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:



(Dollars in thousands)	2011		2010
Commercial real estate	$	410,352	$	425,528
Commercial and industrial	140,857		153,713
Real estate construction	30,577		27,595
Residential real estate	219,619		219,833
Home equity lines of credit	47,790		48,525
Consumer	87,531		83,323
Deposit account overdrafts	1,780		2,201
Total loans	$	938,506	$	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:



(Dollars in thousands)	2011		2010
Commercial real estate	$	3,754	$	3,616
Commercial and industrial	109		200
Residential real estate	14,497		17,893
Consumer	101		123
Total outstanding balance	$	18,461	$	21,832
Net carrying amount	$	17,954	$	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 $184.8 million and $181.8 million at December 31, 2011 and December 31, 2010, respectively. Peoples also had pledged commercial loans to secure borrowings with the FRB. The outstanding balances of these loans totaled $124.0 million and $195.6 million at December 31, 2011 and December 31, 2010, respectively.

Related Party Loans

In the normal course of its business, Peoples Bank has granted loans to executive officers and directors of Peoples. Related party loans were made on substantially the same terms, including interest rates charged and collateral required, as those prevailing at the time for comparable loans with unrelated persons and did not involve more than normal risk of collectibility. At December 31, 2011, no related party loan was past due 90 or more days, renegotiated or on nonaccrual status. Activity in related party loans is presented in the table below. Other changes primarily consist of changes in related party status during the year.



(Dollars in thousands)
Balance, December 31, 2010	$	6,301
New loans and disbursements	5,468
Repayments	(4,040		)
Other changes	(207		)
Balance, December 31, 2011	$	7,522

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
(Dollars in thousands)	2011		2010		2011		2010
Commercial real estate	$	23,546	$	34,392	$	—	$	—
Commercial and industrial	2,262		1,714		—		—
Real estate construction	—		—		—		—
Residential real estate	3,865		3,790		—		27
Home equity lines of credit	349		554		—		—
Consumer	—		—		—		—
Total	$	30,022	$	40,450	$	—	$	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 of these loans 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
December 31, 2011
Commercial real estate	$	2,700	$	2,286	$	11,363	$	16,349	$	394,003	$	410,352
Commercial and industrial	230		360		37		627		140,230		140,857
Real estate construction	—		—		—		—		30,577		30,577
Residential real estate	5,750		1,187		3,082		10,019		209,600		219,619
Home equity lines of credit	206		—		349		555		47,235		47,790
Consumer	874		86		—		960		86,571		87,531
Deposit account overdrafts	66		—		—		66		1,714		1,780
Total	$	9,826	$	3,919	$	14,831	$	28,576	$	909,930	$	938,506
December 31, 2010
Commercial real estate	$	2,952	$	5,171	$	13,816	$	21,939	$	403,589	$	425,528
Commercial and industrial	563		12		247		822		152,891		153,713
Real estate construction	100		—		872		972		26,623		27,595
Residential real estate	4,481		2,229		2,739		9,449		210,384		219,833
Home equity lines of credit	186		58		458		702		47,823		48,525
Consumer	725		119		—		844		82,479		83,323
Deposit account overdrafts	—		—		—		—		2,201		2,201
Total	$	9,007	$	7,589	$	18,132	$	34,728	$	925,990	$	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 jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that Peoples 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
December 31, 2011
Commercial real estate	$	310,996	$	56,142	$	40,165	$	—	$	3,049	$	410,352
Commercial and industrial	100,987		10,157		15,104		—		14,609		140,857
Real estate construction	23,710		2,062		2,932		—		1,873		30,577
Residential real estate	28,507		7,125		5,885		20		178,082		219,619
Home equity lines of credit	1,491		1,394		42		—		44,863		47,790
Consumer	72		32		—		—		87,427		87,531
Deposit account overdrafts	—		—		—		—		1,780		1,780
Total	$	465,763	$	76,912	$	64,128	$	20	$	331,683	$	938,506
December 31, 2010
Commercial real estate	$	303,997	$	47,203	$	71,765	$	—	$	2,563	$	425,528
Commercial and industrial	123,612		6,340		9,446		247		14,068		153,713
Real estate construction	17,284		3,545		4,010		—		2,756		27,595
Residential real estate	19,326		4,144		10,035		—		186,328		219,833
Home equity lines of credit	284		340		2,108		—		45,793		48,525
Consumer	89		—		—		—		83,234		83,323
Deposit account overdrafts	—		—		—		—		2,201		2,201
Total	$	464,592	$	61,572	$	97,364	$	247	$	336,943	$	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
December 31, 2011
Commercial real estate	$	49,402	$	6,882	$	16,501	$	23,383	$	1,026	$	23,058	$	—
Commercial and industrial	2,290		1,801		420		2,221		407		1,098		—
Real estate construction	—		—		—		—		—		—		—
Residential real estate	3,901		323		2,226		2,549		49		2,081		—
Home equity lines of credit	420		—		269		269		—		332		—
Total	$	56,013	$	9,006	$	19,416	$	28,422	$	1,482	$	26,569	$	—
December 31, 2010
Commercial real estate	$	59,272	$	6,403	$	28,035	$	34,438	$	1,789	$	21,736	$	10
Commercial and industrial	2,333		1,086		729		1,815		572		1,713		5
Real estate construction	—		—		—		—		—		—		—
Residential real estate	1,831		961		506		1,467		342		1,405		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

