UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
| | | | |
x
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
March 31, 2020
OR
|
| | | | |
o
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____ to ____
Commission File Number: 000-16772
|
| | | | | | | | | | | | | | | | | | | | | | |
| PEOPLES BANCORP INC. | | | | | | | |
| (Exact name of Registrant as specified in its charter) | | | | | | | |
| Ohio | | | | | 31-0987416 | | |
| (State or other jurisdiction of incorporation or organization) | | | | | (I.R.S. Employer Identification No.) | | |
138 Putnam Street, P.O. Box 738, Marietta, Ohio | | | | 45750 | | | |
| Marietta, | Ohio | | | | 45750 | | |
| (Address of principal executive offices) | | | | | (Zip Code) | | |
| Registrant’s telephone number, including area code: | | | | | (740) | | 373-3155 | |
| | Not Applicable | | | | | | |
| | (Former name, former address and former fiscal year, if changed since last report) | | | | | | |
| Securities registered pursuant to Section 12(b) of the Act: | | | | | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered | | | |
| Common Shares, without par value | PEBO | PEBO | | The Nasdaq Stock Market | | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | | | |
Large accelerated filero | o | Accelerated filerx | ☒ |
Non-accelerated filero
| o | Smaller reporting companyo | ☐ |
| | Emerging growth companyo | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o ☐ No x☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:20,690,48020,034,344 common shares, without par value, at October 29, 2019.
May 4, 2020.
| | | | | |
| Table of Contents | |
| |
Table of Contents |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
PART I
ITEM 1. FINANCIAL STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | September 30,
2019 | December 31,
2018 | | March 31,
2020 | December 31,
2019 |
| | | |
| (Dollars in thousands) | (Unaudited) | | (Dollars in thousands) | (Unaudited) | |
| Assets | | Assets | |
| Cash and cash equivalents: | | Cash and cash equivalents: | |
| Cash and due from banks | $ | 68,399 |
| $ | 61,775 |
| Cash and due from banks | $ | 56,490 | | $ | 53,263 | |
| Interest-bearing deposits in other banks | 53,050 |
| 15,837 |
| Interest-bearing deposits in other banks | 107,162 | | 61,930 | |
| Total cash and cash equivalents | 121,449 |
| 77,612 |
| Total cash and cash equivalents | 163,652 | | 115,193 | |
| Available-for-sale investment securities, at fair value (amortized cost of $976,286 at September 30, 2019 and $804,655 at December 31, 2018) | 988,035 |
| 791,891 |
| |
| Held-to-maturity investment securities, at amortized cost (fair value of $34,893 at September 30, 2019 and $36,963 at December 31, 2018) | 33,829 |
| 36,961 |
| |
| Available-for-sale investment securities, at fair value (amortized cost of $932,179 at March 31, 2020 and $929,395 at December 31, 2019) (a) | | Available-for-sale investment securities, at fair value (amortized cost of $932,179 at March 31, 2020 and $929,395 at December 31, 2019) (a) | 960,835 | | 936,101 | |
| Held-to-maturity investment securities, at amortized cost (fair value of $40,682 at March 31, 2020 and $32,541 at December 31, 2019) (a)(b) | | Held-to-maturity investment securities, at amortized cost (fair value of $40,682 at March 31, 2020 and $32,541 at December 31, 2019) (a)(b) | 38,738 | | 31,747 | |
| Other investment securities | 43,045 |
| 42,985 |
| Other investment securities | 46,924 | | 42,730 | |
| Total investment securities | 1,064,909 |
| 871,837 |
| |
| Loans, net of deferred fees and costs (a) | 2,850,316 |
| 2,728,778 |
| |
| Allowance for loan losses | (21,585 | ) | (20,195 | ) | |
| Net loans | 2,828,731 |
| 2,708,583 |
| |
| Total investment securities (a)(b) | | Total investment securities (a)(b) | 1,046,497 | | 1,010,578 | |
| Loans, net of deferred fees and costs (b) | | Loans, net of deferred fees and costs (b) | 2,911,437 | | 2,873,525 | |
| Allowance for credit losses (b) | | Allowance for credit losses (b) | (42,833) | | (21,556) | |
| Net loans (b) | | Net loans (b) | 2,868,604 | | 2,851,969 | |
| Loans held for sale | 4,522 |
| 5,470 |
| Loans held for sale | 2,217 | | 6,499 | |
| Bank premises and equipment, net of accumulated depreciation | 63,338 |
| 56,542 |
| Bank premises and equipment, net of accumulated depreciation | 60,301 | | 61,846 | |
| Bank owned life insurance | 70,396 |
| 68,934 |
| Bank owned life insurance | 70,195 | | 69,722 | |
| Goodwill | 166,494 |
| 151,245 |
| Goodwill | 165,805 | | 165,701 | |
| Other intangible assets | 12,632 |
| 10,840 |
| Other intangible assets | 11,642 | | 11,802 | |
| Other assets | 63,677 |
| 40,391 |
| Other assets | 80,207 | | 60,855 | |
| Total assets | $ | 4,396,148 |
| $ | 3,991,454 |
| Total assets | $ | 4,469,120 | | $ | 4,354,165 | |
| Liabilities | | Liabilities | | | | |
| Deposits: | | Deposits: | |
| Non-interest-bearing | $ | 677,232 |
| $ | 607,877 |
| Non-interest-bearing | $ | 727,266 | | $ | 671,208 | |
| Interest-bearing | 2,679,970 |
| 2,347,588 |
| Interest-bearing | 2,671,164 | | 2,620,204 | |
| Total deposits | 3,357,202 |
| 2,955,465 |
| Total deposits | 3,398,430 | | 3,291,412 | |
| Short-term borrowings | 288,150 |
| 356,198 |
| Short-term borrowings | 259,661 | | 316,977 | |
| Long-term borrowings | 84,194 |
| 109,644 |
| Long-term borrowings | 132,791 | | 83,123 | |
| Accrued expenses and other liabilities | 78,069 |
| 50,007 |
| 94,517 | | 68,260 | |
| Total liabilities | 3,807,615 |
| 3,471,314 |
| Total liabilities | 3,885,399 | | 3,759,772 | |
| Stockholders’ equity | | Stockholders’ equity | | | | |
| Preferred stock, no par value, 50,000 shares authorized, no shares issued at September 30, 2019 and December 31, 2018 | — |
| — |
| |
| Common stock, no par value, 24,000,000 shares authorized, 21,149,122 shares issued at September 30, 2019 and 20,124,378 shares issued at December 31, 2018, including shares held in treasury | 420,070 |
| 386,814 |
| |
| Preferred stock, no par value, 50,000 shares authorized, no shares issued at March 31, 2020 and December 31, 2019 | | Preferred stock, no par value, 50,000 shares authorized, no shares issued at March 31, 2020 and December 31, 2019 | — | | — | |
| Common stock, no par value, 24,000,000 shares authorized, 21,162,702 shares issued at March 31, 2020 and 21,156,143 shares issued at December 31, 2019, including shares held in treasury | | Common stock, no par value, 24,000,000 shares authorized, 21,162,702 shares issued at March 31, 2020 and 21,156,143 shares issued at December 31, 2019, including shares held in treasury | 420,678 | | 420,876 | |
Retained earnings | 179,238 |
| 160,346 |
| 175,637 | | 187,149 | |
| Accumulated other comprehensive income (loss), net of deferred income taxes | 1,089 |
| (12,933 | ) | Accumulated other comprehensive income (loss), net of deferred income taxes | 8,252 | | (1,425) | |
| Treasury stock, at cost, 493,742 shares at September 30, 2019 and 601,289 shares at December 31, 2018 | (11,864 | ) | (14,087 | ) | |
| Treasury stock, at cost, 865,998 shares at March 31, 2020 and 504,182 shares at December 31, 2019 | | Treasury stock, at cost, 865,998 shares at March 31, 2020 and 504,182 shares at December 31, 2019 | (20,846) | | (12,207) | |
| Total stockholders’ equity | 588,533 |
| 520,140 |
| Total stockholders’ equity | 583,721 | | 594,393 | |
| Total liabilities and stockholders’ equity | $ | 4,396,148 |
| $ | 3,991,454 |
| Total liabilities and stockholders’ equity | $ | 4,469,120 | | $ | 4,354,165 | |
(a) Also referredAvailable-for-sale investment securities and held-to-maturity investment securities are presented net of allowance for credit losses of $0 and $6,000, respectively, as of March 31, 2020.
(b) On January 1, 2020, Peoples adopted ASU 2016-13 and adopted the current expected credit loss ("CECL") model, which resulted in the establishment of a $7,000 allowance for credit losses for held-to-maturity investment securities; an increase in loan balances of $2.6 million to throughoutestablish the document as "total loans"allowance for credit losses for purchased credit deteriorated loans; an increase to the allowance for credit losses (which was the "allowance for loan losses" prior to January 1, 2020) of $5.8 million; the addition of a $1.5 million unfunded commitment liability included in accrued expenses and "loans held for investment."other liabilities; and a reduction to retained earnings of $3.7 million, net of statutory federal corporate income tax.
See Notes to the Unaudited Consolidated Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS (Unaudited)
| | | | | | | | | | | |
| Three Months Ended | | | | |
| March 31, | | | | |
| (Dollars in thousands, except per share data) | 2020 | 2019 | | | |
| Interest income: | | | | | |
| Interest and fees on loans | $ | 34,588 | | $ | 34,053 | | | | |
| Interest and dividends on taxable investment securities | 5,383 | | 5,810 | | | | |
| Interest on tax-exempt investment securities | 655 | | 537 | | | | |
| Other interest income | 236 | | 176 | | | | |
| Total interest income | 40,862 | | 40,576 | | | | |
| Interest expense: | | | | | |
| Interest on deposits | 4,629 | | 4,844 | | | | |
| Interest on short-term borrowings | 1,039 | | 1,173 | | | | |
| Interest on long-term borrowings | 558 | | 645 | | | | |
| | | | | |
| Total interest expense | 6,226 | | 6,662 | | | | |
| Net interest income | 34,636 | | 33,914 | | | | |
| Provision for (recovery of) credit losses (a) | 16,969 | | (263) | | | | |
| Net interest income after provision for (recovery of) credit losses | 17,667 | | 34,177 | | | | |
| | | | | |
| | | | | |
| | | | | |
| Non-interest income: | | | | | |
| Insurance income | 4,130 | | 4,621 | | | | |
| Electronic banking income | 3,280 | | 2,987 | | | | |
| Trust and investment income | 3,262 | | 3,112 | | | | |
| Deposit account service charges | 2,820 | | 2,341 | | | | |
| Mortgage banking income | 750 | | 788 | | | | |
| Bank owned life insurance income | 582 | | 485 | | | | |
| Net gain on investment securities | 319 | | 30 | | | | |
| Commercial loan swap fees | 244 | | 146 | | | | |
| Net loss on asset disposals and other transactions | (87) | | (182) | | | | |
| Other non-interest income | 437 | | 1,101 | | | | |
| Total non-interest income | 15,737 | | 15,429 | | | | |
| Non-interest expense: | | | | | |
| Salaries and employee benefit costs | 19,918 | | 19,202 | | | | |
| Net occupancy and equipment expense | 3,154 | | 2,978 | | | | |
| Electronic banking expense | 1,865 | | 1,577 | | | | |
| Data processing and software expense | 1,752 | | 1,545 | | | | |
| Professional fees | 1,693 | | 1,276 | | | | |
| Franchise tax expense | 882 | | 705 | | | | |
| Amortization of other intangible assets | 729 | | 694 | | | | |
| Foreclosed real estate and other loan expenses | 578 | | 255 | | | | |
| Marketing expense | 473 | | 594 | | | | |
| Communication expense | 280 | | 278 | | | | |
| FDIC insurance premium | (5) | | 371 | | | | |
| Other non-interest expense | 3,006 | | 2,385 | | | | |
| Total non-interest expense | 34,325 | | 31,860 | | | | |
| (Loss) income before income taxes | (921) | | 17,746 | | | | |
| Income tax (benefit) expense | (156) | | 3,377 | | | | |
| Net (loss) income | $ | (765) | | $ | 14,369 | | | | |
| | | | | |
| | | | | |
| (Loss) earnings per common share - basic | $ | (0.04) | | $ | 0.74 | | | | |
| (Loss) earnings per common share - diluted | $ | (0.04) | | $ | 0.73 | | | | |
| Weighted-average number of common shares outstanding - basic | 20,367,564 | | 19,366,008 | | | | |
| Weighted-average number of common shares outstanding - diluted | 20,538,214 | | 19,508,868 | | | | |
| Cash dividends declared | $ | 7,038 | | $ | 5,868 | | | | |
| Cash dividends declared per common share | $ | 0.34 | | $ | 0.30 | | | | |
|
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (Dollars in thousands, except per share data) | 2019 | 2018 | | 2019 | 2018 |
| Interest income: | | | | | |
| Interest and fees on loans | $ | 36,522 |
| $ | 33,355 |
| | $ | 107,235 |
| $ | 91,486 |
|
| Interest and dividends on taxable investment securities | 5,891 |
| 5,577 |
| | 17,670 |
| 17,057 |
|
| Interest on tax-exempt investment securities | 690 |
| 613 |
| | 1,956 |
| 1,891 |
|
| Other interest income | 506 |
| 86 |
| | 945 |
| 192 |
|
| Total interest income | 43,609 |
| 39,631 |
| | 127,806 |
| 110,626 |
|
| Interest expense: | | | | | |
| Interest on deposits | 6,159 |
| 4,018 |
| | 16,722 |
| 9,332 |
|
| Interest on short-term borrowings | 1,150 |
| 1,617 |
| | 3,556 |
| 3,760 |
|
| Interest on long-term borrowings | 546 |
| 672 |
| | 1,811 |
| 2,043 |
|
| Total interest expense | 7,855 |
| 6,307 |
| | 22,089 |
| 15,135 |
|
| Net interest income | 35,754 |
| 33,324 |
| | 105,717 |
| 95,491 |
|
| Provision for loan losses | 1,005 |
| 1,302 |
| | 1,368 |
| 4,473 |
|
| Net interest income after provision for loan losses | 34,749 |
| 32,022 |
| | 104,349 |
| 91,018 |
|
| Non-interest income: | | | | | |
| Electronic banking income | 3,577 |
| 2,890 |
| | 9,831 |
| 8,460 |
|
| Insurance income | 3,386 |
| 3,388 |
| | 11,493 |
| 11,412 |
|
| Deposit account service charges | 3,233 |
| 2,652 |
| | 8,551 |
| 7,160 |
|
| Trust and investment income | 3,205 |
| 3,110 |
| | 9,718 |
| 9,410 |
|
| Mortgage banking income | 1,204 |
| 1,060 |
| | 2,992 |
| 2,380 |
|
| Commercial loan swap fees | 772 |
| 355 |
| | 1,434 |
| 617 |
|
| Bank owned life insurance income | 487 |
| 495 |
| | 1,462 |
| 1,460 |
|
| Net gain (loss) on investment securities | 97 |
| — |
| | 70 |
| (146 | ) |
| Net (loss) gain on asset disposals and other transactions | (78 | ) | 12 |
| | (553 | ) | (319 | ) |
| Other non-interest income | 510 |
| 391 |
| | 2,113 |
| 2,143 |
|
| Total non-interest income | 16,393 |
| 14,353 |
|
| 47,111 |
| 42,577 |
|
| Non-interest expense: | | | | | |
| Salaries and employee benefit costs | 18,931 |
| 17,908 |
| | 58,957 |
| 51,923 |
|
| Net occupancy and equipment expense | 3,098 |
| 2,850 |
| | 9,208 |
| 8,519 |
|
| Electronic banking expense | 2,070 |
| 1,552 |
| | 5,340 |
| 4,409 |
|
| Data processing and software expense | 1,572 |
| 1,408 |
| | 4,684 |
| 4,089 |
|
| Professional fees | 1,544 |
| 1,395 |
| | 5,164 |
| 6,135 |
|
| Amortization of other intangible assets | 953 |
| 862 |
| | 2,471 |
| 2,477 |
|
| Franchise tax expense | 797 |
| 616 |
| | 2,274 |
| 1,874 |
|
| Marketing expense | 634 |
| 456 |
| | 1,718 |
| 1,437 |
|
| Foreclosed real estate and other loan expenses | 600 |
| 373 |
| | 1,324 |
| 923 |
|
| Communication expense | 268 |
| 305 |
| | 863 |
| 949 |
|
| FDIC insurance expense | — |
| 391 |
| | 752 |
| 1,173 |
|
| Other non-interest expense | 2,526 |
| 2,713 |
| | 10,974 |
| 11,113 |
|
| Total non-interest expense | 32,993 |
| 30,829 |
| | 103,729 |
| 95,021 |
|
| Income before income taxes | 18,149 |
| 15,546 |
| | 47,731 |
| 38,574 |
|
| Income tax expense | 3,281 |
| 2,821 |
| | 8,896 |
| 6,216 |
|
| Net income | $ | 14,868 |
| $ | 12,725 |
| | $ | 38,835 |
| $ | 32,358 |
|
| Earnings per common share - basic | $ | 0.72 |
| $ | 0.65 |
| | $ | 1.93 |
| $ | 1.70 |
|
| Earnings per common share - diluted | $ | 0.72 |
| $ | 0.65 |
| | $ | 1.91 |
| $ | 1.69 |
|
| Weighted-average number of common shares outstanding - basic | 20,415,245 |
| 19,325,457 |
| | 20,023,271 |
| 18,875,290 |
|
| Weighted-average number of common shares outstanding - diluted | 20,595,769 |
| 19,466,865 |
| | 20,178,634 |
| 19,004,087 |
|
| Cash dividends declared | $ | 7,040 |
| $ | 5,472 |
| | $ | 19,943 |
| $ | 15,709 |
|
| Cash dividends declared per common share | $ | 0.34 |
| $ | 0.28 |
| | $ | 0.98 |
| $ | 0.82 |
|
See Notes to the Unaudited Consolidated Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | | |
| | September 30, | | September 30, | | March 31, | | | |
| (Dollars in thousands) | 2019 | 2018 | | 2019 | 2018 | (Dollars in thousands) | 2020 | 2019 | | |
| Net income | $ | 14,868 |
| $ | 12,725 |
| | $ | 38,835 |
| $ | 32,358 |
| |
| Other comprehensive income (loss): | | | | |
| Net (loss) income | | Net (loss) income | $ | (765) | | $ | 14,369 | | | |
| Other comprehensive income: | | Other comprehensive income: | | |
| Available-for-sale investment securities: | | | | Available-for-sale investment securities: | | |
| Gross unrealized holding gain (loss) arising during the period | 2,913 |
| (5,813 | ) | | 24,585 |
| (18,587 | ) | |
| Related tax (expense) benefit | (612 | ) | 1,221 |
| | (5,163 | ) | 4,958 |
| |
| Less: reclassification adjustment for net gain (loss) included in net income | 97 |
| — |
| | 70 |
| (146 | ) | |
| Related tax (expense) benefit | (21 | ) | — |
| | (15 | ) | 31 |
| |
| Amounts reclassified out of accumulated other comprehensive loss per ASU 2016-01 (a) | — |
| — |
| | — |
| (5,020 | ) | |
| Net effect on other comprehensive income (loss) | 2,225 |
| (4,592 | ) | | 19,367 |
| (18,534 | ) | |
| Gross unrealized holding gain arising during the period | | Gross unrealized holding gain arising during the period | 22,268 | | 8,725 | | | |
| Related tax expense | | Related tax expense | (4,676) | | (1,832) | | | |
| Less: reclassification adjustment for net gain included in net income | | Less: reclassification adjustment for net gain included in net income | 319 | | 30 | | | |
| Related tax expense | | Related tax expense | (67) | | (6) | | | |
| | Net effect on other comprehensive income | | Net effect on other comprehensive income | 17,340 | | 6,869 | | | |
| Defined benefit plans: | | | | Defined benefit plans: | | |
| Net gain arising during the period | 2 |
| 1,177 |
| | 4 |
| 1,177 |
| |
| Related tax expense | (1 | ) | (247 | ) | | (1 | ) | (247 | ) | |
| Net (loss) gain arising during the period | | Net (loss) gain arising during the period | (365) | | 2 | | | |
| Related tax (benefit) expense | | Related tax (benefit) expense | 76 | | — | | | |
| Amortization of unrecognized loss and service cost on benefit plans | 17 |
| 28 |
| | 54 |
| 80 |
| Amortization of unrecognized loss and service cost on benefit plans | 28 | | 17 | | | |
| Related tax expense | (3 | ) | (6 | ) | | (11 | ) | (17 | ) | Related tax expense | (6) | | (4) | | | |
| Recognition of loss due to settlement and curtailment | — |
| 176 |
| | — |
| 176 |
| Recognition of loss due to settlement and curtailment | 368 | | — | | | |
| Related tax expense | — |
| (37 | ) | | — |
| (37 | ) | Related tax expense | (77) | | — | | | |
| Net effect on other comprehensive income | 15 |
| 1,091 |
| | 46 |
| 1,132 |
| Net effect on other comprehensive income | 24 | | 15 | | | |
| Cash flow hedges: | | | | Cash flow hedges: | | |
| Net (loss) gain arising during the period | (1,857 | ) | 651 |
| | (6,824 | ) | 2,566 |
| |
| Related tax benefit (expense) | 390 |
| (137 | ) | | 1,433 |
| (539 | ) | |
| Net effect on other comprehensive (loss) income | (1,467 | ) | 514 |
| | (5,391 | ) | 2,027 |
| |
| Total other comprehensive income (loss), net of tax | 773 |
| (2,987 | ) | | 14,022 |
| (15,375 | ) | |
| Net loss arising during the period | | Net loss arising during the period | (9,730) | | (1,833) | | | |
| Related tax benefit | | Related tax benefit | 2,043 | | 385 | | | |
| Net effect on other comprehensive loss | | Net effect on other comprehensive loss | (7,687) | | (1,448) | | | |
| Total other comprehensive income, net of tax | | Total other comprehensive income, net of tax | 9,677 | | 5,436 | | | |
| Total comprehensive income | $ | 15,641 |
| $ | 9,738 |
| | $ | 52,857 |
| $ | 16,983 |
| Total comprehensive income | $ | 8,912 | | $ | 19,805 | | | |
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, which resulted in the reclassification of $5.0 million in net unrealized gains on equity investment securities from accumulated other comprehensive loss to retained earnings.
See Notes to the Unaudited Consolidated Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
| | | | | | | | | | | | | | | | | | |
| | | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| | Common Stock | Retained Earnings | | Treasury Stock | |
| (Dollars in thousands) | | | | | | |
| Balance, December 31, 2019 | | $ | 420,876 | | $ | 187,149 | | $ | (1,425) | | $ | (12,207) | | $ | 594,393 | |
| | | | | | |
| Net loss | | — | | (765) | | — | | — | | (765) | |
| Other comprehensive income, net of tax | | — | | — | | 9,677 | | — | | 9,677 | |
| | | | | | |
| | | | | | |
| Cash dividends declared | | — | | (7,038) | | — | | — | | (7,038) | |
| | | | | | |
| Reissuance of treasury stock for common share awards | | (1,865) | | — | | — | | 1,865 | | — | |
| | | | | | |
| | | | | | |
| Repurchase of treasury stock in connection with employee incentive plan and under compensation plan for Boards of Directors | | — | | — | | — | | (812) | | (812) | |
| Common shares repurchased under share repurchase program | | — | | — | | — | | (10,226) | | (10,226) | |
| Common shares issued under dividend reinvestment plan | | 209 | | — | | — | | — | | 209 | |
| Common shares issued under compensation plan for Boards of Directors | | 45 | | — | | — | | 195 | | 240 | |
| Gross common shares issued under performance unit awards | | 41 | | — | | — | | 234 | | 275 | |
| Common shares issued under employee stock purchase plan | | (8) | | — | | — | | 105 | | 97 | |
| Stock-based compensation | | 1,380 | | — | | — | | — | | 1,380 | |
| Impact of adoption of new accounting standard, net of taxes (a) | | — | | (3,709) | | — | | — | | (3,709) | |
| | | | | | |
| | | | | | |
| Balance, March 31, 2020 | | $ | 420,678 | | $ | 175,637 | | $ | 8,252 | | $ | (20,846) | | $ | 583,721 | |
|
| | | | | | | | | | | | | | | |
| | | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders' Equity |
| | Common Stock | Retained Earnings | Treasury Stock |
| (Dollars in thousands) |
| Balance, December 31, 2018 | $ | 386,814 |
| $ | 160,346 |
| $ | (12,933 | ) | $ | (14,087 | ) | $ | 520,140 |
|
| Net income | — |
| 38,835 |
| — |
| — |
| 38,835 |
|
| Other comprehensive income, net of tax | — |
| — |
| 14,022 |
| — |
| 14,022 |
|
| Cash dividends declared | — |
| (19,943 | ) | — |
| — |
| (19,943 | ) |
| Reissuance of treasury stock for common share awards | (2,951 | ) | — |
| — |
| 2,951 |
| — |
|
| Reissuance of treasury stock for deferred compensation plan for Boards of Directors | — |
| — |
| — |
| 53 |
| 53 |
|
| Repurchase of treasury stock in connection with employee incentive plan and under compensation plan for Boards of Directors | — |
| — |
| — |
| (790 | ) | (790 | ) |
| Common shares repurchased under share repurchase program | — |
| — |
| — |
| (431 | ) | (431 | ) |
| Common shares issued under dividend reinvestment plan | 678 |
| — |
| — |
| — |
| 678 |
|
| Common shares issued under compensation plan for Boards of Directors | 65 |
| — |
| — |
| 196 |
| 261 |
|
| Common shares issued under employee stock purchase plan | 83 |
| — |
| — |
| 244 |
| 327 |
|
| Stock-based compensation | 2,944 |
| — |
| — |
| — |
| 2,944 |
|
| Issuance of common shares related to merger with First Prestonsburg Bancshares Inc. | 32,437 |
| — |
| — |
| — |
| 32,437 |
|
| Balance, September 30, 2019 | $ | 420,070 |
| $ | 179,238 |
| $ | 1,089 |
| $ | (11,864 | ) | $ | 588,533 |
|
See Notes to the Unaudited Consolidated Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | | | Nine Months Ended | | Three Months Ended | |
| | September 30, | | March 31, | |
| (Dollars in thousands) | 2019 | 2018 | (Dollars in thousands) | 2020 | 2019 |
| Net cash provided by operating activities | $ | 52,528 |
| $ | 50,263 |
| Net cash provided by operating activities | $ | 18,218 | | $ | 6,279 | |
| Investing activities: | | Investing activities: | |
| Available-for-sale investment securities: | | Available-for-sale investment securities: | |
| Purchases | (246,563 | ) | (120,492 | ) | Purchases | (72,942) | | (37,462) | |
| Proceeds from sales | 72,706 |
| 14,489 |
| Proceeds from sales | 5,620 | | 7,425 | |
| Proceeds from principal payments, calls and prepayments | 130,860 |
| 93,336 |
| Proceeds from principal payments, calls and prepayments | 61,701 | | 25,799 | |
| Held-to-maturity investment securities: | | Held-to-maturity investment securities: | |
| Purchases | | Purchases | (8,404) | | — | |
| Proceeds from principal payments | 2,939 |
| 3,521 |
| Proceeds from principal payments | 1,354 | | 1,277 | |
| Other investment securities: | | Other investment securities: | |
| Purchases | (1,420 | ) | (2,547 | ) | Purchases | (5,376) | | (246) | |
| Proceeds from sales | 5,415 |
| 7,544 |
| Proceeds from sales | 957 | | 2,694 | |
| Proceeds from insurance claim | 26 |
| — |
| |
| Net decrease (increase) in loans held for investment | 11,993 |
| (113,433 | ) | |
| | Net increase in loans held for investment | | Net increase in loans held for investment | (32,265) | | (6,811) | |
| Net expenditures for premises and equipment | (2,758 | ) | (3,660 | ) | Net expenditures for premises and equipment | (1,028) | | (1,584) | |
| Proceeds from sales of other real estate owned | 221 |
| 265 |
| Proceeds from sales of other real estate owned | 50 | | 2 | |
| | Proceeds from bank owned life insurance contracts | | Proceeds from bank owned life insurance contracts | 109 | | — | |
| Business acquisitions, net of cash received | 7,813 |
| 4,695 |
| Business acquisitions, net of cash received | (839) | | — | |
| Investment in limited partnership and tax credit funds | (5,021 | ) | (5,399 | ) | |
| (Investment in) return of limited partnership and tax credit funds | | (Investment in) return of limited partnership and tax credit funds | (15) | | 1 | |
| Net cash used in investing activities | (23,789 | ) | (121,681 | ) | Net cash used in investing activities | (51,078) | | (8,905) | |
| Financing activities: | |
| |
| Financing activities: | | | | |
| Net increase in non-interest-bearing deposits | 10,856 |
| 31,950 |
| Net increase in non-interest-bearing deposits | 56,058 | | 20,587 | |
| Net increase in interest-bearing deposits | 132,795 |
| 79,761 |
| Net increase in interest-bearing deposits | 50,905 | | 161,293 | |
| Net (decrease) increase in short-term borrowings | (105,636 | ) | 2,515 |
| |
| Net decrease in short-term borrowings | | Net decrease in short-term borrowings | (57,316) | | (168,023) | |
| Proceeds from long-term borrowings | | Proceeds from long-term borrowings | 50,000 | | — | |
| Payments on long-term borrowings | (2,388 | ) | (3,092 | ) | Payments on long-term borrowings | (372) | | (503) | |
| | Cash dividends paid | (19,212 | ) | (15,266 | ) | Cash dividends paid | (6,918) | | (5,719) | |
| Repurchase of treasury stock under share repurchase program | (431 | ) | — |
| |
| Repurchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors to be held as treasury stock | (790 | ) | (1,271 | ) | |
| Purchase of treasury stock under share repurchase program | | Purchase of treasury stock under share repurchase program | (10,226) | | — | |
| Purchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors to be held as treasury stock | | Purchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors to be held as treasury stock | (812) | | (450) | |
| Proceeds from issuance of common shares | 6 |
| 24 |
| Proceeds from issuance of common shares | — | | 3 | |
| Contingent consideration payments made after a business acquisition | (102 | ) | (224 | ) | Contingent consideration payments made after a business acquisition | — | | (102) | |
| | Net cash provided by financing activities | 15,098 |
| 94,397 |
| Net cash provided by financing activities | 81,319 | | 7,086 | |
| Net increase in cash and cash equivalents | 43,837 |
| 22,979 |
| Net increase in cash and cash equivalents | 48,459 | | 4,460 | |
| Cash and cash equivalents at beginning of period | 77,612 |
| 72,194 |
| Cash and cash equivalents at beginning of period | 115,193 | | 77,612 | |
| Cash and cash equivalents at end of period | $ | 121,449 |
| $ | 95,173 |
| Cash and cash equivalents at end of period | $ | 163,652 | | $ | 82,072 | |
| | | |
| Supplemental cash flow information: | | Supplemental cash flow information: | |
| Interest paid | 21,902 |
| 13,758 |
| Interest paid | 6,634 | | 6,499 | |
| Income taxes paid | 10,050 |
| 6,735 |
| |
| | Supplemental noncash disclosures: | | Supplemental noncash disclosures: | |
| Transfers from loans to other real estate owned | 153 |
| 59 |
| Transfers from loans to other real estate owned | 66 | | 14 | |
| Lease right-of-use assets obtained in exchange for lessee operating lease liabilities | | Lease right-of-use assets obtained in exchange for lessee operating lease liabilities | 27 | | — | |
See Notes to the Unaudited Consolidated Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
Basis of Presentation: The accompanying Unaudited Consolidated Financial Statements of Peoples Bancorp Inc. and its subsidiaries ("Peoples" refers to Peoples Bancorp Inc. and its consolidated subsidiaries collectively, except where the context indicates the reference relates solely to Peoples Bancorp Inc.) have been prepared in accordance with accounting principles generally accepted in the United States ("US GAAP") for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not contain all of the information and footnotes required by US GAAP for annual financial statements and should be read in conjunction with Peoples’ Annual Report on Form 10-K for the fiscal year ended December 31, 20182019 ("Peoples' 20182019 Form 10-K").
The accounting and reporting policies followed in the presentation of the accompanying Unaudited Consolidated Financial Statements are consistent with those described in "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples’ 20182019 Form 10-K, as updated by the information contained in this Form 10-Q. Management has evaluated all significant events and transactions that occurred after September 30, 2019March 31, 2020 for potential recognition or disclosure in these unaudited consolidated financial statements. In the opinion of management, these unaudited consolidated financial statements reflect all adjustments necessary to present fairly such information for the periods and at the dates indicated. Such adjustments are normal and recurring in nature. Intercompany accounts and transactions have been eliminated. The Consolidated Balance Sheet at December 31, 2018,2019, contained herein, has been derived from the audited Consolidated Balance Sheet included in Peoples’ 20182019 Form 10-K.
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year, due in part to seasonal variations and unusual or infrequently occurring items.
Peoples' insurance income includes performance-based insurance commissions that are recognized by Peoples Risk Management, Inc., a wholly-owned subsidiarywhen received, which typically occurs, for the most part, during the first quarter of Peoples, was formed on August 22,each year. For the three months ended March 31, 2020 and 2019, and is a Nevada-based captive insurance company which insures against certain risks unique to the operations of Peoples and for which insurance may not be currently available or economically feasible. Peoples Risk Management, Inc. pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among all participants. Peoples Risk Management, Inc. is subject to the regulations of the State of Nevadaperformance-based insurance commissions recognized totaled $1.3 million and undergoes periodic examinations by the Nevada Division of Insurance.$1.4 million, respectively.
New Accounting Pronouncements: From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies that are adopted by Peoples as of the required effective dates. The following accounting pronouncements should be read in conjunction with "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples’ 20182019 Form 10-K.
Accounting Standards Update ("ASU") 2017-04 - Intangibles - Goodwill and Other (Topic 350): Simplifying Unless otherwise discussed, management believes the Test for Goodwill Impairment. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating the requirement to calculate the implied fair valueimpact of goodwill to measure a goodwill impairment charge. This accounting guidanceany recently issued standards, including those issued but not yet effective, will be effective for interim and annual reporting periods beginning after December 15, 2019 (effective January 1, 2020 for Peoples). Peoples early adopted this new accounting guidance as of January 1, 2019, and it will be incorporated in the October 1, 2019 annual goodwill and intangible assets impairment analysis, but it is not expected to have a material impact on Peoples' consolidated financial statements.statements taken as a whole.
ASUAccounting Standards Update ("ASU") 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This accounting guidance replaces the current "incurred loss" model for recognizing credit losses with an "expected loss" model, referred to as the Current Expected Credit Loss ("CECL") model. Under the CECL model, Peoples will beis required to present certain financial assets carried at amortized cost, such as loans held-for-investment and held-to-maturity investment securities, at the net amount expected to be collected. ASU 2018-19 clarified that receivables arising from operating leases are not within the scope of SubtopicAccounting Standards Codification ("ASC") 326-20, and should be accounted for according to TopicASC 842.
The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ThisThe measurement willis to take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model required under currentprevious US GAAP accounting guidance, which delaysdelayed recognition until it was probable a loss had been incurred.
Peoples adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized costs on January 1, 2020. Reporting periods beginning after December 31, 2019 are presented as required by ASU 2016-13, while prior period amounts continue to be reported in accordance with previously applicable US GAAP requirements. Peoples is using the prospective transition approach for financial assets purchased with credit deterioration that were previously classified as purchased credit impaired and accounted for under ASC 310-30. Peoples did not reassess whether purchased credit impaired assets met the criteria of purchased credit deteriorated assets as of the date of adoption.
As of January 1, 2020, Peoples recorded a one-time cumulative-effect adjustment to reduce retained earnings by $3.7 million, net of statutory corporate federal income taxes, an increase in allowance for credit losses of $5.8 million and an increase in unfunded commitment liability of $1.5 million. On January 1, 2020, the amortized cost basis of the purchased credit deteriorated assets were adjusted to reflect the addition of $2.6 million to establish the allowance for credit losses. The remaining interest-related discount is
being accreted into interest income at the effective interest rate beginning on January 1, 2020. As of January 1, 2020, Peoples did not record an allowance for credit losses for available-for-sale investment securities, as all unrealized losses on these securities were deemed to be non-credit in nature, with no credit deterioration upon review by Peoples. Peoples recorded an allowance for credit losses for held-to-maturity securities of $7,000 as of January 1, 2020.
probable a loss has been incurred. Accordingly, Peoples expects thatThe following table illustrates the impact on the allowance for credit losses from the adoption of ASU 2016-13:
| | | | | | | | | | | |
| | | |
| (Dollars in thousands) | As Reported Under ASC 326 January 1, 2020 | Pre-ASC 326 Adoption December 31, 2019 | Impact of ASC 326 Adoption |
| Assets: |
|
|
|
| Loans, at amortized cost | $ | 2,876,147 | | $ | 2,873,525 | | $ | 2,622 | |
| | | |
| Allowance for credit losses on loans: | | | |
| Construction | 651 | | 1,188 | | (537) | |
| Commercial real estate, other | 8,549 | | 6,560 | | 1,989 | |
| Commercial and industrial | 5,820 | | 8,568 | | (2,748) | |
| Residential real estate | 4,360 | | 1,296 | | 3,064 | |
| Home equity lines of credit | 1,572 | | 612 | | 960 | |
| Consumer, indirect | 5,389 | | 2,942 | | 2,447 | |
| Consumer, direct | 890 | | 296 | | 594 | |
| Deposit account overdrafts | 94 | | 94 | | — | |
| Allowance for credit losses on loans | 27,325 | | 21,556 | | 5,769 | |
|
|
|
|
| Liabilities: |
|
|
|
| Allowance for credit losses for unfunded commitments | $ | 1,495 | | $ | — | | $ | 1,495 | |
Investment Securities: Investment securities are recorded initially at cost, which includes premiums and discounts if purchased at other than par or face value. Peoples amortizes premiums and accretes discounts as an adjustment to interest income on a level yield basis. The cost of investment securities sold, excluding equity investment securities, and any resulting gain or loss, is based on the CECL modelspecific identification method and recognized as of the trade date. The cost of equity investment securities is based on the weighted-average method.
Peoples determines the appropriate classification of investment securities at the time of purchase. Held-to-maturity securities are those securities that Peoples has the positive intent and ability to hold to maturity and are recorded at amortized cost. Available-for-sale securities are those securities that would be available to be sold in the future in response to Peoples' liquidity needs, changes in market interest rates, and asset-liability management strategies, among other considerations. Available-for-sale securities are reported at fair value, with unrealized gains and losses reported in total stockholders' equity as a separate component of accumulated other comprehensive income or loss, net of applicable deferred income taxes.
