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. The major classifications of loan balances, excluding loans held for sale, were as follows:



(Dollars in thousands)	2012		2011
Commercial real estate, construction	$	34,265	$	30,577
Commercial real estate, other	378,073		410,352
Commercial real estate	412,338		440,929
Commercial and industrial	180,131		140,857
Residential real estate	233,841		219,619
Home equity lines of credit	51,053		47,790
Consumer	101,246		87,531
Deposit account overdrafts	6,563		1,780
Total loans	$	985,172	$	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:



(Dollars in thousands)	2012		2011
Commercial real estate	$	2,145	$	3,754
Commercial and industrial	74		109
Residential real estate	12,873		14,497
Consumer	84		101
Total outstanding balance	$	15,176	$	18,461
Net carrying amount	$	14,700	$	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 $202.0 million and $184.8 million at December 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 $123.8 million and $124.0 million at December 31, 2012 and December 31, 2011, respectively.

Related Party Loans

In the normal course of its business, Peoples Bank has granted loans to certain directors and officers of Peoples, including their affiliates, families and entities in which they are principal owners. 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, 2012, 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, 2011	$	7,522
New loans and disbursements	3,292
Repayments	(3,806		)
Other changes	3
Balance, December 31, 2012	$	7,011

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)	2012		2011		2012		2011
Commercial real estate, construction	$	—	$	—	$	—	$	—
Commercial real estate, other	9,831		23,546		—		—
Commercial real estate	9,831		23,546		—		—
Commercial and industrial	627		2,262		181		—
Residential real estate	3,136		3,865		—		—
Home equity lines of credit	24		349		—		—
Consumer	20		—		4		—
Total	$	13,638	$	30,022	$	185	$	—

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, 2012
Commercial real estate, construction	$	—	$	77	$	—	$	77	$	34,188	$	34,265
Commercial real estate, other	11,382		705		5,144		17,231		360,842		378,073
Commercial real estate	11,382		782		5,144		17,308		395,030		412,338
Commercial and industrial	3,841		116		294		4,251		175,880		180,131
Residential real estate	4,640		1,049		2,019		7,708		226,133		233,841
Home equity lines of credit	274		25		24		323		50,730		51,053
Consumer	926		127		10		1,063		100,183		101,246
Deposit account overdrafts	55		—		—		55		6,508		6,563
Total	$	21,118	$	2,099	$	7,491	$	30,708	$	954,464	$	985,172
December 31, 2011
Commercial real estate, construction	$	—	$	—	$	—	$	—	$	30,577	$	30,577
Commercial real estate, other	2,700		2,286		11,363		16,349		394,003		410,352
Commercial real estate	2,700		2,286		11,363		16,349		424,580		440,929
Commercial and industrial	230		360		37		627		140,230		140,857
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, 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 described 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, 2012
Commercial real estate, construction	$	29,738	$	—	$	1,095	$	—	$	3,432	$	34,265
Commercial real estate, other	328,435		18,940		29,573		—		1,125		378,073
Commercial real estate	358,173		18,940		30,668		—		4,557		412,338
Commercial and industrial	150,180		21,566		7,054		—		1,331		180,131
Residential real estate	22,392		1,768		7,597		10		202,074		233,841
Home equity lines of credit	1,051		—		1,094		—		48,908		51,053
Consumer	66		—		47		—		101,133		101,246
Deposit account overdrafts	—		—		—		—		6,563		6,563
Total	$	531,862	$	42,274	$	46,460	$	10	$	364,566	$	985,172
December 31, 2011
Commercial real estate, construction	$	23,710	$	2,932	$	2,062	$	—	$	1,873	$	30,577
Commercial real estate, other	310,996		40,165		56,142		—		3,049		410,352
Commercial real estate	334,706		43,097		58,204		—		4,922		440,929
Commercial and industrial	113,391		18,636		6,625		—		2,205		140,857
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	$	478,167	$	64,688	$	76,352	$	20	$	319,279	$	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
December 31, 2012
Commercial real estate, construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate, other	19,023		2,785		7,053		9,838		1,262		11,048		—
Commercial real estate	19,023		$	2,785	$	7,053	$	9,838	$	1,262	$	11,048	$	—
Commercial and industrial	696		182		437		619		36		518		—
Residential real estate	3,943		418		3,063		3,481		123		2,014		149
Home equity lines of credit	349		—		349		349		—		140		17
Consumer	114		—		114		114		—		49		14
Total	$	24,125	$	3,385	$	11,016	$	14,401	$	1,421	$	13,769	$	180
December 31, 2011
Commercial real estate, construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate, other	49,402		6,882		16,501		23,383		1,026		23,058		—
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		—
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 December 31, 2012, Peoples' impaired loans shown in the table above included loans that were classified as troubled debt restructurings.

