| 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, central and eastern Kentucky and west central West Virginia. 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) June 30, December 31, 2019 Construction $ 109,953 $ 88,518 Commercial real estate, other 914,420 833,238 Commercial and industrial 1,070,326 662,993 Residential real estate 613,084 661,476 Home equity lines of credit 123,384 132,704 Consumer, indirect 450,334 417,185 Consumer, direct 78,926 76,533 Deposit account overdrafts 592 878 Total loans, at amortized cost $ 3,361,019 $ 2,873,525 Commercial and industrial loan balances grew significantly compared to December 31, 2019. Peoples began participating as a Small Business Administration ("SBA") Paycheck Protection Program ("PPP") lender during the second quarter of 2020, and originated approximately $488.1 million of PPP loans during the first six months of 2020. At June 30, 2020, the PPP loans had an amortized cost of $457.7 million, and were included in commercial and industrial loan balances. Peoples also recorded deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, which totaled $13.6 million at June 30, 2020. During the second quarter of 2020, Peoples recorded amortization of net deferred loan origination fees of $1.9 million on PPP loans. The remaining net deferred loan origination fees will be amortized over the life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income. Accrued interest receivable is not included within the loan balances, but is presented in the “Other assets” line of the Unaudited Consolidated Balance Sheets, with no recorded allowance for credit losses. Interest receivable on loans was $9.2 million at June 30, 2020 and $9.1 million at December 31, 2019. 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 amortized cost of loans on nonaccrual status and loans delinquent for 90 days or more and accruing were as follows: June 30, 2020 December 31, 2019 (Dollars in thousands) Nonaccrual (a)(b) Accruing Loans 90+ Days Past Due Nonaccrual (a) Accruing Loans 90+ Days Past Due (b) Construction $ 4 $ — $ 411 $ — Commercial real estate, other 9,678 130 6,801 907 Commercial and industrial 4,745 — 2,155 155 Residential real estate 8,905 1,618 6,361 2,677 Home equity lines of credit 687 46 1,165 108 Consumer, indirect 802 57 840 — Consumer, direct 208 29 48 85 Total loans, at amortized cost $ 25,029 $ 1,880 $ 17,781 $ 3,932 (a) There were $1.4 million of nonaccrual loans for which there was no allowance for credit losses as of June 30, 2020 and $3.1 million at December 31, 2019. (b) The new accounting for purchased credit deteriorated loans under ASU 2016-13 resulted in the movement of $3.9 million of loans from the 90+ days past due and accruing category to the nonaccrual category as of January 1, 2020. At December 31, 2019, these loans were presented as 90+ days past due and accruing, As of June 30, 2020, Peoples had made short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment for borrowers, which were insignificant. Under the CARES Act, borrowers that are considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. As such, these modifications made under the CARES Act are not included in Peoples' nonaccrual or accruing loans 90+ days past due as of June 30, 2020. The new accounting for purchased credit deteriorated loans under ASU 2016-13 resulted in the movement of $3.9 million of loans from the 90+ days past due and accruing category to the nonaccrual category as of January 1, 2020. As of December 31, 2019, these loans were presented as 90+ days past due and accruing. Although they were not accruing contractual interest income, they were accreting income from the discount that was recognized due to acquisition accounting. The additional increase in nonaccrual loans compared to December 31, 2019 was due to a $1.5 million commercial relationship and several smaller commercial relationships being placed on nonaccrual. The amount of interest income recognized on nonaccrual loans during the three and six months ended June 30, 2020 was $392,000 and $850,000, respectively. The following table presents the aging of the amortized cost of past due loans: Loans Past Due Current Loans Total Loans (Dollars in thousands) 30 - 59 days 60 - 89 days 90 + Days Total June 30, 2020 Construction — — 4 $ 4 $ 109,949 109,953 Commercial real estate, other 595 1,097 9,235 10,927 903,493 914,420 Commercial and industrial 1,842 35 4,710 6,587 1,063,739 1,070,326 Residential real estate 1,641 3,417 5,576 10,634 602,450 613,084 Home equity lines of credit 511 540 472 1,523 121,861 123,384 Consumer, indirect 1,580 208 219 2,007 448,327 450,334 Consumer, direct 158 24 185 367 78,559 78,926 Deposit account overdrafts — — — — 592 592 Total loans, at amortized cost $ 6,327 $ 5,321 $ 20,401 $ 32,049 $ 3,328,970 $ 3,361,019 December 31, 2019 Construction $ 5 $ — $ 411 $ 416 $ 88,102 $ 