Regulatory Matters

The following is a summary of certain regulatory matters affecting Peoples and its subsidiaries:

Federal Reserve Requirements

Peoples Bank is required to maintain a minimum level of reserves, consisting of cash on hand and non-interest-bearing balances with the Federal Reserve Bank of Cleveland, based on the amount of deposit liabilities. Average required reserve balances were approximately $6.1 million and $6.2 million in 2011 and 2010, respectively.

Limits on Dividends

The primary source of funds for the dividends paid by Peoples is dividends received from Peoples Bank. The payment of dividends by Peoples Bank is subject to various banking regulations. The most restrictive provision requires regulatory approval if dividends declared in any calendar year exceed the total net profits of that year plus the retained net profits of the preceding two years. In 2011, Peoples Bank declared dividends in excess of its net profits for the year to provide funding for the repurchase of Series A Preferred Shares that occurred on December 28, 2011, as discussed in further detail in Note 11. As a result, Peoples Bank had no capacity to pay dividends without regulatory approval at December 31, 2011, since the aggregate dividends declared for the preceding three years exceeded the cumulative net profits for those years. The excess dividend amount will reduce the amount of Peoples Bank's dividend capacity during 2012.

Capital Requirements

Peoples and Peoples Bank are subject to various regulatory capital guidelines administered by the banking regulatory agencies. Under capital adequacy requirements and the regulatory framework for prompt corrective action, Peoples and its banking subsidiary must meet specific capital guidelines that involve quantitative measures of each entity's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Peoples' and Peoples Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet future minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a material effect on Peoples' financial results.

Quantitative measures established by regulation to ensure capital adequacy require Peoples and Peoples Bank to maintain minimum amounts and ratios of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Peoples and Peoples Bank met all capital adequacy requirements at December 31, 2011.

As of December 31, 2011, the most recent notifications from the banking regulatory agencies categorized Peoples and Peoples Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Peoples and Peoples Bank must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since these notifications that management believes have changed Peoples or Peoples Bank's category.

Peoples and Peoples Bank's actual capital amounts and ratios as of December 31 are also presented in the following table:



	December 31, 2011				December 31, 2010
(Dollars in thousands)	Amount		Ratio		Amount		Ratio
PEOPLES
Total Capital ⁽¹⁾
Actual	$	180,053	16.2	%	$	209,738	18.2	%
For capital adequacy	88,915		8.0	%	91,967		8.0	%
To be well capitalized	111,144		10.0	%	114,959		10.0	%
Tier 1 ⁽²⁾
Actual	$	165,121	14.9	%	$	194,407	16.9	%
For capital adequacy	44,458		4.0	%	45,983		4.0	%
To be well capitalized	66,687		6.0	%	68,975		6.0	%
Tier 1 Leverage ⁽³⁾
Actual	$	165,121	9.5	%	$	194,407	10.6	%
For capital adequacy	69,913		4.0	%	73,177		4.0	%
To be well capitalized	87,392		5.0	%	91,471		5.0	%
Net Risk-Weighted Assets	1,111,443				1,149,587
PEOPLES BANK
Total Capital ⁽¹⁾
Actual	$	166,622	15.1	%	$	177,793	15.6	%
For capital adequacy	88,546		8.0	%	91,412		8.0	%
To be well capitalized	110,682		10.0	%	114,265		10.0	%
Tier 1 ⁽²⁾
Actual	$	152,665	13.8	%	$	163,356	14.3	%
For capital adequacy	44,273		4.0	%	45,706		4.0	%
To be well capitalized	66,409		6.0	%	68,559		6.0	%
Tier 1 Leverage ⁽³⁾
Actual	$	152,665	8.8	%	$	163,356	9.0	%
For capital adequacy	69,277		4.0	%	72,391		4.0	%
To be well capitalized	86,596		5.0	%	90,488		5.0	%
Net Risk-Weighted Assets	$	1,106,824			$	1,142,652

(1) Ratio represents total capital to net risk-weighted assets
(2) Ratio represents Tier 1 capital to net risk-weighted assets
(3) Ratio represents Tier 1 capital to average assets

As more fully disclosed in Note 11, Peoples repurchased $21.0 million on February 2, 2011 and $18.0 million on December 28, 2011 of its Series A Preferred Shares held by the U.S. Treasury, resulting in a corresponding reduction in Peoples' Tier 1 and Total capital for regulatory purposes.