Loans

Peoples' loan portfolio consists of various types of loans originated primarily as a result of lending opportunities within Peoples' primary market areas of northeastern, central and southeastern Ohio, west central West Virginia, and northeastern Kentucky. Acquired loans consist of loans purchased in 2012 or thereafter in a business combination. The major classifications of loan balances, excluding loans held for sale, were as follows at December 31:



(Dollars in thousands)	2014		2013
Originated loans:
Commercial real estate, construction	$	37,901	$	44,703
Commercial real estate, other	434,660		394,532
Commercial real estate	472,561		439,235
Commercial and industrial	249,975		206,276
Residential real estate	254,169		248,883
Home equity lines of credit	62,463		55,178
Consumer	169,913		133,864
Deposit account overdrafts	2,933		2,060
Total originated loans	$	1,212,014	$	1,085,496
Acquired loans:
Commercial real estate, construction	$	1,051	$	2,836
Commercial real estate, other	121,475		55,638
Commercial real estate	122,526		58,474
Commercial and industrial	30,056		26,478
Residential real estate	225,274		19,734
Home equity lines of credit	18,232		4,898
Consumer	12,796		1,154
Total acquired loans	$	408,884	$	110,738
Total loans	$	1,620,898	$	1,196,234

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. The carrying amounts of these loans included in the loan balances above are summarized as follows at December 31:



(Dollars in thousands)	2014		2013
Commercial real estate	$	7,762	$	963
Commercial and industrial	1,041		78
Residential real estate	15,183		1,236
Consumer	306		—
Total outstanding balance	$	24,292	$	2,277
Net carrying amount	$	19,067	$	1,875

Changes in the accretable yield for acquired purchased credit impaired loans the year ended December 31, 2014 were as follows:



(Dollars in thousands)	Accretable Yield
Balance, December 31, 2013	$	103
Additions:
Reclassification from nonaccretable to accretable	402
Midwest Bancshares, Inc.	750
Ohio Heritage Bancorp, Inc.	1,485
North Akron Savings Bank	813
Accretion	(381		)
Balance, December 31, 2014	$	3,172

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 $457.1 million and $259.1 million at December 31, 2014 and 2013, respectively. Peoples also had pledged commercial loans to secure borrowings with the FRB. The outstanding balances of these loans totaled $150.7 million and $113.0 million at December 31, 2014 and 2013, respectively.

Related Party Loans

In the normal course of its business, Peoples Bank has granted loans to certain directors and officers, 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 collectability. At December 31, 2014, 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, 2013	$	11,359
New loans and disbursements	11,139
Repayments	(7,940		)
Other changes	(560		)
Balance, December 31, 2014	$	13,998

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 at December 31:



					Accruing Loans 90+ Days Past Due
	Nonaccrual Loans				Accruing Loans 90+ Days Past Due
(Dollars in thousands)	2014		2013		2014		2013
Originated loans:
Commercial real estate, construction	$	—	$	—	$	—	$	—
Commercial real estate, other	2,575		2,798		—		—
Commercial real estate	2,575		2,798		—		—
Commercial and industrial	1,286		630		—		—
Residential real estate	3,049		2,161		818		199
Home equity lines of credit	341		87		20		873
Consumer	19		58		2		—
Total originated loans	$	7,270	$	5,734	$	840	$	1,072
Acquired loans:
Commercial real estate, construction	$	96	$	96	$	—	$	—
Commercial real estate, other	9		—		567		—
Commercial real estate	105		96		567		—
Commercial and industrial	708		—		301		78
Residential real estate	304		104		1,083		90
Home equity lines of credit	19		—		—		—
Consumer	—		—		8		—
Total acquired loans	$	1,136	$	200	$	1,959	$	168
Total loans	$	8,406	$	5,934	$	2,799	$	1,240

The following table presents the aging of the recorded investment in past due loans and leases at December 31:



	Loans Past Due								Current Loans		Total Loans
(Dollars in thousands)	30 - 59 days		60 - 89 days		90 + Days		Total
2014
Originated loans:
Commercial real estate, construction	$	—	$	—	$	—	$	—	$	37,901	$	37,901
Commercial real estate, other	565		285		1,220		2,070		432,590		434,660
Commercial real estate	565		285		1,220		2,070		470,491		472,561
Commercial and industrial	17		18		1,245		1,280		248,695		249,975
Residential real estate	4,502		1,062		1,902		7,466		246,703		254,169
Home equity lines of credit	344		425		129		898		61,565		62,463
Consumer	1,136		157		2		1,295		168,618		169,913
Deposit account overdrafts	65		—		—		65		2,868		2,933
Total originated loans	$	6,629	$	1,947	$	4,498	$	13,074	$	1,198,940	$	1,212,014
Acquired loans:
Commercial real estate, construction	$	—	$	—	$	96	$	96	$	955	$	1,051
Commercial real estate, other	1,067		143		567		1,777		119,698		121,475
Commercial real estate	1,067		143		663		1,873		120,653		122,526
Commercial and industrial	46		6		815		867		29,189		30,056
Residential real estate	4,026		1,331		1,179		6,536		218,738		225,274
Home equity lines of credit	9		19		—		28		18,204		18,232
Consumer	245		27		8		280		12,516		12,796
Total acquired loans	$	5,393	$	1,526	$	2,665	$	9,584	$	399,300	$	408,884
Total loans	$	12,022	$	3,473	$	7,163	$	22,658	$	1,598,240	$	1,620,898
2013
Originated loans:
Commercial real estate, construction	$	1,066	$	—	$	—	$	1,066	$	43,637	$	44,703
Commercial real estate, other	432		—		1,249		1,681		392,851		394,532
Commercial real estate	1,498		—		1,249		2,747		436,488		439,235
Commercial and industrial	171		17		49		237		206,039		206,276
Residential real estate	4,584		1,140		1,258		6,982		241,901		248,883
Home equity lines of credit	254		65		929		1,248		53,930		55,178
Consumer	919		153		58		1,130		132,734		133,864
Deposit account overdrafts	47		—		—		47		2,013		2,060
Total originated loans	$	7,473	$	1,375	$	3,543	$	12,391	$	1,073,105	$	1,085,496
Acquired loans:
Commercial real estate, construction	$	274	$	—	$	—	$	274	$	2,562	$	2,836
Commercial real estate, other	—		679		—		679		54,959		55,638
Commercial real estate	274		679		—		953		57,521		58,474
Commercial and industrial	—		73		78		151		26,327		26,478
Residential real estate	861		369		194		1,424		18,310		19,734
Home equity lines of credit	—		—		—		—		4,898		4,898
Consumer	57		12		—		69		1,085		1,154
Total acquired loans	$	1,192	$	1,133	$	272	$	2,597	$	108,141	$	110,738
Total loans	$	8,665	$	2,508	$	3,815	$	14,988	$	1,181,246	$	1,196,234

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 loan 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 loan 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 the loan. 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 each such 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 at December 31:



	Pass Rated		Watch		Substandard		Doubtful		Not Rated		Total Loans
(Dollars in thousands)	(Grades 1 - 4)		(Grade 5)		(Grade 6)		(Grade 7)
2014
Originated loans:
Commercial real estate, construction	$	37,637	$	—	$	—	$	—	$	264	$	37,901
Commercial real estate, other	405,224		12,316		17,120		—		—		434,660
Commercial real estate	442,861		12,316		17,120		—		264		472,561
Commercial and industrial	239,168		8,122		2,684		1		—		249,975
Residential real estate	21,296		1,195		11,601		56		220,021		254,169
Home equity lines of credit	767		—		965		—		60,731		62,463
Consumer	60		1		8		—		169,844		169,913
Deposit account overdrafts	—		—		—		—		2,933		2,933
Total originated loans	$	704,152	$	21,634	$	32,378	$	57	$	453,793	$	1,212,014
Acquired loans:
Commercial real estate, construction	$	955	$	—	$	—	$	—	$	96	$	1,051
Commercial real estate, other	106,115		7,100		8,260		—		—		121,475
Commercial real estate	107,070		7,100		8,260		—		96		122,526
Commercial and industrial	27,313		255		2,294		194		—		30,056
Residential real estate	13,458		833		1,540		—		209,443		225,274
Home equity lines of credit	98		—		—		—		18,134		18,232
Consumer	279		—		—		—		12,517		12,796
Total acquired loans	$	148,218	$	8,188	$	12,094	$	194	$	240,190	$	408,884
Total loans	$	852,370	$	29,822	$	44,472	$	251	$	693,983	$	1,620,898
2013
Originated loans:
Commercial real estate, construction	$	43,048	$	—	$	68	$	—	$	1,587	$	44,703
Commercial real estate, other	370,812		11,918		11,299		—		503		394,532
Commercial real estate	413,860		11,918		11,367		—		2,090		439,235
Commercial and industrial	187,025		5,203		13,506		542		—		206,276
Residential real estate	24,198		1,497		8,094		4		215,090		248,883
Home equity lines of credit	844		—		1,014		—		53,320		55,178
Consumer	50		5		24		—		133,785		133,864
Deposit account overdrafts	—		—		—		—		2,060		2,060
Total originated loans	$	625,977	$	18,623	$	34,005	$	546	$	406,345	$	1,085,496
Acquired loans:
Commercial real estate, construction	$	359	$	148	$	—	$	—	$	2,329	$	2,836
Commercial real estate, other	52,501		1,515		1,622		—		—		55,638
Commercial real estate	52,860		1,663		1,622		—		2,329		58,474
Commercial and industrial	25,168		810		500		—		—		26,478
Residential real estate	2,624		1,290		—		—		15,820		19,734
Home equity lines of credit	—		—		—		—		4,898		4,898
Consumer	—		—		—		—		1,154		1,154
Total acquired loans	$	80,652	$	3,763	$	2,122	$	—	$	24,201	$	110,738
Total loans	$	706,629	$	22,386	$	36,127	$	546	$	430,546	$	1,196,234

