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, southwestern and southeastern Ohio, west central West Virginia, and northeastern Kentucky. Acquired loans consist of loans purchased in 2012 or thereafter. Loans that were acquired and subsequently re-underwritten, are reported as originated upon execution of such credit actions (for example, renewals and increases in lines of credit). The major classifications of loan balances (in each case, net of deferred fees and costs) excluding loans held for sale, were as follows:



(Dollars in thousands)	March 31, 2018		December 31, 2017
Originated loans:
Commercial real estate, construction	$	99,757	$	107,118
Commercial real estate, other	627,932		595,447
Commercial real estate	727,689		702,565
Commercial and industrial	455,243		438,051
Residential real estate	302,890		304,523
Home equity lines of credit	87,722		88,902
Consumer, indirect	347,607		340,390
Consumer, direct	67,386		67,010
Consumer	414,993		407,400
Deposit account overdrafts	543		849
Total originated loans	$	1,989,080	$	1,942,290
Acquired loans:
Commercial real estate, construction	$	8,054	$	8,319
Commercial real estate, other	156,115		165,120
Commercial real estate	164,169		173,439
Commercial and industrial	33,815		34,493
Residential real estate	194,063		184,864
Home equity lines of credit	20,008		20,575
Consumer, indirect	253		329
Consumer, direct	940		1,147
Consumer	1,193		1,476
Total acquired loans	$	413,248	$	414,847
Loans, net of deferred fees and costs	$	2,402,328	$	2,357,137

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 purchased credit impaired loans included in the loan balances above are summarized as follows:



(Dollars in thousands)	March 31, 2018		December 31, 2017
Commercial real estate, other	$	7,794	$	8,117
Commercial and industrial	718		767
Residential real estate	19,156		19,532
Consumer	27		33
Total outstanding balance	$	27,695	$	28,449
Net carrying amount	$	18,864	$	19,564

Changes in the accretable yield for purchased credit impaired loans for the three months ended March 31, 2018 were as follows:



	For the three moths ended
(Dollars in thousands)	March 31, 2018			March 31, 2017
Balance, December 31, 2017	$	6,704		$	7,132
Accretion	(412		)	(461		)
Balance, March 31, 2018	$	6,292		$	6,671

Peoples completes annual re-estimations of cash flows on acquired purchased credit impaired loans in August of each year. At the end of each quarter, Peoples evaluates factors to determine if a material change has occurred in acquired loans accounted for and if a re-estimation is needed. Factors evaluated to determine if a re-estimation is needed include changes in: risk ratings, maturity dates, charge-offs, payoffs, nonaccrual status and loans that have become past due.

Cash flows expected to be collected on purchased credit impaired loans are estimated 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 the principal expected to be collected. In re-forecasting future estimated cash flows, credit loss expectations are adjusted as necessary.

Peoples pledges 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 $486.5 million and $487.2 million at March 31, 2018 and December 31, 2017, respectively. Peoples also pledges commercial loans to secure borrowings with the FRB. The outstanding balances of these loans totaled $71.5 million and $74.0 million at March 31, 2018 and December 31, 2017, 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, 2018		December 31, 2017		March 31, 2018		December 31, 2017
Originated loans:
Commercial real estate, construction	$	732	$	754	$	—	$	—
Commercial real estate, other	6,673		6,877		—		—
Commercial real estate	7,405		7,631		—		—
Commercial and industrial	1,598		739		—		—
Residential real estate	3,666		3,546		298		548
Home equity lines of credit	507		550		29		50
Consumer, indirect	306		256		—		—
Consumer, direct	17		39		—		16
Consumer	323		295		—		16
Total originated loans	$	13,499	$	12,761	$	327	$	614
Acquired loans:
Commercial real estate, other	$	269	$	192	$	71	$	215
Commercial and industrial	141		259		—		45
Residential real estate	2,062		2,168		632		730
Home equity lines of credit	230		312		—		22
Consumer, direct	1		—		—		—
Total acquired loans	$	2,703	$	2,931	$	703	$	1,012
Total loans	$	16,202	$	15,692	$	1,030	$	1,626