During 2012, in accordance with regulatory guidance regarding borrowers who were in Chapter 7 bankruptcy, Peoples identified $3.0 million of loans that were TDRs. The regulatory guidance requires loans to be accounted for as collateral-dependent loans when borrowers have filed Chapter 7 bankruptcy, the debt has been discharged and the borrower has not reaffirmed the debt, regardless of the delinquency status of the loan. The filing of bankruptcy by the borrower is evidence of financial difficulty and the discharge of the obligation by the bankruptcy court is deemed to be a concession granted to the borrower. The $3.0 million includes $2.7 million of loans that were accruing as of December 31, 2012 since Peoples expects to collect all principal and interest payments.

The following table summarizes the loans that were modified as a TDR during the years ended December 31, 2012 and 2011.



		Recorded Investment (1)							Recorded Investment (1)
	Number of Contracts	Pre-Modification		Post-Modification		At December 31, 2012		Number of Contracts	Pre-Modification		Post-Modification		At December 31, 2011
Commercial real estate, construction	—	$	—	$	—	$	—	—	$	—	$	—	$	—
Commercial real estate, other	4	$	1,765	$	1,765	$	1,734	5	$	3,169	$	3,169	$	2,959
Commercial real estate	4	$	1,765	$	1,765	$	1,734	5	$	3,169	$	3,169	$	2,959
Residential real estate	66	$	2,550	$	2,550	$	2,550	—	$	—	$	—	$	—
Home equity lines of credit	24	$	349	$	349	$	349	—	$	—	$	—	$	—
Consumer	37	$	115	$	115	$	115	—	$	—	$	—	$	—


(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.

The following table presents those loans modified in a TDR during the year that subsequently defaulted (i.e., 90 days or more past due following a modification) during the years ended December 31, 2012 and 2011:



	2012			2011
	Number of Contracts	Recorded Investment (1)	Impact on the Allowance for Loan Losses	Number of Contracts	Recorded Investment (1)	Impact on the Allowance for Loan Losses
Commercial Real Estate	—	—	—	2	675	—
Residential Real Estate	1	26	—	1	315	—
Total	1	26	—	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 had approximately $4,000 of additional commitments to lend additional funds to 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			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	(5,146		)	(34		)	(1,091		)	(94		)	(572		)	(574		)	(7,511		)
Recoveries	4,399			358			773			32			561			198			6,321
Net (charge-offs) recoveries	(747		)	324			(318		)	(62		)	(11		)	(376		)	(1,190		)
(Recovery of) provision for loan losses	(3,985		)	(1,025		)	—			—			—			294			(4,716		)
Balance, December 31, 2012	$	14,215		$	1,733		$	801		$	479		$	438		$	145		$	17,811

Period-end amount allocated to:
Loans individually evaluated for impairment	$	1,262		$	36		$	123		$	—		$	—		$	—		$	1,421
Loans collectively evaluated for impairment	12,953			1,697			678			479			438			145			16,390
Ending balance	$	14,215		$	1,733		$	801		$	479		$	438		$	145		$	17,811

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 (recovery of) 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