Certain restricted equity investment securities that do not have readily determinable fair values and for which Peoples does not exercise significant influence, are carried at cost. These cost method securities are reported in other investment securities on the Unaudited Consolidated Balance Sheets and consist primarily of shares of the Federal Home Loan Bank of Cincinnati (the "FHLB") and the Federal Reserve Bank of Cleveland (the "FRB").
Peoples evaluates available-for-sale investment securities on a quarterly basis to determine how much, if any, allowance for credit losses is required. Peoples reviews available-for-sale investment securities at an unrealized loss position, with potential exposure to a credit event (which excludes U.S. government and U.S. government sponsored agency securities) to determine if the unrealized loss was credit-related. An allowance for credit losses is recorded to the extent that the unrealized losses are credit-related and likely to be permanent.
Peoples evaluates held-to-maturity investment securities on a quarterly basis in determining an allowance for credit losses. Peoples has determined that the loss given default for U.S. government sponsored enterprise investment securities is zero, due to the fact that it is unlikely the ultimate guarantor (the U.S. government) would not perform on its implicit guarantee in the event of default. The remaining securities are included in the calculation of the allowance for credit losses for held-to-maturity investment securities.
Loans: Loans originated that Peoples has the positive intent and ability to hold for the foreseeable future or to maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, purchase premiums and discounts, charge-offs and an allowance for credit losses. The foreseeable future is based upon current market conditions and business strategies, as well as balance sheet management and liquidity. As the conditions change, so may management's view of the foreseeable future.
Peoples considers loans 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. Upon detection of the reduced ability of a borrower to meet cash flow obligations, consumer and residential real estate loans are typically charged down to the net realizable value, with the residual balance placed on nonaccrual status. Loans deemed to be uncollectable are charged against the allowance for credit losses, while recoveries of previously charged off amounts are credited to the allowance for credit losses.
Loans acquired in a business combination that have evidence of more than insignificant credit deterioration, which includes loans that Peoples believes it is probable that it will materially affect howbe unable to collect all contractually required payments, are considered "purchased credit deteriorated" loans. These loans are recorded at the purchase price, and an allowance for credit losses is determined and could require increases tousing the allowancesame methodology as for credit losses. Moreover, the CECL model may create more volatility in the level of Peoples'other loans. The initial allowance for credit losses and credit loss expense. If requireddetermined on a collective basis is allocated to materially increaseindividual loans. The total of the level ofpurchase price and allowance for credit losses for any reason, such increase could adversely affect Peoples'is the initial amortized cost of these loans. The variance between the initial amortized cost basis and the par value of the loan is considered an interest premium or discount, which is amortized or accreted into interest income on a level yield method over the life of the loan.
Loans acquired in a business financial conditioncombination that are not considered purchased credit deteriorated are recorded at the fair value and results of operations.
The CECL standard will become effective for interimthe difference between the acquisition date fair value and annual reporting periods beginning after December 15, 2019 (effective January 1, 2020 for Peoples). Peoples hasthe contractual amounts due at the acquisition date represents the discount or premium to a committee that meets regularly to monitor progress and oversee the project. Peoples has implemented a third-party software solution,loan's cost basis and is utilizingaccreted or amortized to interest income over the tool to run test calculations throughout 2019 in anticipation ofloan's remaining life using the full implementation at the beginning of 2020. Peoples has engaged consultants to assist with the completion of certain aspects of the project plan. Peoples will complete model validation during 2019, and is currently refining the economic forecasting process, documenting accounting policies, reviewing business processes, evaluating potential changes to the control environment and critically reviewing model output. Peoples completed a test run of its process, inclusive of the model, at the end of the third quarter of 2019.level yield method.
Based on current forecasted economic conditions and portfolio balances, Peoples estimates that the impact to theAllowance for Credit Losses: The allowance for credit losses is a valuation reserve established through the provision for certain portionscredit losses charged against income. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
The allowance for credit losses is measured on a pool basis, with loans collectively evaluated when similar risk characteristics exist. Peoples evaluated risk characteristics, including but not limited to; internal or third-party credit scores or credit ratings, risk ratings or classifications, financial asset type, collateral type, size, effective interest rate, term, geographical location, industry of the implementation will resultborrower, vintage, historical or credit loss patterns and reasonable and supportable forecast periods. Peoples identified 16 segments for which it believes there are similar risk characteristics and utilized a discounted cash flow methodology in an increase of approximately 25% to 35% of the September 30, 2019 allowance for loan losses balance. This estimate includes the potential impact of modeled results for outstanding loans, impaired loans that are individually evaluated, qualitative factors and investment securities. Approximately two-thirds of the estimated increase is being driven by the establishment ofdetermining an allowance for credit losses for acquired performingeach segment.
In estimating credit losses, Peoples uses a loss driver method, which analyzes one or more economic variables to the change in default rate using a regression analysis. Variables that had a strong correlation were selected as economic factors, or variables, for the model. If a single variable was not found to be strongly correlated, additional variables were included. Peoples utilized the U.S. unemployment, Ohio unemployment, Ohio Gross Domestic Product, and the Ohio Case Shiller Home Price Indices as economic factors in modeling.
Probabilities of default are used in the loss driver model, and are analyzed on a quarterly basis to assess reasonableness. Current conditions probabilities of default is a credit performance metric, with default defined as loans being 90 days or more past due, nonaccrual loans, troubled-debt restructurings and loans with a partial or entire charge-off.
Peoples measured loss given default at the segment level due to statistical considerations using historical information. Peoples also utilized peer data due to somewhat volatile loss history in certain segments to normalize default curves, which currently haveprovided more meaningful results.
Peoples modeled amortizing loans with a smallprepayment rate annualized to one year. The prepayment rates were calculated using Peoples' historical data, at the segment level.
Peoples models extensions of contractual terms in the following situations: when a loan is 60 days or more past due, when a charge-off has occurred, if the loan is in non-accrual status, if a troubled debt restructuring ("TDR") has occurred, or if the loan is grade 5 or higher. When any of these criteria are met and the loan matures within the next 12 months, the loan will be modeled to extend for an additional 12 months.
In general, Peoples completes a quarterly evaluation based on several qualitative factors to determine if there should be adjustments made to loss rates used in determining the allowance for credit losses. These factors include economic conditions, collateral, concentrations, troubled assets, Peoples' loss trends, peer loss trends, delinquency trends, portfolio composition and loan losses. The remainder of the increase is being driven by the duration of longer term consumer loans. This estimate excludes the impact of the unfunded commitment liabilitygrowth, underwriting and the increase in theother certain risks.
The allowance for credit losses related to purchased credit deteriorated loans. The impactspecific loans was based on management's estimate of these items willpotential losses on impaired loans as determined by (1) the present value of expected future cash flows, (2) the fair value of collateral if the loan is determined to be evaluated duringcollateral dependent, or (3) the fourth quarter of 2019. The estimates provided are subject to changeloan's observable market price.
Peoples categorized loans involving commercial borrowers into risk categories based upon many factors, including:
•uncertainty aroundan established grading matrix. This system was used to manage the economic conditions that will exist at implementation;
•risk within Peoples' commercial lending activities, evaluate changes in the composition, balance and risk characteristicsoverall credit quality of the loan portfolio and evaluate the appropriateness of the allowance for credit losses. Loan grades are assigned at implementation;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 million are reviewed on an annual basis for
possible credit deterioration. Loan relationships whose aggregate credit exposure to Peoples is equal to or less than $1 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 generally reviewed on a quarterly basis.
The primary factors considered when assigning a risk grade to a loan include (1) reliability and sustainability of the primary source of repayment, (2) past, present and projected financial condition of the borrower, and (3) current economic and industry conditions. Other factors that could influence the risk grade assigned include the type and quality of collateral and the strength of any guarantors. The primary source of repayment for commercial real estate loans and commercial and industrial loans is normally the operating cash flow of the business available to repay debt. Management's analysis of operating cash flow for commercial real estate loans secured by non-owner occupied properties takes into account factors such as rent rolls and vacancy statistics. Management's analysis of operating cash flow for commercial real estate loans secured by owner occupied properties and all commercial and industrial loans considers the profitability, liquidity and leverage of the business. The evaluation of construction loans includes consideration of the borrower's ability to complete construction within the established budget.
The primary factors considered when classifying residential real estate, home equity lines of credit and consumer loans include the loan's past due status and declaration of bankruptcy by the borrower(s). The classification of residential real estate and home equity lines of credit also takes into consideration the current value of the underlying collateral.
Peoples has elected the practical expedient not to measure allowance for credit losses for accrued interest receivables.
Unfunded Commitments: Peoples also completes a quarterly evaluation for unfunded commitments for loans that are not conditionally cancellable, which includes construction loans, floor plan lines of credit, home equity lines of credit, other credit lines and letters of credit. Peoples performed a study to determine the historical funding rates of unadvanced portions of loans, and applied these funding rates to the modeling process based upon results of model validation and further process development and refinement; and
continued execution of the governance framework and review process.
Peoples expects to recognize a one-time cumulative-effect adjustment tounfunded commitments at period end. The loss rates, including qualitative factors, in determining the allowance for credit losses and related tax effect, as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issuedwere applied at the end of 2016. The cumulative-effect adjustment will be based onsegment level to the change inunfunded commitment amount to determine the allowance for credit lossesloss liability for modeled results for outstanding loans, impaired loansunfunded commitments.
Troubled Debt Restructuring ("TDR"): The restructuring of a loan is considered a TDR if both (1) the borrower is experiencing financial difficulties and (2) the creditor has granted a concession. Loans acquired that are individually evaluated, qualitative factors, investment securities andrestructured after acquisition are not considered TDRs if the unfunded commitment liability. The impactloans evidenced credit deterioration as of the implementationacquisition date and are accounted for in pools of purchased credit deteriorated loans will be contemplated separately fromloans.
In assessing whether or not a borrower is experiencing financial difficulties, Peoples considers information currently available regarding the one-time cumulative-effect adjustment. Basedfinancial condition of the borrower. This information includes, but is not limited to, whether (1) the borrower is currently in payment default on any of the uncertainties around factors that may be present at implementation date, Peoplesborrower's debt; (2) a payment default is probable in the foreseeable future without the modification; (3) the borrower has declared or is in the process of determiningdeclaring bankruptcy; and (4) the magnitude of any such one-time cumulative-effect adjustment orborrower's projected cash flow is insufficient to satisfy contractual payments due under the original terms of the overall impactloan 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 loans with similar risk characteristics, the significance of the modification relative to the unpaid principal loan balance or collateral value underlying the loan, 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 (1) a reduction in the interest rate for the remaining life of the loan, (2) an extension of the maturity date at an interest rate lower than the current market rate for a new standardloan with similar risk, (3) a temporary period of interest-only payments, and (4) a reduction in the contractual payment amount for either a short period or the remaining term of the loan. All TDRs are evaluated individually to determine if a write-down is required and if they should be on Peoples'accrual or nonaccrual status.
On March 22, 2020, federal and state 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.
Nonaccrual loans: Peoples discontinues the accrual of interest on a loan when conditions cause management to believe collection of all or any portion of the loan's contractual interest is doubtful. Such conditions may include the borrower being 90 days or more past due on any contractual payments, or current information regarding the borrower's financial condition and resultsrepayment ability. All unpaid accrued interest deemed uncollectable is reversed, which reduces Peoples' net interest income. Interest received on nonaccrual loans is included in income only if principal recovery is reasonably assured.
Interest Income Recognition: Interest income on loans and investment securities is a three-year phase-in option for regulatory capital effectsrecognized by methods that result in level rates of return on principal amounts outstanding. This includes yield adjustments resulting from the amortization of premiums on investment securities, loan costs and premiums, and accretion of discounts on investment securities, loan fees and discounts. Loans that have been placed on nonaccrual, and are subsequently returned to accruing status, recognize interest income similar to other accruing loans once they return to accruing status. Prior accrued interest that was reversed when the loan was placed on nonaccrual is recognized when received, after the principal of the one-time cumulative-effect adjustment, however, Peoples does not currently anticipate opting forloan has been paid. Since mortgage-backed securities comprise a sizable portion of Peoples' investment portfolio, a significant increase in principal payments on those securities can impact interest income due to the phase-in based upon preliminary projections, but could change its position once closer to implementation.corresponding acceleration of premium amortization or discount accretion.
Note 2 Fair Value of Assets and Liabilities
Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, Peoples measures, records and reports various types of assets and liabilities at fair value on either a recurring or a non-recurring basis in the Consolidated Financial Statements. Those assets and liabilities are presented below in the sections entitled “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis” and “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis.”
Depending on the nature of the asset or liability, Peoples uses various valuation methodologies and assumptions to estimate fair value. The measurement of fair value under US GAAP uses a hierarchy, which is described in "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples' 20182019 Form 10‑K.
10-K.
Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets or liabilities required to be measured at fair value on a recurring basis between levels of the fair value hierarchy during the periods presented.
Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis
The following table provides the fair value for assets and liabilities required to be measured and reported at fair value on a recurring basis on the Unaudited Consolidated Balance Sheets by level in the fair value hierarchy.
| | | | Recurring Fair Value Measurements at Reporting Date | | | Recurring Fair Value Measurements at Reporting Date | |
| | September 30, 2019 | | December 31, 2018 | | | March 31, 2020 | | | December 31, 2019 | |
| (Dollars in thousands) | Level 1 | Level 2 | Level 3 | | Level 1 | Level 2 | Level 3 | (Dollars in thousands) | | Level 1 | Level 2 | Level 3 | | Level 1 | Level 2 | Level 3 |
| | | | |
| Assets: | | | | Assets: | | | |
| Available-for-sale investment securities: | | | | Available-for-sale investment securities: | | |
| Obligations of: | | | | Obligations of: | | | |
| | U.S. government sponsored agencies | $ | — |
| $ | 12,145 |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| U.S. government sponsored agencies | | $ | — | | $ | 6,361 | | $ | — | | | $ | — | | $ | 8,209 | | $ | — | |
| States and political subdivisions | — |
| 115,613 |
| — |
| | — |
| 88,587 |
| — |
| States and political subdivisions | | — | | 108,812 | | — | | | — | | 114,104 | | — | |
| Residential mortgage-backed securities | — |
| 835,172 |
| — |
| | — |
| 692,608 |
| — |
| Residential mortgage-backed securities | | — | | 823,893 | | — | | | — | | 791,009 | | — | |
| Commercial mortgage-backed securities | — |
| 20,461 |
| — |
| | — |
| 6,707 |
| — |
| Commercial mortgage-backed securities | | — | | 17,061 | | — | | | — | | 18,088 | | — | |
| Bank-issued trust preferred securities | — |
| 4,644 |
| — |
| | — |
| 3,989 |
| — |
| Bank-issued trust preferred securities | | — | | 4,708 | | — | | | — | | 4,691 | | — | |
| | Total available-for-sale securities | — |
| 988,035 |
| — |
| | — |
| 791,891 |
| — |
| Total available-for-sale securities | | — | | 960,835 | | — | | | — | | 936,101 | | — | |
| Equity investment securities | 121 |
| 197 |
| — |
| | 94 |
| 183 |
| — |
| |
| Derivative assets (a) | — |
| 14,301 |
| — |
| | — |
| 4,544 |
| — |
| |
| Equity investment securities (a) | | Equity investment securities (a) | | 83 | | 206 | | — | | | 123 | | 198 | | — | |
| Derivative assets (b) | | Derivative assets (b) | | — | | 30,235 | | — | | | — | | 11,419 | | — | |
| Liabilities: | | | | Liabilities: | | |
| Derivative liabilities (b) | $ | — |
| $ | 20,223 |
| $ | — |
| | $ | — |
| $ | 3,562 |
| $ | — |
| |
| Derivative liabilities (c) | | Derivative liabilities (c) | | $ | — | | $ | 43,659 | | $ | — | | | $ | — | | $ | 15,116 | | $ | — | |
(a) Included in other investment securities on the Unaudited Consolidated Balance Sheets. For additional information, see "Note 3 Investment Securities of the Notes to the Unaudited Consolidated Financial Statements."
(b) Included in other assets on the Unaudited Consolidated Balance Sheets. For additional information, see "Note 9 Derivative Financial Instruments" of the Notes to the Unaudited Consolidated Financial Statements.
(b)(c) Included in accrued expenses and other liabilities on the Unaudited Consolidated Balance Sheets. For additional information, see "Note 9 Derivative Financial Instruments" of the Notes to the Unaudited Consolidated Financial Statements.
Available-for-Sale Investment Securities:The fair values used by Peoples are obtained from an independent pricing service and represent either quoted market prices for the identical securities (Level 1) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatility, LIBOR yield curves, credit spreads and prices from market makers and live trading systems (Level 2). Management reviews the valuation methodology and quality controls utilized by the pricing services in management's overall assessment of the reasonableness of the fair values provided, and challenges prices when management believes a material discrepancy in pricing exists.
Equity Investment Securities:The fair values of Peoples' equity investment securities are obtained from quoted prices in active exchange markets for identical assets or liabilities (Level 1) or quoted prices in less active markets (Level 2).
Derivative Assets and Liabilities: Derivative assets and liabilities are recognized on the Unaudited Consolidated Balance Sheets at their fair value within other assets and accrued expenses and other liabilities, respectively. The fair value for derivative instruments is determined based on market prices, broker-dealer quotations on similar products, or other related input parameters (Level 2).
Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis
The following table provides the fair value for each class of assets and liabilities required to be measured and reported at fair value on a non-recurring basis on the Unaudited Consolidated Balance Sheets by level in the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Non-Recurring Fair Value Measurements at Reporting Date | | | | | | |
| | March 31, 2020 | | | | December 31, 2019 | | |
| (Dollars in thousands) | | Level 1 | Level 2 | Level 3 | | Level 1 | Level 2 | Level 3 |
| | | | | | | | |
| | | | | | | | |
| Other real estate owned ("OREO") | | $ | — | | $ | — | | $ | 226 | | | $ | — | | $ | — | | $ | 227 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Non-Recurring Fair Value Measurements at Reporting Date |
| | September 30, 2019 | | December 31, 2018 |
| (Dollars in thousands) | Level 1 | Level 2 | Level 3 | | Level 1 | Level 2 | Level 3 |
| |
| Impaired loans | $ | — |
| $ | — |
| $ | 28,300 |
| | $ | — |
| $ | — |
| $ | 24,129 |
|
| Other real estate owned ("OREO") | — |
| — |
| 289 |
| | — |
| — |
| 94 |
|
Impaired Loans: Impaired loans are measured and reported at fair value when the amounts to be received are less than the carrying value of the loans. One of the allowable methods for determining the amount of impairment is estimating fair value using the fair value of the collateral for collateral-dependent loans. Management’s determination of the fair value for these loans uses a market approach representing the estimated net proceeds to be received from the sale of the collateral based on observable market prices or the market value provided by independent, licensed or certified appraisers (Level 3), less estimated selling costs. At September 30, 2019, impaired loans with an aggregate principal balance of $38.6 million were outstanding and reported at fair value of $28.3 million. For the three and nine months ended September 30, 2019, Peoples recognized a reduction of $81,000 and an increase of $516,000 in the specific reserve on impaired loans, through the allowance for loan losses.
Other Real Estate Owned: OREO, included in other assets on the Unaudited Consolidated Balance Sheets, is comprised primarily of commercial and residential real estate properties acquired by Peoples in satisfaction of a loan. OREO obtained in satisfaction of a loan is recorded at the lower of cost or estimated fair value, less estimated costs to sell the property. The carrying value of OREO is not re-measured to fair value on a recurring basis, but is based on recent real estate appraisals and is updated at least annually. These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available (Level 3).
Financial Instruments Not Required to be Measured or Reported at Fair Value
The following table provides the carrying amount for each class of assets and liabilities and the fair value for certain financial instruments that are not required to be measured or reported at fair value on the Unaudited Consolidated Balance Sheets.
| | | | Fair Value Measurements of Other Financial Instruments | | | Fair Value Measurements of Other Financial Instruments | |
| (Dollars in thousands) | Fair Value Hierarchy Level | September 30, 2019 | | December 31, 2018 | (Dollars in thousands) | | Fair Value Hierarchy Level | March 31, 2020 | | | December 31, 2019 | |
| Carrying Amount | Fair Value | | Carrying Amount | Fair Value | | Carrying Amount | Fair Value | | Carrying Amount | Fair Value |
| | | | |
| Assets: | | | | | Assets: | | |
| Cash and cash equivalents | 1 | $ | 121,449 |
| $ | 121,449 |
| | $ | 77,612 |
| $ | 77,612 |
| Cash and cash equivalents | | 1 | $ | 163,652 | | $ | 163,652 | | | $ | 115,193 | | $ | 115,193 | |
| | Held-to-maturity investment securities: | | | | | Held-to-maturity investment securities: | | |
| Obligations of: | | | | | Obligations of: | | |
| States and political subdivisions | 2 | 4,395 |
| 4,897 |
| | 4,403 |
| 4,896 |
| States and political subdivisions | | 2 | 3,844 | | 4,348 | | | 4,346 | | 4,791 | |
| Residential mortgage-backed securities | 2 | 22,412 |
| 22,608 |
| | 29,044 |
| 28,603 |
| Residential mortgage-backed securities | | 2 | 29,070 | | 30,090 | | | 21,494 | | 21,569 | |
| Commercial mortgage-backed securities | 2 | 7,022 |
| 7,388 |
| | 3,514 |
| 3,464 |
| Commercial mortgage-backed securities | | 2 | 5,830 | | 6,250 | | | 5,907 | | 6,181 | |
| Total held-to-maturity securities | | 33,829 |
| 34,893 |
| | 36,961 |
| 36,963 |
| Total held-to-maturity securities | | | 38,744 | | 40,688 | | | 31,747 | | 32,541 | |
| | Other investment securities: | | | | | Other investment securities: | | |
| Federal Home Loan Bank ("FHLB") stock | 2 | 27,716 |
| 27,716 |
| | 29,367 |
| 29,367 |
| Federal Home Loan Bank ("FHLB") stock | | 2 | 31,595 | | 31,595 | | | 27,235 | | 27,235 | |
| Federal Reserve Bank ("FRB") stock | 2 | 13,310 |
| 13,310 |
| | 12,294 |
| 12,294 |
| Federal Reserve Bank ("FRB") stock | | 2 | 13,310 | | 13,310 | | | 13,310 | | 13,310 | |
| Nonqualified deferred compensation | 2 | 1,336 |
| 1,336 |
| | 987 |
| 987 |
| Nonqualified deferred compensation | | 2 | 1,365 | | 1,365 | | | 1,499 | | 1,499 | |
| Other investment securities | 2 | 365 |
| 365 |
| | 60 |
| 60 |
| Other investment securities | | 2 | 365 | | 365 | | | 365 | | 365 | |
| Other investment securities (a) | | 42,727 |
| 42,727 |
| | 42,708 |
| 42,708 |
| Other investment securities (a) | | | 46,635 | | 46,635 | | | 42,409 | | 42,409 | |
| Net loans | 3 | 2,828,731 |
| 3,146,439 |
| | 2,708,583 |
| 2,907,537 |
| Net loans | | 3 | 2,868,604 | | 3,227,179 | | | 2,851,969 | | 3,147,190 | |
| Loans held for sale | 2 | 4,522 |
| 4,824 |
| | 5,470 |
| 5,492 |
| Loans held for sale | | 2 | 2,217 | | 2,364 | | | 6,499 | | 6,553 | |
| Bank owned life insurance | 3 | 70,396 |
| 70,396 |
| | 68,934 |
| 68,934 |
| Bank owned life insurance | | 3 | 70,195 | | 70,195 | | | 69,722 | | 69,722 | |
| Servicing rights (b) | 3 | 2,684 |
| 3,439 |
| | 2,655 |
| 4,568 |
| |
| Servicing rights (b)(c) | | Servicing rights (b)(c) | | 3 | 2,576 | | 2,736 | | | 2,742 | | 3,881 | |
| Liabilities: | | | | | Liabilities: | | |
| Deposits | 2 | $ | 3,357,202 |
| $ | 3,377,795 |
| | $ | 2,955,465 |
| $ | 2,953,452 |
| Deposits | | 2 | $ | 3,398,430 | | $ | 3,406,572 | | | $ | 3,291,412 | | $ | 3,292,950 | |
| Short-term borrowings | 2 | 288,150 |
| 289,776 |
| | 356,198 |
| 349,994 |
| Short-term borrowings | | 2 | 259,661 | | 275,389 | | | 316,977 | | 317,973 | |
| Long-term borrowings | 2 | 84,194 |
| 84,261 |
| | 109,644 |
| 107,696 |
| Long-term borrowings | | 2 | 132,791 | | 140,353 | | | 83,123 | | 82,701 | |
(a) Other investment securities, as reported on the Unaudited Consolidated Balance Sheets, also includes equity investment securities for 20192020 and 2018,2019, which are reported in the Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis table above.
(b) Included in other intangible assets on the Unaudited Consolidated Balance Sheets. Servicing rights are carried at the lower of cost or market value.
$182,000 during the first quarter of 2020 as the fair value of the servicing rights was less than the carrying value.
For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include cash and cash equivalents, demand and other non-fixed-maturity deposits, and overnight borrowings. Peoples used the following methods and assumptions in estimating the fair value of the following financial instruments:
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, balances due from other banks, interest-bearing deposits in other banks, federal funds sold and other short-term investments with original maturities of ninety days or less. The carrying amount for cash and due from banks is a reasonable estimate of fair value. (Level 1).
Held-to-Maturity Investment Securities:The fair values used by Peoples are obtained from an independent pricing service and represent fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatility, LIBOR yield curves, credit spreads and prices from market makers and live trading systems (Level 2). Management reviews the valuation methodology and quality controls utilized by the pricing services in management's overall assessment of the reasonableness of the fair values provided, and challenges prices when management believes a material discrepancy in pricing exists.
Other Investment Securities: Other investment securities are measured at their respective redemption values due to restrictions placed on their transferability (Level 2).
Net Loans: The fair value of portfolio loans assumes sale of the notes to a third-party financial investor. Accordingly, this value is not necessarily the value to Peoples if the notes were held to maturity. Peoples considered interest rate, credit and market factors in estimating the fair value of loans (Level 3). Fair values for loans are estimated using a discounted cash flow
methodology. The discount rates take into account interest rates currently being offered to customers for loans with similar terms, the credit risk associated with the loan and other market factors, including liquidity.
Loans Held for Sale:Loans originated and intended to be sold in the secondary market, generally 1-4 family residential loans, are carried, in aggregate, at the lower of cost or estimated fair value. The use of a valuation model using quoted prices of similar instruments arerepresents significant inputs in arriving at the fair value (Level 2).
Bank Owned Life Insurance: Peoples' bank owned life insurance policies are recorded at their cash surrender value (Level 3). Peoples recognizes tax-exempt income from the periodic increases in the cash surrender value of these policies and from death benefits.
Servicing Rights: The fair value of the servicing rights is determined by using a discounted cash flow model, which estimates the present value of the future net cash flows of the servicing portfolio based on various factors, such as servicing costs, expected prepayment speeds and discount rates (Level 3). Peoples recognized a write-down on servicing rights of $182,000 during the first quarter of 2020 as the fair value of the servicing rights was less than the carrying value.
Deposits: The fair value of fixed maturity certificates of deposit ("CDs") is estimated using a discounted cash flow calculation based on current rates offered for deposits of similar remaining maturities (Level 2).
Short-term Borrowings: The fair value of short-term borrowings is estimated using a discounted cash flow analysis based on rates currently available to Peoples for borrowings with similar terms (Level 2).
Long-term Borrowings: The fair value of long-term borrowings is estimated using a discounted cash flow analysis based on rates currently available to Peoples for borrowings with similar terms (Level 2).
Certain financial assets and financial liabilities that are not required to be measured or reported at fair value can be subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These financial assets and liabilities include the following: customer relationships, the deposit base, and other information required to compute Peoples’ aggregate fair value that are not included in the above information. Accordingly, the above fair values are not intended to represent the aggregate fair value of Peoples.
Note 3 Investment Securities
Available-for-sale
The following table summarizes Peoples' available-for-sale investment securities:
| | | | | | | | | | | | | | |
| (Dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| March 31, 2020 | | | | |
| Obligations of: | | | | |
| | | | |
| U.S. government sponsored agencies | $ | 5,918 | | $ | 443 | | $ | — | | $ | 6,361 | |
| States and political subdivisions | 105,904 | | 3,026 | | (118) | | 108,812 | |
| Residential mortgage-backed securities | 798,762 | | 25,914 | | (783) | | 823,893 | |
| Commercial mortgage-backed securities | 16,899 | | 279 | | (117) | | 17,061 | |
| Bank-issued trust preferred securities | 4,696 | | 202 | | (190) | | 4,708 | |
| | | | |
| Total available-for-sale securities | $ | 932,179 | | $ | 29,864 | | $ | (1,208) | | $ | 960,835 | |
| December 31, 2019 | | | | |
| Obligations of: | | | | |
| | | | |
| U.S. government sponsored agencies | $ | 7,917 | | $ | 292 | | $ | — | | $ | 8,209 | |
| States and political subdivisions | 111,217 | | 3,018 | | (131) | | 114,104 | |
| Residential mortgage-backed securities | 787,430 | | 7,763 | | (4,184) | | 791,009 | |
| Commercial mortgage-backed securities | 18,135 | | 88 | | (135) | | 18,088 | |
| Bank-issued trust preferred securities | 4,696 | | 137 | | (142) | | 4,691 | |
| | | | |
| Total available-for-sale securities | $ | 929,395 | | $ | 11,298 | | $ | (4,592) | | $ | 936,101 | |
|
| | | | | | | | | | | | |
| (Dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| September 30, 2019 | | | | |
| Obligations of: | | | | |
| U.S. government sponsored agencies | $ | 11,714 |
| $ | 431 |
| $ | — |
| $ | 12,145 |
|
| States and political subdivisions | 112,647 |
| 3,029 |
| (63 | ) | 115,613 |
|
| Residential mortgage-backed securities | 826,797 |
| 11,230 |
| (2,855 | ) | 835,172 |
|
| Commercial mortgage-backed securities | 20,432 |
| 137 |
| (108 | ) | 20,461 |
|
| Bank-issued trust preferred securities | 4,696 |
| 122 |
| (174 | ) | 4,644 |
|
| Total available-for-sale securities | $ | 976,286 |
| $ | 14,949 |
| $ | (3,200 | ) | $ | 988,035 |
|
| December 31, 2018 | | | | |
| Obligations of: | | | | |
| States and political subdivisions | $ | 88,358 |
| $ | 787 |
| $ | (558 | ) | $ | 88,587 |
|
| Residential mortgage-backed securities | 705,289 |
| 2,720 |
| (15,401 | ) | 692,608 |
|
| Commercial mortgage-backed securities | 6,812 |
| — |
| (105 | ) | 6,707 |
|
| Bank-issued trust preferred securities | 4,196 |
| 75 |
| (282 | ) | 3,989 |
|
| Total available-for-sale securities | $ | 804,655 |
| $ | 3,582 |
| $ | (16,346 | ) | $ | 791,891 |
|
The unrealized losses related to residential mortgage-backed securities at September 30, 2019March 31, 2020 and December 31, 2018,2019, were attributed to changes in market interest rates and spreads since the securities were purchased.
During each of the three months ended March 31, 2020 and 2019, Peoples realized 0 gross losses from sales of available-for-sale securities. The gross gains and gross losses realized by Peoples from sales of available-for-sale securities for the periods ended September 30March 31 were as follows:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | | March 31, | |
| (Dollars in thousands) | 2019 | 2018 | | 2019 | 2018 | (Dollars in thousands) | 2020 | 2019 | |
| Gross gains realized | $ | 97 |
| $ | — |
| | $ | 157 |
| $ | 5 |
| Gross gains realized | $ | 319 | | $ | 30 | | |
| Gross losses realized | — |
| — |
| | 87 |
| 151 |
| |
| Net losses realized | $ | 97 |
| $ | — |
| | $ | 70 |
| $ | (146 | ) | |
| | Net gain realized | | Net gain realized | $ | 319 | | $ | 30 | | |
The cost of investment securities sold, and any resulting gain, or loss, were based on the specific identification method and recognized as of the trade date.
The following table presents a summary of available-for-sale investment securities that had an unrealized loss:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | | | 12 Months or More | | | | Total | |
| (Dollars in thousands) | Fair Value | Unrealized Loss | No. of Securities | | Fair Value | Unrealized Loss | No. of Securities | | Fair Value | Unrealized Loss |
| March 31, 2020 | | | | | | | | | | |
| Obligations of: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| States and political subdivisions | | $ | 2,337 | | $ | 75 | | 2 | | | $ | 2,251 | | $ | 43 | | 1 | | | $ | 4,588 | | $ | 118 | |
| Residential mortgage-backed securities | 57,391 | | 449 | | 28 | | | 18,948 | | 334 | | 15 | | | 76,339 | | 783 | |
| Commercial mortgage-backed securities | — | | — | | — | | | 2,050 | | 117 | | 3 | | | 2,050 | | 117 | |
| Bank-issued trust preferred securities | — | | — | | — | | | 1,810 | | 190 | | 2 | | | 1,810 | | 190 | |
| | | | | | | | | | |
| Total | $ | 59,728 | | $ | 524 | | 30 | | | $ | 25,059 | | $ | 684 | | 21 | | | $ | 84,787 | | $ | 1,208 | |
| December 31, 2019 | | | | | | | | | | | | |
| Obligations of: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| States and political subdivisions | $ | 6,226 | | $ | 74 | | 2 | | | $ | 2,441 | | $ | 57 | | 1 | | | $ | 8,667 | | $ | 131 | |
| Residential mortgage-backed securities | 284,096 | | 2,527 | | 62 | | | 88,993 | | 1,657 | | 39 | | | 373,089 | | 4,184 | |
| Commercial mortgage-backed securities | 970 | | 21 | | 1 | | | 2,409 | | 114 | | 3 | | | 3,379 | | 135 | |
| Bank-issued trust preferred securities | — | | — | | — | | | 1,858 | | 142 | | 2 | | | 1,858 | | 142 | |
| | | | | | | | | | |
| Total | $ | 291,292 | | $ | 2,622 | | 65 | | | $ | 95,701 | | $ | 1,970 | | 45 | | | $ | 386,993 | | $ | 4,592 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or More | | Total |
| (Dollars in thousands) | Fair Value | Unrealized Loss | No. of Securities | | Fair Value | Unrealized Loss | No. of Securities | | Fair Value | Unrealized Loss |
| September 30, 2019 | | | | | | | | | | |
| Obligations of: | | | | | | | | | | |
| States and political subdivisions | $ | — |
| $ | — |
| — |
| | $ | 2,632 |
| $ | 63 |
| 1 |
| | $ | 2,632 |
| $ | 63 |
|
| Residential mortgage-backed securities | 176,740 |
| 1,267 |
| 41 |
| | 110,378 |
| 1,588 |
| 42 |
| | 287,118 |
| 2,855 |
|
| Commercial mortgage-backed securities | — |
| — |
| — |
| | 2,481 |
| 108 |
| 3 |
| | 2,481 |
| 108 |
|
| Bank-issued trust preferred securities | — |
| — |
| — |
| | 1,826 |
| 174 |
| 2 |
| | 1,826 |
| 174 |
|
| Total | $ | 176,740 |
| $ | 1,267 |
| 41 |
| | $ | 117,317 |
| $ | 1,933 |
| 48 |
| | $ | 294,057 |
| $ | 3,200 |
|
| December 31, 2018 | | | | | | | | | | |
| Obligations of: | | | | | | | | | | |
| States and political subdivisions | $ | 10,173 |
| $ | 18 |
| 17 |
| | $ | 19,918 |
| $ | 540 |
| 20 |
| | $ | 30,091 |
| $ | 558 |
|
| Residential mortgage-backed securities | 47,562 |
| 226 |
| 50 |
| | 517,335 |
| 15,175 |
| 170 |
| | 564,897 |
| 15,401 |
|
| Commercial mortgage-backed securities | — |
| — |
| — |
| | 6,707 |
| 105 |
| 3 |
| | 6,707 |
| 105 |
|
| Bank-issued trust preferred securities | — |
| — |
| — |
| | 1,718 |
| 282 |
| 2 |
| | 1,718 |
| 282 |
|
| Total | $ | 57,735 |
| $ | 244 |
| 67 |
| | $ | 545,678 |
| $ | 16,102 |
| 195 |
| | $ | 603,413 |
| $ | 16,346 |
|
Management systematically evaluates available-for-sale investment securities for other-than-temporary declines in fair valuean allowance for credit losses on a quarterly basis. At September 30, 2019,March 31, 2020, management concluded nothat 0 individual securities were other-than-temporarily impaired sinceat an unrealized loss position required an allowance for credit losses. At March 31, 2020, Peoples did not have the intent to sell, nor was it more likely than not that Peoples would be required to sell, any of the securities with an unrealized loss prior to recovery. Further, the unrealized losses at both September 30,March 31, 2020 and March 31, 2019 and December 31, 2018 were largely attributable to changes in market interest rates and spreads since the securities were purchased.purchased, and were not credit related losses. Accrued interest receivable is not included in investment securities balances, and is presented in the “Other assets” line of the Unaudited Consolidated Balance Sheets, with no recorded allowance for credit losses. Interest receivable on investment securities was $3.8 million at March 31, 2020 and $3.6 million at December 31, 2019.
At September 30, 2019,March 31, 2020, approximately 99% of the mortgage-backed securities with a market value that had been at an unrealized loss position for twelve months or more were issued by U.S. government sponsored agencies. The remaining 1%, or two2 positions, consisted of privately issued mortgage-backed securities with all of the underlying mortgages originated prior to 2004. Both of these positions had a fair value of less than 90% of their book value, with an aggregate book and fair value of $208,000$202,000 and $146,000,$165,000, respectively. Management analyzed the underlying credit quality of these securities and concluded the unrealized losses were primarily attributable to the floating rate nature of these investments and the low remaining number of loans underlying these securities.
The unrealized losses with respect to the two2 bank-issued trust preferred securities that had been in an unrealized loss position for twelve months or more at September 30, 2019March 31, 2020 were primarily attributable to the subordinated nature of the debt.
The table below presents the amortized cost, fair value and total weighted-average yield of available-for-sale securities by contractual maturity at September 30, 2019.March 31, 2020. The weighted-average yields are based on the amortized cost. In some cases, the issuers may have the right to call or prepay obligations without call or prepayment penalties prior to the contractual maturity date.
