Loans

Peoples' loan portfolio has consisted of various types of loans originated primarily as a result of lending opportunities within Peoples' primary market areas of northeastern, central, southwestern 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:



(Dollars in thousands)	March 31, 2015		December 31, 2014
Originated loans:
Commercial real estate, construction	$	44,276	$	37,901
Commercial real estate, other	429,541		434,660
Commercial real estate	473,817		472,561
Commercial and industrial	247,103		249,975
Residential real estate	256,551		254,169
Home equity lines of credit	63,491		62,463
Consumer	176,857		169,913
Deposit account overdrafts	3,146		2,933
Total originated loans	$	1,220,965	$	1,212,014
Acquired Loans:
Commercial real estate, construction	$	9,759	$	1,051
Commercial real estate, other	317,225		121,475
Commercial real estate	326,984		122,526
Commercial and industrial	78,873		30,056
Residential real estate	317,529		225,274
Home equity lines of credit	38,222		18,232
Consumer	13,723		12,796
Deposit account overdrafts	—		—
Total acquired loans	$	775,331	$	408,884
Loans, net of deferred fees and costs	$	1,996,296	$	1,620,898

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, 2015		December 31, 2014
Commercial real estate	$	19,036	$	7,762
Commercial and industrial	3,722		1,041
Residential real estate	30,197		15,183
Consumer	304		306
Total outstanding balance	$	53,259	$	24,292
Net carrying amount	$	43,210	$	19,067

Changes in the accretable yield for the three months ended March 31, 2015 were as follows:



(Dollars in thousands)	Accretable Yield
Balance, December 31, 2014	$	3,172
Additions:
Reclassification from nonaccretable to accretable	1,112
NB&T Financial Group, Inc.	4,783
Accretion	(311		)
Balance, March 31, 2015	$	8,756

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 $447.9 million and $457.1 million at March 31, 2015 and December 31, 2014, respectively. Peoples also had pledged commercial loans to secure borrowings with the FRB. The outstanding balances of these loans totaled $140.4 million and $150.7 million at March 31, 2015 and December 31, 2014, 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 loans delinquent for 90 days or more and accruing were as follows:



	Nonaccrual Loans				Loans 90+ Days Past Due and Accruing
(Dollars in thousands)	March 31, 2015		December 31, 2014		March 31, 2015		December 31, 2014
Originated loans:
Commercial real estate, construction	$	—	$	—	$	—	$	—
Commercial real estate, other	2,128		2,575		394		—
Commercial real estate	2,128		2,575		394		—
Commercial and industrial	1,277		1,286		125		—
Residential real estate	3,228		3,049		73		818
Home equity lines of credit	432		341		34		20
Consumer	14		19		—		2
Total originated loans	$	7,079	$	7,270	$	626	$	840
Acquired loans:
Commercial real estate, construction	$	96	$	96	$	—	$	—
Commercial real estate, other	37		9		1,752		567
Commercial real estate	133		105		1,752		567
Commercial and industrial	451		708		283		301
Residential real estate	680		304		1,023		1,083
Home equity lines of credit	19		19		13		—
Consumer	—		—		3		8
Total acquired loans	$	1,283	$	1,136	$	3,074	$	1,959
Total loans	$	8,362	$	8,406	$	3,700	$	2,799

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



	Loans Past Due									Current Loans		Total Loans
(Dollars in thousands)	30 - 59 days		60 - 89 days		90 + Days		Total
March 31, 2015
Originated loans:
Commercial real estate, construction	$	—	$	—	$	—	$	—		$	44,276	$	44,276
Commercial real estate, other	2,926		49		1,395		4,370			425,171		429,541
Commercial real estate	2,926		49		1,395		4,370			469,447		473,817
Commercial and industrial	757		14		1,367		2,138			244,965		247,103
Residential real estate	3,737		591		927		5,255			251,296		256,551
Home equity lines of credit	113		83		274		470			63,021		63,491
Consumer	685		118		—		803			176,054		176,857
Deposit account overdrafts	23		—		—		23			3,123		3,146
Total originated loans	$	8,241	$	855	$	3,963	$	13,059		$	1,207,906	$	1,220,965
Acquired loans:
Commercial real estate, construction	$	—	$	—	$	96	$	96		$	9,663	$	9,759
Commercial real estate, other	1,634		271		1,760		3,665			313,560		317,225
Commercial real estate	1,634		271		1,856		3,761			323,223		326,984
Commercial and industrial	1,737		341		283		2,361			76,512		78,873
Residential real estate	5,341		805		1,267		7,413			310,116		317,529
Home equity lines of credit	27		19		13		59			38,163		38,222
Consumer	145		28		3		176			13,547		13,723
Deposit account overdrafts	—		—		—		—		—	—		—
Total acquired loans	$	8,884	$	1,464	$	3,422	$	13,770		$	761,561	$	775,331
Total loans	$	17,125	$	2,319	$	7,385	$	26,829		$	1,969,467	$	1,996,296
December 31, 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
Deposit account overdrafts	—		—		—		—		—	—		—
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

