectively evaluated for impairment	20,198			3,954			1,359			—			534			872			251			27,168
Ending balance	$	20,198		$	3,954		$	1,359		$	—		$	534		$	872		$	251		$	27,168