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)	June 30, 2015		December 31, 2014
Originated loans:
Commercial real estate, construction	$	50,168	$	37,901
Commercial real estate, other	449,163		434,660
Commercial real estate	499,331		472,561
Commercial and industrial	256,080		249,975
Residential real estate	263,129		254,169
Home equity lines of credit	67,384		62,463
Consumer	196,306		169,913
Deposit account overdrafts	3,263		2,933
Total originated loans	$	1,285,493	$	1,212,014
Acquired Loans:
Commercial real estate, construction	$	11,220	$	1,051
Commercial real estate, other	293,369		121,475
Commercial real estate	304,589		122,526
Commercial and industrial	71,013		30,056
Residential real estate	302,639		225,274
Home equity lines of credit	36,607		18,232
Consumer	11,692		12,796
Deposit account overdrafts	—		—
Total acquired loans	$	726,540	$	408,884
Loans, net of deferred fees and costs	$	2,012,033	$	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)	June 30, 2015		December 31, 2014
Commercial real estate, other	$	18,321	$	7,762
Commercial and industrial	3,538		1,041
Residential real estate	29,145		15,183
Consumer	272		306
Total outstanding balance	$	51,276	$	24,292
Net carrying amount	$	39,371	$	19,067

Changes in the accretable yield for the six months ended June 30, 2015 were as follows:



(Dollars in thousands)	Accretable Yield
Balance, December 31, 2014	$	3,172
Additions:
Reclassification from nonaccretable to accretable	2,066
NB&T Financial Group, Inc.	3,622
Accretion	(826		)
Balance, June 30, 2015	$	8,034

Cash flows expected to be collected on acquired impaired loans are estimated semi-annually by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, and the amount of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary.

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 $557.2 million and $457.1 million at June 30, 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 $135.3 million and $150.7 million at June 30, 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)	June 30, 2015		December 31, 2014		June 30, 2015		December 31, 2014
Originated loans:
Commercial real estate, construction	$	—	$	—	$	—	$	—
Commercial real estate, other	1,912		2,575		—		—
Commercial real estate	1,912		2,575		—		—
Commercial and industrial	13,736		1,286		—		—
Residential real estate	3,266		3,049		101		818
Home equity lines of credit	418		341		—		20
Consumer	53		19		4		2
Total originated loans	$	19,385	$	7,270	$	105	$	840
Acquired loans:
Commercial real estate, construction	$	—	$	96	$	—	$	—
Commercial real estate, other	86		9		984		567
Commercial real estate	86		105		984		567
Commercial and industrial	549		708		488		301
Residential real estate	764		304		1,550		1,083
Home equity lines of credit	39		19		17		—
Consumer	—		—		21		8
Total acquired loans	$	1,438	$	1,136	$	3,060	$	1,959
Total loans	$	20,823	$	8,406	$	3,165	$	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
June 30, 2015
Originated loans:
Commercial real estate, construction	$	928	$	—	$	—	$	928	$	49,240	$	50,168
Commercial real estate, other	8,863		123		822		9,808		439,355		449,163
Commercial real estate	9,791		123		822		10,736		488,595		499,331
Commercial and industrial	4,273		10,000		54		14,327		241,753		256,080
Residential real estate	2,620		648		1,117		4,385		258,744		263,129
Home equity lines of credit	227		47		224		498		66,886		67,384
Consumer	847		220		38		1,105		195,201		196,306
Deposit account overdrafts	23		—		—		23		3,240		3,263
Total originated loans	$	17,781	$	11,038	$	2,255	$	31,074	$	1,254,419	$	1,285,493
Acquired loans:
Commercial real estate, construction	$	—	$	—	$	69	$	69	$	11,151	$	11,220
Commercial real estate, other	1,472		837		991		3,300		290,069		293,369
Commercial real estate	1,472		837		1,060		3,369		301,220		304,589
Commercial and industrial	227		1,961		937		3,125		67,888		71,013
Residential real estate	1,584		1,258		1,930		4,772		297,867		302,639
Home equity lines of credit	99		23		38		160		36,447		36,607
Consumer	153		14		21		188		11,504		11,692
Deposit account overdrafts	—		—		—		—		—		—
Total acquired loans	$	3,535	$	4,093	$	3,986	$	11,614	$	714,926	$	726,540
Total loans	$	21,316	$	15,131	$	6,241	$	42,688	$	1,969,345	$	2,012,033
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)
June 30, 2015
Originated loans:
Commercial real estate, construction	$	49,726	$	—	$	—	$	—	$	442	$	50,168
Commercial real estate, other	431,822		9,260		8,081		—		—		449,163
Commercial real estate	481,548		9,260		8,081		—		442		499,331
Commercial and industrial	231,339		7,135		17,605		1		—		256,080
Residential real estate	21,036		1,107		13,694		119		227,173		263,129
Home equity lines of credit	754		—		759		—		65,871		67,384
Consumer	54		—		5		—		196,247		196,306
Deposit account overdrafts	—		—		—		—		3,263		3,263
Total originated loans	$	734,731	$	17,502	$	40,144	$	120	$	492,996	$	1,285,493
Acquired loans:
Commercial real estate, construction	$	11,161	$	—	$	—	$	—	$	59	$	11,220
Commercial real estate, other	246,105		18,239		17,458		118		11,449		293,369
Commercial real estate	257,266		18,239		17,458		118		11,508		304,589
Commercial and industrial	58,855		3,812		5,210		342		2,794		71,013
Residential real estate	19,218		2,124		1,144		—		280,153		302,639
Home equity lines of credit	318		—		—		—		36,289		36,607
Consumer	316		—		1		—		11,375		11,692
Deposit account overdrafts	—		—		—		—		—		—
Total acquired loans	$	335,973	$	24,175	$	23,813	$	460	$	342,119	$	726,540
Total loans	$	1,070,704	$	41,677	$	63,957	$	580	$	835,115	$	2,012,033
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
June 30, 2015
Commercial real estate, construction	$	21,385	$	—	$	21,385	$	21,385	$	—	$	4,338	$	389
Commercial real estate, other	11,057		915		9,969		10,884		286		3,039		297
Commercial real estate	32,442		$	915	$	31,354	$	32,269	$	286	$	7,377	$	686
Commercial and industrial	26,267		13,898		9,825		23,723		3,556		5,661		206
Residential real estate	9,252		50		8,399		8,449		6		4,471		182
Home equity lines of credit	313		—		310		310		—		190		6
Consumer	318		—		310		310		—		138		13
Total	$	68,592	$	14,863	$	50,198	$	65,061	$	3,848	$	17,837	$	1,093
December 31, 2014
Commercial real estate, construction	$	9,914	$	—	$	9,909	9,909		$	—	$	2,020	$	540
Commercial real estate, other	8,668		653		7,742		8,395		189		2,951		248
Commercial real estate	18,582		$	653	$	17,651	$	18,304	$	189	$	4,971	$	788
Commercial and industrial	3,747		1,945		1,767		3,712		816		766		73
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	391		—		386		386		—		156		24
Total	$	30,109	$	2,651	$	26,674	$	29,325	$	1,014	$	9,734	$	1,175