88,518 Commercial real estate, other 376 337 7,501 8,214 825,024 833,238 Commercial and industrial 2,780 312 1,244 4,336 658,657 662,993 Residential real estate 10,538 2,918 5,872 19,328 642,148 661,476 Home equity lines of credit 642 510 1,033 2,185 130,519 132,704 Consumer, indirect 3,574 714 370 4,658 412,527 417,185 Consumer, direct 619 117 112 848 75,685 76,533 Deposit account overdrafts — — — — 878 878 Total loans, at amortized cost $ 18,534 $ 4,908 $ 16,543 $ 39,985 $ 2,833,540 $ 2,873,525 The increase in loans 90+ days past due, compared to December 31, 2019, was mostly due to one $2.5 million commercial relationship. Delinquency trends remained stable, as 99.0% of Peoples' portfolio was considered “current” at June 30, 2020, compared to 98.6% at December 31, 2019. As of June 30, 2020, Peoples had made short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment for borrowers, which were insignificant. Under the CARES Act, borrowers that are considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. As such, these modifications made under the CARES Act are not reflected as loans past due in the table above as of June 30, 2020. Pledged Loans Peoples has pledged certain loans secured by one-to-four family and multifamily residential mortgages, and home equity lines of credit under a blanket collateral agreement to secure borrowings from the FHLB. Peoples also has pledged commercial loans to secure borrowings with the FRB. Loans pledged are summarized as follows: (Dollars in thousands) June 30, 2020 December 31, 2019 Loans pledged to FHLB $ 464,770 $ 458,227 Loans pledged to FRB 521,094 172,693 During the second quarter of 2020, Peoples pledged additional collateral to the FRB to secure potential funding needs in light of the COVID-19 pandemic, as well as to fund the PPP loan originations that occurred during the quarter. Credit Quality Indicators As discussed in "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples' 2019 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. Loan grades are assigned at the time a new loan or lending commitment is extended by Peoples and may be changed at any time when circumstances warrant. Loans to borrowers with an aggregate unpaid principal balance in excess of $1.0 million are reviewed at least on an annual basis for possible credit deterioration. Loan relationships whose aggregate credit exposure to Peoples is equal to or less than $1.0 million are reviewed on an event driven basis. Triggers for review include knowledge of adverse events affecting the borrower's business, receipt of financial statements indicating deteriorating credit quality or other similar events. Adversely classified loans are reviewed on a quarterly basis. 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 credit losses are taken during 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,” 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 “pass" for disclosure purposes. The following table summarizes the risk category of loans within Peoples' loan portfolio based upon the most recent analysis performed at June 30, 2020: (Dollars in thousands) 2020 2019 2018 2017 2016 Prior Revolving Loans Revolving Loans Converted to Term Total Loans Construction Pass $ 14,934 $ 52,867 $ 3,463 $ 34,080 $ 1,406 $ 705 $ 444 $ 35,426 $ 107,899 Special mention $ — — 415 — — 146 4 — 565 Substandard — — — 404 — 1,085 — — 1,489 Total 14,934 52,867 3,878 34,484 1,406 1,936 448 35,426 109,953 Commercial real estate, other Pass 72,717 135,406 107,372 101,444 110,664 233,262 96,499 23,043 857,364 Special mention — 3,600 1,132 4,407 558 7,073 4,848 124 21,618 Substandard — 1,574 68 2,209 2,016 25,323 4,153 47 35,343 Doubtful — — — — — 95 — — 95 Total 72,717 140,580 108,572 108,060 113,238 265,753 105,500 23,214 914,420 Commercial and industrial Pass 462,493 106,252 82,797 39,273 50,439 72,763 224,744 42,925 1,038,761 Special mention 401 398 417 230 1,657 1,445 12,199 1,469 16,747 Substandard 2,118 2,069 289 2,161 368 4,373 3,226 2,701 14,604 Doubtful — — — — 7 207 — 187 214 Total 465,012 108,719 83,503 41,664 52,471 78,788 240,169 47,282 1,070,326 Residential real estate Pass 18,462 46,167 30,246 35,652 52,555 351,179 63,691 — 597,952 Special mention — — — — — 1 — — 1 Substandard — — — — — 14,560 — — 14,560 Doubtful — — — — — 363 — — 363 Loss — — — — — 208 — — 208 Total 18,462 46,167 30,246 35,652 52,555 366,311 63,691 — 613,084 Home equity lines of credit Pass 7,969 15,083 14,772 14,082 13,372 44,530 13,576 4,173 123,384 Total 7,969 15,083 14,772 14,082 13,372 44,530 13,576 4,173 123,384 Consumer, indirect Pass 98,210 115,808 94,468 54,703 24,863 10,384 51,898 — 450,334 Total 98,210 115,808 94,468 54,703 24,863 10,384 51,898 — 450,334 Consumer, direct Pass 17,557 20,942 15,371 6,847 3,966 4,271 9,972 — 78,926 Total 17,557 20,942 15,371 6,847 3,966 4,271 9,972 — 78,926 Deposit account overdrafts 592 — — — — — — — 592 Total loans, at amortized cost $ 695,453 $ 500,166 $ 350,810 $ 295,492 $ 261,871 $ 771,973 $ 485,254 $ 110,095 $ 3,361,019 During the second quarter of 2020, Peoples downgraded additional credits based upon updated information that became available, and the downgrades were not related to COVID-19. At June 30, 2020, Peoples had a total of $1.6 million of loans secured by residential real estate mortgages that were in the process of foreclosure. Collateral Dependent Loans Peoples has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans: • Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate. • Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage. • Home equity lines of credit are generally secured by second mortgages on residential real estate property. • Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral. The following table details Peoples' amortized cost of collateral dependent loans: (Dollars in thousands) June 30, 2020 December 31, 2019 Commercial real estate, other $ 9,372 $ 6,818 Commercial and industrial 4,509 1,962 Residential real estate 1,714 1,847 Home equity lines of credit 411 681 Consumer, indirect — 713 Consumer, direct — 94 Total collateral dependent loans $ 16,006 $ 12,115 The increase in collateral dependent commercial and industrial loans at June 30, 2020 compared to December 31, 2019 was mostly due to one commercial relationship that became collateral dependent, coupled with some smaller relationships. In addition, the increase in collateral dependent consumer loans was driven by a change in the policy threshold for evaluation of individually impaired loans, which was previously $100,000 and on January 1, 2020 was changed to $250,000, thereby reducing the amount of loans considered collateral dependent which were no longer above the threshold. The following table summarizes the loans that were modified as TDRs during the three months ended June 30: Three Months Ended Recorded Investment (a) (Dollars in thousands) Number of Contracts Pre-Modification Post-Modification Remaining Recorded Investment June 30, 2020 Residential real estate 5 303 303 303 Home equity lines of credit 2 14 14 14 Consumer, indirect 8 62 62 62 Total 15 $ 379 $ 379 $ 379 June 30, 2019 Originated loans: Residential real estate 1 $ 37 $ 37 $ 37 Home equity lines of credit 2 60 60 60 Consumer, indirect 7 110 110 110 Consumer, direct 3 41 41 41 Consumer 10 151 151 151 Total 13 $ 248 $ 248 $ 248 Acquired loans: Commercial real estate, other 7 $ 725 $ 699 $ 700 Commercial and industrial 4 1,259 1,259 1,259 Residential real estate 35 $ 1,823 $ 1,823 $ 1,823 Home equity lines of credit 7 113 113 113 Consumer, direct 16 340 340 340 Total 69 $ 4,260 $ 4,234 $ 4,235 (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. Six Months Ended Recorded Investment (a) (Dollars in thousands) Number of Contracts Pre-Modification Post-Modification Remaining Recorded Investment June 30, 2020 Commercial real estate, other 1 $ 265 $ 265 $ 265 Commercial and industrial 1 145 145 145 Residential real estate 8 756 786 783 Home equity lines of credit 4 55 55 53 Consumer, indirect 13 128 128 122 Consumer, direct 3 51 51 49 Consumer 16 179 179 171 Total 30 $ 1,400 $ 1,430 $ 1,417 June 30, 2019 Originated loans: Commercial and industrial 2 $ 38 $ 38 $ 35 Residential real estate 3 436 440 437 Home equity lines of credit 4 139 139 139 Consumer, indirect 8 123 123 123 Consumer, direct 5 69 69 67 Consumer 13 192 192 190 Total 22 $ 805 $ 809 $ 801 Acquired loans: Commercial real estate, other 7 $ 724 $ 699 $ 700 Commercial and industrial 4 1,259 1,259 1,259 Residential real estate 36 1,847 1,847 1,842 Home equity lines of credit 9 179 179 178 Consumer, direct 16 340 340 340 Total 72 $ 4,349 $ 4,324 $ 4,319 (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. On March 22, 2020, federal and state government banking regulators issued a joint statement, with which the FASB concurred as to the approach, regarding accounting for loan modifications for borrowers affected by COVID-19. In this guidance, short-term modifications, made on a good faith basis in response to COVID-19, to borrowers who were current prior to any relief, are not considered TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment which are insignificant. Under the guidance, borrowers that are considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. In addition, modification or deferral programs mandated by the U.S. federal government or any state government related to COVID-19 are not in the scope of ASC 310-40. Peoples did not have any 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 borrowers whose loan terms have been modified in a TDR. Allowance for Credit Losses Changes in the allowance for credit losses for the three months ended June 30, 2020 are summarized below: (Dollars in thousands) Beginning Balance, March 31, 2020 Initial Allowance for