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, 2018
Originated loans:
Commercial real estate, construction	$	—	$	—	$	732	$	732	$	99,025	$	99,757
Commercial real estate, other	596		—		6,512		7,108		620,824		627,932
Commercial real estate	596		—		7,244		7,840		719,849		727,689
Commercial and industrial	1,352		1,180		1,570		4,102		451,141		455,243
Residential real estate	4,220		1,107		1,778		7,105		295,785		302,890
Home equity lines of credit	111		122		337		570		87,152		87,722
Consumer, indirect	1,510		176		152		1,838		345,769		347,607
Consumer, direct	204		24		11		239		67,147		67,386
Consumer	1,714		200		163		2,077		412,916		414,993
Deposit account overdrafts	—		—		—		—		543		543
Total originated loans	$	7,993	$	2,609	$	11,092	$	21,694	$	1,967,386	$	1,989,080
Acquired loans:
Commercial real estate, construction	$	33	$	—	$	—	$	33	$	8,021	$	8,054
Commercial real estate, other	490		—		264		754		155,361		156,115
Commercial real estate	523		—		264		787		163,382		164,169
Commercial and industrial	—		—		105		105		33,710		33,815
Residential real estate	2,499		782		1,982		5,263		188,800		194,063
Home equity lines of credit	59		—		182		241		19,767		20,008
Consumer, indirect	4		—		—		4		249		253
Consumer, direct	16		2		—		18		922		940
Consumer	20		2		—		22		1,171		1,193
Total acquired loans	$	3,101	$	784	$	2,533	$	6,418	$	406,830	$	413,248
Total loans	$	11,094	$	3,393	$	13,625	$	28,112	$	2,374,216	$	2,402,328



	Loans Past Due								Current Loans		Total Loans
(Dollars in thousands)	30 - 59 days		60 - 89 days		90 + Days		Total
December 31, 2017
Originated loans:
Commercial real estate, construction	$	—	$	—	$	—	$	—	$	107,118	$	107,118
Commercial real estate, other	990		—		6,492		7,482		587,965		595,447
Commercial real estate	990		—		6,492		7,482		695,083		702,565
Commercial and industrial	1,423		92		706		2,221		435,830		438,051
Residential real estate	4,562		1,234		2,408		8,204		296,319		304,523
Home equity lines of credit	502		80		395		977		87,925		88,902
Consumer, indirect	2,153		648		105		2,906		337,484		340,390
Consumer, direct	417		46		48		511		66,499		67,010
Consumer	2,570		694		153		3,417		403,983		407,400
Deposit account overdrafts	—		—		—		—		849		849
Total originated loans	$	10,047	$	2,100	$	10,154	$	22,301	$	1,919,989	$	1,942,290
Acquired loans:
Commercial real estate, construction	$	—	$	—	$	—	$	—	$	8,319	$	8,319
Commercial real estate, other	775		948		312		2,035		163,085		165,120
Commercial real estate	775		948		312		2,035		171,404		173,439
Commercial and industrial	—		1		171		172		34,321		34,493
Residential real estate	4,656		1,391		1,910		7,957		176,907		184,864
Home equity lines of credit	126		—		301		427		20,148		20,575
Consumer, indirect	3		—		—		3		326		329
Consumer, direct	10		11		—		21		1,126		1,147
Consumer	13		11		—		24		1,452		1,476
Total acquired loans	$	5,570	$	2,351	$	2,694	$	10,615	$	404,232	$	414,847
Total loans	$	15,617	$	4,451	$	12,848	$	32,916	$	2,324,221	$	2,357,137

During the first three months of 2018, Peoples' delinquency trends improved compared to the balances at December 31, 2017, as total loans past due declined in both the originated and acquired loan portfolios.

Credit Quality Indicators

As discussed in Note 1 of the Notes to the Consolidated Financial Statements included in Peoples' 2017 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.

“Special Mention” (grade 5): Loans in this risk grade are the equivalent of the regulatory definition of “Other Assets Especially Mentioned.” Loans in this risk 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 a 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 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, classification of the loan as an estimated 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 a 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 loans within Peoples' loan portfolio based upon the most recent analysis performed:



	Pass Rated (Grades 1 - 4)		Special Mention (Grade 5)		Substandard (Grade 6)		Doubtful (Grade 7)		Not Rated		Total Loans
(Dollars in thousands)
March 31, 2018
Originated loans:
Commercial real estate, construction	$	92,383	$	6,190	$	732	$	—	$	452	$	99,757
Commercial real estate, other	596,903		14,058		16,971		—		—		627,932
Commercial real estate	689,286		20,248		17,703		—		452		727,689
Commercial and industrial	404,591		46,477		4,175		—		—		455,243
Residential real estate	17,037		579		11,270		131		273,873		302,890
Home equity lines of credit	454		—		—		—		87,268		87,722
Consumer, indirect	51		6		—		—		347,550		347,607
Consumer, direct	37		—		—		—		67,349		67,386
Consumer	88		6		—		—		414,899		414,993
Deposit account overdrafts	—		—		—		—		543		543
Total originated loans	$	1,111,456	$	67,310	$	33,148	$	131	$	777,035	$	1,989,080
Acquired loans:
Commercial real estate, construction	$	8,003	$	—	$	51	$	—	$	—	$	8,054
Commercial real estate, other	144,647		3,440		7,918		110		—		156,115
Commercial real estate	152,650		3,440		7,969		110		—		164,169
Commercial and industrial	31,351		185		2,279		—		—		33,815
Residential real estate	11,633		647		1,024		—		180,759		194,063
Home equity lines of credit	44		—		—		—		19,964		20,008
Consumer, indirect	8		—		—		—		245		253
Consumer, direct	32		—		—		—		908		940
Consumer	40		—		—		—		1,153		1,193
Total acquired loans	$	195,718	$	4,272	$	11,272	$	110	$	201,876	$	413,248
Total loans	$	1,307,174	$	71,582	$	44,420	$	241	$	978,911	$	2,402,328