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | Within 1 Year | 1 to 5 Years | 5 to 10 Years | Over 10 Years | Total |
| Amortized cost | | | | | |
| Obligations of: | | | | | |
| | | | | |
| U.S. government sponsored agencies | $ | — | | $ | 1,993 | | $ | 3,925 | | $ | — | | $ | 5,918 | |
| States and political subdivisions | 4,641 | | 23,918 | | 42,744 | | 34,601 | | 105,904 | |
| Residential mortgage-backed securities | 4 | | 1,656 | | 81,803 | | 715,299 | | 798,762 | |
| Commercial mortgage-backed securities | 4,750 | | 8,024 | | 974 | | 3,151 | | 16,899 | |
| Bank-issued trust preferred securities | — | | — | | 4,696 | | — | | 4,696 | |
| | | | | |
| Total available-for-sale securities | $ | 9,395 | | $ | 35,591 | | $ | 134,142 | | $ | 753,051 | | $ | 932,179 | |
| Fair value | | | | | | | | | | |
| Obligations of: | | | | | | | | | | |
| | | | | |
| U.S. government sponsored agencies | $ | — | | $ | 2,115 | | $ | 4,246 | | $ | — | | $ | 6,361 | |
| States and political subdivisions | 4,655 | | 24,299 | | 44,538 | | 35,320 | | 108,812 | |
| Residential mortgage-backed securities | 4 | | 1,710 | | 83,776 | | 738,403 | | 823,893 | |
| Commercial mortgage-backed securities | 4,781 | | 8,162 | | 1,025 | | 3,093 | | 17,061 | |
| Bank-issued trust preferred securities | — | | — | | 4,708 | | — | | 4,708 | |
| | | | | |
| Total available-for-sale securities | $ | 9,440 | | $ | 36,286 | | $ | 138,293 | | $ | 776,816 | | $ | 960,835 | |
| Total weighted-average yield | 2.25 | % | 2.63 | % | 2.68 | % | 2.58 | % | 2.59 | % |
|
| | | | | | | | | | | | | | | |
| (Dollars in thousands) | Within 1 Year | 1 to 5 Years | 5 to 10 Years | Over 10 Years | Total |
| Amortized cost | | | | | |
| Obligations of: | | | | | |
| U.S. government sponsored agencies | $ | — |
| $ | 1,992 |
| $ | 9,722 |
| $ | — |
| $ | 11,714 |
|
| States and political subdivisions | 3,769 |
| 28,595 |
| 42,723 |
| 37,560 |
| 112,647 |
|
| Residential mortgage-backed securities | 1 |
| 1,703 |
| 66,677 |
| 758,416 |
| 826,797 |
|
| Commercial mortgage-backed securities | — |
| 15,858 |
| 989 |
| 3,585 |
| 20,432 |
|
| Bank-issued trust preferred securities | — |
| — |
| 4,696 |
| — |
| 4,696 |
|
| Total available-for-sale securities | $ | 3,770 |
| $ | 48,148 |
| $ | 124,807 |
| $ | 799,561 |
| $ | 976,286 |
|
| Fair value | | | | | |
| Obligations of: | | | | | |
| U.S. government sponsored agencies | $ | — |
| $ | 2,053 |
| $ | 10,092 |
| $ | — |
| $ | 12,145 |
|
| States and political subdivisions | 3,774 |
| 28,917 |
| 44,334 |
| 38,588 |
| 115,613 |
|
| Residential mortgage-backed securities | 1 |
| 1,731 |
| 66,823 |
| 766,617 |
| 835,172 |
|
| Commercial mortgage-backed securities | — |
| 15,952 |
| 1,027 |
| 3,482 |
| 20,461 |
|
| Bank-issued trust preferred securities | — |
| — |
| 4,644 |
| — |
| 4,644 |
|
| Total available-for-sale securities | $ | 3,775 |
| $ | 48,653 |
| $ | 126,920 |
| $ | 808,687 |
| $ | 988,035 |
|
| Total weighted-average yield | 2.26 | % | 2.52 | % | 2.74 | % | 2.83 | % | 2.80 | % |
Held-to-Maturity
The following table summarizes Peoples’ held-to-maturity investment securities:
| | | (Dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | (Dollars in thousands) | Amortized Cost | Allowance for Credit Losses | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| September 30, 2019 | | |
| March 31, 2020 | | March 31, 2020 | | | |
| Obligations of: | | Obligations of: | | | |
| States and political subdivisions | $ | 4,395 |
| $ | 502 |
| $ | — |
| $ | 4,897 |
| States and political subdivisions | $ | 3,844 | | $ | (6) | | $ | 504 | | $ | — | | $ | 4,342 | |
| Residential mortgage-backed securities | 22,412 |
| 237 |
| (41 | ) | 22,608 |
| Residential mortgage-backed securities | 29,070 | | — | | 1,020 | | — | | 30,090 | |
| Commercial mortgage-backed securities | 7,022 |
| 366 |
| — |
| 7,388 |
| Commercial mortgage-backed securities | 5,830 | | — | | 420 | | — | | 6,250 | |
| Total held-to-maturity securities | $ | 33,829 |
| $ | 1,105 |
| $ | (41 | ) | $ | 34,893 |
| Total held-to-maturity securities | $ | 38,744 | | $ | (6) | | $ | 1,944 | | $ | — | | $ | 40,682 | |
| December 31, 2018 | | |
| December 31, 2019 | | December 31, 2019 | | | |
| Obligations of: | | Obligations of: | | | |
| States and political subdivisions | $ | 4,403 |
| $ | 493 |
| $ | — |
| $ | 4,896 |
| States and political subdivisions | $ | 4,346 | | $ | — | | $ | 445 | | $ | — | | $ | 4,791 | |
| Residential mortgage-backed securities | 29,044 |
| 191 |
| (632 | ) | 28,603 |
| Residential mortgage-backed securities | 21,494 | | — | | 169 | | (94) | | 21,569 | |
| Commercial mortgage-backed securities | 3,514 |
| — |
| (50 | ) | 3,464 |
| Commercial mortgage-backed securities | 5,907 | | — | | 275 | | (1) | | 6,181 | |
| Total held-to-maturity securities | $ | 36,961 |
| $ | 684 |
| $ | (682 | ) | $ | 36,963 |
| Total held-to-maturity securities | $ | 31,747 | | $ | — | | $ | 889 | | $ | (95) | | $ | 32,541 | |
There were no0 gross gains or gross losses realized by Peoples from sales of held-to-maturity securities for anyeither of the three and nine months ended September 30, 2019March 31, 2020 and 2018.2019.
At March 31, 2020, there were 0 held-to-maturity investment securities that had an unrealized loss. The following table presents a summary of held-to-maturity investment securities that had an unrealized loss:loss at December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | | | 12 Months or More | | | | Total | |
| (Dollars in thousands) | Fair
Value | Unrealized Loss | No. of Securities | | Fair
Value | Unrealized Loss | No. of Securities | | Fair
Value | Unrealized Loss |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | | | |
| | | | | | | | | | |
| Residential mortgage-backed securities | $ | 7,731 | | $ | 67 | | 1 | | | $ | 890 | | $ | 27 | | 1 | | | $ | 8,621 | | $ | 94 | |
| Commercial mortgage-backed securities | 1,666 | | 1 | | 1 | | | — | | — | | — | | | 1,666 | | 1 | |
| Total | $ | 9,397 | | $ | 68 | | 2 | | | $ | 890 | | $ | 27 | | 1 | | | $ | 10,287 | | $ | 95 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or More | | Total |
| (Dollars in thousands) | Fair Value | Unrealized Loss | No. of Securities | | Fair Value | Unrealized Loss | No. of Securities | | Fair Value | Unrealized Loss |
| September 30, 2019 | | | | | | | | | | |
| Residential mortgage-backed securities | $ | 7,885 |
| $ | 14 |
| 1 |
| | $ | 899 |
| $ | 27 |
| 1 |
| | $ | 8,784 |
| $ | 41 |
|
| Total | $ | 7,885 |
| $ | 14 |
| 1 |
| | $ | 899 |
| $ | 27 |
| 1 |
| | $ | 8,784 |
| $ | 41 |
|
| December 31, 2018 | | | | | | | | | | |
| Residential mortgage-backed securities | $ | — |
| $ | — |
| — |
| | $ | 13,102 |
| $ | 632 |
| 5 |
| | $ | 13,102 |
| $ | 632 |
|
| Commercial mortgage-backed securities | — |
| — |
| — |
| | 3,464 |
| 50 |
| 1 |
| | 3,464 |
| 50 |
|
| Total | $ | — |
| $ | — |
| — |
| | $ | 16,566 |
| $ | 682 |
| 6 |
| | $ | 16,566 |
| $ | 682 |
|
The table below presents the amortized cost, fair value and total weighted-average yield of held-to-maturity securities by contractual maturity at September 30, 2019.March 31, 2020. The weighted-average yields are based on the amortized cost.cost and are computed on a fully taxable-equivalent basis using a statutory federal corporate income tax rate of 21%. In some cases, the issuers may have the right to call or prepay obligations without call or prepayment penalties prior to the contractual maturity date.
| | | (Dollars in thousands) | Within 1 Year | 1 to 5 Years | 5 to 10 Years | Over 10 Years | Total | (Dollars in thousands) | Within 1 Year | 1 to 5 Years | 5 to 10 Years | Over 10 Years | Total |
| Amortized cost | | Amortized cost | |
| Obligations of: | | Obligations of: | |
| States and political subdivisions | $ | 303 |
| $ | — |
| $ | 2,985 |
| $ | 1,107 |
| $ | 4,395 |
| States and political subdivisions | $ | 300 | | $ | — | | $ | 3,544 | | $ | — | | $ | 3,844 | |
| Residential mortgage-backed securities | — |
| — |
| 3,842 |
| 18,570 |
| 22,412 |
| Residential mortgage-backed securities | — | | — | | 3,399 | | 25,671 | | 29,070 | |
| Commercial mortgage-backed securities | — |
| 404 |
| 3,868 |
| 2,750 |
| 7,022 |
| Commercial mortgage-backed securities | — | | 392 | | 3,816 | | 1,622 | | 5,830 | |
| Total held-to-maturity securities | $ | 303 |
| $ | 404 |
| $ | 10,695 |
| $ | 22,427 |
| $ | 33,829 |
| Total held-to-maturity securities | $ | 300 | | $ | 392 | | $ | 10,759 | | $ | 27,293 | | $ | 38,744 | |
| Fair value | | Fair value | | | | | | | | | | |
| Obligations of: | | Obligations of: | | | | | | | | | | |
| States and political subdivisions | $ | 305 |
| $ | — |
| $ | 3,481 |
| $ | 1,111 |
| $ | 4,897 |
| States and political subdivisions | $ | 301 | | $ | — | | $ | 4,041 | | $ | — | | $ | 4,342 | |
| Residential mortgage-backed securities | — |
| — |
| 3,916 |
| 18,692 |
| 22,608 |
| Residential mortgage-backed securities | — | | — | | 3,538 | | 26,552 | | 30,090 | |
| Commercial mortgage-backed securities | — |
| 410 |
| 4,208 |
| 2,770 |
| 7,388 |
| Commercial mortgage-backed securities | — | | 402 | | 4,214 | | 1,634 | | 6,250 | |
| Total held-to-maturity securities | $ | 305 |
| $ | 410 |
| $ | 11,605 |
| $ | 22,573 |
| $ | 34,893 |
| Total held-to-maturity securities | $ | 301 | | $ | 402 | | $ | 11,793 | | $ | 28,186 | | $ | 40,682 | |
| Total weighted-average yield | 2.61 | % | 2.29 | % | 1.49 | % | 2.82 | % | 2.39 | % | Total weighted-average yield | 2.55 | % | 2.29 | % | 2.79 | % | 2.71 | % | 2.73 | % |
Other Investment Securities
Peoples' other investment securities on the Unaudited Consolidated Balance SheetSheets consist largely of shares of FHLB of Cincinnati and FRB of Cleveland stock, and other equity investment securities.
The following table summarizes the carrying value of Peoples' other investment securities:
| | | (Dollars in thousands) | September 30, 2019 | December 31, 2018 | (Dollars in thousands) | March 31, 2020 | December 31, 2019 |
| FHLB stock | $ | 27,716 |
| $ | 29,367 |
| FHLB stock | $ | 31,595 | | $ | 27,235 | |
| FRB stock | 13,310 |
| 12,294 |
| FRB stock | 13,310 | | 13,310 | |
| Nonqualified deferred compensation | 1,336 |
| 987 |
| Nonqualified deferred compensation | 1,365 | | 1,499 | |
| Equity investment securities | 318 |
| 277 |
| Equity investment securities | 289 | | 321 | |
| Other investment securities | 365 |
| 60 |
| Other investment securities | 365 | | 365 | |
| Total other investment securities | $ | 43,045 |
| $ | 42,985 |
| Total other investment securities | $ | 46,924 | | $ | 42,730 | |
|
Peoples redeemed FHLB stock in order to be in compliance with the requirements of the FHLB of Cincinnati, which redemptions totaled $1.5 million$700,000 during the thirdfirst quarter of 2019, $1.1 million during the second quarter of 2019, and $1.82020. Peoples purchased additional FHLB Stock, which totaled $5.0 million during the first quarter 2020, as a result of 2019. During the second quarterFHLB of 2019, Peoples acquired $2.8 millionCincinnati's capital requirements on FHLB stock fromadvances during the First Prestonsburg acquisition.quarter.
During the three and nine months ended September 30,March 31, 2020 and March 31, 2019, Peoples recorded the change in the fair value of equity investment securities held at September 30,March 31, 2020 and March 31, 2019, respectively, in other non-interest income, resulting in unrealized gains of $19,000 and
$42,000, respectively. During the three and nine months ended September 30, 2018, Peoples recorded the change in the fair value of equity investment securities held at September 30, 2018 in other non-interest income, resulting in an unrealized loss of $16,000$30,000 and an unrealized gain of $621,000,$22,000, respectively. Net realized gains on sales of equity investment securities, included in other non-interest income during the first ninethree months of 2019, consisted of a realized gain of $787,000 related to the sale of restricted Class B Visa stock, which had been held at a carrying cost and fair value of zero due to the litigation liability associated with the stock.
At September 30, 2019,March 31, 2020, Peoples' investment in equity investment securities was comprised largely of common stocks issued by various unrelated bank holding companies. There were no0 equity investment securities of a single issuer that exceeded 10% of Peoples' stockholders' equity.
Pledged Securities
Peoples had pledged available-for-sale investment securities and held-to-maturity investment securities to secure public and trust department deposits, and repurchase agreements in accordance with federal and state requirements. Peoples also pledged available-for-sale investment securities and held-to-maturity securities to secure additional borrowing capacity at the FHLB and the FRB.
The following table summarizes the carrying value of Peoples' pledged securities:
| | | | | | | | | | | | |
| | | Carrying Amount | | |
| (Dollars in thousands) | | March 31, 2020 | | December 31, 2019 |
| | | | |
| Securing public and trust department deposits, and repurchase agreements: | | | | |
| Available-for-sale | | $ | 572,848 | | | $ | 527,655 | |
| Held-to-maturity | | 19,263 | | | 12,975 | |
| Securing additional borrowing capacity at the FHLB and the FRB: | | | | |
| Available-for-sale | | 92,651 | | | 44,618 | |
| Held-to-maturity | | 13,587 | | | 14,155 | |
| | | | |
|
| | | | | | | |
| | Carrying Amount |
| (Dollars in thousands) | September 30, 2019 | | December 31, 2018 |
| |
| Securing public and trust department deposits, and repurchase agreements: | | | |
| Available-for-sale | $ | 565,093 |
| | $ | 429,987 |
|
| Held-to-maturity | 14,302 |
| | 16,928 |
|
| | | | |
| Securing additional borrowing capacity at the FHLB and the FRB: | | | |
| Available-for-sale | 49,911 |
| | 60,058 |
|
| Held-to-maturity | 14,835 |
| | 16,731 |
|
Note 4 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 central and eastern 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,
2020 | December 31, 2019 |
| Construction | $ | 110,865 | | $ | 88,518 | |
| Commercial real estate, other | 897,817 | | 833,238 | |
| Commercial and industrial | 654,530 | | 662,993 | |
| Residential real estate | 625,366 | | 661,476 | |
| Home equity lines of credit | 128,011 | | 132,704 | |
| Consumer, indirect | 418,066 | | 417,185 | |
| Consumer, direct | 76,172 | | 76,533 | |
| Deposit account overdrafts | 610 | | 878 | |
| Total loans, at amortized cost | $ | 2,911,437 | | $ | 2,873,525 | |
|
| | | | | | |
| (Dollars in thousands) | September 30,
2019 | December 31, 2018 |
| Originated loans: | | |
| Commercial real estate, construction | $ | 100,338 |
| $ | 124,013 |
|
| Commercial real estate, other | 659,103 |
| 632,200 |
|
| Commercial real estate | 759,441 |
| 756,213 |
|
| Commercial and industrial | 564,279 |
| 530,207 |
|
| Residential real estate | 308,964 |
| 296,860 |
|
| Home equity lines of credit | 92,910 |
| 93,326 |
|
| Consumer, indirect | 423,217 |
| 407,167 |
|
| Consumer, direct | 72,699 |
| 71,674 |
|
| Consumer | 495,916 |
| 478,841 |
|
| Deposit account overdrafts | 1,081 |
| 583 |
|
| Total originated loans | $ | 2,222,591 |
| $ | 2,156,030 |
|
| Acquired loans: | | |
| Commercial real estate, construction | $ | 4,435 |
| $ | 12,404 |
|
| Commercial real estate, other | 171,096 |
| 184,711 |
|
| Commercial real estate | 175,531 |
| 197,115 |
|
| Commercial and industrial | 43,961 |
| 35,537 |
|
| Residential real estate | 358,053 |
| 296,937 |
|
| Home equity lines of credit | 41,942 |
| 40,653 |
|
| Consumer, indirect | 67 |
| 136 |
|
| Consumer, direct | 8,171 |
| 2,370 |
|
| Consumer | 8,238 |
| 2,506 |
|
| Total acquired loans | $ | 627,725 |
| $ | 572,748 |
|
| Total loans | $ | 2,850,316 |
| $ | 2,728,778 |
|
Accrued interest receivable is not included in loan balances, and 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 $8.8 million at March 31, 2020 and $9.1 million at December 31, 2019.
Nonaccrual and Past Due Loans
Peoples has acquired variousA 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 through business combinationson nonaccrual status and loans delinquent for 90 days or more and accruing were as follows:
| | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | December 31, 2019 | |
| (Dollars in thousands) | Nonaccrual (1)(2) | Accruing Loans 90+ Days Past Due | | Nonaccrual (1) | Accruing Loans 90+ Days Past Due (2) |
| Construction | $ | 99 | | $ | — | | | $ | 411 | | $ | — | |
| Commercial real estate, other | 9,577 | | — | | | 6,801 | | 907 | |
| Commercial and industrial | 5,010 | | 806 | | | 2,155 | | 155 | |
| Residential real estate | 8,640 | | 557 | | | 6,361 | | 2,677 | |
| Home equity lines of credit | 1,152 | | 143 | | | 1,165 | | 108 | |
| Consumer, indirect | 834 | | — | | | 840 | | — | |
| Consumer, direct | 170 | | 37 | | | 48 | | 85 | |
| Total loans, at amortized cost | $ | 25,482 | | $ | 1,543 | | | | $ | 17,781 | | $ | 3,932 | |
(1) There were 0 nonaccrual loans for which there was at acquisition, evidence of deterioration ofno allowance for credit quality since origination, and for which it was probable that all contractually required payments would not be collected.losses.
(2) The carrying amounts of these purchased credit impaired loans included in the loan balances above are summarized as follows:
|
| | | | | | |
| (Dollars in thousands) | September 30,
2019 | December 31,
2018 |
| Commercial real estate | $ | 9,063 |
| $ | 11,955 |
|
| Commercial and industrial | 3,791 |
| 1,287 |
|
| Residential real estate | 24,361 |
| 20,062 |
|
| Consumer | 663 |
| 58 |
|
| Total outstanding balance | $ | 37,878 |
| $ | 33,362 |
|
| Net carrying amount | $ | 23,796 |
| $ | 22,475 |
|
Changes in the accretable yieldnew accounting for purchased credit impaireddeteriorated loans forunder ASU 2016-13 resulted in the nine months ended September 30 were as follows:
|
| | | | | | |
| (Dollars in thousands) | September 30,
2019 | September 30,
2018 |
| Balance, beginning of period | $ | 8,955 |
| $ | 6,704 |
|
| Reclassification from nonaccretable to accretable | 199 |
| 2,019 |
|
| Additions: | | |
| ASB Financial Corp. | — |
| 2,047 |
|
| First Prestonsburg Bancshares Inc. | 3,860 |
| — |
|
| Accretion | (1,763 | ) | (1,392 | ) |
| Balance, September 30 | $ | 11,251 |
| $ | 9,378 |
|
The fair valuemovement of newly acquired$3.9 million of loans is determined atfrom the time of acquisition and 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 purchased credit impaired loans, 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, loans that have become90+ days past due and actual cash flowsaccruing 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,
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 the projected cash flows from the last re-estimation. Peoples evaluates these changes quarterlyDecember 31, 2019 was due to a $1.5 million commercial relationship and compares the current status or activity to those at the previous cash flow re-estimation date, and the related materiality of the changes. As of September 30, 2019, these changes, when compared to the total loan portfolio and the factors at the last re-estimation date, would not have a material impactseveral smaller commercial relationships being placed on amounts recorded since the last re-estimation. Peoples completed a re-estimation of cash flows on purchased credit impaired loans in August 2019, resulting in a reclassification from nonaccretable to accretable yield as shown in the table above.
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 thenonaccrual. The amount of interest income and possiblyrecognized on nonaccrual loans during the principal expectedfirst quarter of 2020 was $458,000.
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 | | |
| March 31, 2020 | | | | | | |
| Construction | $ | — | | $ | 4 | | $ | 94 | | $ | 98 | | $ | 110,767 | | $ | 110,865 | |
| Commercial real estate, other | 3,707 | | 77 | | 8,929 | | 12,713 | | 885,104 | | 897,817 | |
| Commercial and industrial | 2,135 | | 42 | | 5,472 | | 7,649 | | 646,881 | | 654,530 | |
| Residential real estate | 10,790 | | 886 | | 4,467 | | 16,143 | | 609,223 | | 625,366 | |
| Home equity lines of credit | 626 | | 267 | | 1,055 | | 1,948 | | 126,063 | | 128,011 | |
| Consumer, indirect | 3,046 | | 502 | | 330 | | 3,878 | | 414,188 | | 418,066 | |
| Consumer, direct | 457 | | 84 | | 151 | | 692 | | 75,480 | | 76,172 | |
| Deposit account overdrafts | — | | — | | — | | — | | 610 | | 610 | |
| Total loans, at amortized cost | $ | 20,761 | | $ | 1,862 | | $ | 20,498 | | $ | 43,121 | | $ | 2,868,316 | | $ | 2,911,437 | |
| 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 be collected. In re-forecasting future estimated cash flows, credit loss expectations are adjustedDecember 31, 2019, was mostly due to one $2.5 million commercial relationship. Delinquency trends remained stable, as necessary.98.5% of Peoples' portfolio was considered “current” at March 31, 2020, compared to 98.6% at December 31, 2019.
Pledged Loans
Peoples pledgeshas pledged certain loans secured by 1-4one-to-four family and multifamily residential mortgages and home equity lines of credit under a blanket collateral agreement to secure borrowings from the FHLB of Cincinnati. The amount of loans pledged under this blanket collateral agreement totaled $485.8 million and $505.7 million at September 30, 2019 and December 31, 2018, respectively. Peoples also pledgeshas pledged commercial loans to secure borrowings with the FRB of Cleveland. The outstanding balances of these loans totaled $171.7 million and $180.9 million at September 30, 2019 and December 31, 2018, 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 pledged are summarized as follows:
|
| | | | | | | | | | | | | |
| | Nonaccrual Loans | | Loans 90+ Days Past Due and Accruing |
| (Dollars in thousands) | September 30,
2019 | December 31,
2018 | | September 30,
2019 | December 31,
2018 |
| Originated loans: | | | | | |
| Commercial real estate, construction | $ | — |
| $ | 710 |
| | $ | — |
| $ | — |
|
| Commercial real estate, other | 6,680 |
| 6,565 |
| | — |
| 786 |
|
| Commercial real estate | 6,680 |
| 7,275 |
| | — |
| 786 |
|
| Commercial and industrial | 1,120 |
| 1,673 |
| | 298 |
| — |
|
| Residential real estate | 4,145 |
| 4,105 |
| | 431 |
| 398 |
|
| Home equity lines of credit | 387 |
| 596 |
| | 134 |
| 7 |
|
| Consumer, indirect | 771 |
| 480 |
| | — |
| — |
|
| Consumer, direct | 53 |
| 56 |
| | — |
| — |
|
| Consumer | 824 |
| 536 |
| | — |
| — |
|
| Total originated loans | $ | 13,156 |
| $ | 14,185 |
| | $ | 863 |
| $ | 1,191 |
|
| Acquired loans: | | | | | |
| Commercial real estate, construction | $ | 230 |
| $ | — |
| | $ | — |
| $ | — |
|
| Commercial real estate, other | 155 |
| 319 |
| | 582 |
| 15 |
|
| Commercial real estate | 385 |
| 319 |
| | 582 |
| 15 |
|
| Commercial and industrial | 95 |
| 36 |
| | 274 |
| 18 |
|
| Residential real estate | 1,862 |
| 1,921 |
| | 2,664 |
| 1,032 |
|
| Home equity lines of credit | 700 |
| 637 |
| | 49 |
| — |
|
| Consumer, direct | 2 |
| — |
| | 83 |
| — |
|
| Total acquired loans | $ | 3,044 |
| $ | 2,913 |
| | $ | 3,652 |
| $ | 1,065 |
|
| Total loans | $ | 16,200 |
| $ | 17,098 |
| | $ | 4,515 |
| $ | 2,256 |
|
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 | |
| September 30, 2019 | | | | | | | |
| Originated loans: | | | | | | | |
| Commercial real estate, construction | $ | — |
| $ | — |
| $ | — |
| $ | — |
| | $ | 100,338 |
| $ | 100,338 |
|
| Commercial real estate, other | 8 |
| 171 |
| 6,482 |
| 6,661 |
| | 652,442 |
| 659,103 |
|
| Commercial real estate | 8 |
| 171 |
| 6,482 |
| 6,661 |
| | 752,780 |
| 759,441 |
|
| Commercial and industrial | 429 |
| 175 |
| 1,279 |
| 1,883 |
| | 562,396 |
| 564,279 |
|
| Residential real estate | 1,288 |
| 845 |
| 2,489 |
| 4,622 |
| | 304,342 |
| 308,964 |
|
| Home equity lines of credit | 95 |
| 129 |
| 476 |
| 700 |
| | 92,210 |
| 92,910 |
|
| Consumer, indirect | 2,719 |
| 484 |
| 215 |
| 3,418 |
| | 419,799 |
| 423,217 |
|
| Consumer, direct | 292 |
| 42 |
| 6 |
| 340 |
| | 72,359 |
| 72,699 |
|
| Consumer | 3,011 |
| 526 |
| 221 |
| 3,758 |
| | 492,158 |
| 495,916 |
|
| Deposit account overdrafts | — |
| — |
| — |
| — |
| | 1,081 |
| 1,081 |
|
| Total originated loans | $ | 4,831 |
| $ | 1,846 |
| $ | 10,947 |
| $ | 17,624 |
| | $ | 2,204,967 |
| $ | 2,222,591 |
|
| Acquired loans: | | | | | | | |
| Commercial real estate, construction | $ | 100 |
| $ | 317 |
| $ | 230 |
| $ | 647 |
| | $ | 3,788 |
| $ | 4,435 |
|
| Commercial real estate, other | 473 |
| 290 |
| 724 |
| 1,487 |
| | 169,609 |
| 171,096 |
|
| Commercial real estate | 573 |
| 607 |
| 954 |
| 2,134 |
| | 173,397 |
| 175,531 |
|
| Commercial and industrial | 159 |
| 123 |
| 368 |
| 650 |
| | 43,311 |
| 43,961 |
|
| Residential real estate | 1,270 |
| 1,020 |
| 3,252 |
| 5,542 |
| | 352,511 |
| 358,053 |
|
| Home equity lines of credit | 681 |
| 42 |
| 706 |
| 1,429 |
| | 40,513 |
| 41,942 |
|
| Consumer, indirect | — |
| — |
| — |
| — |
| | 67 |
| 67 |
|
| Consumer, direct | 47 |
| 19 |
| 85 |
| 151 |
| | 8,020 |
| 8,171 |
|
| Consumer | 47 |
| 19 |
| 85 |
| 151 |
|
| 8,087 |
| 8,238 |
|
| Total acquired loans | $ | 2,730 |
| $ | 1,811 |
| $ | 5,365 |
| $ | 9,906 |
| | $ | 617,819 |
| $ | 627,725 |
|
| Total loans | $ | 7,561 |
| $ | 3,657 |
| $ | 16,312 |
| $ | 27,530 |
| | $ | 2,822,786 |
| $ | 2,850,316 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Loans Past Due | | Current Loans | Total Loans |
| (Dollars in thousands) | 30 - 59 days | 60 - 89 days | 90 + Days | Total | |
| December 31, 2018 | | | | | | | |
| Originated loans: | | | | | | | |
| Commercial real estate, construction | $ | — |
| $ | — |
| $ | 710 |
| $ | 710 |
| | $ | 123,303 |
| $ | 124,013 |
|
| Commercial real estate, other | 12 |
| 736 |
| 7,151 |
| 7,899 |
| | 624,301 |
| 632,200 |
|
| Commercial real estate | 12 |
| 736 |
| 7,861 |
| 8,609 |
| | 747,604 |
| 756,213 |
|
| Commercial and industrial | 1,678 |
| 3,520 |
| 1,297 |
| 6,495 |
| | 523,712 |
| 530,207 |
|
| Residential real estate | 4,457 |
| 1,319 |
| 2,595 |
| 8,371 |
| | 288,489 |
| 296,860 |
|
| Home equity lines of credit | 531 |
| 30 |
| 431 |
| 992 |
| | 92,334 |
| 93,326 |
|
| Consumer, indirect | 3,266 |
| 488 |
| 165 |
| 3,919 |
| | 403,248 |
| 407,167 |
|
| Consumer, direct | 308 |
| 50 |
| 42 |
| 400 |
| | 71,274 |
| 71,674 |
|
| Consumer | 3,574 |
| 538 |
| 207 |
| 4,319 |
|
| 474,522 |
| 478,841 |
|
| Deposit account overdrafts | — |
| — |
| — |
| — |
| | 583 |
| 583 |
|
| Total originated loans | $ | 10,252 |
| $ | 6,143 |
| $ | 12,391 |
| $ | 28,786 |
| | $ | 2,127,244 |
| $ | 2,156,030 |
|
| Acquired loans: | | | | | | | |
| Commercial real estate, construction | $ | 511 |
| $ | — |
| $ | — |
| $ | 511 |
| | $ | 11,893 |
| $ | 12,404 |
|
| Commercial real estate, other | 523 |
| 457 |
| 233 |
| 1,213 |
| | 183,498 |
| 184,711 |
|
| Commercial real estate | 1,034 |
| 457 |
| 233 |
| 1,724 |
| | 195,391 |
| 197,115 |
|
| Commercial and industrial | 111 |
| 13 |
| 18 |
| 142 |
| | 35,395 |
| 35,537 |
|
| Residential real estate | 6,124 |
| 1,823 |
| 1,885 |
| 9,832 |
| | 287,105 |
| 296,937 |
|
| Home equity lines of credit | 238 |
| 233 |
| 534 |
| 1,005 |
| | 39,648 |
| 40,653 |
|
| Consumer, indirect | — |
| — |
| — |
| — |
| | 136 |
| 136 |
|
| Consumer, direct | 23 |
| 6 |
| — |
| 29 |
| | 2,341 |
| 2,370 |
|
| Consumer | 23 |
| 6 |
| — |
| 29 |
| | 2,477 |
| 2,506 |
|
| Total acquired loans | $ | 7,530 |
| $ | 2,532 |
| $ | 2,670 |
| $ | 12,732 |
| | $ | 560,016 |
| $ | 572,748 |
|
| Total loans | $ | 17,782 |
| $ | 8,675 |
| $ | 15,061 |
| $ | 41,518 |
| | $ | 2,687,260 |
| $ | 2,728,778 |
|
Delinquency trends remained stable, as 99.0% of Peoples' portfolio was considered “current” at September 30, 2019, compared to 98.5% at December 31, 2018. | | | | | | | | |
| (Dollars in thousands) | March 31, 2020 | December 31, 2019 |
| Loans pledged to FHLB of Cincinnati | $ | 484,772 | | $ | 458,227 | |
| Loans pledged to FRB of Cleveland | 440,349 | | 172,693 | |
Credit Quality Indicators
As discussed in "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples' 20182019 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 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 generally 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 loancredit 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,” “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.”“pass" for disclosure purposes.