At June 30, 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 and six months ended June 30.



		Three Months Ended							Six Months Ended
		Recorded Investment (1)							Recorded Investment (1)
(Dollars in thousands)	Number of Contracts	Pre-Modification		Post-Modification		Remaining Recorded Investment		Number of Contracts	Pre-Modification		Post-Modification		Remaining Recorded Investment
June 30, 2015
Originated loans:
Commercial real estate, other	—	$	—	$	—	$	—	—	$	—	$	—	$	—
Residential real estate	2	184		184		184		2	184		184		184
Home equity lines of credit	4	92		92		91		9	308		309		306
Consumer	2	10		10		10		3	16		16		16
Acquired loans:
Commercial real estate, other	1	24		24		24		1	24		24		24
Home equity lines of credit	1	8		8		8		1	8		8		8
Residential real estate	2	35		35		35		2	35		35		35
June 30, 2014
Originated loans:
Commercial real estate, construction	1	$	96	$	96	$	96	1	$	96	$	96	$	96
Commercial real estate, other	—	—		—		—		1	511		511		497
Residential real estate	10	450		449		449		18	946		946		935
Home equity lines of credit	2	39		39		39		4	86		86		86
Consumer	18	76		76		76		20	97		97		96
(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 six months ended June 30 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).



	June 30, 2015				June 30, 2014
(Dollars in thousands)	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
Acquired loans:
Commercial and industry	2	$	196	—	—	$	—	$	—
Residential real estate	—	—		—	1	$	40	$	—
Total	2	196		—	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 did not have any originated loans that were modified as a TDR during the last twelve months that subsequently defaulted. 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 June 30, 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	(44		)	(343		)	(282		)	(81		)	(482		)	(323		)	(1,555		)
Recoveries	137			93			161			80			332			93			896
Net recoveries (charge-offs)	93			(250		)	(121		)	(1		)	(150		)	(230		)	(659		)
(Recovery of) provision for loan losses	(2,733		)	3,408			(207		)	45			237			272			1,022
Balance, June 30, 2015	$	7,185		$	7,194		$	1,299		$	738		$	1,674		$	154		$	18,244

Period-end amount allocated to:
Loans individually evaluated for impairment	$	286		$	3,556		$	6		$	—		$	—		$	—		$	3,848
Loans collectively evaluated for impairment	6,899			3,638			1,293			738			1,674			154			14,396
Ending balance	$	7,185		$	7,194		$	1,299		$	738		$	1,674		$	154		$	18,244

Balance, January 1, 2014	$	13,215		$	2,174		$	881		$	343		$	316		$	136		$	17,065
Charge-offs	—			(49		)	(272		)	(45		)	(552		)	(201		)	(1,119		)
Recoveries	208			59			117			12			351			100			847
Net recoveries (charge-offs)	208			10			(155		)	(33		)	(201		)	(101		)	(272		)
(Recovery of) provision for loan losses	(3,156		)	1,035			1,092			346			1,183			91			591
Balance, June 30, 2014	$	10,267		$	3,219		$	1,818		$	656		$	1,298		$	126		$	17,384

Period-end amount allocated to:
Loans individually evaluated for impairment	$	158		$	9		$	—		$	—		$	—		$	—		$	167
Loans collectively evaluated for impairment	10,109			3,210			1,818			656			1,298			126			17,217
Ending balance	$	10,267		$	3,219		$	1,818		$	656		$	1,298		$	126		$	17,384

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.