	Pass Rated (Grades 1 - 4)		Special Mention (Grade 5)		Substandard (Grade 6)		Doubtful (Grade 7)		Not Rated		Total Loans
(Dollars in thousands)
December 31, 2017
Originated loans:
Commercial real estate, construction	$	100,409	$	5,502	$	754	$	—	$	453	$	107,118
Commercial real estate, other	561,320		17,189		16,938		—		—		595,447
Commercial real estate	661,729		22,691		17,692		—		453		702,565
Commercial and industrial	420,477		13,062		4,512		—		—		438,051
Residential real estate	17,896		1,000		11,371		216		274,040		304,523
Home equity lines of credit	454		—		—		—		88,448		88,902
Consumer, indirect	55		8		—		—		340,327		340,390
Consumer, direct	33		—		—		—		66,977		67,010
Consumer	88		8		—		—		407,304		407,400
Deposit account overdrafts	—		—		—		—		849		849
Total originated loans	$	1,100,644	$	36,761	$	33,575	$	216	$	771,094	$	1,942,290
Acquired loans:
Commercial real estate, construction	$	8,267	$	—	$	52	$	—	$	—	$	8,319
Commercial real estate, other	149,486		6,527		9,107		—		—		165,120
Commercial real estate	157,753		6,527		9,159		—		—		173,439
Commercial and industrial	32,011		157		2,325		—		—		34,493
Residential real estate	12,543		593		1,105		—		170,623		184,864
Home equity lines of credit	124		—		—		—		20,451		20,575
Consumer, indirect	12		—		—		—		317		329
Consumer, direct	35		—		—		—		1,112		1,147
Consumer	47		—		—		—		1,429		1,476
Total acquired loans	$	202,478	$	7,277	$	12,589	$	—	$	192,503	$	414,847
Total loans	$	1,303,122	$	44,038	$	46,164	$	216	$	963,597	$	2,357,137

In the first three months of 2018, Peoples' classified loans, which are loans categorized as substandard or doubtful, declined compared to the balances at December 31, 2017 mostly due to loan payoffs.

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)
March 31, 2018
Commercial real estate, construction	$	819	$	—	$	732	$	732	$	—	$	743	$	—
Commercial real estate, other	14,480		14		13,132		13,146		1		13,295		105
Commercial real estate	15,299		14		13,864		13,878		1		14,038		105
Commercial and industrial	2,429		1,699		557		2,256		224		1,890		15
Residential real estate	24,422		476		22,459		22,935		57		22,839		312
Home equity lines of credit	1,647		70		1,573		1,643		15		1,652		20
Consumer, indirect	301		74		231		305		20		285		5
Consumer, direct	76		53		23		76		39		77		1
Consumer	377		127		254		381		59		362		6
Total	$	44,174	$	2,386	$	38,707	$	41,093	$	356	$	40,781	$	458
December 31, 2017
Commercial real estate, construction	$	821	$	—	$	754	$	754	$	—	$	788	$	—
Commercial real estate, other	14,909		14		13,606		13,620		1		14,392		503
Commercial real estate	15,730		14		14,360		14,374		1		15,180		503
Commercial and industrial	1,690		951		572		1,523		199		1,668		65
Residential real estate	24,743		477		22,626		23,103		58		23,195		1,246
Home equity lines of credit	1,707		81		1,624		1,705		18		1,505		85
Consumer, indirect	273		70		206		276		26		184		20
Consumer, direct	87		56		28		84		37		79		7
Consumer	360		126		234		360		63		263		27
Total	$	44,230	$	1,649	$	39,416	$	41,065	$	339	$	41,811	$	1,926