The following table summarizes the risk category of loans within Peoples' loan portfolio based upon the most recent analysis performed:performed at March 31, 2020:
|
| | | | | | | | | | | | | | | | | | |
| | Pass Rated (Grades 1 - 4) | Special Mention (Grade 5) | Substandard (Grade 6) | Doubtful (Grade 7) | Not Rated | Total Loans |
| (Dollars in thousands) |
| September 30, 2019 | | | | | | |
| Originated loans: | | | | | | |
| Commercial real estate, construction | $ | 99,569 |
| $ | — |
| $ | — |
| $ | — |
| $ | 769 |
| $ | 100,338 |
|
| Commercial real estate, other | 626,042 |
| 22,003 |
| 11,058 |
| — |
| — |
| 659,103 |
|
| Commercial real estate | 725,611 |
| 22,003 |
| 11,058 |
| — |
| 769 |
| 759,441 |
|
| Commercial and industrial | 544,048 |
| 6,341 |
| 13,890 |
| — |
| — |
| 564,279 |
|
| Residential real estate | 19,489 |
| 177 |
| 16,214 |
| 226 |
| 272,858 |
| 308,964 |
|
| Home equity lines of credit | 1,429 |
| — |
| — |
| — |
| 91,481 |
| 92,910 |
|
| Consumer, indirect | — |
| — |
| — |
| — |
| 423,217 |
| 423,217 |
|
| Consumer, direct | 27 |
| — |
| — |
| — |
| 72,672 |
| 72,699 |
|
| Consumer | 27 |
| — |
| — |
| — |
| 495,889 |
| 495,916 |
|
| Deposit account overdrafts | — |
| — |
| — |
| — |
| 1,081 |
| 1,081 |
|
| Total originated loans | $ | 1,290,604 |
| $ | 28,521 |
| $ | 41,162 |
| $ | 226 |
| $ | 862,078 |
| $ | 2,222,591 |
|
| Acquired loans: | | | | | | |
| Commercial real estate, construction | $ | 2,766 |
| $ | 920 |
| $ | 749 |
| $ | — |
| $ | — |
| $ | 4,435 |
|
| Commercial real estate, other | 155,011 |
| 7,860 |
| 8,139 |
| 86 |
| — |
| 171,096 |
|
| Commercial real estate | 157,777 |
| 8,780 |
| 8,888 |
| 86 |
| — |
| 175,531 |
|
| Commercial and industrial | 39,127 |
| 1,049 |
| 3,785 |
| — |
| — |
| 43,961 |
|
| Residential real estate | 33,453 |
| 3,053 |
| 4,663 |
| 128 |
| 316,756 |
| 358,053 |
|
| Home equity lines of credit | 2,017 |
| 93 |
| — |
| — |
| 39,832 |
| 41,942 |
|
| Consumer, indirect | — |
| — |
| — |
| — |
| 67 |
| 67 |
|
| Consumer, direct | 13 |
| — |
| — |
| — |
| 8,158 |
| 8,171 |
|
| Consumer | 13 |
| — |
| — |
| — |
| 8,225 |
| 8,238 |
|
| Total acquired loans | $ | 232,387 |
| $ | 12,975 |
| $ | 17,336 |
| $ | 214 |
| $ | 364,813 |
| $ | 627,725 |
|
| Total loans | $ | 1,522,991 |
| $ | 41,496 |
| $ | 58,498 |
| $ | 440 |
| $ | 1,226,891 |
| $ | 2,850,316 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Pass Rated (Grades 1 - 4) | Special Mention (Grade 5) | Substandard (Grade 6) | Doubtful (Grade 7) | Not Rated | Total Loans |
| (Dollars in thousands) |
| December 31, 2018 | | | | | | |
| Originated loans: | | | | | | |
| Commercial real estate, construction | $ | 121,457 |
| $ | — |
| $ | 1,472 |
| $ | — |
| $ | 1,084 |
| $ | 124,013 |
|
| Commercial real estate, other | 612,099 |
| 10,898 |
| 9,203 |
| — |
| — |
| 632,200 |
|
| Commercial real estate | 733,556 |
| 10,898 |
| 10,675 |
| — |
| 1,084 |
| 756,213 |
|
| Commercial and industrial | 476,290 |
| 45,990 |
| 7,692 |
| — |
| 235 |
| 530,207 |
|
| Residential real estate | 14,229 |
| 500 |
| 11,971 |
| 409 |
| 269,751 |
| 296,860 |
|
| Home equity lines of credit | 453 |
| — |
| — |
| — |
| 92,873 |
| 93,326 |
|
| Consumer, indirect | 8 |
| — |
| — |
| — |
| 407,159 |
| 407,167 |
|
| Consumer, direct | 30 |
| — |
| — |
| — |
| 71,644 |
| 71,674 |
|
| Consumer | 38 |
| — |
| — |
| — |
| 478,803 |
| 478,841 |
|
| Deposit account overdrafts | — |
| — |
| — |
| — |
| 583 |
| 583 |
|
| Total originated loans | $ | 1,224,566 |
| $ | 57,388 |
| $ | 30,338 |
| $ | 409 |
| $ | 843,329 |
| $ | 2,156,030 |
|
| Acquired loans: | | | | | | |
| Commercial real estate, construction | $ | 8,976 |
| $ | 1,795 |
| $ | 1,633 |
| $ | — |
| $ | — |
| $ | 12,404 |
|
| Commercial real estate, other | 169,260 |
| 7,241 |
| 8,114 |
| 96 |
| — |
| 184,711 |
|
| Commercial real estate | 178,236 |
| 9,036 |
| 9,747 |
| 96 |
| — |
| 197,115 |
|
| Commercial and industrial | 32,471 |
| 2,008 |
| 1,058 |
| — |
| — |
| 35,537 |
|
| Residential real estate | 17,370 |
| 1,938 |
| 2,033 |
| 137 |
| 275,459 |
| 296,937 |
|
| Home equity lines of credit | 33 |
| — |
| — |
| — |
| 40,620 |
| 40,653 |
|
| Consumer, indirect | 4 |
| — |
| — |
| — |
| 132 |
| 136 |
|
| Consumer, direct | 31 |
| — |
| — |
| — |
| 2,339 |
| 2,370 |
|
| Consumer | 35 |
| — |
| — |
| — |
| 2,471 |
| 2,506 |
|
| Total acquired loans | $ | 228,145 |
| $ | 12,982 |
| $ | 12,838 |
| $ | 233 |
| $ | 318,550 |
| $ | 572,748 |
|
| Total loans | $ | 1,452,711 |
| $ | 70,370 |
| $ | 43,176 |
| $ | 642 |
| $ | 1,161,879 |
| $ | 2,728,778 |
|
In the first nine months of 2019, Peoples' classified loans, which are loans categorized as substandard or doubtful, increased compared to the balances at December 31, 2018 mostly due to downgrades during the period combined with loans acquired in the First Prestonsburg merger, which were partially offset by paydowns on classified loans. At September 30, 2019, criticized loans, which are those categorized as special mention, substandard or doubtful, declined compared to the balance at December 31, 2018, largely due to the upgrade of two commercial relationships, partially offset by loans acquired in the First Prestonsburg merger. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans | Revolving Loans Converted to Term | Total Loans |
| Construction | | | | | | | | | | | | |
| | | | |
| Pass | $ | 4,092 | | $ | 38,085 | | $ | 30,264 | | $ | 34,158 | | $ | 1,277 | | $ | 839 | | $ | 500 | | $ | 1,085 | | $ | 109,215 | |
| Special mention | — | | — | | — | | — | | — | | — | | 152 | | — | | 152 | |
| Substandard | — | | — | | — | | 409 | | — | | 1,089 | | — | | — | | 1,498 | |
| | | | | | | | | |
| Total | 4,092 | | 38,085 | | 30,264 | | 34,567 | | 1,277 | | 1,928 | | 652 | | 1,085 | | 110,865 | |
| Commercial real estate, other | | | | | | | | | | | |
| | | | |
| Pass | 34,844 | | 123,054 | | 83,513 | | 107,026 | | 114,584 | | 261,144 | | 122,359 | | 20,711 | | 846,524 | |
| Special mention | — | | 44 | | 584 | | 2,054 | | 4,570 | | 6,394 | | 1,634 | | 125 | | 15,280 | |
| Substandard | — | | 930 | | 1,076 | | 2,198 | | 2,086 | | 21,000 | | 8,604 | | 96 | | 35,894 | |
| Doubtful | — | | — | | — | | — | | — | | 119 | | — | | — | | 119 | |
| Total | 34,844 | | 124,028 | | 85,173 | | 111,278 | | 121,240 | | 288,657 | | 132,597 | | 20,932 | | 897,817 | |
| Commercial and industrial | | | | | | | | | | | | | | | | | |
| Pass | 27,851 | | 115,319 | | 86,120 | | 53,941 | | 54,880 | | 89,840 | | 203,505 | | 32,037 | | 631,456 | |
| Special mention | — | | 205 | | 181 | | 168 | | 8 | | 1,396 | | 4,701 | | 15 | | 6,659 | |
| Substandard | — | | 2,169 | | 1,002 | | 3,185 | | 470 | | 3,578 | | 5,428 | | 2,147 | | 15,832 | |
| Doubtful | — | | — | | — | | — | | 7 | | 233 | | 343 | | 193 | | 583 | |
| Total | 27,851 | | 117,693 | | 87,303 | | 57,294 | | 55,365 | | 95,047 | | 213,977 | | 34,392 | | 654,530 | |
| Residential real estate | | | | | | | | | | | | | | | | | |
| Pass | 8,820 | | 51,870 | | 33,071 | | 37,058 | | 54,563 | | 368,621 | | 71,077 | | 190 | | 625,080 | |
| Special mention | — | | — | | — | | — | | — | | 2 | | — | | — | | 2 | |
| Substandard | — | | — | | — | | — | | — | | 210 | | 74 | | — | | 284 | |
| | | | | | | | | |
| Total | 8,820 | | 51,870 | | 33,071 | | 37,058 | | 54,563 | | 368,833 | | 71,151 | | 190 | | 625,366 | |
| Home equity lines of credit | | | | | | | | | | | | | | | | | |
| Pass | 3,209 | | 14,712 | | 15,145 | | 15,905 | | 14,208 | | 48,551 | | 16,281 | | 4,510 | | 128,011 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total | 3,209 | | 14,712 | | 15,145 | | 15,905 | | 14,208 | | 48,551 | | 16,281 | | 4,510 | | 128,011 | |
| Consumer, indirect | | | | | | | | | | | | | | | | | | |
| Pass | 34,969 | | 122,879 | | 104,388 | | 61,567 | | 29,552 | | 9,438 | | 55,273 | | — | | 418,066 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total | 34,969 | | 122,879 | | 104,388 | | 61,567 | | 29,552 | | 9,438 | | 55,273 | | — | | 418,066 | |
| Consumer, direct | | | | | | | | | | | | | | | | | | |
| Pass | 7,736 | | 23,732 | | 17,511 | | 8,038 | | 4,697 | | 4,335 | | 10,123 | | — | | 76,172 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total | 7,736 | | 23,732 | | 17,511 | | 8,038 | | 4,697 | | 4,335 | | 10,123 | | — | | 76,172 | |
| Deposit account overdrafts | 610 | | | | | | | | | | | | | | | | 610 | |
| Total loans, at amortized cost | $ | 122,131 | | $ | 492,999 | | $ | 372,855 | | $ | 325,707 | | $ | 280,902 | | $ | 816,789 | | $ | 500,054 | | $ | 61,109 | | $ | 2,911,437 | |
At September 30, 2019,March 31, 2020, Peoples had a total of $1.9$2.1 million of loans secured by residential real estate mortgages that were in the process of foreclosure.
Collateral Dependent Loans
Impaired LoansPeoples 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 summarizesdetails Peoples' amortized cost of collateral dependent loans:
| | | | | | | | | | | | | |
| (Dollars in thousands) | March 31, 2020 | | | December 31, 2019 | |
| | | | | |
| | | | | |
| Commercial real estate, other | $ | 9,572 | | | | $ | 6,818 | | |
| Commercial and industrial | 5,791 | | | | 1,962 | | |
| Residential real estate | 2,006 | | | | 1,847 | | |
| Home equity lines of credit | 776 | | | | 681 | | |
| Consumer, indirect | — | | | | 713 | | |
| Consumer, direct | — | | | | 94 | | |
| Total collateral dependent loans | $ | 18,145 | | | | $ | 12,115 | | |
The increase in collateral dependent commercial and industrial 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) |
| September 30, 2019 | | | | | | | |
| Commercial real estate, construction | $ | 780 |
| $ | — |
| $ | 693 |
| $ | 693 |
| $ | — |
| $ | 702 |
| $ | 1 |
|
| Commercial real estate, other | 15,093 |
| 4,754 |
| 9,755 |
| 14,509 |
| 475 |
| 13,764 |
| 369 |
|
| Commercial real estate | 15,873 |
| 4,754 |
| 10,448 |
| 15,202 |
| 475 |
| 14,466 |
| 370 |
|
| Commercial and industrial | 4,113 |
| 999 |
| 3,087 |
| 4,086 |
| 206 |
| 2,481 |
| 99 |
|
| Residential real estate | 25,447 |
| 381 |
| 26,582 |
| 26,963 |
| 47 |
| 23,312 |
| 1,065 |
|
| Home equity lines of credit | 1,433 |
| 416 |
| 1,019 |
| 1,435 |
| 43 |
| 1,329 |
| 61 |
|
| Consumer, indirect | 597 |
| 195 |
| 410 |
| 605 |
| 30 |
| 456 |
| 31 |
|
| Consumer, direct | 628 |
| 43 |
| 586 |
| 629 |
| 10 |
| 261 |
| 22 |
|
| Consumer | 1,225 |
| 238 |
| 996 |
| 1,234 |
| 40 |
| 717 |
| 53 |
|
| Total | $ | 48,091 |
| $ | 6,788 |
| $ | 42,132 |
| $ | 48,920 |
| $ | 811 |
| $ | 42,305 |
| $ | 1,648 |
|
| December 31, 2018 | | | | | | | |
| Commercial real estate, construction | $ | 2,376 |
| $ | — |
| $ | 2,376 |
| $ | 2,376 |
| $ | — |
| $ | 1,732 |
| $ | 74 |
|
| Commercial real estate, other | 15,464 |
| 274 |
| 14,946 |
| 15,220 |
| 119 |
| 14,043 |
| 455 |
|
| Commercial real estate | 17,840 |
| 274 |
| 17,322 |
| 17,596 |
| 119 |
| 15,775 |
| 529 |
|
| Commercial and industrial | 3,305 |
| 790 |
| 2,436 |
| 3,226 |
| 157 |
| 2,423 |
| 72 |
|
| Residential real estate | 25,990 |
| 644 |
| 24,034 |
| 24,678 |
| 154 |
| 22,769 |
| 1,134 |
|
| Home equity lines of credit | 2,291 |
| 424 |
| 1,869 |
| 2,293 |
| 73 |
| 1,832 |
| 109 |
|
| Consumer, indirect | 496 |
| — |
| 503 |
| 503 |
| — |
| 278 |
| 15 |
|
| Consumer, direct | 79 |
| 22 |
| 57 |
| 79 |
| 6 |
| 63 |
| 20 |
|
| Consumer | 575 |
| 22 |
| 560 |
| 582 |
| 6 |
| 341 |
| 35 |
|
| Total | $ | 50,001 |
| $ | 2,154 |
| $ | 46,221 |
| $ | 48,375 |
| $ | 509 |
| $ | 43,140 |
| $ | 1,879 |
|
Peoples'at March 31, 2020 compared to December 31, 2019 was mostly due to one commercial relationship that became collateral dependent. In addition, the decline in collateral dependent consumer loans was driven by a change in the threshold for evaluation of individually impaired loans, shown inwhich was previously $100,000 and on January 1, 2020 was changed to $250,000, thereby reducing the tableamount of loans considered collateral dependent which were no longer above included loans that were classified as troubled debt restructurings ("TDRs").the threshold.
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 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 TDRTDRs during the three months ended September 30:March 31:
| | | | Recorded Investment (1) | |
| (Dollars in thousands) | | (Dollars in thousands) | Number of Contracts | Pre-Modification | Post-Modification | Remaining Recorded Investment |
| March 31, 2020 | | March 31, 2020 | |
| Originated loans: | | Originated loans: | |
| Commercial real estate, other | | Commercial real estate, other | 1 | | $ | 265 | | $ | 265 | | $ | 265 | |
| Commercial and industrial | | Commercial and industrial | 1 | | 145 | | 145 | | 145 | |
| | Residential real estate | | Residential real estate | 3 | | 452 | | 483 | | 481 | |
| Home equity lines of credit | | Home equity lines of credit | 2 | | 41 | | 41 | | 41 | |
| Consumer - indirect | | Consumer - indirect | 11 | | 175 | | 175 | | 175 | |
| Consumer - direct | | Consumer - direct | 4 | | 57 | | 57 | | 57 | |
| Total | | Total | 22 | | $ | 1,135 | | $ | 1,166 | | $ | 1,164 | |
| March 31, 2019 | | March 31, 2019 | |
| Originated loans: | | Originated loans: | |
| | Commercial and industrial | | Commercial and industrial | 2 | | $ | 38 | | $ | 38 | | $ | 36 | |
| Residential real estate | | Residential real estate | 2 | | 399 | | 403 | | 403 | |
| Home equity lines of credit | | Home equity lines of credit | 2 | | 79 | | 79 | | 79 | |
| Consumer, indirect | | Consumer, indirect | 6 | | 72 | | 72 | | 72 | |
| Consumer, direct | | Consumer, direct | 5 | | 37 | | 37 | | 37 | |
| Consumer | | Consumer | 11 | | 109 | | 109 | | 109 | |
| Total | | Total | 17 | | $ | 625 | | $ | 629 | | $ | 627 | |
| Acquired loans: | | Acquired loans: | |
| | Residential real estate | | Residential real estate | 1 | | $ | 24 | | $ | 24 | | $ | 24 | |
| Home equity lines of credit | | Home equity lines of credit | 2 | | 65 | | 66 | | 66 | |
| | | | | Three Months Ended | |
| | | Recorded Investment (a) | |
| (Dollars in thousands) | Number of Contracts | Pre-Modification | Post-Modification | Remaining Recorded Investment | |
| September 30, 2019 | | |
| Originated loans: | | |
| Consumer, indirect | 15 |
| $ | 205 |
| $ | 205 |
| $ | 205 |
| |
| Total originated loans | 15 |
| $ | 205 |
| $ | 205 |
| $ | 205 |
| |
| Acquired loans: | | |
| Residential real estate | 1 |
| $ | 70 |
| $ | 70 |
| $ | 70 |
| |
| Total acquired loans | 1 |
| $ | 70 |
| $ | 70 |
| $ | 70 |
| |
| September 30, 2018 | | |
| Originated loans: | | |
| Residential real estate | 3 |
| $ | 87 |
| $ | 87 |
| $ | 87 |
| |
| Home equity lines of credit | 4 |
| 533 |
| 533 |
| 531 |
| |
| Consumer, indirect | 7 |
| 150 |
| 150 |
| 150 |
| |
| Total originated loans | 14 |
| $ | 770 |
| $ | 770 |
| $ | 768 |
| |
| Acquired loans: | | |
| Residential real estate | 3 |
| $ | 272 |
| $ | 272 |
| $ | 272 |
| |
| Home equity lines of credit | 1 |
| 54 |
| 54 |
| 54 |
| |
| Total acquired loans | 4 |
| $ | 326 |
| $ | 326 |
| $ | 326 |
| |
| Total | | Total | 3 | | $ | 89 | | $ | 90 | | $ | 90 | |
(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.
| | (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.
| |
(a) The amounts shown are inclusive of all partial paydownsOn March 22, 2020, federal and charge-offs. Loans modifiedstate government banking regulators issued a joint statement, with which the FASB concurred with 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 a TDR thatresponse to COVID-19, to borrowers who were
fully paid down, charged-off or foreclosed upon by period-end current prior to any relief, are not reported.
|
| | | | | | | | | | | |
| | | Nine Months Ended |
| | | Recorded Investment (a) |
| (Dollars in thousands) | Number of Contracts | Pre-Modification | Post-Modification | Remaining Recorded Investment |
| September 30, 2019 | | | |
| Originated loans: | | | |
| Commercial and industrial | 2 |
| $ | 38 |
| $ | 38 |
| $ | 34 |
|
| Residential real estate | 3 |
| 437 |
| 440 |
| 434 |
|
| Home equity lines of credit | 4 |
| 139 |
| 139 |
| 137 |
|
| Consumer, indirect | 23 |
| 328 |
| 328 |
| 312 |
|
| Consumer, direct | 3 |
| 52 |
| 52 |
| 48 |
|
| Consumer | 26 |
| 380 |
| 380 |
| 360 |
|
| Total originated loans | 35 |
| $ | 994 |
| $ | 997 |
| $ | 965 |
|
| Acquired loans: | | | |
| Commercial real estate, other | 3 |
| $ | 101 |
| $ | 76 |
| $ | 75 |
|
| Commercial and industrial | 5 |
| 1,557 |
| 1,557 |
| 1,510 |
|
| Residential real estate | 35 |
| 2,088 |
| 2,088 |
| 2,037 |
|
| Home equity lines of credit | 8 |
| 172 |
| 172 |
| 168 |
|
| Consumer, direct | 16 |
| 340 |
| 340 |
| 330 |
|
| Total acquired loans | 67 |
| $ | 4,258 |
| $ | 4,233 |
| $ | 4,120 |
|
| September 30, 2018 | | | |
| Originated loans: | | | |
| Residential real estate | 9 |
| $ | 871 |
| $ | 871 |
| $ | 871 |
|
| Home equity lines of credit | 6 |
| 565 |
| 565 |
| 562 |
|
| Consumer, indirect | 26 |
| 454 |
| 454 |
| 420 |
|
| Consumer, direct | 5 |
| 27 |
| 27 |
| 18 |
|
| Consumer | 31 |
| 481 |
| 481 |
| 438 |
|
| Total originated loans | 46 |
| $ | 1,917 |
| $ | 1,917 |
| $ | 1,871 |
|
| Acquired loans: | | | |
| Commercial real estate, other | 1 |
| $ | 50 |
| $ | 50 |
| $ | 47 |
|
| Residential real estate | 15 |
| 1,258 |
| 1,258 |
| 1,244 |
|
| Home equity lines of credit | 5 |
| 140 |
| 140 |
| 139 |
|
| Total acquired loans | 21 |
| $ | 1,448 |
| $ | 1,448 |
| $ | 1,430 |
|
(a) The amounts shownrepayment terms, or other delays in payment which are inclusive of all partial paydowns and charge-offs. Loans modified ininsignificant. 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 TDR that were
fully paid down, charged-offmodification program is implemented. In addition, modification or foreclosed upondeferral programs mandated by period endthe U.S. federal government or any state government related to COVID-19 are not reported.
The following table presents those acquired loans modified in a TDR during the year that subsequently defaulted (i.e., were 90 days or more past due following a modification) during the nine-month periods ended September 30:
|
| | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | September 30, 2018 |
| (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: | | | | | | | |
| Home equity lines of credit | — |
| $ | — |
| $ | — |
| | 1 |
| $ | 10 |
| $ | — |
|
| Consumer, direct | 2 |
| 35 |
| — |
| | — |
| — |
| — |
|
| Total | 2 |
| $ | 35 |
| $ | — |
| | 1 |
| $ | 10 |
| $ | — |
|
| (a) The amount shown is 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 no0 commitments to lend additional funds to the related debtorsborrowers whose loan terms have been modified in a TDR.
Allowance for Originated LoanCredit Losses
Changes in the allowance for originated loancredit losses for the ninethree months ended September 30 were as follows:March 31, 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | Commercial Real Estate | Commercial and Industrial | Residential Real Estate | Home Equity Lines of Credit | Consumer Indirect | Consumer Direct | Deposit Account Overdrafts | Total |
| Balance, January 1, 2019 | $ | 8,003 |
| $ | 6,178 |
| $ | 1,214 |
| $ | 618 |
| $ | 3,214 |
| $ | 351 |
| $ | 81 |
| $ | 19,659 |
|
| Charge-offs | (153 | ) | (324 | ) | (257 | ) | (45 | ) | (1,266 | ) | (150 | ) | (632 | ) | (2,827 | ) |
| Recoveries | 98 |
| 2,093 |
| 220 |
| 10 |
| 229 |
| 45 |
| 157 |
| 2,852 |
|
| Net (charge-offs) recoveries | (55 | ) | 1,769 |
| (37 | ) | (35 | ) | (1,037 | ) | (105 | ) | (475 | ) | 25 |
|
| Provision for (recovery of) loan losses | 518 |
| (785 | ) | (15 | ) | (16 | ) | 1,070 |
| 93 |
| 522 |
| 1,387 |
|
| Balance, September 30, 2019 | $ | 8,466 |
| $ | 7,162 |
| $ | 1,162 |
| $ | 567 |
| $ | 3,247 |
| $ | 339 |
| $ | 128 |
| $ | 21,071 |
|
| | | | | | | | | |
| Balance, January 1, 2018 | $ | 7,797 |
| $ | 5,813 |
| $ | 904 |
| $ | 693 |
| $ | 2,944 |
| $ | 464 |
| $ | 70 |
| $ | 18,685 |
|
| Charge-offs | (849 | ) | (38 | ) | (293 | ) | (67 | ) | (1,967 | ) | (297 | ) | (731 | ) | (4,242 | ) |
| Recoveries | 58 |
| 10 |
| 98 |
| 12 |
| 403 |
| 114 |
| 160 |
| 855 |
|
| Net charge-offs | (791 | ) | (28 | ) | (195 | ) | (55 | ) | (1,564 | ) | (183 | ) | (571 | ) | (3,387 | ) |
| Provision for loan losses | 960 |
| 353 |
| 290 |
| 70 |
| 2,043 |
| 114 |
| 596 |
| 4,426 |
|
| Balance, September 30, 2018 | $ | 7,966 |
| $ | 6,138 |
| $ | 999 |
| $ | 708 |
| $ | 3,423 |
| $ | 395 |
| $ | 95 |
| $ | 19,724 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| (Dollars in thousands) | Beginning Balance,
January 1, 2020 | Initial Allowance for Purchased Credit Deteriorated Assets | Provision for Credit Losses | Charge-offs | Recoveries | Ending Balance, March 31, 2020 |
| Construction | $ | 600 | | $ | 51 | | $ | 1,091 | | $ | — | | $ | — | | $ | 1,742 | |
| Commercial real estate, other | 7,193 | | 1,356 | | 3,487 | | (10) | | 116 | | 12,142 | |
| Commercial and industrial | 4,960 | | 860 | | 2,656 | | (937) | | 1,204 | | 8,743 | |
| Residential real estate | 3,977 | | 383 | | 1,445 | | (118) | | 57 | | 5,744 | |
| Home equity lines of credit | 1,570 | | 2 | | 136 | | (14) | | 1 | | 1,695 | |
| Consumer, indirect | 5,389 | | — | | 6,085 | | (721) | | 125 | | 10,878 | |
| Consumer, direct | 856 | | 34 | | 961 | | (62) | | 14 | | 1,803 | |
| Deposit account overdrafts | 94 | | — | | 145 | | (213) | | 60 | | 86 | |
| Total | $ | 24,639 | | $ | 2,686 | | $ | 16,006 | | $ | (2,075) | | $ | 1,577 | | $ | 42,833 | |
The significant increase in the allowance for loancredit losses allocatedas of March 31, 2020 compared to commercial real estate recorded duringJanuary 1, 2020 was mostly due to the first nine monthsrecent COVID-19 pandemic, and the resulting impact to 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 March 31, 2020 calculation of 2019 was driven by anthe allowance for credit losses included higher unemployment rates and lower Ohio Gross Domestic Product, which drove much of the increase in the allowance needed for loans individually evaluated for impairment combined with loan growth. The declinecredit losses at March 31, 2020. Approximately 72% of the increase in the allowance for loancredit losses allocatedat March 31, 2020, compared to residential real estate recorded duringJanuary 1, 2020, was related to the first nine months of 2019 was driven by a decreasechange in the allowance needed for loans individually evaluated for impairment whicheconomic forecast, and the remaining increase was offset partially by loan growth. Theattributable to changes in the composition of the loan portfolio. 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 March 31, 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 Coronavirus Aid, Relief and Economic Security ("CARES") Act stimulus package and the Small Business Administration ("SBA") Paycheck Protection Program ("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 March 31, 2020.
During the first quarter of 2020, Peoples recognized a recovery of $1.2 million on a commercial and industrial consumer indirectloan that was previously charged-off.
As of March 31, 2020, Peoples had recorded an unfunded commitment liability of $2.4 million, an increase compared to $1.5 million on January 1, 2020. The unfunded commitment liability is presented in the “Accrued expenses and consumer direct categoriesother liabilities” line of the allowance for originated loan losses and the related provision for originated loan losses recorded during the nine months of 2019 were driven by net charge-off activity and increases in the size of the respective loan portfolios.
Unaudited Consolidated Balance Sheets.
The following table details the recorded investment and allowance for originated loan losses disaggregated based on impairment method:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | Commercial Real Estate | Commercial and Industrial | Residential Real Estate | Home Equity Lines of Credit | Consumer Indirect | Consumer Direct | Deposit Account Overdrafts | Total |
| September 30, 2019 | | | | | | | | |
| Allowance for loan losses allocated to: | | | | | | | |
| Loans individually evaluated for impairment | $ | 475 |
| $ | 206 |
| $ | 47 |
| $ | 43 |
| $ | 30 |
| $ | 10 |
| $ | — |
| $ | 811 |
|
| Loans collectively evaluated for impairment | 7,991 |
| 6,956 |
| 1,115 |
| 524 |
| 3,217 |
| 329 |
| 128 |
| 20,260 |
|
| Ending balance | $ | 8,466 |
| $ | 7,162 |
| $ | 1,162 |
| $ | 567 |
| $ | 3,247 |
| $ | 339 |
| $ | 128 |
| $ | 21,071 |
|
| | | | | | | | | |
| Recorded investment in: | | | | | | | |
| Loans individually evaluated for impairment | $ | 15,202 |
| $ | 4,086 |
| $ | 26,963 |
| $ | 1,435 |
| $ | 605 |
| $ | 629 |
| $ | — |
| $ | 48,920 |
|
| Loans collectively evaluated for impairment | 744,239 |
| 560,193 |
| 282,001 |
| 91,475 |
| 422,612 |
| 72,070 |
| 1,081 |
| 2,173,671 |
|
| Ending balance | $ | 759,441 |
| $ | 564,279 |
| $ | 308,964 |
| $ | 92,910 |
| $ | 423,217 |
| $ | 72,699 |
| $ | 1,081 |
| $ | 2,222,591 |
|
| | | | | | | | | |
| December 31, 2018 | | | | | | | | |
| Allowance for loan losses allocated to: | | | | | | | |
| Loans individually evaluated for impairment | $ | 119 |
| $ | 157 |
| $ | 154 |
| $ | 73 |
| $ | — |
| $ | 6 |
| $ | — |
| $ | 509 |
|
| Loans collectively evaluated for impairment | 7,884 |
| 6,021 |
| 1,060 |
| 545 |
| 3,214 |
| 345 |
| 81 |
| 19,150 |
|
| Ending balance | $ | 8,003 |
| $ | 6,178 |
| $ | 1,214 |
| $ | 618 |
| $ | 3,214 |
| $ | 351 |
| $ | 81 |
| $ | 19,659 |
|
| | | | | | | | | |
| Recorded investment in: | | | | | | | |
| Loans individually evaluated for impairment | $ | 17,596 |
| $ | 3,226 |
| $ | 24,678 |
| $ | 2,293 |
| $ | 503 |
| $ | 79 |
| $ | — |
| $ | 48,375 |
|
| Loans collectively evaluated for impairment | 738,617 |
| 526,981 |
| 272,182 |
| 91,033 |
| 406,664 |
| 71,595 |
| 583 |
| 2,107,655 |
|
| Ending balance | $ | 756,213 |
| $ | 530,207 |
| $ | 296,860 |
| $ | 93,326 |
| $ | 407,167 |
| $ | 71,674 |
| $ | 583 |
| $ | 2,156,030 |
|
| | | | | | | | | |
| September 30, 2018 | | | | | | | | |
| Allowance for loan losses allocated to: | | | | | | | |
| Loans individually evaluated for impairment | $ | 91 |
| $ | 191 |
| $ | 40 |
| $ | 83 |
| $ | 140 |
| $ | 32 |
| $ | — |
| $ | 577 |
|
| Loans collectively evaluated for impairment | 7,875 |
| 5,947 |
| 959 |
| 625 |
| 3,283 |
| 363 |
| 95 |
| 19,147 |
|
| Ending balance | $ | 7,966 |
| $ | 6,138 |
| $ | 999 |
| $ | 708 |
| $ | 3,423 |
| $ | 395 |
| $ | 95 |
| $ | 19,724 |
|
| | | | | | | | | |
| Recorded investment in: | | | | | | | |
| Loans individually evaluated for impairment | $ | 18,375 |
| $ | 2,185 |
| $ | 25,147 |
| $ | 2,270 |
| $ | 527 |
| $ | 77 |
| $ | — |
| $ | 48,581 |
|
| Loans collectively evaluated for impairment | 715,907 |
| 508,406 |
| 274,621 |
| 90,622 |
| 396,174 |
| 72,524 |
| 649 |
| 2,058,903 |
|
| Ending balance | $ | 734,282 |
| $ | 510,591 |
| $ | 299,768 |
| $ | 92,892 |
| $ | 396,701 |
| $ | 72,601 |
| $ | 649 |
| $ | 2,107,484 |
|
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 non-impaired 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:
|
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (Dollars in thousands) | 2019 | 2018 | | 2019 | 2018 |
| Non-impaired loans: | | | | | |
| Balance, beginning of period | $ | 380 |
| $ | — |
| | $ | 383 |
| $ | — |
|
| Charge-offs | — |
| — |
| | (3 | ) | — |
|
| Balance, end of period | $ | 380 |
| $ | — |
| | $ | 380 |
| $ | — |
|
| | | | | | |
| Purchased credit impaired loans: | | | | | |
| Balance, beginning of period | $ | 153 |
| $ | 108 |
| | $ | 153 |
| $ | 108 |
|
| (Recovery of) provision for loan losses | (19 | ) | 47 |
| | (19 | ) | 47 |
|
| Balance, end of period | $ | 134 |
| $ | 155 |
| | $ | 134 |
| $ | 155 |
|
Note 5 Long-Term Borrowings
The following table summarizes Peoples' long-term borrowings:
| | | | September 30, 2019 | | December 31, 2018 | | March 31, 2020 | | | December 31, 2019 | |
| (Dollars in thousands) | Balance | Weighted-
Average
Rate | | Balance | Weighted-
Average
Rate | (Dollars in thousands) | Balance | Weighted-
Average
Rate | | Balance | Weighted-
Average
Rate |
| FHLB putable, non-amortizing, fixed-rate advances | $ | 65,000 |
| 2.18 | % | | $ | 85,000 |
| 2.05 | % | FHLB putable, non-amortizing, fixed-rate advances | $ | 115,000 | | 1.57 | % | | $ | 65,000 | | 2.18 | % |
| | FHLB amortizing, fixed-rate advances | 11,785 |
| 1.77 | % | | 17,361 |
| 2.09 | % | FHLB amortizing, fixed-rate advances | $ | 10,300 | | 1.74 | % | | $ | 10,672 | | 1.74 | % |
| Junior subordinated debt securities | 7,409 |
| 7.29 | % | | 7,283 |
| 7.83 | % | Junior subordinated debt securities | $ | 7,491 | | 5.21 | % | | $ | 7,451 | | 6.55 | % |
| | Total long-term borrowings | $ | 84,194 |
| 2.57 | % | | $ | 109,644 |
| 2.44 | % | Total long-term borrowings | $ | 132,791 | | 1.78 | % | | $ | 83,123 | | 2.51 | % |
Peoples continually evaluates its overall balance sheet position given the interest rate environment. During the first ninethree months of 2019, no additional borrowings were2020, Peoples entered into and three long-term FHLB non-amortizing advances totaling $25.01 additional $50.0 million were reclassified to short-term borrowings as the maturity became less than one year.
As of September 30, 2019, Peoples had one remaining FHLB putable, option-based advance. non-amortizing fixed-rate advance with an interest rate of 0.77%, which matures in 2030.
The FHLB putable, non-amortizing, fixed rate advances have maturities ranging from one to ten years that may be repaid prior to maturity, subject to the payment of termination fees. The FHLB has the option, at its sole discretion, to terminate the advance after thean initial fixed rate period of three months or twelve months, requiring full repayment of the advance by Peoples prior to the stated maturity. If thean advance is terminated prior to maturity, the FHLB will offer Peoples replacement funding at the then-prevailing rate on an advance product then offered by the FHLB, subject to normal FHLB credit and collateral requirements. Peoples is requiredThese advances require monthly interest payments, with no repayment of principal until the earlier of either an option to make quarterly interest payments.terminate being exercised by the FHLB or the stated maturity.
The amortizing, fixed-rate FHLB advances have a fixed rate for the term of each advance, with remaining maturities ranging from seven6 to twelveeleven years. These advances require monthly principal and interest payments, with some having a constant prepayment rate requiring an additional principal payment annually. These advances are not eligible for optional prepayment prior to maturity.
The aggregate minimum annual retirements of long-term borrowings in future periods are as follows:
| | | | | | | | |
| (Dollars in thousands) | Balance | Weighted-Average Rate (a) |
| Nine months ending December 31, 2020 | $ | 2,223 | | 1.48 | % |
| Year ending December 31, 2021 | 21,979 | | 1.75 | % |
| Year ending December 31, 2022 | 16,521 | | 1.97 | % |
| Year ending December 31, 2023 | 1,157 | | 1.39 | % |
| Year ending December 31, 2024 | 869 | | 1.34 | % |
| Thereafter | 90,042 | | 1.61 | % |
| Total long-term borrowings | $ | 132,791 | | 1.68 | % |
|
| | | | | |
| (Dollars in thousands) | Balance | Weighted-Average Rate |
| Three months ending December 31, 2019 | $ | 1,071 |
| 1.87 | % |
| Year ending December 31, 2020 | 2,555 |
| 1.35 | % |
| Year ending December 31, 2021 | 21,979 |
| 1.74 | % |
| Year ending December 31, 2022 | 16,521 |
| 1.95 | % |
| Year ending December 31, 2023 | 1,157 |
| 1.08 | % |
| Thereafter | 40,911 |
| 3.40 | % |
| Total long-term borrowings | $ | 84,194 |
| 2.57 | % |
Effective April 3, 2019, Peoples terminated(a) The weighted-average rate includes the Credit Agreement, dated asimpact of March 4, 2016, between Peoples, as Borrower, and Raymond James Bank, N.A., as Lender (the "RJB Credit Agreement"), with a revolving lineaccreting the current book value of creditthe junior subordinated debt securities to face value over the period. The weighted-average rates for the FHLB advances are 1.68% in the maximum aggregate principal amount of $15.0 million. As of the termination date, April 3, 2019, andnine months ending December 31, 2018, there were no borrowings outstanding under the RJB Credit Agreement. Additional information regarding the RJB Credit Agreement can be found2020, 1.78% in "Note 9 Long-Term Borrowings"2021, 2.00% in 2022, 1.73% in 2023, 1.74% in 2024, and 1.43% thereafter.
Peoples replaced the RBJ Credit Agreement with a short-term revolving line of credit. On April 3, 2019, Peoples entered into a Loan Agreement (the “U.S. Bank Loan Agreement”) with U.S. Bank National Association. The U.S. Bank Loan Agreement has a one-year term and provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $20.0 million that may be used: (i) for working capital purposes; (ii) to finance dividends or other distributions (other than stock dividends and stock splits) on or in respect of Peoples’ capital stock and redemptions, repurchases or other acquisitions of any of Peoples’ capital stock permitted under the U.S. Bank Loan Agreement and (iii) to finance acquisitions permitted under the U.S. Bank Loan Agreement.
Note 6 Stockholders’ Equity
The following table details the progression in Peoples’ common shares and treasury stock during the ninethree months ended September 30, 2019:March 31, 2020:
| | | | | | | | | |
| | | Common Stock | Treasury Stock |
| Shares at December 31, 2019 | | 21,156,143 | | 504,182 | |
| Changes related to stock-based compensation awards: | | | | | |
| | | |
| Release of restricted common shares | | — | | 21,448 | |
| Cancellation of restricted common shares | | — | | 3,602 | |
| | | |
| Grant of restricted common shares | | — | | (80,338) | |
| Grant of unrestricted common shares | | — | | (4,030) | |
| Changes related to deferred compensation plan for Boards of Directors: | | | |
| Purchase of treasury stock | | — | | 3,159 | |
| | | |
| Common shares repurchased under share repurchase program | | — | | 436,137 | |
| Common shares issued under dividend reinvestment plan | | 6,559 | | — | |
| Common shares issued under compensation plan for Boards of Directors | | — | | (4,396) | |
| Gross common shares issued under performance unit awards | | — | | (9,395) | |
| Common shares issued under employee stock purchase plan | | — | | (4,371) | |
| | | |
| | | |
| Shares at March 31, 2020 | | 21,162,702 | | 865,998 | |
|
| | | | |
| | Common Stock | Treasury Stock |
| Shares at December 31, 2018 | 20,124,378 |
| 601,289 |
|
| Changes related to stock-based compensation awards: | | |
| Release of restricted common shares | — |
| 19,174 |
|
| Cancellation of restricted common shares | — |
| 10,240 |
|
| Grant of restricted common shares | — |
| (133,926 | ) |
| Grant of common shares | — |
| (5,130 | ) |
| Changes related to deferred compensation plan for Boards of Directors: | | |
| Purchase of treasury stock | — |
| 5,497 |
|
| Disbursed out of treasury stock | — |
| (2,187 | ) |
| Common shares repurchased under share repurchase program | — |
| 14,175 |
|
| Common shares issued under dividend reinvestment plan | 19,266 |
| — |
|
| Common shares issued under compensation plan for Boards of Directors | — |
| (5,103 | ) |
| Common shares issued under employee stock purchase plan | — |
| (10,287 | ) |
| Issuance of common shares related to the merger with First Prestonsburg Bancshares Inc. | 1,005,478 |
| — |
|
| Shares at September 30, 2019 | 21,149,122 |
| 493,742 |
|
Under its Amended Articles of Incorporation, Peoples is authorized to issue up to 50,000 preferred shares, in one or more series, having such voting powers, designations, preferences, rights, qualifications, limitations and restrictions as determined by Peoples' Board of Directors. At September 30, 2019,March 31, 2020, Peoples had no0 preferred shares issued or outstanding.