Peoples' average recorded investment in impaired loans was $38.1 million in 2009, with interest income recognized on impaired loans of $19,000.

At December 31, 2011, Peoples' impaired loans shown in the table above included loans that were classified as TDRs. The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

In assessing whether or not a borrower is experiencing financial difficulties, Peoples considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor's projected cash flow is sufficient to satisfy contractual payments due under the original terms of the loan without a modification.

Peoples considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by Peoples include the debtor's ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by Peoples generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a temporary period of interest-only payments, and (iv) a reduction in the contractual payment amount for either a short period or remaining term of the loan.

The following table summarizes the loans that were modified as a TDR during the year ended December 31, 2011:



		Recorded Investment (1)
	Number of Contracts	Pre-Modification		Post-Modification		At December 31, 2011
Commercial Real Estate	5	$	3,169	$	3,169	$	2,959
(1) The amounts shown are inclusive of all partial paydowns and charge-offs. Loans modified in a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported.

All of these loans were identified as being impaired prior to January 1, 2011 and no portion of the debt was forgiven, thus, the determination of these loans being categorized as TDRs had no impact on the recorded values of these loans or the related allowance during the year ended December 31, 2011. Therefore, the Pre-Modification and Post-Modification recorded investment is the same amount. The concessions granted to the borrowers included either acceptance of interest only payments, a reduction to the monthly payments as part of a short-term forbearance period, or a modified interest rate from a floating rate to a fixed rate with principle and interest payments required instead of interest only payments.

The following table presents those loans modified in a TDR over the last twelve months that subsequently defaulted (i.e., 90 days or more past due following a modification) during the year ended December 31, 2011:



	Number of Contracts	Recorded Investment (1)	Impact on the Allowance for Loan Losses
Commercial Real Estate	2	675	—
Residential Real Estate	1	315	—
Total	3	990	—
(1) The amounts shown are inclusive of all partial paydowns and charge-offs. Loans modified in a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported.

Peoples' has no additional commitments to lend additional funds to any of the related debtors whose terms have been modified in a TDR.

Allowance for Loan Losses

Changes in the allowance for loan losses in the periods ended December 31, 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	(11,249		)	(1,033		)	(1,593		)	—			(366		)	(939		)	(664		)	(15,844		)
Recoveries	2,469			729			636			—			51			687			225			4,797
Net (charge-offs)	(8,780		)	(304		)	(957		)	—			(315		)	(252		)	(439		)	(11,047		)
Provision for loan losses	5,921			578			676			—			425			(20		)	418			7,998
Balance, December 31, 2011	$	18,947		$	2,434		$	1,119		$	—		$	541		$	449		$	227		$	23,717

Period-end amount allocated to:
Loans individually evaluated for impairment	$	1,026		$	407		$	49		$	—		$	—		$	—		$	—		$	1,482
Loans collectively evaluated for impairment	17,921			2,027			1,070			—			541			449			227			22,235
Ending balance	$	18,947		$	2,434		$	1,119		$	—		$	541		$	449		$	227		$	23,717
Balance, January 1, 2010	$	22,125		$	1,586		$	1,619		$	—		$	528		$	1,074		$	325		$	27,257
Charge-offs	(25,569		)	(1,281		)	(1,129		)	(68		)	(131		)	(1,074		)	(929		)	(30,181		)
Recoveries	1,323			220			225			—			34			671			301			2,774
Net (charge-offs)	(24,246		)	(1,061		)	(904		)	(68		)	(97		)	(403		)	(628		)	(27,407		)
Provision for loan losses	23,927			1,635			685			68			—			50			551			26,916
Balance, December 31, 2010	$	21,806		$	2,160		$	1,400		$	—		$	431		$	721		$	248		$	26,766

Period-end amount allocated to:
Loans individually evaluated for impairment	$	1,789		$	572		$	342		$	—		$	254		$	—		$	—		$	2,957
Loans collectively evaluated for impairment	20,017			1,588			1,058			—			177			721			248			23,809
Ending balance	$	21,806		$	2,160		$	1,400		$	—		$	431		$	721		$	248		$	26,766