Credit Quality Indicators

As discussed in Note 1 of the Notes to the Consolidated Financial Statements included in Peoples' 2014 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 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 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 (Grades 1 - 4)		Watch (Grade 5)		Substandard (Grade 6)		Doubtful (Grade 7)		Not Rated		Total Loans
(Dollars in thousands)
March 31, 2015
Originated loans:
Commercial real estate, construction	$	44,011	$	—	$	—	$	—	$	265	$	44,276
Commercial real estate, other	401,076		12,014		16,451		—		—		429,541
Commercial real estate	445,087		12,014		16,451		—		265		473,817
Commercial and industrial	220,201		8,961		17,096		1		844		247,103
Residential real estate	21,241		1,081		13,089		237		220,903		256,551
Home equity lines of credit	763		—		762		—		61,966		63,491
Consumer	68		—		6		—		176,783		176,857
Deposit account overdrafts	—		—		—		—		3,146		3,146
Total originated loans	$	687,360	$	22,056	$	47,404	$	238	$	463,907	$	1,220,965
Acquired loans:
Commercial real estate, construction	$	9,759	$	—	$	—	$	—	$	—	$	9,759
Commercial real estate, other	282,216		18,045		16,461		503		—		317,225
Commercial real estate	291,975		18,045		16,461		503		—		326,984
Commercial and industrial	69,323		4,396		4,812		342		—		78,873
Residential real estate	19,077		1,775		836		—		295,841		317,529
Home equity lines of credit	324		—		—		—		37,898		38,222
Consumer	336		—		1		—		13,386		13,723
Deposit account overdrafts	—		—		—		—		—		—
Total acquired loans	$	381,035	$	24,216	$	22,110	$	845	$	347,125	$	775,331
Total loans	$	1,068,395	$	46,272	$	69,514	$	1,083	$	811,032	$	1,996,296
December 31, 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
Deposit account overdrafts	—		—		—		—		—		—
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

Impaired Loans

The following table summarizes loans classified as impaired:



	Unpaid Principal Balance		Recorded Investment				Total Recorded Investment				Average Recorded Investment		Interest Income Recognized
			With Allowance		Without Allowance				Related Allowance
(Dollars in thousands)			With Allowance		Without Allowance				Related Allowance
March 31, 2015
Commercial real estate, construction	$	44	$	—	$	44	$	44	$	—	$	18	$	2
Commercial real estate, other	1,762		742		786		1,528		189		675		18
Commercial real estate	1,806		$	742	$	830	$	1,572	$	189	$	693	$	20
Commercial and industrial	4,330		1,428		2,103		3,531		527		1,249		11
Residential real estate	9,895		51		9,034		9,085		9		2,996		160
Home equity lines of credit	429		—		427		427		—		156		51
Consumer	155		—		149		149		—		60		41
Total	$	16,615	$	2,221	$	12,543	$	14,764	$	725	$	5,154	$	283
December 31, 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

At March 31, 2015, Peoples' impaired loans shown in the table above included loans that were classified as troubled debt restructurings ("TDRs").

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 borrower is currently in payment default on any of the borrower's debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the borrower has declared or is in the process of declaring bankruptcy; and (iv) the borrower'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 borrower'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.

The following table summarizes the loans that were modified as a TDR during the three months ended March 31.



		Three Months Ended
		Recorded Investment (1)
	Number of Contracts	Pre-Modification		Post-Modification		Remaining Recorded Investment
March 31, 2015
Originated loans:
Commercial real estate, other	—	$	—	$	—	$	—
Residential real estate	—	—		—		—
Home equity lines of credit	5	217		217		217
Consumer	1	3		3		3
Acquired loans:
Residential real estate	4	$	419	$	419	$	419
March 31, 2014
Originated loans:
Commercial real estate, other	1	$	511	$	511	$	503
Residential real estate	8	496		497		496
Home equity lines of credit	2	47		47		47
Consumer	5	64		64		64
(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 that were modified as a TDR during the last twelve months that subsequently defaulted (i.e., 90 days or more past due following a modification).



	March 31, 2015					March 31, 2014
	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	$	51	$	—
Total	—	$	—	$	—	1	$	51	$	—
Acquired loans:
Residential real estate	—	$	—	$	—	1	$	40	$	—
Total	—	$	—	$	—	1	$	40	$	—
(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, 2015	$	9,825		$	4,036		$	1,627		$	694		$	1,587		$	112		$	17,881
Charge-offs	(10		)	—			(186		)	(58		)	(187		)	(143		)	(584		)
Recoveries	55			12			115			15			186			58			441
Net recoveries (charge-offs)	45			12			(71		)	(43		)	(1		)	(85		)	(143		)
(Recovery of) provision for loan losses	(796		)	1,059			4			57			(74		)	100			350
Balance, March 31, 2015	$	9,074		$	5,107		$	1,560		$	708		$	1,512		$	127		$	18,088

Period-end amount allocated to:
Loans individually evaluated for impairment	$	189		$	527		$	9		$	—		$	—		$	—		$	725
Loans collectively evaluated for impairment	8,885			4,580			1,551			708			1,512			127			17,363
Ending balance	$	9,074		$	5,107		$	1,560		$	708		$	1,512		$	127		$	18,088

Balance, January 1, 2014	$	13,215		$	2,174		$	881		$	343		$	316		$	136		$	17,065
Charge-offs	—			(49		)	(137		)	(20		)	(302		)	(110		)	(618		)
Recoveries	112			5			38			6			184			70			415
Net recoveries (charge-offs)	112			(44		)	(99		)	(14		)	(118		)	(40		)	(203		)
Provision for loan losses	—			—			—			—			—			8			8
Balance, March 31, 2014	$	13,327		$	2,130		$	782		$	329		$	198		$	104		$	16,870

Period-end amount allocated to:
Loans individually evaluated for impairment	$	111		$	526		$	—		$	—		$	—		$	—		$	637
Loans collectively evaluated for impairment	13,216			1,604			782			329			198			104			16,233
Ending balance	$	13,327		$	2,130		$	782		$	329		$	198		$	104		$	16,870

The reduction in the allowance for loan losses allocated to commercial real estate, and related recovery of loan losses recorded during 2015 compared to 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 2015 were driven by net charge-off activity and increases in these respective loan portfolios.