On April 20, 2020, Peoples' Board of Directors declared a quarterly cash dividend of $0.34 per common share, payable on May 18, 2020, to shareholders of record on May 4, 2020. The following table details the cash dividends declared per common share during 20192020 and the comparable period of 2018:2019:
| | | | | | | | |
| 2020 | 2019 |
| First quarter | $ | 0.34 | | 0.30 | |
| Second quarter | 0.34 | | 0.34 | |
| | |
| | |
| Total dividends declared | $ | 0.68 | | $ | 0.64 | |
|
| | | | | | |
| | 2019 | 2018 |
| First quarter | $ | 0.30 |
| $ | 0.26 |
|
| Second quarter | 0.34 |
| 0.28 |
|
| Third quarter | 0.34 |
| 0.28 |
|
| Fourth quarter | 0.34 |
| 0.30 |
|
| Total dividends declared | $ | 1.32 |
| $ | 1.12 |
|
Accumulated Other Comprehensive Income (Loss)
The following table details the change in the components of Peoples’ accumulated other comprehensive income (loss) for the ninethree months ended September 30, 2019:March 31, 2020:
| | | | | | | | | | | | | | |
| (Dollars in thousands) | Unrealized Gain on Securities | Unrecognized Net Pension and Postretirement Costs | Unrealized Loss on Cash Flow Hedge | Accumulated Other Comprehensive Income (Loss) |
| Balance, December 31, 2019 | $ | 5,300 | | $ | (3,958) | | $ | (2,767) | | $ | (1,425) | |
| Reclassification adjustments to net income: | | | | |
| Realized gain on sale of securities, net of tax | (252) | | — | | — | | (252) | |
| Realized loss due to settlement and curtailment, net of tax | — | | 291 | | — | | 291 | |
| Other comprehensive income (loss), net of reclassifications and tax | 17,592 | | (267) | | (7,687) | | 9,638 | |
| Balance, March 31, 2020 | $ | 22,640 | | $ | (3,934) | | $ | (10,454) | | $ | 8,252 | |
|
| | | | | | | | | | | | |
| (Dollars in thousands) | Unrealized Gain (Loss) on Securities | Unrecognized Net Pension and Postretirement Costs | Unrealized (Loss) Gain on Cash Flow Hedge | Accumulated Other Comprehensive Income (Loss) |
| Balance, December 31, 2018 | $ | (10,082 | ) | $ | (3,711 | ) | $ | 860 |
| $ | (12,933 | ) |
| Reclassification adjustments to net income: | | | |
|
|
| Realized gain on sale of securities, net of tax | (55 | ) | — |
| — |
| (55 | ) |
| Other comprehensive income (loss), net of reclassifications and tax | 19,422 |
| 46 |
| (5,391 | ) | 14,077 |
|
| Balance, September 30, 2019 | $ | 9,285 |
| $ | (3,665 | ) | $ | (4,531 | ) | $ | 1,089 |
|
Note 7 Employee Benefit Plans
Peoples sponsors a noncontributory defined benefit pension plan that covers substantially all employees hired before January 1, 2010. The plan provides retirement benefits based on an employee’s years of service and compensation. For employees hired before January 1, 2003, the amount of postretirement benefit is based on the employee’s average monthly compensation over the highest five consecutive years out of the employee’s last ten years with Peoples while an eligible employee. For employees hired on or after January 1, 2003, the amount of postretirement benefit is based on 2% of the employee’s annual compensation during the years 2003 through 2009, plus accrued interest. Effective January 1, 2010, the pension plan was closed to new entrants. Effective March 1, 2011, the accrual of pension plan benefits for all participants was frozen. Peoples recognized this freeze as a curtailment as of December 31, 2010 and March 1, 2011, under the terms of the pension plan. Effective July 1, 2013, a participant in the pension plan who is employed by Peoples may elect to receive or to commence receiving such person's retirement benefits as of the later of such person's normal retirement date or the first day of the month first following the date such person makes an election to receive his or her retirement benefits.
Peoples also provides post-retirement health and life insurance benefits to certain former employees and directors. Only those individuals who retired before January 27, 2012 were eligible for life insurance benefits. As of January 1, 2011, all retirees who desire to participate in the Peoples Bank medical plan do so by electing COBRA, which provides up to 18 months of coverage; retirees over the age of 65 also have the option to pay to participate in a group Medicare supplemental plan. Peoples only pays 100% of the cost for those individuals who retired before January 1, 1993. For all others, the retiree is responsible for most, if not all, of the cost of the health benefits. Peoples’ policy is to fund the cost of the benefits as they arise.
The following tables detail the components of the net periodic cost for the plans described above:
| | | | | | | | | | | |
| Pension Benefits | | | | |
| | Three Months Ended | | | | |
| | March 31, | | | | |
| (Dollars in thousands) | 2020 | 2019 | | | |
| Interest cost | $ | 94 | | $ | 109 | | | | |
| Expected return on plan assets | (200) | | (195) | | | | |
| Amortization of net loss | 30 | | 19 | | | | |
| Settlement of benefit obligation | 368 | | — | | | | |
| Net periodic loss (income) | $ | 292 | | $ | (67) | | | | |
|
| | | | | | | | | | | | | |
| | Pension Benefits |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (Dollars in thousands) | 2019 | 2018 | | 2019 | 2018 |
| Interest cost | $ | 109 |
| $ | 104 |
| | $ | 328 |
| $ | 314 |
|
| Expected return on plan assets | (195 | ) | (147 | ) | | (586 | ) | (440 | ) |
| Amortization of net loss | 19 |
| 29 |
| | 58 |
| 84 |
|
| Settlement of benefit obligation | — |
| 176 |
| | — |
| 176 |
|
| Net periodic (income) loss | $ | (67 | ) | $ | 162 |
| | $ | (200 | ) | $ | 134 |
|
| | | | Postretirement Benefits | | Postretirement Benefits | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | | |
| | September 30, | | September 30, | | March 31, | | | |
| (Dollars in thousands) | 2019 | 2018 | | 2019 | 2018 | (Dollars in thousands) | 2020 | 2019 | | |
| Interest cost | $ | 1 |
| $ | — |
| | $ | 3 |
| $ | 2 |
| Interest cost | $ | 1 | | $ | 1 | | | |
| Amortization of prior service cost | — |
| — |
| | (1 | ) | — |
| |
| | Amortization of net gain | (2 | ) | (1 | ) | | (4 | ) | (4 | ) | Amortization of net gain | (2) | | (2) | | | |
| | Net periodic income | $ | (1 | ) | $ | (1 | ) | | $ | (2 | ) | $ | (2 | ) | Net periodic income | $ | (1) | | $ | (1) | | | |
Under US GAAP, Peoples is required to recognize a settlement gain or loss when the aggregate amount of lump-sum distributions to participants equals or exceeds the sum of the service and interest cost components of the net periodic pension cost. The amount of settlement gain or loss recognized is the pro rata amount of the unrealized gain or loss existing immediately prior to the settlement. In general, both the projected benefit obligation and fair value of plan assets are required to be remeasured in order to determine the settlement gain or loss.
During the first quarter of 2020, the total lump-sum distributions made to participants under the noncontributory defined benefit pension plan caused the total settlements to exceed the recognition threshold for settlement gains or losses. As a result, Peoples recorded settlement charges of $368,000 in the three months ended March 31, 2020. There were 0 settlement charges recorded during the three months ended March 31, 2019 under the noncontributory defined benefit pension plan. The following table summarizes the change in the projected benefit obligation and funded status as a result of the remeasurement and the aggregate settlements for the three months ended March 31, 2020:
| | | | | | | | | | | | | | |
| As of | March 31, 2020 | | |
| (Dollars in thousands) | December 31, | Before | Impact of | After |
| Funded status: | 2019 | Settlements | Settlements | Settlements |
| Projected benefit obligation | $ | 12,668 | | $ | 13,734 | | $ | (650) | | $ | 13,084 | |
| Fair value of plan assets | 11,865 | | 10,253 | | (650) | | 9,603 | |
| Funded status | $ | (803) | | $ | (3,481) | | $ | — | | $ | (3,481) | |
| Gross unrealized loss | $ | 5,068 | | $ | 7,823 | | $ | (368) | | $ | 7,455 | |
| Assumptions: | | | | |
| Discount rate | 3.12 | % | 2.65 | % | | | 2.65 | % |
| Expected return on plan assets | 7.50 | % | 7.50 | % | | | 7.50 | % |
Note 8 (Loss) Earnings Per Common Share
The calculations of basic and diluted (loss) earnings per common share were as follows:
| | | | | | | | | | | | | |
| Three Months Ended | | | | |
| March 31, | | | | |
| (Dollars in thousands, except per common share data) | 2020 | 2019 | | | |
| Distributed earnings allocated to common shareholders | $ | 6,943 | | $ | 5,777 | | | | |
| Undistributed (loss) earnings allocated to common shareholders | (7,782) | | 8,490 | | | | |
| Net (loss) earnings allocated to common shareholders | $ | (839) | | $ | 14,267 | | | | |
| | | | | |
| Weighted-average common shares outstanding | 20,367,564 | | 19,366,008 | | | | |
| Effect of potentially dilutive common shares | 170,650 | | 142,860 | | | | |
| Total weighted-average diluted common shares outstanding | 20,538,214 | | 19,508,868 | | | | |
| | | | | |
| (Loss) earnings per common share: | | | | | |
| Basic | $ | (0.04) | | $ | 0.74 | | | | |
| Diluted | $ | (0.04) | | $ | 0.73 | | | | |
| Anti-dilutive common shares excluded from calculation: | | | | | |
| Restricted shares | 37,284 | | 2,057 | | | | |
|
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (Dollars in thousands, except per common share data) | 2019 | 2018 | | 2019 | 2018 |
| Distributed earnings allocated to common shareholders | $ | 6,941 |
| $ | 5,409 |
| | $ | 19,652 |
| $ | 15,532 |
|
| Undistributed earnings allocated to common shareholders | 7,828 |
| 7,246 |
| | 18,900 |
| 16,638 |
|
| Net earnings allocated to common shareholders | $ | 14,769 |
| $ | 12,655 |
| | $ | 38,552 |
| $ | 32,170 |
|
| | | | | | |
| Weighted-average common shares outstanding | 20,415,245 |
| 19,325,457 |
| | 20,023,271 |
| 18,875,290 |
|
| Effect of potentially dilutive common shares | 180,524 |
| 141,408 |
| | 155,363 |
| 128,797 |
|
| Total weighted-average diluted common shares outstanding | 20,595,769 |
| 19,466,865 |
| | 20,178,634 |
| 19,004,087 |
|
| | | | | | |
| Earnings per common share: | | | | | |
| Basic | $ | 0.72 |
| $ | 0.65 |
| | $ | 1.93 |
| $ | 1.70 |
|
| Diluted | $ | 0.72 |
| $ | 0.65 |
| | $ | 1.91 |
| $ | 1.69 |
|
| Anti-dilutive common shares excluded from calculation: | | | | | |
| Restricted shares | 844 |
| 5,541 |
| | 720 |
| 2,193 |
|
Note 9 Derivative Financial Instruments
Peoples utilizes interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. The fair value of derivative financial instruments is included in the other assets and the accrued expenses and other liabilities lines in the accompanying Unaudited Consolidated Balance Sheets and in the net cash provided by operating activities in the Unaudited Consolidated Statements of Cash Flows.
DerivativesDerivative Financial Instruments and Hedging Activities - Risk Management Objective of Using DerivativesDerivative Financial Instruments
Peoples is exposed to certain risks arising from both its business operations and economic conditions. Peoples principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. Peoples manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities, and through the use of derivative financial instruments. Specifically, Peoples enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known or expected cash amounts, the values of which are determined by interest rates. Peoples’ derivative financial instruments are used to manage differences in the amount, timing and duration of Peoples' known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings. Peoples also has interest rate derivativesderivative financial instruments that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in Peoples' assets or liabilities. Peoples manages a matched book with respect to customer-related derivative financial instruments in order to minimize its net risk exposure resulting from such transactions.
Cash Flow Hedges of Interest Rate Risk
Peoples' objectives in using interest rate derivativesderivative financial instruments are to add stability to interest income and expense, and to manage its exposure to interest rate movements. To accomplish these objectives, Peoples has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for Peoples making fixed payments. As of September 30, 2019,March 31, 2020, Peoples had entered into sixteen17 interest rate swap contracts with an aggregate notional value of $150.0$160.0 million. Peoples will pay a fixed rate of interest for up to ten years while receiving a floating rate component of interest equal to the three-month LIBOR rate. The interest received on the floating rate component is intended to offset the interest paid on rolling three-month FHLB advances or rolling three-month brokered certificates of deposit, which will continue to be rolled through the life of the swaps. As of March 31, 2020, the
interest rate swaps were funded by $110.0 million of rolling three-month FHLB advances and $50.0 million rolling three-month brokered CDs.
Amounts reported in accumulated other comprehensive income (loss) ("AOCI"), related to derivativesderivative financial instruments will be reclassified to interest income or expense as interest payments are made or received on Peoples' variable-rate assets or liabilities. During the three and nine months ended September 30, 2019,March 31, 2020, Peoples had reclassifications of gains to interest expense of $30,000 and $183,000, respectively,$118,000 and during the three and nine months ended September 30, 2018,March 31, 2019, Peoples had reclassifications of gainsloss to interest expenseearnings of $2,000 and $18,000, respectively.$83,000.
For derivativesderivative financial instruments designated as cash flow hedges, the effective portion of changes in the fair value of each derivative financial instrument is reported in AOCI (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. Peoples assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the hedging derivative hedgingfinancial instrument with the changes in cash flows of the designated hedged transaction. The reset dates and the payment dates on the 90-day advances or brokered certificates of deposit used to fund the swaps are matched to the reset dates and payment dates on the receipt of the 3-monththree-month LIBOR floating portion of the swaps to ensure effectiveness of the cash flow hedge. Effectiveness is measured by ensuring that reset dates and payment dates are matched.
The following table summarizes information about the interest rate swaps designated as cash flow hedges:
|
| | | | | | |
| (Dollars in thousands) | September 30,
2019 | December 31,
2018 |
| Notional amount | $ | 150,000 |
| $ | 110,000 |
|
| Weighted average pay rates | 2.22 | % | 2.37 | % |
| Weighted average receive rates | 1.53 | % | 2.57 | % |
| Weighted average maturity | 5.7 years |
| 6.2 years |
|
| Pre-tax unrealized gains included in AOCI | $ | 5,736 |
| $ | 860 |
|
| | | | | | | | |
| (Dollars in thousands) | March 31,
2020 | December 31,
2019 |
| Notional amount | $ | 160,000 | | $ | 160,000 | |
| Weighted average pay rates | 2.18 | % | 2.18 | % |
| Weighted average receive rates | 0.58 | % | 1.73 | % |
| Weighted average maturity | 5.1 years | 5.4 years |
| Pre-tax unrealized losses included in AOCI | $ | (13,233) | | $ | (3,503) | |
The following table presents net losses or gains recorded in AOCI and in the Unaudited Consolidated Statements of IncomeOperations related to the cash flow hedges:
|
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| (Dollars in thousands) | 2019 | 2018 | | 2019 | 2018 |
| Amount of loss (gain) recognized in AOCI, pre-tax | $ | 1,796 |
| $ | (651 | ) | | $ | 6,457 |
| $ | (2,558 | ) |
| Amount of (loss) gain recognized in earnings | $ | — |
| $ | — |
| | $ | (19 | ) | $ | 30 |
|
| | | | | | | | | | | |
| Three Months Ended | | | | |
| March 31, | | | | |
| (Dollars in thousands) | 2020 | 2019 | | | |
| Amount of loss recognized in AOCI, pre-tax | $ | (9,730) | | $ | (1,833) | | | | |
| Amount of loss recognized in earnings | $ | — | | $ | (19) | | | | |
The following table reflects the cash flow hedges, which are included in the Unaudited Consolidated Balance Sheets at fair value:
| | | | | | | | | | | | | | | | | |
| March 31,
2020 | | | December 31,
2019 | |
| (Dollars in thousands) | Notional Amount | Fair Value | | Notional Amount | Fair Value |
| Included in other assets: | | | | | |
| Interest rate swaps related to debt | $ | — | | $ | — | | | $ | 55,000 | | $ | 644 | |
| Total included in other assets | $ | — | | $ | — | | | $ | 55,000 | | $ | 644 | |
| | | | | |
| Included in accrued expenses and other liabilities: | | | | | |
| Interest rate swaps related to debt | $ | 160,000 | | $ | 13,424 | | | $ | 105,000 | | $ | 4,340 | |
| Total included in accrued expenses and other liabilities | $ | 160,000 | | $ | 13,424 | | | $ | 105,000 | | $ | 4,340 | |
|
| | | | | | | | | | | | | |
| | September 30,
2019 | | December 31,
2018 |
| (Dollars in thousands) | Notional Amount | Fair Value | | Notional Amount | Fair Value |
| Included in other assets: | | | | | |
| Interest rate swaps related to debt | $ | 20,000 |
| $ | 105 |
| | $ | 60,000 |
| $ | 2,093 |
|
| Total included in other assets | $ | 20,000 |
| $ | 105 |
| | $ | 60,000 |
| $ | 2,093 |
|
| | | | | | |
| Included in accrued expenses and other liabilities: | | | | | |
| Interest rate swaps related to debt | $ | 130,000 |
| $ | 6,026 |
| | $ | 50,000 |
| $ | 1,111 |
|
| Total included in accrued expenses and other liabilities | $ | 130,000 |
| $ | 6,026 |
| | $ | 50,000 |
| $ | 1,111 |
|
Peoples had $21.2 million and no amount of cash pledged at September 30, 2019 and December 31, 2018, respectively, against interest rate swaps related to debt; however, the counterparties had pledged no amount of cash and $130,000, respectively, at those dates.
Non-Designated Hedges
Peoples maintains an interest rate protection program for commercial loan customers, which was established in 2010. Under this program, Peoples originates variable rate loans with interest rate swaps, where the customer enters into an interest rate swap with Peoples on terms that match the terms of the loan. By entering into the interest rate swap with the customer, Peoples Bank effectively provides the customer with a fixed rate loan while creating a variable rate asset for Peoples Bank. Peoples Bank offsets its exposure in the swap by entering into an offsetting interest rate swap with an unaffiliated institution. These interest rate swaps do not qualify as designated hedges; therefore, each swap is accounted for as a standalone derivative. Peoples had interest rate swaps associated with commercial loans with a gross notional value of $590.0 million and fair value of $14.2 million of equally offsetting assets and liabilities at September 30, 2019, and a gross notional value of $453.4 million and fair value of $2.5 million of equally offsetting assets and liabilities at December 31, 2018.derivative financial instrument. These interest rate swaps did not have a material impact on Peoples' results of operation or financial condition.
The following table reflects the non-designated hedges, which are included in the Unaudited Consolidated Balance Sheets at fair value:
| | | | | | | | | | | | | | | | | |
| March 31,
2020 | | | December 31,
2019 | |
| (Dollars in thousands) | Notional Amount | Fair Value | | Notional Amount | Fair Value |
| Included in other assets: | | | | | |
| Interest rate swaps related to commercial loans | $ | 337,265 | | $ | 30,235 | | | $ | 321,394 | | $ | 10,776 | |
| Total included in other assets | $ | 337,265 | | $ | 30,235 | | | $ | 321,394 | | $ | 10,776 | |
| | | | | |
| Included in accrued expenses and other liabilities: | | | | | |
| Interest rate swaps related to commercial loans | $ | 337,265 | | $ | 30,235 | | | $ | 321,394 | | $ | 10,776 | |
| Total included in accrued expenses and other liabilities | $ | 337,265 | | $ | 30,235 | | | $ | 321,394 | | $ | 10,776 | |
|
| | | | | | | | | | | | | |
| | September 30,
2019 | | December 31,
2018 |
| (Dollars in thousands) | Notional Amount | Fair Value | | Notional Amount | Fair Value |
| Included in other assets: | | | | | |
| Interest rate swaps related to commercial loans | $ | 295,070 |
| $ | 14,197 |
| | $ | 226,662 |
| $ | 2,451 |
|
| Total included in other assets | $ | 295,070 |
| $ | 14,197 |
| | $ | 226,662 |
| $ | 2,451 |
|
| | | | | | |
| Included in accrued expenses and other liabilities: | | | | | |
| Interest rate swaps related to commercial loans | $ | 295,070 |
| $ | 14,197 |
| | $ | 226,662 |
| $ | 2,451 |
|
| Total included in accrued expenses and other liabilities | $ | 295,070 |
| $ | 14,197 |
| | $ | 226,662 |
| $ | 2,451 |
|
Peoples had no cash pledged againstPledged Collateral
When the fair value of Peoples' interest rate swaps related to commercial loans.are in a net liability position, Peoples must pledge collateral and when the interest rate swaps are in a net asset position, the counterparties must pledge collateral. At March 31, 2020 and December 31, 2019, Peoples had $44.0 million and $20.0 million, respectively, of cash pledged, while the counterparties had 0 amount of cash pledged at either date. Cash pledged is included in interest-bearing deposits in other banks on the Unaudited Consolidated Balance Sheets.
Note 10 Stock-Based Compensation
Under the Peoples Bancorp Inc. Third Amended and Restated 2006 Equity Plan (the "2006 Equity Plan"), Peoples may grant, among other awards, nonqualified stock options, incentive stock options, restricted common stockshare awards, stock appreciation rights, ("SARs"), performance units and unrestricted common share awards to employees and non-employee directors. The total number of common shares available under the 2006 Equity Plan is 891,340. The maximum number of common shares that can be issued for incentive stock options is 500,000 common shares. Prior to 2007, Peoples granted nonqualified and incentive stock options to employees and nonqualified stock options to non-employee directors under the 2006 Equity Plan and predecessor plans. Since February 2009, Peoples has granted restricted common shares to employees, and periodically to non-employee directors, subject to the terms and conditions prescribed by the 2006 Equity Plan. Additionally, in 20182019 and 2019, the Board of Directors2020, Peoples granted unrestricted common shares to non-employee directors and to full-time and part-time employees who did not already participate in the 2006 Equity Plan. In general, common shares issued in connection with stock-based awards are issued from treasury shares to the extent available. If no treasury shares are available, common shares are issued from authorized but unissued common shares.
Restricted Common Shares
Under the 2006 Equity Plan, Peoples may award restricted common shares to officers, key employees and non-employee directors. In general, the restrictions on the restricted common shares awarded to employees expire after periods ranging from one to five years. Since 2018, common shares awarded to non-employee directors have vested immediately upon grant with no restrictions. Restrictions on restricted common shares awarded to employees typically expire after periods ranging from one to three years. In the first ninethree months of 2019,2020, Peoples granted an aggregate of 117,77380,338 restricted common shares subject to performance-based vesting to officers and key employees with restrictions that will lapse three years after the grant datedate; provided that in order for the restricted common shares to vest in full, Peoples must have reported positive net income and maintained a well capitalizedwell-capitalized status by regulatory standards for each of the three fiscal years preceding the vesting date. During the first nine months of 2019, Peoples granted, to certain key employees, an aggregate of 16,153 restricted common shares subject to time-based vesting with restrictions that will lapse three years after the grant date.
The following table summarizes the changes to Peoples’ restricted common shares for the ninethree months ended September 30, 2019:March 31, 2020:
| | | | Time-Based Vesting | | Performance-Based Vesting | | Time-Based Vesting | | | Performance-Based Vesting | |
| | Number of Common Shares | Weighted-Average Grant Date Fair Value | | Number of Common Shares | Weighted-Average Grant Date Fair Value | | Number of Common Shares | Weighted-Average Grant Date Fair Value | | Number of Common Shares | Weighted-Average Grant Date Fair Value |
| Outstanding at January 1 | 43,679 |
| $ | 29.64 |
| | 175,772 |
| $ | 31.08 |
| Outstanding at January 1 | 32,230 | | $ | 33.05 | | | 253,884 | | $ | 33.29 | |
| Awarded | 16,153 |
| 31.35 |
| | 117,773 |
| 32.20 |
| Awarded | — | | — | | | 80,338 | | 32.91 | |
| Released | 22,750 |
| 24.70 |
| | 33,400 |
| 17.86 |
| Released | 4,000 | | 31.63 | | | 56,827 | | 32.42 | |
| Forfeited | 4,852 |
| 35.87 |
| | 5,388 |
| 33.17 |
| Forfeited | 200 | | 34.14 | | | 3,402 | | 33.04 | |
| Outstanding at September 30 | 32,230 |
| $ | 33.05 |
| | 254,757 |
| $ | 33.29 |
| |
| Outstanding at March 31 | | Outstanding at March 31 | 28,030 | | $ | 33.25 | | | 273,993 | | $ | 33.36 | |
For the ninethree months ended September 30, 2019,March 31, 2020, the total intrinsic value for restricted common shares released was $1.8$2.0 million compared to $3.2$1.1 million for the ninethree months ended September 30, 2018.March 31, 2019.
Performance Unit Awards
Under the 2006 Equity Plan, Peoples may grant performance unit awards to officers, key employees and non-employee directors. On July 26, 2017, Peoples granted a total of seven performance unit awards to individuals who were then serving as officers, with a maximum aggregate dollar amount of $1.3 million represented by the performance units subject to such awards and each performance unit representing $1.00. As of September 30,During 2019, one of the seven performance unit awards had beenwas forfeited as one of the individuals granted aindividual to whom the performance unit award was granted left Peoples before meeting the minimum service requirement to retain the performance unit award. The performance unit awards granted covercovered the performance period beginning January 1, 2018 and ending on December 31, 2019, and arewere subject to two performance goals. Twenty-five percent of the performance units subject to each award will vest if, but only if, the related company-specific target performance goal is achieved. The remaining 75% of the performance units subject to each award will vest based on the relative performance of Peoples compared to a defined peer group (measured by percentile ranking) with respect to the related maximum performance goal. If, for the performance period, the target level of achievement forachieved the first performance goal and/or the maximum level of achievement forby exceeding its target cumulative two-year adjusted earnings per share. However, Peoples failed to achieve the second performance goal is not reached,as its adjusted return on average assets for the dollar amount represented bymeasurement period ranked below the target percentile compared to its peer group. As a result, during the first quarter of 2020, the remaining six officers holding performance units associated with each performance goal will be adjusted to reflect the levelunit awards received an aggregate of performance achieved. After the vesting date, the participant will receive that number of9,395 common shares of Peoples equal to (i) the aggregate number of
the participant's performance units (and equivalent dollar value of such performance units) that vested based on the performance achieved under both performance goals (ii) divided by theat a fair market value of a$29.26 per common share of Peoples on the date the performance units arewere deemed to have vested, (which will be the last daywith a related expense of the performance period) and rounded down to the nearest whole common share.$275,000.
Stock-Based Compensation
Peoples recognizes stock-based compensation, which is included as a component of Peoples’ salaries and employee benefit costs, for restricted common shares and performance unit awards, as well as purchases made by participants in the employee stock purchase plan. For restricted common shares, Peoples recognizes stock-based compensation based on the estimated fair value of the awards expected to vest on the grant date, for the portion of awards thatdate. The estimated fair value is expected to vestthen expensed over the vesting period.period, which is normally three years. For performance unit awards, Peoples recognizesrecognized stock-based compensation over the performance period, based on the portion of the awards that iswas expected to vest based on the expected level of achievement of the two performance goals. Peoples also has an employee stock purchase plan whereby employees can purchase Peoples' common shares at a discount of up to 15%. The following table summarizes the amount of stock-based compensation expense and related tax benefit recognized for each period:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | | March 31, | |
| (Dollars in thousands) | 2019 | 2018 | | 2019 | 2018 | (Dollars in thousands) | 2020 | 2019 | |
| Employee stock-based compensation expense: | | Employee stock-based compensation expense: | | |
| Stock grant expense | | Stock grant expense | $ | 1,380 | | $ | 1,153 | | |
| Employee stock purchase plan expense | | Employee stock purchase plan expense | 15 | | 16 | | |
| Performance unit (benefit) expense | | Performance unit (benefit) expense | (12) | | 39 | | |
| Total employee stock-based compensation expense | | Total employee stock-based compensation expense | 1,383 | | 1,208 | | |
| Non-employee director stock-based compensation expense | | Non-employee director stock-based compensation expense | 182 | | 152 | | |
| Total stock-based compensation expense | $ | 950 |
| $ | 579 |
| | $ | 3,088 |
| $ | 2,089 |
| Total stock-based compensation expense | 1,565 | | 1,360 | | |
| Recognized tax benefit | (199 | ) | (122 | ) | | (648 | ) | (439 | ) | Recognized tax benefit | (329) | | (286) | | |
| Net expense recognized | $ | 751 |
| $ | 457 |
| | $ | 2,440 |
| $ | 1,650 |
| |
| Net stock-based compensation expense | | Net stock-based compensation expense | $ | 1,236 | | $ | 1,074 | | |
Restricted common shares were the primary form of stock-based compensation awards granted by Peoples in the three and nine months ended September 30, 2019March 31, 2020 and 2018.2019. The fair value of restricted common share awards on the grant date is the market price of Peoples' common shares.shares on that date. Total unrecognized stock-based compensation expense related to unvested restricted common share awards was $3.3$3.9 million at September 30, 2019,March 31, 2020, which will be recognized over a weighted-average period of 2.02.1 years. On February 14, 2018, an aggregate
In addition to the portion of 11,112directors' fees paid in common shares, non-employee director stock-based compensation expense included $120,000 during the first three months of 2020, and $102,000 during the first three months of 2019, reflecting separate grants of unrestricted common shares were granted as a one-time special award to all full-timeaggregating 3,680 and part-time employees who did not already participate in the 2006 Equity Plan, with a related stock-based compensation expense of $388,000 being recognized. On June 3, 2019, an aggregate of 880 unrestricted3,200 common shares, were granted as a one-time special award to all full-time and part-time First Prestonsburg employees, with a related stock-based compensation expense of $27,000 being recognized. For the three and nine months ended September 30, 2019, Peoples recorded $46,000 and $96,000, respectively, of stock-based compensation associated with the performance unit awards and for the three and nine months ended September 30, 2018 recorded $62,000 and $188,000, respectively. Additionally, Peoples recognized $16,000 and $48,000 of stock-based compensation associated with the employee stock purchase plan, based on purchases by employees thereunder, in the three and nine months ended September 30, 2019, respectively, and $15,000 and $44,000 for the three and nine months ended September 30, 2018, respectively.
Unrestricted common shares awarded to non-employee directors are included as a component of Peoples' other non-interest expense. On January 31, 2019, Peoples granted to non-employee directors, an aggregate of 3,200 unrestricted common shares, which resulted in an additional $102,000 of stock-based compensation expense being recognized. On January 31, 2018, Peoples granted, to non-employee directors, an aggregate of 3,600 unrestricted common shares, which resulted in an additional $128,000 of stock-based compensation expense being recognized.
Note 11 Revenue
The following table details Peoples' revenue from contracts with customers:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | | March 31, | |
| (Dollars in thousands) | 2019 | 2018 | | 2019 | 2018 | (Dollars in thousands) | 2020 | 2019 | |
| Insurance income: | | | | Insurance income: | | |
| Commission and fees from sale of insurance policies (a) | $ | 3,173 |
| $ | 3,159 |
| | $ | 9,512 |
| $ | 9,541 |
| Commission and fees from sale of insurance policies (a) | $ | 2,692 | | $ | 3,033 | | |
| Fees related to third-party administration services (a) | 140 |
| 131 |
| | 486 |
| 423 |
| Fees related to third-party administration services (a) | 147 | | 169 | | |
| Performance-based commissions (b) | 73 |
| 98 |
| | 1,495 |
| 1,448 |
| Performance-based commissions (b) | 1,291 | | 1,419 | | |
| Trust and investment income (a) | 3,205 |
| 3,110 |
| | 9,718 |
| 9,410 |
| Trust and investment income (a) | 3,262 | | 3,112 | | |
| Electronic banking income: | | | | Electronic banking income: | | |
| Interchange income (a) | 2,842 |
| 2,464 |
| | 8,032 |
| 7,248 |
| Interchange income (a) | 2,401 | | 2,443 | | |
| Promotional and usage income (a) | 735 |
| 426 |
| | 1,799 |
| 1,212 |
| Promotional and usage income (a) | 879 | | 544 | | |
| Deposit account service charges: | | | | Deposit account service charges: | | |
| Ongoing maintenance fees for deposit accounts (a) | 1,049 |
| 691 |
| | 2,813 |
| 2,012 |
| Ongoing maintenance fees for deposit accounts (a) | 980 | | 752 | | |
| Transactional-based fees (b) | 2,184 |
| 1,961 |
| | 5,738 |
| 5,148 |
| Transactional-based fees (b) | 1,840 | | 1,589 | | |
| Commercial loan swap fees (b) | 772 |
| 355 |
| | 1,434 |
| 617 |
| Commercial loan swap fees (b) | 244 | | 146 | | |
| Other non-interest income transactional-based fees (b) | 174 |
| 228 |
| | 598 |
| 772 |
| Other non-interest income transactional-based fees (b) | 218 | | 171 | | |
| Total | $ | 14,347 |
| $ | 12,623 |
| | $ | 41,625 |
| $ | 37,831 |
| |
| Total revenue from contracts with customers | | Total revenue from contracts with customers | $ | 13,954 | | $ | 13,378 | | |
| | | | | | |
| Timing of revenue recognition: | | | | Timing of revenue recognition: | | |
| Services transferred over time | $ | 11,144 |
| $ | 9,981 |
| | $ | 32,360 |
| $ | 29,846 |
| Services transferred over time | $ | 10,361 | | $ | 10,053 | | |
| Services transferred at a point in time | 3,203 |
| 2,642 |
| | 9,265 |
| 7,985 |
| Services transferred at a point in time | 3,593 | | 3,325 | | |
| Total | $ | 14,347 |
| $ | 12,623 |
| | $ | 41,625 |
| $ | 37,831 |
| |
| Total revenue from contracts with customers | | Total revenue from contracts with customers | $ | 13,954 | | $ | 13,378 | | |
(a) Services transferred over time.
(b) Services transferred at a point in time.
Peoples records contract assets for income that has been recognized over a period of time for fulfillment of performance obligations, but has not yet been received related to electronic banking income. This income typically relates to bonuses for which Peoples is eligible, but will not receive until a certain time in the future. Peoples records contract liabilities for payments received for commission income related to the sale of insurance policies, for which the performance obligations have not yet been fulfilled. The contract liabilities are recognized as income over time, during the period in which the performance obligations are fulfilled, which is over the insurance policy period. Peoples also records contract liabilities for bonuses received related to electronic banking income, for which income is recognized during the period in which the performance obligations are fulfilled.
The following table details the change in Peoples' contract assets and contract liabilities for the period ended September 30, 2019:March 31, 2020:
| | | | | | | | |
| | Contract Assets | Contract Liabilities |
| (Dollars in thousands) | | |
| Balance, January 1, 2020 | $ | 600 | | $ | 5,190 | |
| Additional income receivable | 175 | | — | |
| Additional deferred income | — | | (125) | |
| | |
| Recognition of income previously deferred | — | | (21) | |
| Balance, March 31, 2020 | $ | 775 | | $ | 5,044 | |
|
| | | | | | |
| | Contract Assets | Contract Liabilities |
| (Dollars in thousands) |
| Balance, January 1, 2019 | $ | 207 |
| $ | 5,055 |
|
| Additional income receivable | 324 |
| — |
|
| Additional deferred income | — |
| 4,468 |
|
| Receipt of income previously receivable | (11 | ) | — |
|
| Recognition of income previously deferred | — |
| (4,211 | ) |
| Balance, September 30, 2019 | $ | 520 |
| $ | 5,312 |
|
Note 12 Acquisitions
On January 1, 2020, Peoples Insurance acquired a property and casualty-focused independent insurance agency for a purchase price amount equal to $866,000, and recorded $735,000 of customer relationship intangibles, and $27,000 of other assets, resulting in $104,000 of goodwill. The acquisition will not materially impact Peoples' financial position, results of operations or cash flows. As of March 31, 2020, Peoples had $319,000 of contingent consideration payable related to the acquisition.
On April 12, 2019,20, 2020, Peoples completedsigned an asset purchase agreement under which Peoples Bank will acquire the merger with First Prestonsburg Bancshares Inc. ("First Prestonsburg"). First Prestonsburg merged into Peoplesoperations and First Prestonsburg's wholly-owned subsidiary, First Commonwealthassets of Triumph Premium Finance (“TPF”), a division of TBK Bank, SSB. Based in Kansas City, Missouri, TPF provides premium finance services for customers to purchase property and casualty insurance products through its network of Prestonsburg, Inc. ("First Commonwealth"), which operates nine full-service branches located in easternindependent insurance agency customers nationwide. Closing is expected to occur during the third quarter of 2020 and central Kentucky, merged into Peoples Bank. Consideration of $32.4 million was paid by Peoplesis subject to regulatory approval and other conditions set forth in the form of 12.512 Peoples common shares to shareholders of First Prestonsburg for each share of First Prestonsburg common stock they owned, which resulted in the issuance of 1,005,478 Peoples common shares. In addition, immediately prior to the closing of the merger, First Prestonsburg paid a special cash distribution of $140.30 per share (for an aggregate amount of $11.3 million) which was deemed part of the total consideration to its shareholders. As a result, First Prestonsburg shareholders received total consideration of $43.7 million.asset purchase agreement.
The following table provides the preliminary purchase price calculation as of the date of acquisition for the First Prestonsburg acquisition, and the assets acquired and liabilities assumed at their estimated fair values.
|
| | | |
| | |
| (Dollars in thousands, except per share data) | |
| Consideration | |
| Common shares | 80,362 |
|
| Number of common shares of Peoples issued for each common share of acquired company | 12.512 |
|
| Price per Peoples common share, based on closing date | $ | 32.26 |
|
| Common share consideration | $ | 32,437 |
|
| | |
| Net Assets at Fair Value | |
| Assets | |
| Cash and due from banks | $ | 5,016 |
|
| Interest-bearing deposits in other banks | 2,797 |
|
| Total cash and cash equivalents | 7,813 |
|
| Available-for-sale investment securities | 136,596 |
|
| Other investment securities | 3,077 |
|
| Total investment securities | 139,673 |
|
| Loans | 129,365 |
|
| Bank premises and equipment, net of accumulated depreciation | 7,597 |
|
| Other intangible assets | 4,234 |
|
| Other assets | 2,207 |
|
| Total assets | $ | 290,889 |
|
| Liabilities | |
| Deposits: | |
| Non-interest-bearing | $ | 40,089 |
|
| Interest-bearing | 217,151 |
|
| Total deposits | 257,240 |
|
| Short-term borrowings | 14,400 |
|
| Accrued expenses and other liabilities | 2,061 |
|
| Total liabilities | $ | 273,701 |
|
| Net assets | $ | 17,188 |
|
| Goodwill | $ | 15,249 |
|
The estimated fair values presented in the above table reflect additional information that was obtained during the three months ended September 30, 2019, which resulted in changes to certain fair value estimates made as of the date of acquisition. Adjustments to acquisition date estimated fair values are recorded during the period in which they occur and, as a result, previously recorded results have changed. The below table reflects the changes in the estimated fair value at September 30, 2019 from balances reported at June 30, 2019:
|
| | | |
| (Dollars in thousands) | Change in Fair Value |
| Net Assets | |
| Cash and cash equivalents | $ | 17 |
|
| Total investment securities | (1,053 | ) |
| Loans | (1,042 | ) |
| Bank premises and equipment, net of accumulated depreciation | (658 | ) |
| Other assets | (470 | ) |
| Accrued expenses and other liabilities | (4 | ) |
| Change in Goodwill | (3,202 | ) |
Acquired loans are reported net of the unamortized fair value adjustment. The following table details the fair value adjustment for acquired loans as of the acquisition date:
|
| | | |
| (Dollars in thousands) | First Prestonsburg |
| Non-impaired Loans | |
| Contractual cash flows | $ | 168,729 |
|
| Nonaccretable difference | 19,745 |
|
| Expected cash flows | 148,984 |
|
| Accretable yield | 28,269 |
|
| Fair value | $ | 120,715 |
|
| Credit Impaired Loans | |
| Contractual cash flows | $ | 17,847 |
|
| Nonaccretable difference | 5,337 |
|
| Expected cash flows | 12,510 |
|
| Accretable yield | 3,860 |
|
| Fair value | $ | 8,650 |
|
Peoples recorded non-interest expense related primarily to the First Prestonsburg acquisition of $199,000 and $7.2 million for the three and nine months ended September 30, 2019, respectively. For the three and nine months ended September 30, 2019, total non-interest income included gains of $10,000 and losses of $243,000, respectively, associated with the First Prestonsburg merger. For the three and nine months ended September 30, 2019, salaries and employee benefit costs included $68,000 and $2.4 million, respectively, related to change in control agreements, retention and severance bonuses, and regular payroll and taxes after conversion. Professional fees related to the acquisition included a reversal of expense of $6,000 for the three months ended September 30, 2019, and expense of $614,000 for the nine months ended September 30, 2019, and other non-interest expenses included $93,000 and $3.9 million (mainly contract termination fees) for the three and nine months ended September 30, 2019, respectively.
