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 at December 31:



(Dollars in thousands)	2015		2014
Originated loans:
Commercial real estate, construction	$	63,785	$	37,901
Commercial real estate, other	471,184		434,660
Commercial real estate	534,969		472,561
Commercial and industrial	288,130		249,975
Residential real estate	288,783		254,169
Home equity lines of credit	74,176		62,463
Consumer	227,133		169,913
Deposit account overdrafts	1,448		2,933
Total originated loans	$	1,414,639	$	1,212,014
Acquired loans:
Commercial real estate, construction	$	12,114	$	1,051
Commercial real estate, other	265,092		121,475
Commercial real estate	277,206		122,526
Commercial and industrial	63,589		30,056
Residential real estate	276,772		225,274
Home equity lines of credit	32,253		18,232
Consumer	7,981		12,796
Deposit account overdrafts	—		—
Total acquired loans	$	657,801	$	408,884
Total loans	$	2,072,440	$	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, commonly referred to as "purchased 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)	2015		2014
Commercial real estate	$	16,893	$	7,762
Commercial and industrial	3,040		1,041
Residential real estate	27,155		15,183
Consumer	193		306
Total outstanding balance	$	47,281	$	24,292
Net carrying amount	$	35,064	$	19,067

Changes in the accretable yield for acquired purchased credit impaired loans the year ended December 31, 2015 were as follows:



(Dollars in thousands)	Accretable Yield
Balance, December 31, 2014	$	3,172
Additions:
Reclassification from nonaccretable to accretable	2,093
NB&T Financial Group, Inc.	3,611
Accretion	(1,834		)
Balance, December 31, 2015	$	7,042

Cash flows expected to be collected on purchased credit impaired loans are estimated semi-annually by incorporating several key assumptions similar to those used in 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 the amount of 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 $554.8 million and $457.1 million at December 31, 2015 and 2014, respectively. Peoples also had pledged commercial loans to secure borrowings with the FRB. The outstanding balances of these loans totaled $195.5 million and $150.7 million at December 31, 2015 and 2014, respectively.

Related Party Loans

In the normal course of its business, Peoples Bank has granted loans to certain directors and officers of Peoples Bancorp Inc., including their affiliates, families and entities in which they are principal owners. At December 31, 2015, 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 and new directors elected during the year.



(Dollars in thousands)
Balance, December 31, 2014	$	15,192
New loans and disbursements	10,361
Repayments	(6,915		)
Other changes	(538		)
Balance, December 31, 2015	$	18,100

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 at December 31:



					Accruing Loans 90+ Days Past Due
	Nonaccrual Loans				Accruing Loans 90+ Days Past Due
(Dollars in thousands)	2015		2014		2015		2014
Originated loans:
Commercial real estate, construction	$	921	$	—	$	—	$	—
Commercial real estate, other	7,041		2,575		—		—
Commercial real estate	7,962		2,575		—		—
Commercial and industrial	480		1,286		680		—
Residential real estate	3,057		3,049		169		818
Home equity lines of credit	321		341		—		20
Consumer	92		19		1		2
Total originated loans	$	11,912	$	7,270	$	850	$	840
Acquired loans:
Commercial real estate, construction	$	—	$	96	$	—	$	—
Commercial real estate, other	469		9		2,425		567
Commercial real estate	469		105		2,425		567
Commercial and industrial	247		708		1,306		301
Residential real estate	798		304		1,353		1,083
Home equity lines of credit	98		19		35		—
Consumer	7		—		—		8
Total acquired loans	$	1,619	$	1,136	$	5,119	$	1,959
Total loans	$	13,531	$	8,406	$	5,969	$	2,799

