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, northeastern 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)	2013		2012
Commercial real estate, construction	$	47,539	$	34,265
Commercial real estate, other	450,170		378,073
Commercial real estate	497,709		412,338
Commercial and industrial	232,754		180,131
Residential real estate	268,617		233,841
Home equity lines of credit	60,076		51,053
Consumer	135,018		101,246
Deposit account overdrafts	2,060		6,563
Total loans	$	1,196,234	$	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, commonly referred to as "purchase credit impaired" loans. During 2013, Peoples determined that some loans which had originally been classified as purchased credit impaired did not have evidence of deterioration of credit quality on acquisition. As a result, the carrying amounts of loans considered purchased credit impaired have decreased and amounts reported in the following table are reflective of this change. The carrying amounts of these loans included in the loan balances above are summarized as follows:



(Dollars in thousands)	2013		2012
Commercial real estate	$	963	$	39
Commercial and industrial	78		—
Residential real estate	1,236		1,524
Consumer	—		8
Total outstanding balance	$	2,277	$	1,571
Net carrying amount	$	1,875	$	1,095

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 $259.1 million and $202.0 million at December 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 $113.0 million and $123.8 million at December 31, 2013 and December 31, 2012, 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, 2013, 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:



(Dollars in thousands)
Balance, December 31, 2012	$	7,011
New loans and disbursements	11,433
Repayments	(7,085		)
Balance, December 31, 2013	$	11,359

Nonaccrual and Past Due Loans

The recorded investments in loans on nonaccrual status and accruing loans delinquent for 90 days or more were as follows:



					Accruing Loans 90+ Days Past Due
	Nonaccrual Loans				Accruing Loans 90+ Days Past Due
(Dollars in thousands)	2013		2012		2013		2012
Commercial real estate, construction	$	96	$	—	$	—	$	—
Commercial real estate, other	3,717		9,831		—		—
Commercial real estate	3,813		9,831		—		—
Commercial and industrial	708		627		—		181
Residential real estate	3,215		3,136		37		—
Home equity lines of credit	87		24		873		1,050
Consumer	58		20		—		4
Total	$	7,881	$	13,638	$	910	$	1,235

The following table presents the aging of the recorded investment in past due loans and leases:



	Loans Past Due								Current Loans		Total Loans
(Dollars in thousands)	30 - 59 days		60 - 89 days		90 + Days		Total
December 31, 2013
Commercial real estate, construction	$	1,340	$	—	$	—	$	1,340	$	46,199	$	47,539
Commercial real estate, other	432		679		1,249		2,360		447,810		450,170
Commercial real estate	1,772		679		1,249		3,700		494,009		497,709
Commercial and industrial	171		90		127		388		232,366		232,754
Residential real estate	5,445		1,509		1,452		8,406		260,211		268,617
Home equity lines of credit	254		65		929		1,248		58,828		60,076
Consumer	976		165		58		1,199		133,819		135,018
Deposit account overdrafts	47		—		—		47		2,013		2,060
Total	$	8,665	$	2,508	$	3,815	$	14,988	$	1,181,246	$	1,196,234
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	390		65		1,074		1,529		49,524		51,053
Consumer	926		127		10		1,063		100,183		101,246
Deposit account overdrafts	55		—		—		55		6,508		6,563
Total	$	21,234	$	2,139	$	8,541	$	31,914	$	953,258	$	985,172

During 2013, Peoples identified certain home equity lines of credit that had matured and were not sent notices that the principal was due. The majority of the borrowers continued to make required payments past maturity and had not defaulted. These loans should have been reported as past due since the principal was contractually due during a previous period. The total balance of these loans was $0.8 million at December 31, 2013, $1.2 million and $0.8 million at December 31, 2012 and 2011, respectively. Peoples has mailed letters to these customers, informing of the amount of principal due. Peoples has adjusted prior period amounts reported to appropriately reflect the payment status of these loans, and expects the impact of these loans on past due balances to decrease significantly during the first quarter of 2014.

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 by 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 Rated		Total Loans
(Dollars in thousands)	(Grades 1 - 4)		(Grade 5)		(Grade 6)		(Grade 7)
December 31, 2013
Commercial real estate, construction	$	43,407	$	148	$	68	$	—	$	3,916	$	47,539
Commercial real estate, other	423,313		13,433		12,921		—		503		450,170
Commercial real estate	466,720		13,581		12,989		—		4,419		497,709
Commercial and industrial	212,193		6,013		14,006		542		—		232,754
Residential real estate	26,822		2,787		8,094		4		230,910		268,617
Home equity lines of credit	844		—		1,014		—		58,218		60,076
Consumer	50		5		24		—		134,939		135,018
Deposit account overdrafts	—		—		—		—		2,060		2,060
Total	$	706,629	$	22,386	$	36,127	$	546	$	430,546	$	1,196,234
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 Principal Balance		Recorded Investment				Total Recorded Investment				Average Recorded Investment		Interest Income Recognized
			With		Without				Related Allowance
(Dollars in thousands)			Allowance		Allowance				Related Allowance
December 31, 2013
Commercial real estate, construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate, other	4,970		1,150		1,729		2,879		83		4,586		6
Commercial real estate	4,970		$	1,150	$	1,729	$	2,879	$	83	$	4,586	$	6
Commercial and industrial	617		575		5		580		575		278		1
Residential real estate	3,498		—		3,280		3,280		—		2,800		86
Home equity lines of credit	347		—		347		347		—		327		12
Consumer	182		—		182		182		—		127		15
Total	$	9,614	$	1,725	$	5,543	$	7,268	$	658	$	8,118	$	120
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 December 31, 2013, Peoples' impaired loans shown in the table above included loans that were classified as troubled debt restructurings.

The following table summarizes the loans that were modified as a TDR during the years ended December 31, 2013 and 2012.



		Recorded Investment (1)							Recorded Investment (1)
	Number of Contracts	Pre-Modification		Post-Modification		At December 31, 2013		Number of Contracts	Pre-Modification		Post-Modification		At December 31, 2012
Commercial real estate, other	2	$	486	$	486	$	461	4	$	1,765	$	1,765	$	1,734
Commercial and industrial	1	$	5	$	5	$	5	—	$	—	$	—	$	—
Residential real estate	23	$	1,216	$	1,219	$	1,020	66	$	2,550	$	2,550	$	2,550
Home equity lines of credit	5	$	89	$	89	$	88	24	$	349	$	349	$	349
Consumer	37	$	279	$	279	$	142	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, 2013 and 2012:



	2013					2012
	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
Residential real estate	2	$	63	$	—	1	$	26	$	—
Home equity lines of credit	1	6		—		—	—		—
Total	3	$	69	$	—	1	$	26	$	—
(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 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, 2013	$	14,215		$	1,733		$	801		$	479		$	438		$	145		$	17,811
Charge-offs	(1,053		)	(44		)	(621		)	(162		)	(1,084		)	(527		)	(3,491		)
Recoveries	5,839			40			536			26			552			162			7,155
Net recoveries (charge-offs)	4,786			(4		)	(85		)	(136		)	(532		)	(365		)	3,664
(Recovery of) provision for loan losses	(5,786		)	445			165			—			410			356			(4,410		)
Balance, December 31, 2013	$	13,215		$	2,174		$	881		$	343		$	316		$	136		$	17,065

Period-end amount allocated to:
Loans individually evaluated for impairment	$	83		$	575		$	—		$	—		$	—		$	—		$	658
Loans collectively evaluated for impairment	13,132			1,599			881			343			316			136			16,407
Ending balance	$	13,215		$	2,174		$	881		$	343		$	316		$	136		$	17,065

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