Note 13 Leases
Peoples leases certain banking facilities and equipment under various agreements with original terms providing for fixed monthly payments over periods generally ranging from two to thirty years. Certain leases containmay include options to extend or terminate the lease. Only those renewal and termination options andwhich Peoples is reasonably certain of exercising are included in the calculation of the lease liability. Certain leases contain rent escalation clauses calling for rent increases over the term of the lease.lease, which are included in the calculation of the lease liability. Short-term leases of certain facilities and equipment, with lease terms of 12 months or less, are recognized on a straight-line basis over the lease term. At September 30, 2019,March 31, 2020, Peoples did not have any finance leases or any significant lessor agreements. Right of Use ("ROU") assets represent the right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement or remeasurement date of a lease based on the present value of lease payments over the remaining lease term. Operating lease ROU assets include lease payments made at or before the commencement date and initial indirect costs. Operating lease ROU assets exclude lease incentives.
Peoples elected certain practical expedients, in accordance with Accounting Standards Codification ("ASC")ASC 842. Peoples elected to recognize a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019 for the implementation of ASU 2016-02. Peoples also made an accounting policy election to account for each separate lease component of a contract and its associated non-lease components as a single lease component for all leases subject to ASC 842.
The table below details Peoples' lease expense, which is included in net occupancy and equipment expense in the Unaudited Consolidated Statements of Income:Operations:
| | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| (Dollars in thousands) | March 31, 2020 | | March 31, 2019 | | |
| Operating lease expense | $ | 334 | | | $ | 307 | | | |
| Short-term lease expense | 76 | | | 30 | | | |
| Total lease expense | $ | 410 | | | $ | 337 | | | |
|
| | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| (Dollars in thousands) | September 30, 2019 | | September 30, 2019 |
| Operating lease expense | $ | 192 |
| | 815 |
|
| Short-term lease expense | 113 |
| | 170 |
|
| Total lease expense | $ | 305 |
| | $ | 985 |
|
Peoples utilizes an incremental borrowing rate to determine the present value of lease payments for each lease, as the lease agreements do not provide an implicit rate. The estimated incremental borrowing rate reflects a secured rate and is based on the term of the lease and the interest rate environment at the lease commencement or remeasurement date.
The following table details the right-of-use asset, the lease liability and other information related to Peoples' operating leases:
| | | | | | | | |
| (Dollars in thousands) | March 31, 2020 | December 31, 2019 |
| Right-of-use asset: | | |
| Other assets | $ | 7,364 | | $ | 7,606 | |
| Lease liability: | | |
| Accrued expenses and other liabilities | $ | 7,582 | | $ | 7,813 | |
| Other information: | | |
| Weighted-average remaining lease term | 12.4 years | 12.4 years |
| Weighted-average discount rate | 3.15 | % | 3.16 | % |
| | |
| | |
| | |
|
| | | |
| (Dollars in thousands) | September 30, 2019 |
| Right-of-use asset: | |
| Other assets | $ | 6,581 |
|
| Lease liability: | |
| Accrued expenses and other liabilities | $ | 6,774 |
|
| Other information: | |
| Weighted-average remaining lease term | 13.3 years |
|
| Weighted-average discount rate | 2.18 | % |
The following table summarizes the maturity of remaining lease liabilities:
| | | | | |
| (Dollars in thousands) | Balance |
| Nine months ending December 31, 2020 | $ | 1,031 | |
| Year ending December 31, 2021 | 1,146 | |
| Year ending December 31, 2022 | 1,077 | |
| Year ending December 31, 2023 | 883 | |
| Year ending December 31, 2024 | 629 | |
| Thereafter | 4,750 | |
| Total undiscounted lease payments | $ | 9,516 | |
| Imputed interest | $ | (1,934) | |
| Total lease liability | $ | 7,582 | |
|
| | | |
| (Dollars in thousands) | Balance |
| Three months ending December 31, 2019 | $ | 5 |
|
| Year ending December 31, 2020 | 81 |
|
| Year ending December 31, 2021 | 131 |
|
| Year ending December 31, 2022 | 654 |
|
| Year ending December 31, 2023 | 59 |
|
| Thereafter | 5,844 |
|
| Total lease liability | $ | 6,774 |
|
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis (“MD&A”) represents an overview of the results of operations and financial condition of Peoples for the three months ended March 31, 2020 and March 31, 2019. This discussion and analysis should be read in conjunction with the Unaudited Consolidated Financial Statements and the Notes therein.
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the Unaudited Consolidated Financial Statements and Management’s Discussion and Analysis that follows:
| | | | At or For the Three Months Ended | | At or For the Nine Months Ended | | At or For the Three Months Ended | |
| | September 30, | | September 30, | | March 31, | |
| | 2019 | 2018 | | 2019 | 2018 | | 2020 | 2019 | |
| Operating Data (a) | | | | Operating Data (a) | | |
| Total interest income | $ | 43,609 |
| $ | 39,631 |
| | $ | 127,806 |
| $ | 110,626 |
| Total interest income | $ | 40,862 | | $ | 40,576 | | |
| Total interest expense | 7,855 |
| 6,307 |
| | 22,089 |
| 15,135 |
| Total interest expense | 6,226 | | 6,662 | | |
| Net interest income | 35,754 |
| 33,324 |
| | 105,717 |
| 95,491 |
| Net interest income | 34,636 | | 33,914 | | |
| Provision for loan losses | 1,005 |
| 1,302 |
| | 1,368 |
| 4,473 |
| |
| Net gain (loss) on investment securities | 97 |
| — |
| | 70 |
| (146 | ) | |
| Net (loss) gain on asset disposals and other transactions | (78 | ) | 12 |
| | (553 | ) | (319 | ) | |
| Total non-interest income excluding net gains and losses | 16,374 |
| 14,341 |
| | 47,594 |
| 43,042 |
| |
| Provision for (recovery of) credit losses (b) | | Provision for (recovery of) credit losses (b) | 16,969 | | (263) | | |
| Net gain on investment securities | | Net gain on investment securities | 319 | | 30 | | |
| Net loss on asset disposals and other transactions | | Net loss on asset disposals and other transactions | (87) | | (182) | | |
| Total non-interest income excluding net gains and losses (c) | | Total non-interest income excluding net gains and losses (c) | 15,505 | | 15,581 | | |
| Total non-interest expense | 32,993 |
| 30,829 |
| | 103,729 |
| 95,021 |
| Total non-interest expense | 34,325 | | 31,860 | | |
| Net income | 14,868 |
| 12,725 |
| | 38,835 |
| 32,358 |
| |
| Net (loss) income (d) | | Net (loss) income (d) | (765) | | 14,369 | | |
| Balance Sheet Data (a) | | | | Balance Sheet Data (a) | | |
| Total investment securities | $ | 1,064,909 |
| $ | 874,159 |
| | $ | 1,064,909 |
| $ | 874,159 |
| |
| Total investment securities (e) | | Total investment securities (e) | $ | 1,046,497 | | $ | 879,625 | | |
| Loans, net of deferred fees and costs ("total loans") | 2,850,316 |
| 2,707,727 |
| | 2,850,316 |
| 2,707,727 |
| Loans, net of deferred fees and costs ("total loans") | 2,911,437 | | 2,737,580 | | |
| Allowance for loan losses | 21,585 |
| 19,879 |
| | 21,585 |
| 19,879 |
| |
| Allowance for credit losses (e) | | Allowance for credit losses (e) | 42,833 | | 20,939 | | |
| Goodwill and other intangible assets | 179,126 |
| 163,401 |
| | 179,126 |
| 163,401 |
| Goodwill and other intangible assets | 177,447 | | 161,242 | | |
| Total assets | 4,396,148 |
| 4,003,089 |
| | 4,396,148 |
| 4,003,089 |
| Total assets | 4,469,120 | | 4,017,119 | | |
| Non-interest-bearing deposits | 677,232 |
| 617,447 |
| | 677,232 |
| 617,447 |
| Non-interest-bearing deposits | 727,266 | | 628,464 | | |
| Brokered certificates of deposits | | Brokered certificates of deposits | 133,522 | | 287,345 | | |
| Other interest-bearing deposits | 2,417,740 |
| 2,423,676 |
| | 2,417,740 |
| 2,423,676 |
| Other interest-bearing deposits | 2,537,642 | | 2,221,604 | | |
| Brokered certificates of deposits | 262,230 |
| 265,258 |
| | 262,230 |
| 265,258 |
| |
| Short-term borrowings | 288,150 |
| 296,830 |
| | 288,150 |
| 296,830 |
| Short-term borrowings | 259,661 | | 191,363 | | |
| Junior subordinated debentures held by subsidiary trust | 7,409 |
| 7,239 |
| | 7,409 |
| 7,239 |
| Junior subordinated debentures held by subsidiary trust | 7,491 | | 7,325 | | |
| Other long-term borrowings | 84,194 |
| 111,099 |
| | 84,194 |
| 111,099 |
| Other long-term borrowings | 132,791 | | 105,995 | | |
| Total stockholders' equity | 588,533 |
| 504,290 |
| | 588,533 |
| 504,290 |
| |
| Tangible assets (b) | 4,217,022 |
| 3,839,688 |
| | 4,217,022 |
| 3,839,688 |
| |
| Tangible equity (b) | 409,407 |
| 340,889 |
| | 409,407 |
| 340,889 |
| |
| Total stockholders' equity (e) | | Total stockholders' equity (e) | 583,721 | | 535,121 | | |
| Tangible assets (f) | | Tangible assets (f) | 4,291,673 | | 3,855,877 | | |
| Tangible equity (f) | | Tangible equity (f) | 406,274 | | 373,879 | | |
| Per Common Share Data (a) | | | | Per Common Share Data (a) | | |
| Earnings per common share – basic | $ | 0.72 |
| $ | 0.65 |
| | $ | 1.93 |
| $ | 1.70 |
| |
| Earnings per common share – diluted | 0.72 |
| 0.65 |
| | 1.91 |
| 1.69 |
| |
| (Loss) earnings per common share – basic | | (Loss) earnings per common share – basic | $ | (0.04) | | $ | 0.74 | | |
| (Loss) earnings per common share – diluted | | (Loss) earnings per common share – diluted | (0.04) | | 0.73 | | |
| Cash dividends declared per common share | 0.34 |
| 0.28 |
| | 0.98 |
| 0.82 |
| Cash dividends declared per common share | 0.34 | | 0.30 | | |
| Book value per common share (c) | 28.43 |
| 25.79 |
| | 28.43 |
| 25.79 |
| |
| Tangible book value per common share (b)(c) | $ | 19.78 |
| $ | 17.44 |
| | $ | 19.78 |
| $ | 17.44 |
| |
| Book value per common share (g) | | Book value per common share (g) | 28.69 | | 27.19 | | |
| Tangible book value per common share (f)(g) | | Tangible book value per common share (f)(g) | $ | 19.97 | | $ | 19.00 | | |
| Weighted-average number of common shares outstanding – basic | 20,415,245 |
| 19,325,457 |
| | 20,023,271 |
| 18,875,290 |
| Weighted-average number of common shares outstanding – basic | 20,367,564 | | 19,366,008 | | |
| Weighted-average number of common shares outstanding – diluted | 20,595,769 |
| 19,466,865 |
| | 20,178,634 |
| 19,004,087 |
| Weighted-average number of common shares outstanding – diluted | 20,538,214 | | 19,508,868 | | |
| Common shares outstanding at end of period | 20,700,630 |
| 19,550,014 |
| | 20,700,630 |
| 19,550,014 |
| Common shares outstanding at end of period | 20,346,843 | | 19,681,692 | | |
| Closing stock price at end of period | $ | 31.81 |
| $ | 35.03 |
| | $ | 31.81 |
| $ | 35.03 |
| |
| Closing share price at end of period | | Closing share price at end of period | $ | 22.15 | | $ | 30.97 | | |
| | | | | | | | | | | |
| | At or For the Three Months Ended | | | | |
| | March 31, | | | | |
| | 2020 | 2019 | | | |
| Significant Ratios (a) | | | | | |
| Return on average stockholders' equity (h) | (0.52) | % | 11.12 | % | | | |
| Return on average tangible equity (h)(i) | (0.18) | % | 16.69 | % | | | |
| Return on average assets (h) | (0.07) | % | 1.46 | % | | | |
| Return on average assets adjusted for non-core items (h)(j) | (0.05) | % | 1.49 | % | | | |
| Average stockholders' equity to average assets | 13.61 | % | 13.15 | % | | | |
| Average total loans to average deposits | 85.93 | % | 89.36 | % | | | |
| Net interest margin (h)(k) | 3.51 | % | 3.80 | % | | | |
| Efficiency ratio (l) | 66.64 | % | 62.71 | % | | | |
| Efficiency ratio adjusted for non-core items (m) | 65.55 | % | 62.21 | % | | | |
| Pre-provision net revenue to total average assets (n) | 1.45 | % | 1.79 | % | | | |
| Dividend payout ratio (o)(p) | NM | | 40.84 | % | | | |
| Total loans to deposits (g) | 85.74 | % | 87.33 | % | | | |
| Total investment securities as percentage of total assets (g) | 23.42 | % | 21.90 | % | | | |
| Asset Quality Ratios (a) | | | | | | | |
| Nonperforming loans as a percent of total loans (g)(q) | 0.93 | % | 0.66 | % | | | |
| Nonperforming assets as a percent of total assets (g)(q) | 0.61 | % | 0.45 | % | | | |
| Nonperforming assets as a percent of total loans and OREO (g)(q) | 0.94 | % | 0.67 | % | | | |
| Criticized loans as a percent of total loans (g)(r) | 3.12 | % | 3.28 | % | | | |
| Classified loans as a percent of total loans (g)(s) | 2.36 | % | 1.73 | % | | | |
| Allowance for credit losses as a percent of total loans (e)(g) | 1.47 | % | 0.76 | % | | | |
| Allowance for credit losses as a percent of nonperforming loans (e)(g)(q) | 158.49 | % | 115.28 | % | | | |
| Provision for (recovery of) credit losses as a percent of average total loans (b) | 2.37 | % | (0.04) | % | | | |
| Net charge-offs (recoveries) as a percentage of average total loans | 0.07 | % | (0.15) | % | | | |
| Capital Information (a)(g) | | | | | | | |
| Common equity tier 1 capital ratio (t) | 13.91 | % | 13.96 | % | | | |
| Tier 1 risk-based capital ratio | 14.16 | % | 14.22 | % | | | |
| Total risk-based capital ratio (tier 1 and tier 2) | 15.38 | % | 14.98 | % | | | |
| Tier 1 leverage ratio | 10.06 | % | 10.31 | % | | | |
| Common equity tier 1 capital | $ | 415,768 | | $ | 389,394 | | | | |
| Tier 1 capital | 423,259 | | 396,719 | | | | |
| Total capital (tier 1 and tier 2) | 459,727 | | 417,658 | | | | |
| Total risk-weighted assets | $ | 2,988,263 | | $ | 2,788,935 | | | | |
| Total stockholders' equity to total assets | 13.06 | % | 13.32 | | | |
| Tangible equity to tangible assets (f) | 9.47 | % | 9.70 | % | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
(a)Reflects the impact of the acquisition of First Prestonsburg Bancshares Inc. ("First Prestonsburg") beginning April 12, 2019.
(b)On January 1, 2020, Peoples adopted ASU 2016-13 and implemented the current expected credit loss ("CECL") model. Prior to the adoption of CECL, the provision for (recovery of) credit losses was the "provision for (recovery of) loan losses." The provision for credit losses includes changes related to the allowance for credit losses on loans, which includes purchased credit deteriorated loans, held-to-maturity investment securities, and the unfunded commitment liability in 2020.
(c)Total non-interest income excluding net gains and losses, is a non-US GAAP financial measure since it excludes all gains and/or losses included in earnings. Additional information regarding the calculation of total non-interest income excluding net gains and losses can be found under the caption "Efficiency Ratio (non-US GAAP)."
(d)Net income includes non-core non-interest expenses totaling $551,000 for the first three months of 2020 and $253,000 for the first three months of 2019. Additional information regarding the non-core non-interest expense can be found under the caption "Core Non-Interest Expense (non-US GAAP)."
(e)On January 1, 2020, Peoples adopted ASU 2016-13 and implemented the CECL model, which resulted in the establishment of a $7,000 allowance for credit losses for held-to-maturity investment securities; an increase in loan balances of $2.6 million to establish the allowance for credit losses for purchased credit deteriorated loans; an increase to the allowance for credit losses (which was the "allowance for loan losses" prior to January 1, 2020) of $5.8 million; and a reduction to retained earnings of $3.7 million, net of statutory federal corporate income tax.
(f)These amounts represent non-US GAAP financial measures since they exclude the balance sheet impact of goodwill and other intangible assets acquired through acquisitions on total stockholders’ equity and total assets. Additional information regarding the calculation of these non-US GAAP financial measures can be found under the caption “Capital/Stockholders’ Equity.”
(g)Data presented as of the end of the period indicated.
(h)Ratios are presented on an annualized basis.
(i)Return on average tangible equity ratio represents a non-US GAAP financial measure since it excludes the after-tax impact of amortization of other intangible assets from earnings and it excludes the balance sheet impact of goodwill and other intangible assets acquired through acquisitions on total stockholders’ equity. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption “Return on Average Tangible Equity Ratio (non-US GAAP).”
|
| | | | | | | | | | | | | |
| | At or For the Three Months Ended | | At or For the Nine Months Ended |
| | September 30, | | September 30, |
| | 2019 | 2018 | | 2019 | 2018 |
| Significant Ratios (a) | | | | | |
| Return on average stockholders' equity (d) | 10.11 | % | 10.06 | % | | 9.31 | % | 8.97 | % |
| Return on average tangible equity (d)(e) | 15.35 | % | 15.73 | % | | 14.14 | % | 14.09 | % |
| Return on average assets (d) | 1.37 | % | 1.26 | % | | 1.24 | % | 1.13 | % |
| Return on average assets adjusted for non-core items (d)(f) | 1.38 | % | 1.33 | % | | 1.44 | % | 1.31 | % |
| Average stockholders' equity to average assets | 13.53 | % | 12.55 | % | | 13.34 | % | 12.58 | % |
| Average total loans to average deposits | 84.99 | % | 90.47 | % | | 86.83 | % | 89.11 | % |
| Net interest margin (d)(g) | 3.66 | % | 3.68 | % | | 3.74 | % | 3.69 | % |
| Efficiency ratio (h) | 61.10 | % | 62.58 | % | | 65.71 | % | 66.48 | % |
| Efficiency ratio adjusted for non-core items (i) | 60.72 | % | 60.80 | % | | 61.03 | % | 61.41 | % |
| Pre-provision net revenue to total average assets (j) | 1.76 | % | 1.67 | % | | 1.59 | % | 1.52 | % |
| Dividend payout ratio | 47.35 | % | 43.00 | % | | 51.35 | % | 48.55 | % |
| Total investment securities as percentage of total assets (c) | 24.22 | % | 21.84 | % | | 24.22 | % | 21.84 | % |
| Asset Quality Ratios (a) | | | | | |
| Nonperforming loans as a percent of total loans (c)(k) | 0.73 | % | 0.67 | % | | 0.73 | % | 0.67 | % |
| Nonperforming assets as a percent of total assets (c)(k) | 0.48 | % | 0.46 | % | | 0.48 | % | 0.46 | % |
| Nonperforming assets as a percent of total loans and OREO (c)(k) | 0.74 | % | 0.67 | % | | 0.74 | % | 0.67 | % |
| Criticized loans as a percent of total loans (c)(l) | 3.52 | % | 4.38 | % | | 3.52 | % | 4.38 | % |
| Classified loans as a percent of total loans (c)(m) | 2.07 | % | 1.81 | % | | 2.07 | % | 1.81 | % |
| Allowance for loan losses as a percent of total loans (c) | 0.76 | % | 0.73 | % | | 0.76 | % | 0.73 | % |
| Allowance for loan losses as a percent of nonperforming loans (c)(k) | 104.20 | % | 109.71 | % | | 104.20 | % | 109.71 | % |
| Provision for loan losses as a percent of average total loans | 0.14 | % | 0.19 | % | | 0.07 | % | 0.23 | % |
| Net charge-offs (recoveries) as a percentage of average total loans | 0.11 | % | 0.10 | % | | — | % | 0.18 | % |
| Capital Information (a)(c) | |
| | | | |
| Common equity tier 1 capital ratio (n) | 14.19 | % | 13.29 | % | | 14.19 | % | 13.29 | % |
| Tier 1 risk-based capital ratio | 14.45 | % | 13.55 | % | | 14.45 | % | 13.55 | % |
| Total risk-based capital ratio (tier 1 and tier 2) | 15.18 | % | 14.27 | % | | 15.18 | % | 14.27 | % |
| Leverage ratio | 10.28 | % | 9.69 | % | | 10.28 | % | 9.69 | % |
| Common equity tier 1 capital | $ | 417,468 |
| $ | 367,537 |
| | $ | 417,468 |
| $ | 367,537 |
|
| Tier 1 capital | 424,877 |
| 374,776 |
| | 424,877 |
| 374,776 |
|
| Total capital (tier 1 and tier 2) | 446,462 |
| 394,655 |
| | 446,462 |
| 394,655 |
|
| Total risk-weighted assets | $ | 2,941,193 |
| $ | 2,764,951 |
| | $ | 2,941,193 |
| $ | 2,764,951 |
|
| Total stockholders' equity to total assets | 13.39 | % | 12.60 | % | | 13.39 | % | 12.60 | % |
| Tangible equity to tangible assets (b) | 9.71 | % | 8.88 | % | | 9.71 | % | 8.88 | % |
| |
(a) | Reflects the impact of the acquisition of First Prestonsburg Bancshares Inc. ("First Prestonsburg") beginning April 12, 2019, and of ASB Financial Corp. ("ASB") beginning April 13, 2018. |
| |
(b) | These amounts represent non-US GAAP financial measures since they exclude the balance sheet impact of goodwill and other intangible assets acquired through acquisitions on total stockholders’ equity and total assets. Additional information regarding the calculation of these non-US GAAP financial measures can be found under the caption “Capital/Stockholders’ Equity.”
|
| |
(c) | Data presented as of the end of the period indicated. |
| |
(d) | Ratios are presented on an annualized basis. |
| |
(e) | Return on average tangible equity represents a non-US GAAP financial measures since it excludes the after-tax impact of amortization of other intangible assets from earnings and it excludes the balance sheet impact of goodwill and other intangible assets acquired through acquisitions on total stockholders’ equity. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption “Return on Average Tangible Equity Ratio (non-US GAAP).”
|
| |
(f) | Return on average assets adjusted for non-core itemsrepresents a non-US GAAP financial measure since it excludes the impact of the Tax Cuts and Jobs Act on the remeasurement of deferred tax assets and deferred tax liabilities, and the after-tax impact of all gains and/or losses, acquisition-related expenses, and pension settlement charges included in earnings. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption "Return on Average Assets Adjusted for Non-Core Items (non-US GAAP)."
|
| |
(g) | Information presented on a fully tax-equivalent basis. |
| |
(h) | The efficiency ratio is defined as total non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus total non-interest income (excluding all gains and losses). This amount represents a non-US GAAP financial measure since it excludes amortization of other intangible assets, and all gains and/or losses included in earnings, and uses fully tax-equivalent net interest income. |
(j)Return on average assets adjusted for non-core items ratio represents a non-US GAAP financial measure since it excludes the after-tax impact of all gains and/or losses, acquisition-related expenses, pension settlement charges, severance charges and COVID-19 expenses included in earnings. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption "Return on Average Assets Adjusted for Non-Core Items Ratio (non-US GAAP)."
(k)Information presented on a fully tax-equivalent basis.
(l)The efficiency ratio is defined as total non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus total non-interest income (excluding all gains and losses). This amount represents a non-US GAAP financial measure since it excludes amortization of other intangible assets, and all gains and/or losses included in earnings, and uses fully tax-equivalent net interest income. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption “Efficiency Ratio (non-US GAAP).”
| |
(i) | The efficiency ratio adjusted for non-core items is defined as core non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus core non-interest income excluding all gains and losses. This amount represents a non-US GAAP financial measure since it excludes the impact of all gains and/or losses, acquisition-related expenses, and pension settlement charges included in earnings, and uses fully tax-equivalent net interest income. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption “Efficiency Ratio (non-US GAAP).” |
| |
(j) | Pre-provision net revenue is defined as net interest income plus total non-interest income (excluding all gains and losses) minus total non-interest expense. This ratio represents a non-US GAAP financial measure since it excludes the provision for loan losses and all gains and/or losses included in earnings. This measure is a key metric used by federal bank regulatory agencies in their evaluation of capital adequacy for financial institutions. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption “Pre-Provision Net Revenue (non-US GAAP).” |
| |
(k) | Nonperforming loans include loans 90+ days past due and accruing, renegotiated loans and nonaccrual loans. Nonperforming assets include nonperforming loans and other real estate owned. |
| |
(l) | Includes loans categorized as special mention, substandard and doubtful. |
| |
(m) | Includes loans categorized as substandard and doubtful. |
| |
(n) | Peoples' capital conservation buffer was 7.18% at September 30, 2019 and 6.27% at September 30, 2018, compared to 2.50% for the fully phased-in capital conservation buffer required at January 1, 2019. |
(m)The efficiency ratio adjusted for non-core items is defined as core non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus core non-interest income excluding all gains and losses. This amount represents a non-US GAAP financial measure since it excludes the impact of all gains and/or losses, acquisition-related expenses, pension settlement charges, severance expenses and COVID-19 expenses included in earnings, and uses FTE net interest income. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption "Efficiency Ratio (non-US GAAP).”
(n)Pre-provision net revenue is defined as net interest income plus total non-interest income (excluding all gains and losses) minus total non-interest expense. This ratio represents a non-US GAAP financial measure since it excludes the provision for credit losses and all gains and/or losses included in earnings. This measure is a key metric used by federal bank regulatory agencies in their evaluation of capital adequacy for financial institutions. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption “Pre-Provision Net Revenue (non-US GAAP).”
(o)The dividend payout ratio is calculated based on dividends declared during the period divided by net (loss) income for the period.
(p)NM = not meaningful
(q)Nonperforming loans include loans 90+ days past due and accruing, renegotiated loans and nonaccrual loans. Nonperforming assets include nonperforming loans and other real estate owned. 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,
(r)Includes loans categorized as special mention, substandard and doubtful.
(s)Includes loans categorized as substandard and doubtful.
(t)Peoples' capital conservation buffer was 7.38% at March 31, 2020 and 6.98% at March 31, 2019, compared to 2.50% for the fully phased-in capital conservation buffer required at January 1, 2019.
Forward-Looking Statements
Certain statements in this Form 10-Q, which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by the fact they are not historical facts and include words such as "anticipate," "estimate," "may," "feel," "expect," "believe," "plan," "will," "will likely," "would," "should," "could," "project," "goal," "target," "potential," "seek," "intend," and similar expressions.
These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of Peoples' business and operations. Additionally, Peoples' financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to:
| |
(1) | the success, impact, and timing of the implementation of Peoples' business strategies, including the successful integration of the business of First Prestonsburg, and the expansion of consumer lending activity; |
| |
(2) | risks and uncertainties associated with Peoples' entry into new geographic markets and risks resulting from Peoples' inexperience in these new geographic markets; |
| |
(3) | Peoples' ability to identify, acquire, or integrate suitable strategic acquisitions, which may be unsuccessful, or may be more difficult, time-consuming or costly than expected; |
| |
(4) | competitive pressures among financial institutions, or from non-financial institutions, which may increase significantly, including product and pricing pressures, which can in turn impact Peoples' credit spreads, changes to third-party relationships and revenues, changes in the manner of providing services, customer acquisition and retention pressures, and Peoples' ability to attract, develop and retain qualified professionals; |
| |
(5) | changes in the interest rate environment due to economic conditions and/or the fiscal policies of the United States ("U.S.") government and the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which may adversely impact interest rates, interest margins, loan demand and interest rate sensitivity; |
| |
(6) | uncertainty regarding the nature, timing, cost, and effect of legislative or regulatory changes or actions, promulgated and to be promulgated by governmental and regulatory agencies in the state of Ohio, the Federal Deposit Insurance Corporation, the Federal Reserve Board and the Consumer Financial Protection Bureau, which may subject Peoples, its subsidiaries, or one or more acquired companies to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses, including in particular the rules and regulations promulgated and to be promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Basel III regulatory capital reform; |
| |
(7) | the effects of easing restrictions on participants in the financial services industry; |
| |
(8) | local, regional, national and international economic conditions (including the impact of potential or imposed tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations, and the relationship of the U.S. and its global trading partners) and the impact these conditions may have on Peoples, its customers and its counterparties, and Peoples' assessment of the impact, which may be different than anticipated; |
(1)the ever-changing effects of the COVID-19 pandemic - the duration, extent and severity of which are impossible to predict - on economies (local, national and international) and markets, and on Peoples' customers, counterparties, employees and third-party service providers, as well as the effects of various responses of governmental and nongovernmental authorities, including actions directed toward the containment of the COVID-19 pandemic and stimulus packages, which could decrease sales volumes, add volatility to the global stock markets, and increase loan delinquencies and defaults;
(2)the success, impact, and timing of the implementation of Peoples' business strategies and its ability to manage strategic initiatives, including the expansion of commercial and consumer lending activity;
(3)competitive pressures among financial institutions, or from non-financial institutions, which may increase significantly, including product and pricing pressures, which can in turn impact Peoples' credit spreads, changes to third-party relationships and revenues, changes in the manner of providing services, customer acquisition and retention pressures, and Peoples' ability to attract, develop and retain qualified professionals;
(4)changes in the interest rate environment due to economic conditions related to the COVID-19 pandemic or other factors and/or the fiscal and monetary policy measures taken by the U.S. government and the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") in response to such economic conditions, which may adversely impact interest rates, the interest rate yield curve, interest margins, loan demand and interest rate sensitivity;
(5)uncertainty regarding the nature, timing, cost, and effect of legislative or regulatory changes or actions, or deposit insurance premium levels, promulgated and to be promulgated by governmental and regulatory agencies in the State of Ohio, the Federal Deposit Insurance Corporation, the Federal Reserve Board and the Consumer Financial Protection Bureau, which may subject Peoples, its subsidiaries, or one or more acquired companies to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses, including in particular the rules and regulations promulgated and to be promulgated under the Coronavirus Aid, Relief and Economic
Security ("CARES") Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Basel III regulatory capital reform;
| |
(9) | the existence or exacerbation of general geopolitical instability and uncertainty; |
| |
(10) | changes in policy and other regulatory and legal developments, and uncertainty or speculation pending the enactment of such changes; |
| |
(11) | Peoples may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to Peoples' current shareholders; |
| |
(12) | changes in prepayment speeds, loan originations, levels of nonperforming assets, delinquent loans, charge-offs and customer creditworthiness generally, which may be less favorable than expected and adversely impact the amount of interest income generated; |
| |
(13) | adverse changes in economic conditions and/or activities, including, but not limited to, slowing or reversal of the current U.S. economic expansion, continued economic uncertainty in the U.S., the European Union (including the uncertainty surrounding the actions to be taken to implement the referendum by British voters to exit the European Union), Asia, and other areas, which could decrease sales volumes, add volatility to the global stock markets, and increase loan delinquencies and defaults; |
| |
(14) | deterioration in the credit quality of Peoples' loan portfolio, which may adversely impact the provision for loan losses; |
| |
(15) | Peoples may have more credit risk and higher credit losses to the extent loans are concentrated by location or industry of the borrowers or collateral; |
| |
(16) | changes in accounting standards, policies, estimates or procedures, including the extent to which the new current expected credit loss rule issued by the Financial Accounting Standard Board in June 2016, which will require banks to record, at the time of origination, credit losses expected throughout the life of the asset portfolio on loans and held-to-maturity securities, as opposed to the current practice of recording losses when it is probable that a loss event has occurred, may adversely affect Peoples' reported financial condition or results of operations; |
| |
(17) | Peoples' assumptions and estimates used in applying critical accounting policies, which may prove unreliable, inaccurate or not predictive of actual results; |
| |
(18) | the discontinuation of the London Inter-Bank Offered Rate and other reference rates which may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies; |
| |
(19) | adverse changes in the conditions and trends in the financial markets, including political developments, which may adversely affect the fair value of securities within Peoples' investment portfolio, the interest rate sensitivity of Peoples' consolidated balance sheet, and the income generated by Peoples' trust and investment activities; |
| |
(20) | the volatility from quarter to quarter of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors; |
| |
(21) | Peoples' ability to receive dividends from its subsidiaries; |
| |
(22) | Peoples' ability to maintain required capital levels and adequate sources of funding and liquidity; |
| |
(23) | the impact of larger or similar-sized financial institutions encountering problems, which may adversely affect the banking industry and/or Peoples' business generation and retention, funding and liquidity; |
| |
(24) | the costs and effects of new federal and state laws, and other regulatory and legal developments, including the outcome of potential regulatory or other governmental inquiries and legal proceedings and results of regulatory examinations; |
| |
(25) | Peoples' ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks, including those of Peoples' third-party vendors and other service providers, which may prove inadequate, and could adversely affect customer confidence in Peoples and/or result in Peoples incurring a financial loss; |
| |
(26) | Peoples' ability to anticipate and respond to technological changes, and Peoples' reliance on, and the potential failure of, a number of third-party vendors to perform as expected, including Peoples' primary core banking system provider, which can impact Peoples' ability to respond to customer needs and meet competitive demands; |
(6)the effects of easing restrictions on participants in the financial services industry;
(7)local, regional, national and international economic conditions (including the impact of potential or imposed tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations, and the relationship of the U.S. and its global trading partners) and the impact these conditions may have on Peoples, its customers and its counterparties, and Peoples' assessment of the impact, which may be different than anticipated;
(8)Peoples may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to Peoples' current shareholders;
(9)changes in prepayment speeds, loan originations, levels of nonperforming assets, delinquent loans, charge-offs, and customer creditworthiness generally, which may be less favorable than expected in light of the COVID-19 pandemic and adversely impact the amount of interest income generated;
(10)Peoples may have more credit risk and higher credit losses to the extent there are loan concentrations by location or industry of borrowers or collateral;
(11)changes in accounting standards, policies, estimates or procedures may adversely affect Peoples' reported financial condition or results of operations;
(12)the impact of estimates and inputs used within models, which may vary materially from actual outcomes, including under the newly-adopted current expected credit loss model (or "CECL model");
(13)the discontinuation of London Interbank Offered Rates and other reference rates which may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies;
(14)adverse changes in the conditions and trends in the financial markets, including the impacts of the COVID-19 pandemic and the related responses by governmental and nongovernmental authorities to the pandemic, which may adversely affect the fair value of securities within Peoples' investment portfolio, the interest rate sensitivity of Peoples' consolidated balance sheet, and the income generated by Peoples' trust and investment activities;
(15)the volatility from quarter to quarter of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors;
(16)Peoples' ability to receive dividends from its subsidiaries;
(17)Peoples' ability to maintain required capital levels and adequate sources of funding and liquidity;
(18)the impact of larger or similar-sized financial institutions encountering problems, which may adversely affect the banking industry and/or Peoples' business generation and retention, funding and liquidity;
(19)Peoples' ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks, including those of Peoples' third-party vendors and other service providers, which may prove inadequate, and could adversely affect customer confidence in Peoples and/or result in Peoples incurring a financial loss;
(20)Peoples' ability to anticipate and respond to technological changes, and Peoples' reliance on, and the potential failure of, a number of third-party vendors to perform as expected, including Peoples' primary core banking system provider, which can impact Peoples' ability to respond to customer needs and meet competitive demands;
(21)operational issues stemming from and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems on which Peoples and its subsidiaries are highly dependent;
(22)changes in consumer spending, borrowing and saving habits, whether due to changes in retail distribution strategies, consumer preferences and behavior, changes in business and economic conditions (including as a result of the COVID-19 pandemic), legislative or regulatory initiatives (including those in response to the COVID-19 pandemic), or other factors, which may be different than anticipated;
(23)the adequacy of Peoples' internal controls and risk management program in the event of changes in strategic, reputational, market, economic, operational, cybersecurity, compliance, legal, asset/liability repricing, liquidity, credit and interest rate risks associated with Peoples' business;
(24)the impact on Peoples' businesses, personnel, facilities, or systems, of losses related to acts of fraud, theft, or violence;
(25)the impact on Peoples' businesses, as well as on the risks described above, of various domestic or international widespread natural or other disasters, pandemics (including COVID-19), cybersecurity attacks, system failures, civil unrest, military or terrorist activities or international conflicts;
| |
(27) | operational issues stemming from and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems on which Peoples and its subsidiaries are highly dependent; |
| |
(28) | changes in consumer spending, borrowing and saving habits, whether due to tax reform legislation, changes in retail distribution strategies, consumer preferences and behavior, changes in business and economic conditions, legislative or regulatory initiatives, or other factors, which may be different than anticipated; |
| |
(29) | the adequacy of Peoples' internal controls and risk management program in the event of changes in strategic, reputational, market, economic, operational, cyber security, compliance, legal, asset/liability repricing, liquidity, credit and interest rate risks associated with Peoples' business; |
| |
(30) | the impact on Peoples' businesses, personnel, facilities, or systems, related to fraud, theft, or violence; |
| |
(31) | the impact on Peoples' businesses, as well as on the risks described above, of various domestic or international widespread natural or other disasters, pandemics, cyber attacks, system failures, civil unrest, military or terrorist activities or international conflicts; |
| |
(32) | the impact on Peoples' businesses and operating results of any costs associated with obtaining rights in intellectual property claimed by others and adequately protecting Peoples' intellectual property; |
| |
(33) | Peoples' continued ability to grow deposits; and |
| |
(34) | other risk factors relating to the banking industry or Peoples as detailed from time to time in Peoples’ reports filed with the Securities and Exchange Commission (the "SEC"), including those risk factors included in the disclosures under the heading "ITEM 1A. RISK FACTORS" of Peoples’ Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and under the heading "ITEM 1A. RISK FACTORS" in Part II of this Form 10-Q. |
(26)the impact on Peoples' businesses and operating results of any costs associated with obtaining rights in intellectual property claimed by others and adequately protecting Peoples' intellectual property;
(27)risks and uncertainties associated with Peoples' entry into new geographic markets and risks resulting from Peoples' inexperience in these new geographic markets;
(28)Peoples' ability to identify, acquire, or integrate suitable strategic acquisitions, which may be unsuccessful, or may be more difficult, time-consuming or costly than expected;
(29)Peoples' continued ability to grow deposits; and
(30)other risk factors relating to the banking industry or Peoples as detailed from time to time in Peoples’ reports filed with the Securities and Exchange Commission (the "SEC"), including those risk factors included in the disclosures under the heading "ITEM 1A. RISK FACTORS" of Peoples’ Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and under the heading "ITEM 1A. RISK FACTORS" in Part II of this Form 10-Q.
