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:



	March 31,		December 31,
(Dollars in thousands)	2012		2011
Commercial real estate	$	394,034	$	410,352
Commercial and industrial	150,431		140,857
Real estate construction	43,510		30,577
Residential real estate	218,745		219,619
Home equity lines of credit	48,067		47,790
Consumer	86,965		87,531
Deposit account overdrafts	2,351		1,780
Total loans	$	944,103	$	938,506

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:



	March 31,		December 31,
(Dollars in thousands)	2012		2011
Commercial real estate	$	3,222	$	3,754
Commercial and industrial	151		109
Residential real estate	13,893		14,497
Consumer	92		101
Total outstanding balance	$	17,358	$	18,461
Net carrying amount	$	16,851	$	17,954

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 $184.0 million and $184.8 million at March 31, 2012 and December 31, 2011, respectively. Peoples also had pledged commercial loans to secure borrowings with the FRB. The outstanding balances of these loans totaled $162.3 million and $124.0 million at March 31, 2012 and December 31, 2011, 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
	March 31,		December 31,		March 31,		December 31,
(Dollars in thousands)	2012		2011		2012		2011
Commercial real estate	$	14,208	$	23,546	$	—	$	—
Commercial and industrial	1,949		2,262		—		—
Real estate construction	—		—		—		—
Residential real estate	4,135		3,865		—		—
Home equity lines of credit	200		349		—		—
Consumer	—		—		—		—
Total	$	20,492	$	30,022	$	—	$	—

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
March 31, 2012
Commercial real estate	$	1,418	$	5,067	$	7,146	$	13,631	$	380,403	$	394,034
Commercial and industrial	211		295		36		542		149,889		150,431
Real estate construction	—		—		—		—		43,510		43,510
Residential real estate	2,731		732		3,544		7,007		211,738		218,745
Home equity lines of credit	80		6		200		286		47,781		48,067
Consumer	378		30		—		408		86,557		86,965
Deposit account overdrafts	33		—		—		33		2,318		2,351
Total	$	4,851	$	6,130	$	10,926	$	21,907	$	922,196	$	944,103
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

Credit Quality Indicators

As discussed in Note 1 of Peoples' 2011 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
March 31, 2012
Commercial real estate	$	313,376	$	32,847	$	47,083	$	—	$	728	$	394,034
Commercial and industrial	113,420		12,870		5,879		—		18,262		150,431
Real estate construction	37,520		2,915		2,120		—		955		43,510
Residential real estate	27,909		2,380		9,238		8		179,210		218,745
Home equity lines of credit	1,486		42		1,324		—		45,215		48,067
Consumer	86		—		27		—		86,852		86,965
Deposit account overdrafts	—		—		—		—		2,351		2,351
Total	$	493,797	$	51,054	$	65,671	$	8	$	333,573	$	944,103
December 31, 2011
Commercial real estate	$	310,996	$	40,165	$	56,142	$	—	$	3,049	$	410,352
Commercial and industrial	100,987		18,636		6,625		—		14,609		140,857
Real estate construction	23,710		2,932		2,062		—		1,873		30,577
Residential real estate	28,507		2,913		10,097		20		178,082		219,619
Home equity lines of credit	1,491		42		1,394		—		44,863		47,790
Consumer	72		—		32		—		87,427		87,531
Deposit account overdrafts	—		—		—		—		1,780		1,780
Total	$	465,763	$	64,688	$	76,352	$	20	$	331,683	$	938,506

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
March 31, 2012
Commercial real estate	$	27,802	$	2,461	$	12,117	$	14,578	$	587	$	18,980	$	—
Commercial and industrial	2,006		—		1,909		1,909		—		2,065		—
Real estate construction	—		—		—		—		—		—		—
Residential real estate	3,443		1,227		1,263		2,490		350		2,520		—
Home equity lines of credit	420		—		200		200		—		234		—
Total	$	33,671	$	3,688	$	15,489	$	19,177	$	937	$	23,799	$	—
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	$	—

At March 31, 2012, Peoples' impaired loans shown in the table above included loans that were classified as troubled debt restructurings ("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 the 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 the remaining term of the loan.

There were no loans that were modified as a TDR during the three months ended March 31, 2012 and March 31, 2011.

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 three months ended March 31, 2012:



	Number of Contracts	Recorded Investment (1)		Impact on the Allowance for Loan Losses
Commercial Real Estate	3	$	1,232	$	—
(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 March 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, 2012	$	18,947		$	2,434		$	1,119		$	—	$	541		$	449		$	227		$	23,717
Charge-offs	(1,957		)	—			(207		)	—		(71		)	(214		)	(122		)	(2,571		)
Recoveries	1,606			48			304			—		7			188			87			2,240
Net (charge-offs)	(351		)	48			97			—		(64		)	(26		)	(35		)	(331		)
Provision for loan losses	(1,100		)	(1,025		)	—			—		—			—			(12		)	(2,137		)
Balance, March 31, 2012	$	17,496		$	1,457		$	1,216		$	—	$	477		$	423		$	180		$	21,249

Period-end amount allocated to:
Loans individually evaluated for impairment	$	587		$	—		$	350		$	—	$	—		$	—		$	—		$	937
Loans collectively evaluated for impairment	16,909			1,457			866			—		477			423			180			20,312
Ending balance	$	17,496		$	1,457		$	1,216		$	—	$	477		$	423		$	180		$	21,249

Balance, January 1, 2011	$	21,806		$	2,160		$	1,400		$	—	$	431		$	721		$	248		$	26,766
Charge-offs	(7,078		)	(835		)	(201		)	—		(247		)	(283		)	(136		)	(8,780		)
Recoveries	315			59			443			—		10			222			103			1,152
Net (charge-offs)	(6,763		)	(776		)	242			—		(237		)	(61		)	(33		)	(7,628		)
Provision for loan losses	4,570			350			—			—		250			130			11			5,311
Balance, March 31, 2011	$	19,613		$	1,734		$	1,642		$	—	$	444		$	790		$	226		$	24,449

Period-end amount allocated to:
Loans individually evaluated for impairment	$	739		$	163		$	—		$	—	$	85		$	—		$	—		$	987
Loans collectively evaluated for impairment	18,874			1,571			1,642			—		359			790			226			23,462
Ending balance	$	19,613		$	1,734		$	1,642		$	—	$	444		$	790		$	226		$	24,449