Purchased Credit Deteriorated Assets Provision for (Recovery of) Credit Losses (a) Charge-offs Recoveries Ending Balance, June 30, 2020 Construction $ 1,742 $ — $ 920 $ — $ — $ 2,662 Commercial real estate, other 12,142 — 7,135 (135) 6 19,148 Commercial and industrial 8,743 — 573 (15) 805 10,106 Residential real estate 5,744 — 552 (16) 100 6,380 Home equity lines of credit 1,695 — 61 (9) 8 1,755 Consumer, indirect 10,878 — 1,679 (336) 72 12,293 Consumer, direct 1,803 — 179 (51) 10 1,941 Deposit account overdrafts 86 — 61 (119) 49 77 Total $ 42,833 $ — $ 11,160 $ (681) $ 1,050 $ 54,362 (a) Amount does not include the provision for unfunded commitment liability. Changes in the allowance for credit losses for the six months ended June 30, 2020 are summarized below: (Dollars in thousands) Beginning Balance, Initial Allowance for Purchased Credit Deteriorated Assets Provision for (Recovery of) Credit Losses (a) Charge-offs Recoveries Ending Balance, June 30, 2020 Construction $ 600 $ 51 $ 2,011 $ — $ — $ 2,662 Commercial real estate, other 7,193 1,356 10,622 (145) 122 19,148 Commercial and industrial 4,960 860 3,229 (952) 2,009 10,106 Residential real estate 3,977 383 1,997 (134) 157 6,380 Home equity lines of credit 1,570 2 197 (23) 9 1,755 Consumer, indirect 5,389 — 7,764 (1,057) 197 12,293 Consumer, direct 856 34 1,140 (113) 24 1,941 Deposit account overdrafts 94 — 206 (332) 109 77 Total $ 24,639 $ 2,686 $ 27,166 $ (2,756) $ 2,627 $ 54,362 (a) Amount does not include the provision for unfunded commitment liability. Peoples increased its allowance for credit losses based on CECL model results, which incorporated economic forecasts at the end of June 2020. These forecasts included higher unemployment rates nationally and in Ohio, and lower Ohio Gross Domestic Product, which are the key assumptions within the CECL model, compared to March 31, 2020. This was similar to the impact that COVID-19 had on economic forecasts at March 31, 2020, which also resulted in higher allowance for credit losses compared to December 31, 2019. The PPP loans originated during the second quarter of 2020 are guaranteed by the SBA, and therefore, had no impact on the allowance for credit losses at June 30, 2020. Peoples recorded lower provision for credit losses during the second quarter of 2020, compared to the linked quarter, driven primarily by the deterioration in the one-year economic forecast used for the first quarter, which was more severe than the deterioration in the one-year economic forecast used for the second quarter. The significant increase in the allowance for credit losses as of June 30, 2020 compared to January 1, 2020 was mostly due to the recent COVID-19 pandemic, and the resulting impact on economic forecasts utilized in the CECL model. Peoples calculates its allowance for credit losses using a discounted cash flow model, and incorporates economic forecasts, including U.S. unemployment, Ohio unemployment, Ohio Gross Domestic Product, and the Ohio Case Shiller Home Price Indices as economic factors. The economic forecast used in the June 30, 2020 calculation of the allowance for credit losses included higher unemployment rates and lower Ohio Gross Domestic Product, which drove much of the increase in the allowance for credit losses at June 30, 2020. Approximately 63% of the increase in the allowance for credit losses at June 30, 2020, compared to January 1, 2020, was related to the change in the economic forecast, and the remaining increase was attributable to changes in the composition of the loan portfolio including recent loan growth. In addition, Peoples recorded an increase of $5.8 million in allowance for credit losses on January 1, 2020 related to the implementation of ASU 2016-13. As of June 30, 2020, the CECL model produced results, based on economic forecasts, that were higher than Peoples believed to be appropriate at the time. Peoples believes the actions taken to provide relief to consumer and commercial customers, which include at least 90 days of payment relief for those customers, coupled with the CARES Act stimulus package and the SBA PPP, indicate that Peoples would not experience the projected credit losses produced by the model. Therefore, Peoples made certain qualitative adjustments to more closely reflect its estimate of the potential losses of its loan portfolio at June 30, 2020. During the second quarter of 2020, Peoples recognized a recovery of $750,000 on a commercial and industrial loan that was previously charged-off, and recognized a similar $1.2 million recovery during the first quarter of 2020. As of June 30, 2020, Peoples had recorded an unfunded commitment liability of $3.1 million, an increase compared to $1.5 million on January 1, 2020. The unfunded commitment liability is presented in the “Accrued expenses and other liabilities” line of the Unaudited Consolidated Balance Sheets. |