All forward-looking statements speak only as of the filing date of this Form 10-Q and are expressly qualified in their entirety by the cautionary statements. Although management believes the expectations in these forward-looking statements are based on reasonable assumptions within the bounds of management’s knowledge of Peoples’ business and operations, it is possible that actual results may differ materially from these projections. Additionally, Peoples undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the filing date of this Form 10-Q or to reflect the occurrence of unanticipated events except as may be required by applicable legal requirements. Copies of documents filed with the SEC are available free of charge at the SEC’s website at www.sec.gov and/or from Peoples' website – www.peoplesbancorp.com under the “Investor Relations” section.
This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements, and Notes thereto, contained in Peoples’ 20182019 Form 10-K, as well as the Unaudited Consolidated Financial Statements, Notes to the Unaudited Consolidated Financial Statements, ratios, statistics and discussions contained elsewhere in this Form 10-Q.
Business Overview
The following discussion and analysis of Peoples’ Unaudited Consolidated Financial Statements is presented to provide insight into management’s assessment of the financial condition and results of operations.
Peoples offers diversified financial products and services through 8988 locations, including 7977 full-service bank branches, and 8685 Automated Teller Machines ("ATMs") in northeastern, central, southwestern and southeastern Ohio, central and eastern Kentucky, and west central West Virginia and central and eastern Kentucky through its financial service units – Peoples Bank and Peoples Insurance Agency, LLC ("Peoples Insurance"), a subsidiary of Peoples Bank. Peoples Bank is subject to regulation and examination primarily by the Ohio Division of Financial Institutions (the "ODFI"), the Federal Reserve Bank ("FRB") of Cleveland and the Federal Deposit Insurance Corporation (the "FDIC"). Peoples Bank is must also follow the regulations promulgated by the Consumer Financial Protection Bureau (the "CFPB") which regulates consumer financial products and services and certain financial services providers. Peoples Insurance is subject to regulation by the Ohio Department of Insurance and the state insurance regulatory agencies of those states in which Peoples Insurance may do business.
Peoples’ products and services include traditional banking products, such as deposit accounts, lending products and trust services. Peoples provides services through traditional offices, ATMs, mobile banking and telephone and internet-based banking. Peoples also offers a complete array of insurance products and makes available custom-tailored fiduciary, employee benefit plan and asset management services. Brokerage services are offered by Peoples exclusively through an unaffiliated registered broker-dealer located at Peoples Bank's offices.
Critical Accounting Policies
The accounting and reporting policies of Peoples conform to US GAAP and to general practices within the financial services industry. The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Management has identified the accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to understanding Peoples’ Unaudited Consolidated Financial Statements, and Management’s Discussion and Analysis at September 30, 2019,March 31, 2020, which were unchanged fromhave been updated in "Note 1 Summary of Significant Accounting Policies" in this Form 10-Q, and should be read in conjunction with the policies disclosed in Peoples’ 20182019 Form 10-K.
Summary of Recent Transactions and Events
The following is a summary of recent transactions and events that have impacted or are expected to impact Peoples’ results of operations or financial condition:
| |
◦ | During the third quarter of 2019, Peoples repurchased 14,175 of its common shares through its share repurchase program for a total of $431,000. |
| |
◦ | On August 22, 2019, Peoples Risk Management, Inc., a wholly-owned subsidiary of Peoples, was formed. Peoples Risk Management, Inc. is a Nevada-based captive insurance company which insures against certain risks unique to the operations of Peoples and for which insurance may not be currently available or economically feasible. Peoples Risk Management, Inc. pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among all participants. Peoples Risk Management, Inc. is subject to the regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. |
| |
◦ | During the third quarter of 2019, Peoples incurred $189,000 of acquisition-related costs, compared to $7.0 million in the second quarter of 2019, and $674,000 in the third quarter of 2018. During the first nine months of 2019, Peoples incurred $7.5 million of acquisition-related costs, compared to $7.1 million during the first nine months of 2018. The acquisition-related costs in 2019 and 2018 were primarily related to the First Prestonsburg and ASB acquisitions, respectively, and were primarily related to fees associated with early termination of contracts, severance costs and write-offs associated with assets acquired. |
| |
◦ | During the third quarter of 2019, Peoples entered into $10.0 million of interest rate swaps, with a notional value in the aggregate of $10.0 million, which became effective immediately and will mature in 2029, with an interest rate of 1.44%. During the second quarter of 2019, Peoples entered into $30.0
◦On April 20, 2020, Peoples signed an asset purchase agreement under which Peoples Bank will acquire the operations and assets of Triumph Premium Finance (“TPF”), a division of TBK Bank, SSB. Based in Kansas City, Missouri, TPF provides premium finance services for customers to purchase property and casualty insurance products through its network of independent insurance agency customers nationwide. Closing is expected to occur during the third quarter of 2020 and is subject to regulatory approval and other conditions set forth in the asset purchase agreement. ◦On April 2, 2020, Peoples entered into a First Amendment to Loan Agreement to extend the maturity of the Loan Agreement (the “U.S. Bank Loan Agreement”) with U.S. Bank National Association, entered into on April 3, 2019. The First Amendment to Loan Agreement extends the maturity from April 2, 2020 to April 1, 2021. The U.S. Bank Loan Agreement provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $20.0 million that may be used: (i) for working capital purposes; (ii) to finance dividends or other distributions (other than stock dividends and stock splits) on or in respect of Peoples’ capital stock and redemptions, repurchases or other acquisitions of any of Peoples’ capital stock permitted under the U.S. Bank Loan Agreement; and (iii) to finance acquisitions permitted under the U.S. Bank Loan Agreement. ◦In March 2020, the CARES Act created a new loan guarantee program called the Paycheck Protection Program ("PPP") targeted to provide small businesses with support to cover payroll and certain other expenses. Loans made under the PPP are fully guaranteed by the Small Business Administration ("SBA"). Peoples is a PPP participating lender. Additional information can be found later in this discussion under the caption “FINANCIAL CONDITION - COVID-19 Loan Impacts." ◦Peoples has also been selected to partner with JobsOhio, a private nonprofit organization charged with economic development. Additional information can be found later in this discussion under the caption “FINANCIAL CONDITION - COVID-19 Loan Impacts." ◦Peoples is also providing relief solutions to consumer and commercial borrowers during the COVID-19 pandemic. Additional information can be found later in this discussion under the caption “FINANCIAL CONDITION - COVID-19 Loan Impacts." ◦During the first quarter of 2020, Peoples recorded a provision for credit losses of $17.0 million, compared to a provision for loan losses of $1.1 million for the linked quarter and a recovery of loan losses of $263,000 for the first quarter of 2019. The increase in the provision for credit losses compared to the fourth and first quarters of 2019 was primarily due to the recent developments related to COVID-19 and the resulting impact on the economic assumptions used in the CECL model. The first quarters of 2020 and 2019 included recoveries of $1.2 million and $1.8 million, respectively, recorded on a previously charged-off commercial loan. ◦Peoples incurred $368,000 in pension settlement costs during the first quarter of 2020 due to the aggregate amount of lump-sum distributions to participants in Peoples' defined benefit pension plan exceeding the threshold for recognizing such charges during the period. There were no such costs during the linked quarter or the first quarter of 2019. ◦On February 27, 2020, Peoples' Board of Directors authorized a share repurchase program authorizing Peoples to purchase up to an aggregate of $40 million of its outstanding common shares. This program replaced the share repurchase program authorizing Peoples to purchase up to an aggregate of $20 million of its outstanding common shares, which Peoples' Board of Directors had authorized on November 3, 2015 and which was terminated on February 27, 2020. During the first quarter of 2020, Peoples repurchased 436,137 of its common shares through its share repurchase programs that existed at that time for a total of $10.2 million. During the first quarter of 2019, Peoples repurchased 26,427 of its common shares through its share repurchase program that existed at that time for a total of $805,000. ◦During the first quarter of 2020, Peoples recognized an additional $109,000 in bank owned life insurance ("BOLI") income related to tax-free death benefits from the fourth quarter of 2019 that exceeded the cash surrender value of the insurance policies, compared to $482,000 during the fourth quarter of 2019, and none in the first quarter of 2019. ◦During the first quarter of 2020, Peoples recognized a credit to its FDIC insurance premiums related to its quarterly assessment as a result of the deposit insurance fund reaching its target threshold for smaller banks to recognize a credit to their insurance expense. Peoples also recognized credits during the third and fourth quarters of 2019. ◦During the first quarter of 2020, Peoples incurred $10,000 of acquisition-related costs, compared to $65,000 in the fourth quarter of 2019, and $253,000 in the first quarter of 2019. The acquisition-related costs in 2020 and 2019 were primarily related to the First Prestonsburg acquisition. ◦During the first quarter of 2020, Peoples closed one full-service bank branch located in West Virginia when the lease for the location expired in January 2020. Additionally, Peoples provided notification during 2020 that it will be closing one additional full-service bank branch located in Kentucky in July 2020, which is leased. During the fourth quarter of 2019, Peoples closed one full-service bank branch located in Kentucky. During the second quarter of 2019, Peoples closed one full-service bank branch located in West Virginia. During the first quarter of 2019, Peoples closed one full-service bank branch located in West Virginia and one insurance office located in Ohio. The locations closed during 2019 were closed
when the respective leases for those Kentucky, West Virginia and Ohio locations expired. Most employees at the closed locations filled open positions at other branches or offices. ◦On January 1, 2020, Peoples adopted ASU 2016-13 and adopted the current expected credit loss("CECL") model, which resulted in the establishment of a $7,000 allowance for credit losses for held-to-maturity investment securities; an increase in loan balances of $2.6 million to establish the allowance for credit losses for purchased credit deteriorated loans; an increase to the allowance for credit losses (which was the "allowance for loan losses" prior to January 1, 2020) of $5.8 million; the addition of a $1.5 million unfunded commitment liability included in the accrued expenses and other liabilities line of the Unaudited Consolidated Balance Sheets; and a reduction to retained earnings of $3.7 million, net of statutory federal corporate income tax. ◦On January 1, 2020, Peoples Insurance acquired a property and casualty-focused independent insurance agency for a purchase price amount equal to $866,000. ◦During the first quarter of 2019, Peoples sold its restricted Class B Visa stock, which had been held at a carrying cost and fair value of zero due to the litigation liability associated with the stock, resulting in a gain of $787,000 recorded in other non-interest income. ◦During the fourth quarter of 2019, Peoples entered into one interest rate swap with a notional value of $10.0 million, which will mature in 2024, with an interest rate of 1.59%. During the third quarter of 2019, Peoples entered into one interest rate swap with a notional value of $10.0 million, which will mature in 2029, with an interest rate of 1.44%. During the second quarter of 2019, Peoples entered into three interest rate swaps with a notional value in the aggregate of $30.0 million, which became effective immediately and will mature between 2023 and 2026, with interest rates ranging from 1.89% to 1.91%. For additional information regarding Peoples' interest rate swaps, refer to "Note 9 Derivative Financial Instruments" of the Notes to the Unaudited Consolidated Financial Statements. |
| |
◦ | During the third quarter of 2019, Peoples reported that it will be closing one full-service bank branch located in Kentucky and one full-service bank branch located in West Virginia. During the second quarter of 2019, Peoples closed one full-service bank branch located in West Virginia when the lease expired in June 2019. During the first quarter of 2019, Peoples closed one insurance office located in Ohio when the lease for the location expired at the end of January 2019 and one full-service bank branch located in West Virginia when the lease for the location expired in March 2019. Most employees at the closed locations were relocated to other branches or offices. |
| |
◦ | On April 22, 2019, Peoples Bank signed an agreement to open a Federal Funds liquidity facility with Canadian Imperial Bank of Commerce, which either party may cancel at any time. The $20.0 million line increases Peoples Bank's contingent liquidity funding and will serve to help manage Peoples Bank's daily liquidity needs. As of September 30, 2019, Peoples Bank had not borrowed under the agreement. |
| |
◦ | On April 12, 2019, Peoples completed the previously-announced merger with First Prestonsburg. First Prestonsburg merged into Peoples and First Prestonsburg's wholly-owned subsidiary, First Commonwealth Bank of Prestonsburg, Inc., which operated nine full-service bank branches in central and eastern Kentucky, merged into Peoples Bank. First Prestonsburg shareholders received total consideration of $43.7 million in the merger, of which $11.3 million was in the form of a special cash dividend paid by First Prestonsburg to shareholders of First Prestonsburg prior to the merger with the remainder being paid in the form of an aggregate of 1,005,478 Peoples common shares by Peoples. The merger added $129.4 million of total loans and $257.2 million of total deposits at the acquisition date, after preliminary fair value adjustments. Peoples also recorded $4.2 million of other intangible assets and $15.2 million of goodwill. These amounts reflect information available through the date of the filing of this Quarterly |
Report on Form 10-Q. Refer to "Note 12 Acquisitions" of the Notes to the Unaudited Consolidated Financial StatementsStatements.
◦On August 22, 2019, Peoples Risk Management, Inc., a wholly-owned subsidiary of Peoples, was formed. Peoples Risk Management, Inc. is a Nevada-chartered captive insurance company which insures against certain risks unique to the operations of Peoples and for additional information.
| |
◦ | On April 3, 2019, Peoples entered into a Loan Agreement (the “U.S. Bank Loan Agreement”) with U.S. Bank National Association. The U.S. Bank Loan Agreement has a one-year term and provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $20.0 million that may be used: (i) for working capital purposes; (ii) to finance dividends or other distributions (other than stock dividends and stock splits) on or in respect of Peoples’ capital stock and redemptions, repurchases or other acquisitions of any of Peoples’ capital stock permitted under the U.S. Bank Loan Agreement and (iii) to finance acquisitions permitted under the U.S. Bank Loan Agreement. |
| |
◦ | Effective April 3, 2019, Peoples terminated the Credit Agreement, dated as of March 4, 2016 between Peoples, as Borrower, and Raymond James Bank, N.A., as Lender (the "RJB Credit Agreement"), which provided for a revolving line of credit in the maximum aggregate principal amount of $15.0 million. |
| |
◦ | During the first quarter of 2019, Peoples recognized a $1.8 million recovery on a previously charged-off commercial loan. |
| |
◦ | During the first quarter of 2019, Peoples sold its restricted Class B Visa stock, which had been held at a carrying cost and fair value of zero due to the litigation liability associated with the stock, resulting in a gain of $787,000 recorded in other non-interest income. |
| |
◦ | Multiple items impacted Peoples' income tax expense during 2018, primarily as a result of the Tax Cuts and Jobs Act, which lowered the statutory federal corporate income tax rate to 21% as of January 1, 2018, from a previous rate of 35%. There were no similar items in 2019. |
| |
▪ | Beginning on January 1, 2018, Peoples began recognizing income tax expense at the 21% statutory federal corporate income tax rate. |
| |
▪ | During the fourth quarter of 2018, Peoples finalized the remeasurement of its net deferred tax assets and liabilities at the new statutory federal corporate income tax rate of 21%, which resulted in a reduction to income tax expense of $705,000 in 2018. The final adjustment was mainly due to Peoples' contribution of $3.2 million to Peoples' defined benefit pension plan during 2018. |
| |
▪ | During 2018, Peoples released a valuation allowance, which reduced income tax expense by $0.8 million. The valuation allowance was related to a historical tax credit that Peoples had invested in during 2015. Peoples sold $6.7 million of equity investment securities in the second quarter of 2018, which resulted in a capital gain for tax purposes. This capital gain was large enough to offset an anticipated future capital loss, which is expected to be recognized due to the structure of the historical tax credit investment, resulting in the release of the valuation allowance. |
| |
◦ | Peoples incurred $176,000 and $91,000 in pension settlement costs during the third and fourth quarters of 2018, respectively, due to the aggregate amount of lump-sum distributions to participants in Peoples' defined benefit pension plan exceeding the threshold for recognizing such charges during the period. There were no such costs during the first, second or third quarters of 2019 or the first or second quarters of 2018. |
| |
◦ | On July 31, 2018, Peoples entered into $50.0 million of interest rate swaps, which became effective immediately and will mature between 2021 and 2028, with interest rates ranging from 2.92% to 3.00%. Additionally, the three interest rate swaps acquired with the ASB acquisition matured in July of 2018. These swaps locked in funding rates for $40.0 million, in notional value, in FHLB advances that matured in 2018, which had interest rates ranging from 3.57% to 3.92%. For additional information regarding Peoples' interest rate swaps, refer to "Note 9 Derivative Financial Instruments" of the Notes to the Unaudited Consolidated Financial Statements. |
| |
◦ | At the close of business on April 13, 2018, Peoples completed the merger with ASB. ASB merged into Peoples, and ASB's wholly-owned subsidiary, American Savings Bank, fsb, which operated seven full-service bank branches and two loan production offices in southern Ohio and eastern Kentucky, merged into Peoples Bank. Under the terms of the merger agreement, Peoples paid total consideration of $41.5 million. The merger added $239.2 million of total loans and loans held for sale in the aggregate, and $198.6 million of total deposits at the acquisition date, after acquisition accounting adjustments. Peoples also recorded $2.6 million of other intangible assets and $18.1 million of goodwill. |
| |
◦ | On January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of $7.8 million of equity investment securities from available-for-sale investment securities to other investment securities and the |
which insurance may not be currently available or economically feasible. Peoples Risk Management, Inc. pools resources with several other similar insurance company subsidiaries of financial institutions to help minimize the risk allocable to each participating insurer.
◦At the close of business on April 12, 2019, Peoples completed the merger with First Prestonsburg. First Prestonsburg merged into Peoples and First Prestonsburg's wholly-owned subsidiary, The First Commonwealth Bank of Prestonsburg, Inc., which operated nine full-service bank branches in central and eastern Kentucky, merged into Peoples Bank. First Prestonsburg shareholders received total merger consideration of $43.7 million, of which $11.3 million was in the form of a special cash dividend paid by First Prestonsburg to its shareholders prior to the merger with the remainder being paid in the form of an aggregate of 1,005,478 Peoples common shares by Peoples. The merger added $129.4 million of total loans and $257.2 million of total deposits at the acquisition date, after preliminary fair value adjustments. Peoples also recorded $4.2 million of other intangible assets and $15.2 million of goodwill.
48
reclassificationthe COVID-19, the Federal Reserve first lowered the benchmark Federal Funds Target Rate by 50 basis points on March 3, then lowered the target rate another 100 basis points at the next FOMC meeting on March 15. The Federal Funds Target Rate range was 0% - 0.25% as of $5.0 millionMarch 31, 2020 and is not likely to drop below this range. However, the Federal Reserve does have other tools available that it can employ and has expressed an intention to do so in net unrealized gains on equity investment securities from accumulated other comprehensive lossorder to retained earnings.maintain a targeted level of liquidity.
| |
◦ | The Federal Reserve Board began raising interest rates in December 2015 when the Federal Funds effective target range was 0.00% to 0.25%. The last increase was in December 2018, resulting in a target range of 2.25% to 2.50%. The Federal Reserve Board lowered interest rates once in July 2019 and again in September 2019, resulting in a Federal Funds Target Rate of 1.75% to 2.00% by the end of the third quarter. The Federal Funds futures market suggests the Federal Reserve Board will cut interest rates again before the end of 2019. The impact of trade tariffs, coupled with recent weakness in the manufacturing sector, have given rise to concerns of a slowdown of the US economy, which could potentially lead to additional interest rate cuts in 2020. |
The impact of these transactions and events, where material, is discussed in the applicable sections of this Management’s Discussion and Analysis of Results of Operations and Financial Condition.
EXECUTIVE SUMMARY
Peoples recorded a net loss of $0.8 million for the first quarter of 2020, or a loss of $0.04 per diluted common share, compared to net income of $14.9 million, for the third quarter of 2019, representing earnings per diluted common share ofor $0.72 compared to $9.6 million, or $0.46 per diluted common share, for the secondfourth quarter of 2019, and $12.7net income of $14.4 million, or $0.65$0.73 per diluted share, for the thirdfirst quarter of 2018. Acquisition-related costs2019. Non-core items negatively impacted earningsloss per diluted common share by $0.01 per share during$0.02 for the thirdfirst quarter of 2019, and $0.28 per share during the second quarter of 2019. During the third quarter of 2018, earnings2020. Earnings per diluted common share were negatively impacted by $0.03 per share in acquisition-related costs and $0.01 per share for pension settlement charges.
During the first nine months of 2019, net income was $38.8 million, or $1.91 per diluted share, compared to $32.4 million, or $1.69 per diluted common share, for the same period in 2018. The increased earnings were primarily due to increases in net interest income, deposit account service charges, and electronic banking income, which were partially offset by increased salaries and employee benefit costs, and other non-interest expenses, which were impacted by the First Prestonsburg acquisition in 2019 and the ASB acquisition in 2018. Acquisition-related costs negatively impacted earnings per diluted common share by $0.29 during the first nine monthsfourth quarter of 2019, and $0.28 per share during the first nine months of 2018. Earnings per diluted common sharepositively impacted by $0.09 for the first nine monthsquarter of 2018 were also negatively impacted2019, by $0.01 per sharenon-core items. The net loss in the first quarter of 2020, was primarily a result of the provision for pension settlement charges,credit losses recorded during the quarter, which was offset by an additional $0.04 per share provideddriven by the release of a tax valuation allowance.economic developments and uncertainties related to COVID-19. The provision for credit losses was calculated under the CECL accounting methodology in accordance with ASU 2016-13, which is sensitive to future economic projections. Additional information regarding the provision for credit losses can be found later in this discussion under the caption “RESULTS OF OPERATIONS - Provision for (Recovery of) Credit Losses.”
Net interest income was $35.8$34.6 million for the thirdfirst quarter of 2019,2020, down 1% compared to $36.0$35.1 million for the secondfourth quarter of 2019, and an increase of 7%2% compared to $33.3$33.9 million for the thirdfirst quarter of 2018.2019. Net interest margin was 3.66%3.51% for the third first
quarter of 2019,2020, compared to 3.77%3.56% for the secondfourth quarter of 2019, and 3.68%3.80% for the thirdfirst quarter of 2018.2019. Net interest income was impacted by one less calendar day in the first quarter of 2020 compared to the linked quarter. The declinedeclines in net interest income and net interest margin compared to the linked quarter was drivenwere both impacted by the declining interest rate environment during the first quarter of 2020, which resulted in lower yields on loans combined with slightly higherand investment security portfolios, partially offset by lower deposit costs. The increaseCompared to the first quarter of 2019, the improvement in net interest income comparedwas primarily due to the third quarterimpact of 2018, which was impacted by the acquired First Prestonsburg loans and deposits, while the decline in the net interest margin was driven by higherlower yields on loans, combined withinvestment securities, given accelerated premium amortization due to higher loan balances, partially offset by higher interest expense on deposits.prepayment speeds.
Accretion income, net of amortization expense, from acquisitions was $1.2$1.1 million for the third and second quartersfirst quarter of 2020, $1.8 million for the fourth quarter of 2019, and $612,000$722,000 for the thirdfirst quarter of 2018,2019, which added 1211 basis points, 1318 basis points, and 78 basis points, respectively, to net interest margin. The increase in netNet accretion income compared toin the thirdfourth quarter of 20182019 was due toboosted by an acquired commercial loan that paid off during the First Prestonsburg acquisition.
Forquarter, which positively impacted the first nine months of 2019, net interest income was $105.7 million, and net interest margin was 3.74%, compared to $95.5 million and 3.69%, respectively, for the same period in 2018. The increases were driven by higher interest income on loans due to a combination of loan growth, which was primarily the result of the First Prestonsburg and ASB acquisitions, and higher yields from interest rate increases. Interest income on loans outpaced interest expense from deposits, which increased primarily due to higher rates paid on deposits, combined with additional interest expense related to the recent acquisitions. The first nine months of 2018 benefited from proceeds of $588,000 received on an investment security that had been previously written down due to other-than-temporary impairment ("OTTI"), which added 26 basis points to net interest margin. Peoples recorded no similar proceeds during the first nine months of 2019.
Accretion income, net of amortization expense, from acquisitions was $3.1 million for the first nine months of 2019 and $1.7 million for the first nine months of 2018, which added 11 basis points and 7 basis points, respectively, to net interest margin. The growth in net accretion income compared to the first nine months of 2018 was largely due to the First Prestonsburg acquisition and, to a lesser extent, the ASB acquisition.
points.
During the thirdfirst quarter of 2019,2020, Peoples recorded a provision for credit losses of $17.0 million, compared to a provision for loan losses of $1.0$1.1 million compared to $626,000 for the secondfourth quarter of 2019 and $1.3 milliona recovery of loan losses of $263,000 for the thirdfirst quarter of 2018.2019. Net charge-offs for the thirdfirst quarter of 20192020 were $777,000,$498,000, or 0.11%0.07% of average total loans annualized, compared to $208,000,net charge-offs of $1.2 million, or 0.03%0.16% of average total loans annualized, for the linked quarter and $687,000,net recoveries of $1.0 million, or 0.10%0.15% of average total loans annualized, for the thirdfirst quarter of 2018.2019. The provision for loancredit losses during the current quarter was driven by higher net charge-offsprimarily due to the economic downturn related to COVID-19 and originated loan growth. The provision for loanthe resulting impact on the economic assumptions used in estimating the allowance of credit losses duringunder the first nine months of 2019 was $1.4 million, compared to $4.5 million for the first nine months of 2018. Net recoveries for the first nine months of 2019 were $22,000, compared to net charge-offs of $3.4 million, or 0.18% of average total loans, for the first nine months of 2018. The first nine months of 2019 included a $1.8 million recovery recorded on a previously charged-off commercial loan. The first nine months of 2018 included a charge-off of $827,000 on an acquired commercial loan relationship.CECL model in accordance with ASU 2016-13.
For the thirdfirst quarter of 2019,2020, total non-interest income was up $1.1decreased $1.4 million, or 7%8%, compared to the secondfourth quarter of 2019 and was up $2.0 million,$308,000, or 14%2%, fromcompared to the thirdfirst quarter of 2018.2019. Compared to the secondfourth quarter of 2019, electronic banking income was up $310,000, or 9%, income from deposit account service charges increased $256,000, or 9%, commercial loan swap fee income was up $256,000, or 50%, and mortgage banking income increased $204,000, or 20%.were negatively impacted by traditional seasonality factors combined with declining customer activity as the quarter progressed related to the COVID-19 pandemic. Additionally, mortgage banking income during the first quarter of 2020 included a $182,000 write-down of mortgage servicing rights. In the first quarter of 2020, commercial loan swap fees were down considerably from the linked quarter's record high level. These increasesdeclines were partially offset by an increase in insurance income compared to the linked quarter, mainly due to annual performance-based insurance commissions that are primarily received in the first quarter each year and are a declinecore component of $196,000, or 6%, in trust and investment income, and a decline of $100,000, or 3%, in insurance income. The increase in total non-interest income from the thirdfirst quarter of 20182019 was driven by increases in all non-interest income categories, with the exception of bank owned life insurance and insurance income, which had slight decreases.
For the first nine months of 2019, total non-interest income grew 11%, as most categories of non-interest income increased, including income from deposit account service charges, which was up $1.4 million, or 19%, and electronic banking income, which increased $1.4 million, or 16%. Commercial loan swap fee income more than doubled and mortgage banking income, increased $612,000, or 26%. Realized and unrealized gains on equitytrust and investment securities increased $620,000 compared toincome, which were positively impacted by the First Prestonsburg acquisition. These increases were partially offset by a decline in insurance income and the impact of additional income recorded during the first nine monthsquarter of 2018, driven by2019 of $787,000 of income related to the sale of restricted Class B Visa stock duringstock.
Total non-interest expense increased $804,000, or 2%, for the first quarter of 2019.
Total non-interest expense decreased $5.9 million, or 15%, for the third quarter of 20192020 compared to the secondfourth quarter of 2019 and grew $2.2$2.5 million, or 7%8%, compared to the thirdfirst quarter of 2018.2019. The declinefirst quarter of 2020 included pension settlement charges of $368,000 and expenses related to COVID-19 totaling $140,000. The increase compared to the linked quarter was primarily due to acquisition-relateddriven by a $1.0 million, or 5%, increase in salaries and employee benefit costs, partially offset by declines in professional fees of $238,000, or 12%, and amortization of intangibles of $159,000, or 18%. Salaries and employee benefit costs were driven by additional expenses which totaled $199,000 foroccur primarily in the thirdfirst quarter of 2019, comparedeach year related to $6.8 million for the second quarter of 2019.stock-based compensation and contributions to employee health benefit accounts. The growth in total non-interest expense compared to the thirdfirst quarter of 20182019 was led by higher salaries and employee benefit costs, professional fees, foreclosed real estate and other loan expenses, and electronic banking expenses, partially offset by a decline in FDIC insurance expense. Base salaries, stock-based compensation, and medical insurance were the main contributors to the increase in salariespremiums. Salaries and employee benefit costs compared to the third quarter of 2018. Base salaries were impacted by the additional employees from the First Prestonsburg acquisition, annual merit increases, which includedand the continued movement towards a $15 per hour minimum wage throughout the company, and the First Prestonsburg and ASB acquisitions. The $15 per hour minimum wage began being phased in during 2018 and will be largely implemented by January 1, 2020. The increase in stock-based compensation was driven by higher expense related to stock grants made to retirement eligible grantees combined with Peoples' improved performance during recent years. The increase in medical insurance was driven by higher medical claims.
During the first nine months of 2019, total non-interest expense increased 9% compared to the same period in 2018. This increase was led by higher salaries and employee benefitorganization. These costs were partially offset by a decline in professional fees. Salaries and employee benefit costs were up primarilymedical insurance expenses due to higher base salaries, medical insurance and stock-based compensation. Base salaries were impacted by merit increases, which included the continued movement towards a $15 per hour minimum wage throughout the company, and the First Prestonsburg and ASB acquisitions. The increase in medical insurance was driven by higher medical claims. Stock-based compensation increased as a result of higher expense related to stock grants made to retirement eligible grantees combined with Peoples' improved performance during recent years. Professional fees declinedlower claims compared to the first nine monthsquarter of 2018, mostly due to consulting work performed during the first nine months of 2018 which was not repeated in 2019. Net occupancy and equipment expenses also increased compared to the first nine months of 2018, primarily due to the added facilities obtained in the acquisitions. Peoples also made investments in technology, which resulted in increased electronic banking, and data processing and software expenses.
Peoples' efficiency ratio, calculated as total non-interest expense less amortization of other intangible assets divided by fully tax-equivalent ("FTE") net interest income, plus total non-interest income, excluding all gains and losses, for the thirdfirst quarter of 20192020 was 61.1%66.6%, compared to 73.2%61.9% for the secondfourth quarter of 2019 and 62.6%62.7% for the thirdfirst quarter of 2018.2019. The increase in the efficiency ratio improved compared to the linked quarter drivenwas primarily due to the decline in revenue, which was negatively impacted by lower acquisition-related expenses.the developments related to COVID-19 and its impact on the interest rate environment, combined with the increase in total non-interest expense. The efficiency ratio, when adjusted for non-core items, was 60.7%65.5% for the thirdfirst quarter of 2019,2020, compared to 60.2%61.3% for the secondfourth quarter of 2019 and 60.8% for the third quarter of 2018. During the first nine months of 2019, the efficiency ratio was 65.7%, compared to 66.5% for the same period in 2018. The efficiency ratio, when adjusted for non-core items, during the first nine months of
2019 improved to 61.0%, compared to 61.4%62.2% for the first nine monthsquarter of 2018, driven by increases in net interest2019.
Peoples recorded an income and non-interest income.
Incometax benefit of $156,000 for the first quarter of 2020, compared to income tax expense was $3.3 million for the third quarter of 2019, compared to $2.2$2.8 million for the linked quarter and $2.8$3.4 million for the thirdfirst quarter of 2018.2019. The increase in income tax expense compared tobenefit during the linked quarter and thirdfirst quarter of 20182020 was primarily due to higher pre-tax income. Fordriven by a pretax net loss, which was the first nine monthsresult of 2019, Peoplesa $17.0 million provision for credit losses recorded income tax expense of $8.9 million, compared to $6.2 million for the same period in the prior year. The year-over-year increase in income tax expense was primarily due to higher pre-tax income. The first nine months of 2019 included a tax benefit of $195,000 recorded for the vesting of restricted stock during the period. The first nine months of 2018 also included an $805,000 valuation allowance release, as well as a tax benefit of $314,000 recorded for the vesting of restricted stock during the period.quarter.
At September 30, 2019,March 31, 2020, total assets were $4.40$4.47 billion, compared to $3.99$4.35 billion at December 31, 2018.2019. The 10%3% increase compared to December 31, 20182019 was primarily due to the First Prestonsburg acquisition, which added $290.9driven by an increase in cash and cash equivalents of $48.5 million, loan growth of assets, including $129.4$37.9 million, coupled with an increase in total loans and $139.7 million in investment securities after preliminary fair value adjustments.of $35.9 million. The allowance for credit losses increased to $42.8 million, or 1.47% of total loans, compared to $21.6 million and 0.75%, respectively, at December 31, 2019.
Total liabilities were $3.81$3.89 billion at September 30, 2019,March 31, 2020, up $336.3$125.6 million since December 31, 2018.2019. The increase in total liabilities during the first ninethree months of 20192020 was primarily due to an increase in deposits of $401.7$107.0 million, partially offset by a decline in borrowings of $93.5$7.6 million. The growth in deposits compared to December
At March 31, 2018, was mostly due to acquired First Prestonsburg deposit balances, which totaled $214.0 million at September 30, 2019.
At September 30, 2019,2020, total stockholders' equity was $588.5$583.7 million, an increasea decrease of $68.4$10.7 million compared to December 31, 2018.2019. The increasedecrease in total stockholders' equity was mostly due to net incomedriven by a combination of $38.8 million, the $32.4 millionrepurchase of 436,137 common shares issued in connection withfor a total of $10.2 million during the First Prestonsburg acquisition,first quarter of 2020, dividends declared of $7.0 million, a $3.7 million adjustment related to the adoption of the CECL accounting standard, and a net loss of $765,000. These were partially offset by other comprehensive income of $14.0$9.7 million, which was primarily the result of a higher market value related to the available-for-sale investment securities portfolio, partially offset by dividends paida decline in the value of $19.9 million. Additionally, Peoples repurchased 14,175cash flow hedges, both of its common shares under its share repurchase program for a total of $431,000which were driven by overall decreases in market interest rates during the third quarter of 2019.quarter.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the amount by which interest income exceeds interest expense, remains Peoples' largest source of revenue. The amount of net interest income earned by Peoples each quarter is affected by various factors, including changes in market interest rates due to the Federal Reserve Board’s monetary policy, the level and degree of pricing competition for both loans and deposits in Peoples’ markets, and the amount and composition of Peoples' earning assets and interest-bearing liabilities.
Net interest margin, which is calculated by dividing FTE net interest income by average interest-earning assets, serves as an important measurement of the net revenue stream generated by the volume, mix and pricing of interest-earning assets and interest-bearing liabilities. FTE net interest income is calculated by increasing interest income to convert tax-exempt income earned on obligations of states and political subdivisions and tax-exempt loans to the pre-tax equivalent of taxable income using a federal corporate income tax rate of 21%.