Impaired Loans

The following tables summarize loans classified as impaired at December 31:



	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
2014
Commercial real estate, construction	$	101	$	—	$	96	$	96	$	—	$	57	$	6
Commercial real estate, other	2,074		653		1,148		1,801		189		1,632		7
Commercial real estate	2,175		$	653	$	1,244	$	1,897	$	189	$	1,689	$	13
Commercial and industrial	2,379		1,945		399		2,344		816		493		5
Residential real estate	6,889		53		6,372		6,425		9		3,543		272
Home equity lines of credit	500		—		498		498		—		298		18
Consumer	155		—		150		150		—		109		11
Total	$	12,098	$	2,651	$	8,663	$	11,314	$	1,014	$	6,132	$	319
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

At December 31, 2014, 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, 2014 and 2013.



		Recorded Investment (1)							Recorded Investment (1)
	Number of Contracts	Pre-Modification		Post-Modification		At December 31, 2014		Number of Contracts	Pre-Modification		Post-Modification		At December 31, 2013
Originated loans:
Commercial real estate, other	—	$	—	$	—	$	—	2	$	486	$	486	$	461
Commercial and industrial	—	—		—		—		1	5		5		5
Residential real estate	22	996		997		967		21	1,109		1,112		913
Home equity lines of credit	12	238		238		232		5	89		89		88
Consumer	10	$	108	$	108	$	102	37	$	279	$	279	$	142
Acquired loans:
Commercial real estate, construction	1	$	96	$	96	$	96	—	$	—	$	—	$	—
Commercial and industrial	3	605		605		594		—	—		—		—
Residential real estate	4	235		235		234		2	107		107		107
Consumer	5	$	9	$	9	$	6	—	$	—	$	—	$	—
(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, 2014 and 2013:



	2014					2013
	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
Originated loans:
Residential real estate	1	$	33	$	—	2	$	63	$	—
Home equity lines of credit	2	28		—		1	6		—
Total	3	$	61	$	—	3	$	69	$	—
Acquired loans:
Residential real estate	1	$	56	$	—	—	$	—	$	—
Total	1	$	56	$	—	—	$	—	$	—
(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 $40,000 of additional commitments to lend additional funds to the related borrowers 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, 2014	$	13,215		$	2,174		$	881		$	343		$	316		$	136		$	17,065
Charge-offs	(203		)	(199		)	(478		)	(128		)	(1,191		)	(516		)	(2,715		)
Recoveries	2,060			77			169			36			697			153			3,192
Net recoveries (charge-offs)	1,857			(122		)	(309		)	(92		)	(494		)	(363		)	477
(Recovery of) provision for loan losses	(5,247		)	1,984			1,055			443			1,765			339			339
Balance, December 31, 2014	$	9,825		$	4,036		$	1,627		$	694		$	1,587		$	112		$	17,881

Period-end amount allocated to:
Loans individually evaluated for impairment	$	189		$	816		$	9		$	—		$	—		$	—		$	1,014
Loans collectively evaluated for impairment	9,636			3,220			1,618			694			1,587			112			16,867
Balance, December 31, 2014	$	9,825		$	4,036		$	1,627		$	694		$	1,587		$	112		$	17,881

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
Balance, December 31, 2013	$	13,215		$	2,174		$	881		$	343		$	316		$	136		$	17,065

The reduction in the allowance for loan losses allocated to commercial real estate, and related recovery of loan losses recorded during 2014 was driven by net recoveries in recent years reducing the historical loss rates. Increases in commercial and industrial, residential real estate, home equity lines of credit and consumer categories of the allowance for loan losses, and related provision for loan losses recorded during 2014 were driven by net charge-off activity and increases in these respective loan portfolios.