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 loan, such as (i) a reduction in the interest rate for the remaining life of the loan, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new loans 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 (a)
(Dollars in thousands)	Number of Contracts	Pre-Modification		Post-Modification		Remaining Recorded Investment
March 31, 2018
Originated loans:
Residential real estate	2	$	193	$	193	$	193
Consumer, indirect	7	86		86		86
Consumer, direct	2	4		4		4
Consumer	9	90		90		90
Total originated loans	11	$	283	$	283	$	283
Acquired loans:
Commercial real estate, other	1	$	50	$	50	$	50
Residential real estate	2	269		269		269
Consumer, other	1	1		1		1
Total acquired loans	4	$	320	$	320	$	320
March 31, 2017
Originated loans:
Residential real estate	2	$	105	$	105	$	105
Home equity lines of credit	3	226		226		225
Consumer, indirect	4	80		80		80
Consumer, direct	2	9		9		9
Consumer	6	89		89		89
Total originated loans	11	$	420	$	420	$	419
Acquired loans:
Commercial real estate, other	2	$	271	$	271	$	271
Residential real estate	2	126		126		126
Home equity lines of credit	4	294		294		326
Consumer, direct	1	9		9		9
Total acquired loans	9	$	700	$	700	$	732
(a) 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 acquired loans modified in a TDR during the year that subsequently defaulted (i.e., are 90 days or more past due following a modification) during the three months ended March 31:



	March 31, 2018					March 31, 2017
(Dollars in thousands)	Number of Contracts	Recorded Investment (a)		Impact on the Allowance for Loan Losses		Number of Contracts	Recorded Investment (a)		Impact on the Allowance for Loan Losses
Acquired loans:
Residential real estate	—	$	—	$	—	1	$	73	$	—
Total	—	$	—	$	—	1	$	73	$	—
(a) 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 commitments to lend additional funds to the related debtors whose terms have been modified in a TDR.

Allowance for Originated Loan Losses

Changes in the allowance for originated loan losses for the three months ended March 31 were as follows:



(Dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Home Equity Lines of Credit			Consumer Indirect			Consumer Other			Deposit Account Overdrafts			Total
Balance, January 1, 2018	$	7,797		$	5,813		$	904		$	693		$	2,944		$	464		$	70		$	18,685
Charge-offs	(842		)	(31		)	(145		)	(37		)	(929		)	(110		)	(205		)	(2,299		)
Recoveries	15			—			26			7			134			69			70			321
Net (charge-offs)	(827		)	(31		)	(119		)	(30		)	(795		)	(41		)	(135		)	(1,978		)
Provision for (recovery of) loan losses	1,092			(513		)	301			27			885			50			141			1,983
Balance, March 31, 2018	$	8,062		$	5,269		$	1,086		$	690		$	3,034		$	473		$	76		$	18,690

Period-end amount allocated to:
Loans individually evaluated for impairment	$	1		$	224		$	57		$	15		$	20		$	39		$	—		$	356
Loans collectively evaluated for impairment	8,061			5,045			1,029			675			3,014			434			76			18,334
Ending balance	$	8,062		$	5,269		$	1,086		$	690		$	3,034		$	473		$	76		$	18,690

Balance, January 1, 2017	$	7,172		$	6,353		$	982		$	688		$	2,312		$	518		$	171		$	18,196
Charge-offs	—			(117		)	(108		)	(3		)	(483		)	(40		)	(349		)	(1,100		)
Recoveries	102			—			89			3			206			50			65			515
Net recoveries (charge-offs)	102			(117		)	(19		)	—			(277		)	10			(284		)	(585		)
(Recovery of) provision for loan losses	(208		)	298			182			(13		)	374			(90		)	224			767
Balance, March 31, 2017	$	7,066		$	6,534		$	1,145		$	675		$	2,409		$	438		$	111		$	18,378

Period-end amount allocated to:
Loans individually evaluated for impairment	$	462		$	449		$	139		$	16		$	24		$	2		$	—		$	1,092
Loans collectively evaluated for impairment	6,604			6,085			1,006			659			2,385			436			111			17,286
Ending balance	$	7,066		$	6,534		$	1,145		$	675		$	2,409		$	438		$	111		$	18,378

Allowance for Loan Losses for Acquired Loans

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 purchased 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. 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 for the three months ended March 31:



	Three Months Ended
(Dollars in thousands)	March 31, 2018		March 31, 2017
Purchased credit impaired loans:
Balance, beginning of period	$	108	$	233
Recovery of loan losses	—		(143		)
Balance, March 31	$	108	$	90

During the first quarter of 2017, Peoples recorded a recovery of loan losses that was related to an acquired purchased credit impaired loan that was paid off during the quarter.