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
2015
Originated loans:
Commercial real estate, construction	$	913	$	—	$	8	$	921	$	62,864	$	63,785
Commercial real estate, other	7,260		1,258		379		8,897		462,287		471,184
Commercial real estate	8,173		1,258		387		9,818		525,151		534,969
Commercial and industrial	1,437		215		767		2,419		285,711		288,130
Residential real estate	3,124		1,105		1,263		5,492		283,291		288,783
Home equity lines of credit	161		7		104		272		73,904		74,176
Consumer	1,387		250		32		1,669		225,464		227,133
Deposit account overdrafts	—		—		—		—		1,448		1,448
Total originated loans	$	14,282	$	2,835	$	2,553	$	19,670	$	1,394,969	$	1,414,639
Acquired loans:
Commercial real estate, construction	$	—	$	—	$	40	$	40	$	12,074	$	12,114
Commercial real estate, other	1,592		352		2,730		4,674		260,418		265,092
Commercial real estate	1,592		352		2,770		4,714		272,492		277,206
Commercial and industrial	177		232		1,553		1,962		61,627		63,589
Residential real estate	4,910		2,480		1,745		9,135		267,637		276,772
Home equity lines of credit	318		20		95		433		31,820		32,253
Consumer	90		31		—		121		7,860		7,981
Deposit account overdrafts	—		—		—		—		—		—
Total acquired loans	$	7,087	$	3,115	$	6,163	$	16,365	$	641,436	$	657,801
Total loans	$	21,369	$	5,950	$	8,716	$	36,035	$	2,036,405	$	2,072,440
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, 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)
2015
Originated loans:
Commercial real estate, construction	$	62,225	$	—	$	913	$	—	$	647	$	63,785
Commercial real estate, other	434,868		18,710		17,595		—		11		471,184
Commercial real estate	497,093		18,710		18,508		—		658		534,969
Commercial and industrial	259,183		23,601		5,344		—		2		288,130
Residential real estate	21,903		1,168		12,282		187		253,243		288,783
Home equity lines of credit	785		—		175		—		73,216		74,176
Consumer	208		—		3		—		226,922		227,133
Deposit account overdrafts	—		—		—		—		1,448		1,448
Total originated loans	$	779,172	$	43,479	$	36,312	$	187	$	555,489	$	1,414,639
Acquired loans:
Commercial real estate, construction	$	12,114	$	—	$	—	$	—	$	—	$	12,114
Commercial real estate, other	233,630		13,866		17,521		75		—		265,092
Commercial real estate	245,744		13,866		17,521		75		—		277,206
Commercial and industrial	56,077		3,078		4,238		196		—		63,589
Residential real estate	18,027		1,409		1,786		—		255,550		276,772
Home equity lines of credit	316		—		—		—		31,937		32,253
Consumer	256		—		—		—		7,725		7,981
Deposit account overdrafts	—		—		—		—		—		—
Total acquired loans	$	320,420	$	18,353	$	23,545	$	271	$	295,212	$	657,801
Total loans	$	1,099,592	$	61,832	$	59,857	$	458	$	850,701	$	2,072,440
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 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
2015
Commercial real estate, construction	$	957	$	—	$	957	$	957	$	—	$	227	$	3
Commercial real estate, other	23,430		6,396		12,775		19,171		1,363		13,071		815
Commercial real estate	$	24,387	$	6,396	$	13,732	$	20,128	$	1,363	$	13,298	$	818
Commercial and industrial	5,670		1,224		4,130		5,354		351		4,049		246
Residential real estate	31,304		370		28,834		29,204		106		26,785		1,354
Home equity lines of credit	425		—		419		419		—		325		18
Consumer	383		—		298		298		—		295		28
Total	$	62,169	$	7,990	$	47,413	$	55,403	$	1,820	$	44,752	$	2,464
2014
Commercial real estate, construction	$	9,914	$	—	$	9,909	9,909		$	—	$	4,378	$	540
Commercial real estate, other	8,668		653		7,742		8,395		189		4,056		248
Commercial real estate	$	18,582	$	653	$	17,651	$	18,304	$	189	$	8,434	$	788
Commercial and industrial	3,747		1,945		1,767		3,712		816		1,414		73
Residential real estate	6,889		53		6,372		6,425		9		3,582		272
Home equity lines of credit	500		—		498		498		—		298		18
Consumer	391		—		386		386		—		221		24
Total	$	30,109	$	2,651	$	26,674	$	29,325	$	1,014	$	13,949	$	1,175

At December 31, 2015, 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 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 years ended December 31, 2015 and 2014.



