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)	March 31, 2013		December 31, 2012
Commercial real estate, construction	$	24,108	$	34,265
Commercial real estate, other	381,331		378,073
Commercial real estate	405,439		412,338
Commercial and industrial	174,982		180,131
Residential real estate	237,193		233,841
Home equity lines of credit	50,555		51,053
Consumer	108,353		101,246
Deposit account overdrafts	3,996		6,563
Total loans	$	980,518	$	985,172

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)	March 31, 2013		December 31, 2012
Commercial real estate	$	2,055	$	2,145
Commercial and industrial	64		74
Residential real estate	12,489		12,873
Consumer	62		84
Total outstanding balance	$	14,670	$	15,176
Net carrying amount	$	14,193	$	14,700

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 $203.1 million and $202.0 million at March 31, 2013 and December 31, 2012, respectively. Peoples also had pledged commercial loans to secure borrowings with the FRB. The outstanding balances of these loans totaled $159.8 million and $123.8 million at March 31, 2013 and December 31, 2012, 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
(Dollars in thousands)	March 31, 2013		December 31, 2012		March 31, 2013		December 31, 2012
Commercial real estate, construction	$	—	$	—	$	—	$	—
Commercial real estate, other	7,947		9,831		—		—
Commercial real estate	7,947		9,831		—		—
Commercial and industrial	327		627		—		181
Residential real estate	3,442		3,136		—		—
Home equity lines of credit	78		24		—		—
Consumer	9		20		3		4
Total	$	11,803	$	13,638	$	3	$	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
March 31, 2013
Commercial real estate, construction	$	—	$	—	$	—	$	—	$	24,108	$	24,108
Commercial real estate, other	4,320		237		4,481		9,038		372,293		381,331
Commercial real estate	4,320		237		4,481		9,038		396,401		405,439
Commercial and industrial	110		129		287		526		174,456		174,982
Residential real estate	2,126		238		1,685		4,049		233,144		237,193
Home equity lines of credit	82		49		9		140		50,415		50,555
Consumer	279		197		3		479		107,874		108,353
Deposit account overdrafts	46		—		—		46		3,950		3,996
Total	$	6,963	$	850	$	6,465	$	14,278	$	966,240	$	980,518
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

Credit Quality Indicators

As discussed in Note 1 of the Notes to the Consolidated Financial Statements included in Peoples' 2012 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 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
March 31, 2013
Commercial real estate, construction	$	18,858	$	1,013	$	73	$	—	$	4,164	$	24,108
Commercial real estate, other	342,106		13,638		24,723		—		864		381,331
Commercial real estate	360,964		14,651		24,796		—		5,028		405,439
Commercial and industrial	149,932		9,079		14,637		—		1,334		174,982
Residential real estate	22,186		1,835		7,412		5		205,755		237,193
Home equity lines of credit	1,018		—		1,090		—		48,447		50,555
Consumer	71		—		41		—		108,241		108,353
Deposit account overdrafts	—		—		—		—		3,996		3,996
Total	$	534,171	$	25,565	$	47,976	$	5	$	372,801	$	980,518
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

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, 2013
Commercial real estate, construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate, other	16,460		3,458		4,448		7,906		1,226		7,970		—
Commercial real estate	16,460		$	3,458	$	4,448	$	7,906	$	1,226	$	7,970	$	—
Commercial and industrial	696		315		—		315		315		467		—
Residential real estate	3,844		267		3,052		3,319		77		3,279		33
Home equity lines of credit	357		—		357		357		—		348		4
Consumer	162		—		162		162		—		134		4
Total	$	21,519	$	4,040	$	8,019	$	12,059	$	1,618	$	12,198	$	41
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

At March 31, 2013, Peoples' impaired loans shown in the table above included loans that were classified as troubled debt restructurings.

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 insufficient 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.

During 2013, in accordance with regulatory guidance regarding borrowers who were in Chapter 7 bankruptcy, Peoples identified $274,000 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 $274,000 of loans were accruing as of March 31, 2013 since Peoples expects to collect all principal and interest payments.

The following table summarizes the loans that were modified as a TDR during the three months ended March 31, 2013. There were no loans modified as a TDR during the three months ended March 31, 2012.



		Recorded Investment (1)
	Number of Contracts	Pre-Modification		Post-Modification		At March 31, 2013
Residential real estate	6	$	180	$	180	$	180
Home equity lines of credit	1	$	25	$	25	$	25
Consumer	10	$	69	$	69	$	69


(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 for the three months ended March 31, 2012 that were modified as a TDR during the year that subsequently defaulted (i.e., 90 days or more past due following a modification). There were no such loans during the three months ended March 31, 2013.



	March 31, 2012
	Number of Contracts	Recorded Investment (1)	Impact on the Allowance for Loan Losses
Commercial real estate, other	3	1,232	—
Total	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 had no 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 March 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, 2013	$	14,215		$	1,733		$	801		$	479		$	438		$	145		$	17,811
Charge-offs	(566		)	—			(134		)	(2		)	(159		)	(130		)	(991		)
Recoveries	1,374			17			116			8			104			65			1,684
Net recoveries (charge-offs)	808			17			(18		)	6			(55		)	(65		)	693
Recovery of loan losses	(1,050		)	—			—			—			—			(15		)	(1,065		)
Balance, March 31, 2013	$	13,973		$	1,750		$	783		$	485		$	383		$	65		$	17,439

Period-end amount allocated to:
Loans individually evaluated for impairment	$	1,226		$	315		$	77		$	—		$	—		$	—		$	1,618
Loans collectively evaluated for impairment	12,747			1,435			706			485			383			65			15,821
Ending balance	$	13,973		$	1,750		$	783		$	485		$	383		$	65		$	17,439

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) recoveries	(351		)	48			97			(64		)	(26		)	(35		)	(331		)
Recovery of 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