		Recorded Investment (1)
(Dollars in thousands)	Number of Contracts	Pre-Modification		Post-Modification		Remaining Recorded Investment
December 31,2015
Originated loans:
Commercial real estate, other	5	$	900	$	900	$	881
Commercial and industrial	4	834		834		834
Residential real estate	4	207		207		115
Home equity lines of credit	11	402		402		389
Consumer	12	95		95		94
Total	36	$	2,438	$	2,438	$	2,313
Acquired loans:
Residential real estate	4	$	246	$	246	$	246
Home equity lines of credit	1	8		8		7
Total	5	$	254	$	254	$	253
December 31,2014
Originated loans:
Residential real estate	22	$	996	$	997	$	967
Home equity lines of credit	12	238		238		232
Consumer	10	108		108		102
Total	44	$	1,342	$	1,343	$	1,301
Acquired loans:
Commercial real estate, construction	1	$	96	$	96	$	96
Commercial and industrial	3	605		605		594
Residential real estate	4	235		235		234
Consumer	5	9		9		6
Total	13	$	945	$	945	$	930
(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, 2015 and 2014:



	2015					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
Originated loans:
Residential real estate	1	$	151	$	—	1	$	33	$	—
Home equity lines of credit	—	—		—		2	28		—
Total	1	$	151	$	—	3	$	61	$	—
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 no commitments to lend additional funds to the related borrowers whose loan 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, 2015	$	9,825		$	4,036		$	1,627		$	694		$	1,587		$	112		$	17,881
Charge-offs	(242		)	(13,576		)	(628		)	(125		)	(1,353		)	(774		)	(16,698		)
Recoveries	104			98			315			119			755			171			1,562
Net (charge-offs) recoveries	(138		)	(13,478		)	(313		)	(6		)	(598		)	(603		)	(15,136		)
(Recovery of) provision for loan losses	(2,611		)	14,824			(57		)	44			982			612			13,794
Balance, December 31, 2015	$	7,076		$	5,382		$	1,257		$	732		$	1,971		$	121		$	16,539

Period-end amount allocated to:
Loans individually evaluated for impairment	$	1,363		$	351		$	106		$	—		$	—		$	—		$	1,820
Loans collectively evaluated for impairment	5,713			5,031			1,151			732			1,971			121			14,719
Balance, December 31, 2015	$	7,076		$	5,382		$	1,257		$	732		$	1,971		$	121		$	16,539

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

The reduction in the allowance for originated loan losses allocated to commercial real estate was driven by decreased historical loss rates. Historical loss rates are calculated using charge-offs and recoveries within each portfolio over the past five years. The increase in provision for originated commercial and industrial loans during 2015 was primarily related to a specific allowance for one relationship which was charged off in 2015. The reduction in the allowance for originated residential real estate was driven by net recoveries in recent years reducing the historical loss rates. The changes in the home equity lines of credit and consumer categories of the allowance for originated loan losses and the related provision for originated loan losses recorded during 2015 were driven by net charge-off activity and increases in the size of the respective loan portfolios.

Allowance for Acquired Loan Losses

Acquired loans are recorded at their fair value as of the acquisition date with no valuation allowance, and monitored for changes in credit quality and subsequent increases or decreases in expected cash flows. Decreases in expected cash flows of acquired credit impaired loans are recognized as an impairment, with the amount of the expected loss included in management's evaluation of the appropriateness of the allowance for loan losses. Management reforecasts the estimated cash flows expected to be collected on acquired purchased credit impaired impaired loans semi-annually. The methods utilized to estimate the required allowance for loan losses for nonimpaired acquired loans are similar to those utilized for originated loans; however, Peoples records a provision for loan losses only when the computed allowance exceeds the remaining fair value adjustment.

The following table presents activity in the allowance for loan losses for acquired loans as of December 31:



(Dollars in thousands)	2015			2014		2013
Purchased credit impaired loans:
Balance, January 1	$	—		$	—	$	—
Charge-offs	(63		)	—		—
Recoveries	—			—		—
Net recoveries (charge-offs)	(63		)	—		—
Provision for loan losses	303			—		—
Balance, December 31	$	240		$	—	$	—

As of December 31, 2015, the expected cash flows for acquired credit impaired loans had decreased from those as of the respective acquisition dates, resulting in Peoples recording a provision for loan losses with respect to those acquired loans. During 2014 and 2013, the discount recorded on acquired loans was in excess of the calculated allowance for loan losses for the acquired portfolios.