The following table details the calculation of FTE net interest income:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | |
| | March 31,
2020 | December 31,
2019 | March 31,
2019 | | | |
| (Dollars in thousands) | | | | | | |
| Net interest income | $ | 34,636 | | $ | 35,121 | | $ | 33,914 | | | | |
| Taxable equivalent adjustments | 272 | | 287 | | 200 | | | | |
| Fully tax-equivalent net interest income | $ | 34,908 | | $ | 35,408 | | $ | 34,114 | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, |
| (Dollars in thousands) | | 2019 | 2018 |
| Net interest income | $ | 35,754 |
| 36,049 |
| $ | 33,324 |
| | $ | 105,717 |
| $ | 95,491 |
|
| Taxable equivalent adjustments | 314 |
| 267 |
| 221 |
| | 781 |
| 670 |
|
| Fully tax-equivalent net interest income | $ | 36,068 |
| $ | 36,316 |
| $ | 33,545 |
| | $ | 106,498 |
| $ | 96,161 |
|
The following tables detail Peoples’ average balance sheets for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | | | | | | | | | |
| | March 31, 2020 | | | | December 31, 2019 | | | | March 31, 2019 | | |
(Dollars in thousands) | Average Balance | Income/ Expense | Yield/Cost | | Average Balance | Income/ Expense | Yield/Cost | | Average Balance | Income/ Expense | Yield/Cost |
| Short-term investments (a) | | $ | 73,798 | | $ | 236 | | 1.29 | % | | $ | 64,790 | | $ | (26) | | (0.16) | % | | $ | 16,247 | | $ | 176 | | 4.39 | % |
| | | | | | | | | | | |
| Investment securities (b)(c)(d): | | | | | | | | | | | | | | | | | | | | | |
| Taxable | | 928,182 | | 5,428 | | 2.34 | % | | 930,469 | | 5,581 | | 2.40 | % | | 780,721 | | 5,847 | | 3.00 | % |
| Nontaxable | | 106,934 | | 829 | | 3.10 | % | | 110,010 | | 854 | | 3.11 | % | | 83,319 | | 680 | | 3.26 | % |
| Total investment securities | | 1,035,116 | | 6,257 | | 2.42 | % | | 1,040,479 | | 6,435 | | 2.47 | % | | 864,040 | | 6,527 | | 3.03 | % |
| Loans (c)(d)(e): | | | | | | | | | | | | | | | | | | | | | |
| Construction | | 97,839 | | 1,251 | | 5.06 | % | | 87,731 | | 1,308 | | 5.83 | % | | 131,683 | | 1,732 | | 5.26 | % |
| Commercial real estate, other | | 837,602 | | 10,057 | | 4.75 | % | | 833,507 | | 11,349 | | 5.33 | % | | 806,181 | | 10,596 | | 5.26 | % |
| Commercial and industrial | | 649,437 | | 7,424 | | 4.52 | % | | 624,939 | | 7,739 | | 4.85 | % | | 578,954 | | 7,681 | | 5.31 | % |
| Residential real estate (f) | | 665,737 | | 8,371 | | 5.03 | % | | 664,742 | | 7,923 | | 4.77 | % | | 603,253 | | 6,927 | | 4.59 | % |
| Home equity lines of credit | | 131,673 | | 1,775 | | 5.42 | % | | 133,534 | | 1,872 | | 5.56 | % | | 131,089 | | 1,860 | | 5.75 | % |
| Consumer, indirect | | 415,986 | | 4,409 | | 4.26 | % | | 420,229 | | 4,555 | | 4.30 | % | | 409,975 | | 4,088 | | 4.04 | % |
| Consumer, direct | | 76,707 | | 1,354 | | 7.10 | % | | 79,285 | | 1,421 | | 7.11 | % | | 73,457 | | 1,189 | | 6.56 | % |
| Total loans | | 2,874,981 | | 34,641 | | 4.80 | % | | 2,843,967 | | 36,167 | | 5.02 | % | | 2,734,592 | | 34,073 | | 5.00 | % |
| Allowance for credit losses (d) | | (27,548) | | | | | (21,600) | | | | | (20,406) | | | |
| Net loans | | 2,847,433 | | 34,641 | | 4.84 | % | | 2,822,367 | | 36,167 | | 5.05 | % | | 2,714,186 | | 34,073 | | 5.04 | % |
| Total earning assets | | 3,956,347 | | 41,134 | | 4.14 | % | | 3,927,636 | | 42,576 | | 4.28 | % | | 3,594,473 | | 40,776 | | 4.55 | % |
| Goodwill and other intangible assets | | 177,984 | | | | | | 178,163 | | | | | | 161,673 | | | | |
| Other assets | | 247,296 | | | | | | 244,615 | | | | | | 229,475 | | | | |
Total assets | $ | 4,381,627 | | | | | | $ | 4,350,414 | | | | | | $ | 3,985,621 | | | |
| Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | |
| Savings accounts | | $ | 522,893 | | $ | 74 | | 0.06 | % | | $ | 523,767 | | $ | 111 | | 0.08 | % | | $ | 472,656 | | $ | 91 | | 0.08 | % |
| Governmental deposit accounts | 328,407 | | 715 | | 0.88 | % | | 317,819 | | 824 | | 1.03 | % | | 297,537 | | 557 | | 0.76 | % |
| Interest-bearing demand accounts | 628,677 | | 248 | | 0.16 | % | | 631,003 | | 254 | | 0.16 | % | | 569,472 | | 247 | | 0.18 | % |
| Money market accounts | | 476,477 | | 673 | | 0.57 | % | | 455,595 | | 773 | | 0.67 | % | | 395,324 | | 531 | | 0.54 | % |
| Retail certificates of deposit | | 488,948 | | 2,059 | | 1.69 | % | | 490,163 | | 2,252 | | 1.82 | % | | 396,977 | | 1,417 | | 1.45 | % |
| Brokered certificates of deposit | | 191,955 | | 860 | | 1.80 | % | | 243,118 | | 1,274 | | 2.08 | % | | 314,163 | | 2,001 | | 2.58 | % |
| Total interest-bearing deposits | 2,637,357 | | 4,629 | | 0.71 | % | | 2,661,465 | | 5,488 | | 0.82 | % | | 2,446,129 | | 4,844 | | 0.80 | % |
| Borrowed funds: | | | | | | | | | | | | | | | | | | | | | |
| Short-term FHLB advances | | 206,283 | | 994 | | 1.94 | % | | 208,638 | | 1,114 | | 2.12 | % | | 198,643 | | 1,115 | | 2.28 | % |
| Repurchase agreements and other | | 47,351 | | 45 | | 0.38 | % | | 48,249 | | 42 | | 0.35 | % | | 46,111 | | 58 | | 0.50 | % |
| Total short-term borrowings | | 253,634 | | 1,039 | | 1.65 | % | | 256,887 | | 1,156 | | 1.79 | % | | 244,754 | | 1,173 | | 1.94 | % |
| Long-term FHLB advances | | 101,804 | | 447 | | 1.77 | % | | 75,936 | | 405 | | 2.12 | % | | 100,930 | | 508 | | 2.04 | % |
| | | | | | | | | | | |
| Other borrowings | | 7,471 | | 111 | | 5.94 | % | | 7,431 | | 119 | | 6.41 | % | | 7,304 | | 137 | | 7.50 | % |
| Total long-term borrowings | | 109,275 | | 558 | | 2.05 | % | | 83,367 | | 524 | | 2.50 | % | | 108,234 | | 645 | | 2.41 | % |
| Total borrowed funds | | 362,909 | | 1,597 | | 1.77 | % | | 340,254 | | 1,680 | | 1.96 | % | | 352,988 | | 1,818 | | 2.09 | % |
| Total interest-bearing liabilities | 3,000,266 | | 6,226 | | 0.83 | % | | 3,001,719 | | 7,168 | | 0.95 | % | | 2,799,117 | | 6,662 | | 0.96 | % |
| Non-interest-bearing deposits | | 708,512 | | �� | | | | | 685,147 | | | | | | | 613,924 | | | | |
| Other liabilities | | 76,603 | | | | | | | 72,436 | | | | | | | 48,384 | | | | | |
| Total liabilities | | 3,785,381 | | | | | | | 3,759,302 | | | | | | | 3,461,425 | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Stockholders’ equity | | 596,246 | | | | | | | 591,112 | | | | | | | 524,196 | | | | | |
| Total liabilities and stockholders’ equity | | $ | 4,381,627 | | | | | | | $ | 4,350,414 | | | | | | | $ | 3,985,621 | | | | | |
| Interest rate spread (c) | | | | $ | 34,908 | | 3.31 | % | | | | $ | 35,408 | | 3.33 | % | | | | $ | 34,114 | | 3.59 | % |
| Net interest margin (c) | | | | 3.51 | % | | | | | | 3.56 | % | | | | | | 3.80 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended |
| | September 30, 2019 | | June 30, 2019 | | September 30, 2018 |
(Dollars in thousands) | Average Balance | Income/ Expense | Yield/Cost | | Average Balance | Income/ Expense | Yield/Cost | | Average Balance | Income/ Expense | Yield/Cost |
| Short-term investments | $ | 62,860 |
| $ | 506 |
| 3.19 | % | | $ | 27,979 |
| $ | 263 |
| 3.77 | % | | $ | 23,057 |
| $ | 86 |
| 1.48 | % |
| Investment securities (a)(b): | | | | | | | | | | | |
| Taxable (c) | 896,142 |
| 5,986 |
| 2.67 | % | | 874,427 |
| 6,006 |
| 2.75 | % | | 787,081 |
| 5,615 |
| 2.85 | % |
| Nontaxable | 113,806 |
| 874 |
| 3.07 | % | | 118,241 |
| 923 |
| 3.12 | % | | 93,958 |
| 777 |
| 3.31 | % |
| Total investment securities | 1,009,948 |
| 6,860 |
| 2.69 | % | | 992,668 |
| 6,929 |
| 2.79 | % | | 881,039 |
| 6,392 |
| 2.90 | % |
| Loans (b)(d): | | | | | | | | | | | |
| Commercial real estate, construction | 103,758 |
| 1,313 |
| 4.95 | % | | 124,334 |
| 1,655 |
| 5.27 | % | | 123,939 |
| 1,573 |
| 4.97 | % |
| Commercial real estate, other | 844,186 |
| 11,307 |
| 5.24 | % | | 833,991 |
| 11,322 |
| 5.37 | % | | 852,675 |
| 10,934 |
| 5.02 | % |
| Commercial and industrial | 603,750 |
| 8,110 |
| 5.26 | % | | 599,432 |
| 8,081 |
| 5.33 | % | | 526,316 |
| 6,844 |
| 5.09 | % |
| Residential real estate (e) | 648,481 |
| 7,903 |
| 4.87 | % | | 646,978 |
| 7,918 |
| 4.90 | % | | 614,914 |
| 7,010 |
| 4.56 | % |
| Home equity lines of credit | 131,898 |
| 1,977 |
| 5.95 | % | | 132,395 |
| 2,006 |
| 6.08 | % | | 135,626 |
| 1,860 |
| 5.44 | % |
| Consumer, indirect | 423,694 |
| 4,452 |
| 4.17 | % | | 412,986 |
| 4,255 |
| 4.13 | % | | 387,559 |
| 3,872 |
| 3.96 | % |
| Consumer, direct | 82,067 |
| 1,495 |
| 7.23 | % | | 80,442 |
| 1,459 |
| 7.27 | % | | 76,171 |
| 1,281 |
| 6.67 | % |
| Total loans | 2,837,834 |
| 36,557 |
| 5.08 | % | | 2,830,558 |
| 36,696 |
| 5.16 | % | | 2,717,200 |
| 33,374 |
| 4.84 | % |
| Allowance for loan losses | (21,620 | ) | | | | (21,311 | ) | | | | (19,584 | ) | | |
| Net loans | 2,816,214 |
| 36,557 |
| 5.12 | % | | 2,809,247 |
| 36,696 |
| 5.20 | % | | 2,697,616 |
| 33,374 |
| 4.88 | % |
| Total earning assets | 3,889,022 |
| 43,923 |
| 4.47 | % | | 3,829,894 |
| 43,888 |
| 4.56 | % | | 3,601,712 |
| 39,852 |
| 4.37 | % |
| Goodwill and other intangible assets | 179,487 |
| | | | 175,169 |
| | | | 163,615 |
| | |
| Other assets | 242,880 |
| | | | 234,716 |
| | | | 232,927 |
| | |
Total assets | $ | 4,311,389 |
| | | | $ | 4,239,779 |
| | | | $ | 3,998,254 |
| | |
| Deposits: | | | | | | | | | | | |
| Savings accounts | $ | 524,025 |
| $ | 126 |
| 0.10 | % | | $ | 523,295 |
| $ | 110 |
| 0.08 | % | | $ | 476,127 |
| $ | 84 |
| 0.07 | % |
| Governmental deposit accounts | 347,625 |
| 991 |
| 1.13 | % | | 331,607 |
| 848 |
| 1.03 | % | | 328,806 |
| 507 |
| 0.61 | % |
| Interest-bearing demand accounts | 617,770 |
| 378 |
| 0.24 | % | | 603,494 |
| 231 |
| 0.15 | % | | 551,291 |
| 157 |
| 0.11 | % |
| Money market accounts | 434,834 |
| 787 |
| 0.72 | % | | 414,307 |
| 654 |
| 0.63 | % | | 395,477 |
| 365 |
| 0.37 | % |
| Retail certificates of deposit | 495,499 |
| 2,255 |
| 1.81 | % | | 477,530 |
| 2,079 |
| 1.75 | % | | 402,379 |
| 1,372 |
| 1.35 | % |
| Brokered certificates of deposit | 261,145 |
| 1,622 |
| 2.46 | % | | 272,693 |
| 1,797 |
| 2.64 | % | | 256,780 |
| 1,533 |
| 2.37 | % |
| Total interest-bearing deposits | 2,680,898 |
| 6,159 |
| 0.91 | % | | 2,622,926 |
| 5,719 |
| 0.87 | % | | 2,410,860 |
| 4,018 |
| 0.66 | % |
| Borrowed funds: | | | | | | | | | | | |
| Short-term FHLB advances | 190,677 |
| 1,086 |
| 2.26 | % | | 193,963 |
| 1,140 |
| 2.36 | % | | 258,742 |
| 1,475 |
| 2.26 | % |
| Repurchase agreements and other | 46,240 |
| 64 |
| 0.55 | % | | 46,631 |
| 93 |
| 0.80 | % | | 74,174 |
| 142 |
| 0.77 | % |
| Total short-term borrowings | 236,917 |
| 1,150 |
| 1.93 | % | | 240,594 |
| 1,233 |
| 2.06 | % | | 332,916 |
| 1,617 |
| 1.93 | % |
| Long-term FHLB advances | 76,893 |
| 410 |
| 2.12 | % | | 96,519 |
| 491 |
| 2.04 | % | | 104,026 |
| 537 |
| 2.05 | % |
| Other borrowings | 7,388 |
| 136 |
| 7.36 | % | | 7,346 |
| 129 |
| 7.02 | % | | 7,217 |
| 135 |
| 7.48 | % |
| Total long-term borrowings | 84,281 |
| 546 |
| 2.58 | % | | 103,865 |
| 620 |
| 2.39 | % | | 111,243 |
| 672 |
| 2.40 | % |
| Total borrowed funds | 321,198 |
| 1,696 |
| 2.10 | % | | 344,459 |
| 1,853 |
| 2.16 | % | | 444,159 |
| 2,289 |
| 2.05 | % |
| Total interest-bearing liabilities | 3,002,096 |
| 7,855 |
| 1.04 | % | | 2,967,385 |
| 7,572 |
| 1.02 | % | | 2,855,019 |
| 6,307 |
| 0.88 | % |
| Non-interest-bearing deposits | 657,952 |
| | | | 654,468 |
| | | | 592,709 |
| | |
| Other liabilities | 68,072 |
| |
| | | 52,934 |
| |
| | | 48,741 |
| |
| |
| Total liabilities | 3,728,120 |
| | | | 3,674,787 |
| | |
| 3,496,469 |
| | |
| Total stockholders’ equity | 583,269 |
| |
| | | 564,992 |
| |
| | | 501,785 |
| |
| |
| Total liabilities and stockholders’ equity | $ | 4,311,389 |
| |
| | | $ | 4,239,779 |
| |
| | | $ | 3,998,254 |
| |
| |
| Interest rate spread (b) | | $ | 36,068 |
| 3.43 | % | | | $ | 36,316 |
| 3.54 | % | | | $ | 33,545 |
| 3.49 | % |
| Net interest margin (b) | 3.66 | % | | | | 3.77 | % | | | | 3.68 | % |
(a) The fourth quarter amounts reflect an adjustment related to Peoples' balance sheet interest rate swap transactions of $310,000.
(b) Average balances are based on carrying value.
(c) Interest income and yields are presented on a fully tax-equivalent basis, using a 21% statutory federal corporate income tax rate.
(d) On January 1, 2020, Peoples adopted ASU 2016-13 and adopted the CECL model, which resulted in the establishment of a $7,000 allowance for credit losses for held-to-maturity investment securities; an increase in loan balances of $2.6 million to establish the allowance for credit losses for purchased credit deteriorated loans; an increase to the allowance for credit losses (which was the "allowance for loan losses" prior to January 1, 2020) of $5.8 million; the addition of a $1.5 million unfunded commitment liability included in accrued expense and other liabilities; and a reduction to retained earnings of $3.7 million, net of statutory federal corporate income.
(e) Average balances include nonaccrual and impaired loans. Interest income includes interest earned and received on nonaccrual loans prior to the loans being placed on nonaccrual status. Loan fees included in interest income were immaterial for all periods presented. |
| | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | For the Nine Months Ended |
| | September 30, 2019 | | September 30, 2018 |
(Dollars in thousands) | Average Balance | Income/ Expense | Yield/Cost | | Average Balance | Income/ Expense | Yield/Cost |
| Short-term investments | $ | 35,867 |
| $ | 945 |
| 3.52 | % | | $ | 15,379 |
| $ | 192 |
| 1.67 | % |
| Investment securities (a)(b): | | | | | | | |
| Taxable (c) | 850,852 |
| 17,839 |
| 2.80 | % | | 785,454 |
| 17,169 |
| 2.91 | % |
| Nontaxable | 105,233 |
| 2,477 |
| 3.14 | % | | 96,016 |
| 2,395 |
| 3.33 | % |
| Total investment securities | 956,085 |
| 20,316 |
| 2.83 | % | | 881,470 |
| 19,564 |
| 2.96 | % |
| Loans (b)(d): | | | | | | | |
| Commercial real estate, construction | 119,823 |
| 4,700 |
| 5.17 | % | | 120,264 |
| 4,344 |
| 4.76 | % |
| Commercial real estate, other | 828,258 |
| 33,225 |
| 5.29 | % | | 819,797 |
| 30,492 |
| 4.90 | % |
| Commercial and industrial | 594,136 |
| 23,872 |
| 5.30 | % | | 503,328 |
| 18,631 |
| 4.88 | % |
| Residential real estate (e) | 633,070 |
| 22,748 |
| 4.79 | % | | 569,593 |
| 19,068 |
| 4.46 | % |
| Home equity lines of credit | 131,797 |
| 5,843 |
| 5.93 | % | | 125,505 |
| 4,832 |
| 5.15 | % |
| Consumer, indirect | 415,602 |
| 12,795 |
| 4.12 | % | | 363,705 |
| 10,500 |
| 3.86 | % |
| Consumer, other | 78,687 |
| 4,143 |
| 7.04 | % | | 72,499 |
| 3,673 |
| 6.77 | % |
| Total loans | 2,801,373 |
| 107,326 |
| 5.07 | % | | 2,574,691 |
| 91,540 |
| 4.70 | % |
| Less: Allowance for loan losses | (21,117 | ) | | | | (19,116 | ) | | |
| Net loans | 2,780,256 |
| 107,326 |
| 5.12 | % | | 2,555,575 |
| 91,540 |
| 4.75 | % |
| Total earning assets | 3,772,208 |
| 128,587 |
| 4.52 | % | | 3,452,424 |
| 111,296 |
| 4.28 | % |
| Intangible assets | 172,175 |
| | | �� | 156,540 |
| | |
| Other assets | 235,280 |
| | | | 223,590 |
| | |
Total assets | $ | 4,179,663 |
| | | | $ | 3,832,554 |
| | |
| Deposits: | | | | | | | |
| Savings accounts | $ | 506,847 |
| $ | 326 |
| 0.09 | % | | $ | 468,810 |
| $ | 217 |
| 0.06 | % |
| Governmental deposit accounts | 325,773 |
| 2,396 |
| 0.98 | % | | 311,223 |
| 997 |
| 0.43 | % |
| Interest-bearing demand accounts | 597,089 |
| 857 |
| 0.19 | % | | 566,656 |
| 580 |
| 0.14 | % |
| Money market accounts | 414,966 |
| 1,972 |
| 0.64 | % | | 385,768 |
| 914 |
| 0.32 | % |
| Retail certificates of deposit | 457,030 |
| 5,750 |
| 1.68 | % | | 378,871 |
| 3,379 |
| 1.19 | % |
| Brokered certificates of deposit | 282,473 |
| 5,421 |
| 2.57 | % | | 200,637 |
| 3,245 |
| 2.16 | % |
| Total interest-bearing deposits | 2,584,178 |
| 16,722 |
| 0.87 | % | | 2,311,965 |
| 9,332 |
| 0.54 | % |
| Borrowed funds: | | | | | | | |
| Short-term FHLB advances | 194,398 |
| 3,342 |
| 2.30 | % | | 209,980 |
| 3,104 |
| 1.98 | % |
| Repurchase agreements and other | 46,328 |
| 214 |
| 0.62 | % | | 87,076 |
| 656 |
| 1.00 | % |
| Total short-term borrowings | 240,726 |
| 3,556 |
| 1.97 | % | | 297,056 |
| 3,760 |
| 1.69 | % |
| Long-term FHLB advances | 91,359 |
| 1,409 |
| 2.06 | % | | 112,381 |
| 1,660 |
| 1.97 | % |
| Other borrowings | 7,347 |
| 402 |
| 7.30 | % | | 7,364 |
| 383 |
| 6.93 | % |
| Total long-term borrowings | 98,706 |
| 1,811 |
| 2.45 | % | | 119,745 |
| 2,043 |
| 2.28 | % |
| Total borrowed funds | 339,432 |
| 5,367 |
| 2.11 | % | | 416,801 |
| 5,803 |
| 1.86 | % |
| Total interest-bearing liabilities | 2,923,610 |
| 22,089 |
| 1.01 | % | | 2,728,766 |
| 15,135 |
| 0.74 | % |
| Non-interest-bearing deposits | 642,276 |
| | | | 577,461 |
| | |
| Other liabilities | 56,075 |
| |
| | | 44,189 |
| |
| |
| Total liabilities | 3,621,961 |
| | | | 3,350,416 |
| |
| |
|
| Total stockholders’ equity | 557,702 |
| |
| | | 482,138 |
| |
| |
| Total liabilities and stockholders’ equity | $ | 4,179,663 |
| |
| | | $ | 3,832,554 |
| |
| |
| Interest rate spread (b) | | $ | 106,498 |
| 3.51 | % | | | $ | 96,161 |
| 3.54 | % |
| Net interest margin (b) | | | 3.74 | % | | | | 3.69 | % |
| |
(a) | Average balances are based on carrying value. |
| |
(b) | Interest income and yields are presented on a fully tax-equivalent basis using a 21% statutory federal corporate income tax rate. |
| |
(c) | Interest income and yield presented for the first nine months of 2018 include $589,000 of proceeds on an investment security for which an other-than-temporary-impairment had been recorded in previous years. |
(f) Loans held for sale are included in the average loan balance listed. Related interest income on loans originated for sale prior to the loan being sold is included in loan interest income.
| |
(d) | Average balances include nonaccrual, impaired loans and loans held for sale. Interest income includes interest earned and received on nonaccrual loans prior to the loans being placed on nonaccrual status. Loan fees included in interest income were immaterial for all periods presented. |
| |
(e) | Loans held for sale are included in the average loan balance listed. Related interest income on loans originated for sale prior to the loan being sold is included in loan interest income. |
The following table provides an analysis of the changes in FTE net interest income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended March 31, 2020 Compared to | | | | | | | | | | |
| (Dollars in thousands) | December 31, 2019 | | | | March 31, 2019 | | | | | | |
| Increase (decrease) in: | Rate | Volume | Total (a) | | Rate | Volume | Total (a) | | | | |
| INTEREST INCOME: | | | | | | | | | | | |
| Short-term investments (b) | $ | 494 | | $ | (232) | | $ | 262 | | | $ | (778) | | $ | 838 | | $ | 60 | | | | | |
| | | | | | | | | | | |
Investment Securities (c): | | | | | | | | | | | |
| Taxable | (140) | | (13) | | (153) | | | (4,967) | | 4,548 | | (419) | | | | | |
| Nontaxable | (2) | | (23) | | (25) | | | (209) | | 358 | | 149 | | | | | |
| Total investment income | (142) | | (36) | | (178) | | | (5,176) | | 4,906 | | (270) | | | | | |
Loans (c): | | | | | | | | | | | | | |
| Construction | (665) | | 608 | | (57) | | | (63) | | (418) | | (481) | | | | | |
| Commercial real estate, other | (1,654) | | 362 | | (1,292) | | | (2,736) | | 2,197 | | (539) | | | | | |
| Commercial and industrial | (1,694) | | 1,379 | | (315) | | | (4,243) | | 3,986 | | (257) | | | | | |
| Residential real estate | 436 | | 12 | | 448 | | | 691 | | 753 | | 1,444 | | | | | |
| Home equity lines of credit | (62) | | (35) | | (97) | | | (141) | | 56 | | (85) | | | | | |
| Consumer, indirect | (68) | | (78) | | (146) | | | 253 | | 68 | | 321 | | | | | |
| Consumer, direct | (2) | | (65) | | (67) | | | 102 | | 63 | | 165 | | | | | |
| Total loan income | (3,709) | | 2,183 | | (1,526) | | | (6,137) | | 6,705 | | 568 | | | | | |
| Total interest income | $ | (3,357) | | $ | 1,915 | | $ | (1,442) | | | $ | (12,091) | | $ | 12,449 | | $ | 358 | | | | | |
| INTEREST EXPENSE: | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | |
| Savings accounts | $ | (37) | | $ | — | | $ | (37) | | | $ | (69) | | $ | 52 | | $ | (17) | | | | | |
| Governmental deposit accounts | (267) | | 158 | | (109) | | | 94 | | 64 | | 158 | | | | | |
| Interest-bearing demand accounts | (4) | | (2) | | (6) | | | (101) | | 102 | | 1 | | | | | |
| Money market accounts | (295) | | 195 | | (100) | | | 25 | | 117 | | 142 | | | | | |
| Retail certificates of deposit | (186) | | (7) | | (193) | | | 272 | | 370 | | 642 | | | | | |
| Brokered certificates of deposit | (161) | | (253) | | (414) | | | (499) | | (642) | | (1,141) | | | | | |
| Total deposit cost | (950) | | 91 | | (859) | | | (278) | | 63 | | (215) | | | | | |
| Borrowed funds: | | | | | | | | | | | | | |
| Short-term borrowings | (104) | | (13) | | (117) | | | (394) | | 260 | | (134) | | | | | |
| Long-term borrowings | (357) | | 391 | | 34 | | | (117) | | 30 | | (87) | | | | | |
| Total borrowed funds cost | (461) | | 378 | | (83) | | | (511) | | 290 | | (221) | | | | | |
| Total interest expense | (1,411) | | 469 | | (942) | | | (789) | | 353 | | (436) | | | | | |
| Fully tax-equivalent net interest income (b) | $ | (1,946) | | $ | 1,446 | | $ | (500) | | | $ | (11,302) | | $ | 12,096 | | $ | 794 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 Compared to | | Compared to |
| (Dollars in thousands) | June 30, 2019 | | September 30, 2018 | | September 30, 2018 |
| Increase (decrease) in: | Rate | Volume | Total (a) | | Rate | Volume | Total (a) | | Rate | Volume | Total (a) |
| INTEREST INCOME: | | | | | | | | | | | |
| Short-term investments | $ | 9 |
| $ | 234 |
| $ | 243 |
| | $ | 201 |
| $ | 219 |
| $ | 420 |
| | $ | 381 |
| $ | 372 |
| $ | 753 |
|
Investment Securities (b): | | | | | | | | | | | |
| Taxable | (633 | ) | 613 |
| (20 | ) | | (1,821 | ) | 2,192 |
| 371 |
| | 516 |
| 154 |
| 670 |
|
| Nontaxable | (15 | ) | (34 | ) | (49 | ) | | (307 | ) | 404 |
| 97 |
| | 60 |
| 22 |
| 82 |
|
| Total investment income | (648 | ) | 579 |
| (69 | ) | | (2,128 | ) | 2,596 |
| 468 |
| | 576 |
| 176 |
| 752 |
|
Loans (b): | | | | | | | | | | | |
| Commercial real estate, construction | (91 | ) | (251 | ) | (342 | ) | | (6 | ) | (254 | ) | (260 | ) | | 382 |
| (26 | ) | 356 |
|
| Commercial real estate, other | (738 | ) | 723 |
| (15 | ) | | 1,001 |
| (628 | ) | 373 |
| | 2,415 |
| 318 |
| 2,733 |
|
| Commercial and industrial | (288 | ) | 317 |
| 29 |
| | 233 |
| 1,033 |
| 1,266 |
| | 1,685 |
| 3,556 |
| 5,241 |
|
| Residential real estate | (104 | ) | 89 |
| (15 | ) | | 499 |
| 394 |
| 893 |
| | 1,461 |
| 2,219 |
| 3,680 |
|
| Home equity lines of credit | (25 | ) | (4 | ) | (29 | ) | | 403 |
| (286 | ) | 117 |
| | 760 |
| 251 |
| 1,011 |
|
| Consumer, indirect | 50 |
| 147 |
| 197 |
| | 207 |
| 373 |
| 580 |
| | 729 |
| 1,566 |
| 2,295 |
|
| Consumer, direct | (48 | ) | 84 |
| 36 |
| | 103 |
| 111 |
| 214 |
| | 385 |
| 85 |
| 470 |
|
| Total loan income | (1,244 | ) | 1,105 |
| (139 | ) | | 2,440 |
| 743 |
| 3,183 |
| | 7,817 |
| 7,969 |
| 15,786 |
|
| Total interest income | $ | (1,883 | ) | $ | 1,918 |
| $ | 35 |
| | $ | 513 |
| $ | 3,558 |
| $ | 4,071 |
| | $ | 8,774 |
| $ | 8,517 |
| $ | 17,291 |
|
| INTEREST EXPENSE: | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | |
| Savings accounts | $ | 16 |
| $ | — |
| $ | 16 |
| | $ | 33 |
| $ | 9 |
| $ | 42 |
| | $ | 90 |
| $ | 19 |
| $ | 109 |
|
| Governmental deposit accounts | 97 |
| 46 |
| 143 |
| | 453 |
| 31 |
| 484 |
| | 1,351 |
| 48 |
| 1,399 |
|
| Interest-bearing demand accounts | 141 |
| 6 |
| 147 |
| | 200 |
| 21 |
| 221 |
| | 244 |
| 33 |
| 277 |
|
| Money market accounts | 97 |
| 36 |
| 133 |
| | 383 |
| 39 |
| 422 |
| | 984 |
| 74 |
| 1,058 |
|
| Retail certificates of deposit | 84 |
| 92 |
| 176 |
| | 522 |
| 361 |
| 883 |
| | 1,578 |
| 793 |
| 2,371 |
|
| Brokered certificates of deposit | (107 | ) | (68 | ) | (175 | ) | | 63 |
| 26 |
| 89 |
| | 683 |
| 1,493 |
| 2,176 |
|
| Total deposit cost | 328 |
| 112 |
| 440 |
| | 1,654 |
| 487 |
| 2,141 |
| | 4,930 |
| 2,460 |
| 7,390 |
|
| Borrowed funds: | | | | | | | | | | | |
| Short-term borrowings | (58 | ) | (25 | ) | (83 | ) | | (10 | ) | (457 | ) | (467 | ) | | 493 |
| (697 | ) | (204 | ) |
| Long-term borrowings | 111 |
| (185 | ) | (74 | ) | | 106 |
| (232 | ) | (126 | ) | | 132 |
| (364 | ) | (232 | ) |
| Total borrowed funds cost | 53 |
| (210 | ) | (157 | ) | | 96 |
| (689 | ) | (593 | ) | | 625 |
| (1,061 | ) | (436 | ) |
| Total interest expense | 381 |
| (98 | ) | 283 |
| | 1,750 |
| (202 | ) | 1,548 |
| | 5,555 |
| 1,399 |
| 6,954 |
|
| Net interest income | $ | (2,264 | ) | $ | 2,016 |
| $ | (248 | ) | | $ | (1,237 | ) | $ | 3,760 |
| $ | 2,523 |
| | $ | 3,219 |
| $ | 7,118 |
| $ | 10,337 |
|
| |
(a) | The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the dollar amounts of the changes in each. |
| |
(b) | Interest income and yields are presented on a fully tax-equivalent basis using a 21% statutory federal corporate income tax rate. |
(b)The comparison to the three months ended December 31, 2019 reflects an adjustment in the fourth quarter of 2019 related to Peoples' balance sheet interest rate swap transactions of $310,000.
(c)Interest income and yields are presented on a fully tax-equivalent basis using a 21% statutory federal corporate income tax rate.
Net interest income was $35.8 million forimpacted by one less calendar day in the thirdfirst quarter of 2019, a decrease of 1%2020 compared to the linked quarter, and an increase of $2.4 million, or 7%, over the third quarter of 2018. Net interest margin was 3.66% for the third quarter of 2019, compared to 3.77% for the linked quarter, and 3.68% for the third quarter of 2018.quarter. Net interest income remained relatively stable althoughand net interest rates declinedmargin were both impacted by the declining interest rate environment during the first quarter of 2020, which impactedresulted in lower yields on the loan and the investment securities portfolios. The Board of Governors of the Federal Reserve System lowered the Federal Funds effective target range by 150 basis points during the first quarter of 2020 to 0.00% to 0.25%.
Peoples' variable rate commercial loans are subject to changes in the London Interbank Offered Rate and the prime rate, both of which declined during the thirdfirst quarter of 2019. The net interest margin was2020. Yields on investment securities were negatively impacted by the lower interest rates received on loans. At September 30, 2019, average loan balances as a percent of average total earning assets declined to 73.0%, from 73.9% in the linked quarter. Higher deposit costshigher prepayment speeds, which increased premium amortization. These declines were partially offset by lower deposit costs, primarily due to a decrease in interest expenserates paid on borrowings.
deposits.
The increase in net interest income compared to the thirdfirst quarter of 20182019 was driven by higher interest income on loans, due to higher yieldscombined with lower interest rates paid on deposits, which were partially offset by a decline in interest income on investment securities. The increase in interest income on loans combined withwas primarily due to higher loan balances, which were impacted by the acquired First Prestonsburg loans. The higherdecrease in investment securities interest income on loans was partially offset by an increase in interest expense on deposits due to higher rates paid on deposits, combined with additional interest expensemostly related to the acquired First Prestonsburg deposits.higher premium amortization associated with faster prepayment speeds. The decline in net interest margin was largely driven by the lower yields on investment securities due to a decline in interest rates and higher premium amortization.
Accretion income, net of amortization expense, from acquisitions was $1.2$1.1 million for the third and second quartersfirst quarter of 2020, $1.8 million for the fourth quarter of 2019, and $612,000$722,000 for the thirdfirst quarter of 2018,2019, which added 1211 basis points, 1318 basis points, and 78 basis points, respectively, to net interest margin. Net accretion income in the fourth quarter of 2019 was boosted by an acquired commercial loan that paid off during the quarter, which positively impacted the net interest margin by 6 basis points. The increase in accretion income compared to the third quarter of 2018 was due to the First Prestonsburg acquisition.
For the first nine months of 2019, net interest income grew 11% compared to 2018, and net interest margin grew 5 basis points to 3.74%. The increases were driven by higher interest income on loans due to a combination of loan growth, which was primarily the result of the First Prestonsburg acquisition in 2019 and the ASB acquisition in 2018, and higher yields from average interest rate increases. The interest income on loan balances outpaced interest expense from deposits, which increased primarily due to higher rates paid on deposits, combined with additional interest expense related to the recent acquisitions. The first nine months of 2018 benefited from proceeds of $588,000 received on an investment security that had been previously written down due to OTTI, which added 2 basis points to net interest margin. Peoples recorded no similar proceeds during the first nine months of 2019.
Accretion income, net of amortization expense, from acquisitions was $3.1 million for the first nine months of 2019 and $1.7 million for the first nine months of 2018, which added 11 basis points and 7 basis points, respectively, to net interest margin. The growth in accretion income compared to the first nine monthsquarter of 20182019 was largely due to the First Prestonsburg acquisition and, to a lesser extent, the ASB acquisition.
Additional information regarding changes in the Unaudited Consolidated Balance Sheets can be found under appropriate captions of the “FINANCIAL CONDITION” section of this discussion. Additional information regarding Peoples' interest rate risk and the potential impact of interest rate changes on Peoples' results of operations and financial condition can be found later in this discussion under the caption "FINANCIAL CONDITION - Interest Rate Sensitivity and Liquidity."
Provision for Loan(Recovery of) Credit Losses
The following table details Peoples’ provision for loan(recovery of) credit losses:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | | |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, | | March 31,
2020 | December 31,
2019 | March 31,
2019 | | |
| (Dollars in thousands) | | 2019 | 2018 | (Dollars in thousands) | | | |
| Provision for other loan losses | $ | 731 |
| $ | 475 |
| $ | 1,035 |
| | $ | 846 |
| $ | 3,877 |
| |
| Provision for checking account overdrafts | 274 |
| 151 |
| 267 |
| | 522 |
| 596 |
| |
| Provision for loan losses | $ | 1,005 |
| $ | 626 |
| $ | 1,302 |
| | $ | 1,368 |
| $ | 4,473 |
| |
| Provision for (recovery of) other credit losses | | Provision for (recovery of) other credit losses | $ | 16,824 | | $ | 999 | | $ | (360) | | | |
| Provision for checking account overdraft credit losses | | Provision for checking account overdraft credit losses | 145 | | 137 | | 97 | | | |
| Total provision for (recovery of) credit losses | | Total provision for (recovery of) credit losses | $ | 16,969 | | $ | 1,136 | | $ | (263) | | | |
| As a percentage of average total loans (a) | 0.14 | % | 0.09 | % | 0.19 | % | | 0.07 | % | 0.23 | % | As a percentage of average total loans (a) | 2.37 | % | 0.16 | % | (0.04) | % | | |
| (a) Presented on an annualized basis. | | | | (a) Presented on an annualized basis. | | |
The provision for loancredit losses recorded represents the amount needed to maintain the appropriate level of the allowance for loancredit losses based on management’s formal quarterly analysisestimates. During the first quarter of 2020, Peoples adopted ASU 2016-13, and utilized the CECL model to determine its allowance for credit losses, while prior periods used the incurred loss model. The CECL model utilized by Peoples relies on economic forecasts, as well as other key assumptions including prepayments, probability of default and loss given default. Under the incurred loss model, the process for estimating allowance for loan portfolio and procedural methodology that estimates the amount of probable credit losses. This process considerslosses considered various factors that affect losses, such as changes in Peoples’ loan quality and historical loss experience,experience. Given the relatively low recent loss history, the incurred loss model was highly dependent on qualitative factors to arrive at an appropriate allowance for loan losses in periods prior to 2020. These qualitative factors included current economic conditions, and other environmental factors such as changes in real estate market conditions, unemployment, and the economic impact of tariffs.
The provision for loancredit losses duringfor the currentfirst quarter of 2020 was driven by higher net charge-offsprimarily due to the economic downturn related to COVID-19 and originated loan growth.the resulting impact on the economic assumptions used in estimating the allowance of credit losses under the CECL model. Net charge-offs for the thirdfirst quarter of 20192020 were $777,000,$498,000, or 0.11%0.07% of average total loans annualized, compared to $208,000,net charge-offs of $1.2 million, or 0.03%0.16% of average total loans annualized, for the linked quarter and $687,000,net recoveries of $1.0 million, or 0.10%0.15% of average total loans for the third quarter of 2018.
Net recoveriesannualized, for the first nine monthsquarter of 2019 were $22,000, compared to net charge-offs of $3.4 million, or 0.18% of average total loans, for the first nine months of 2018. The first nine months of 2019 included a $1.8 million recovery recorded on a previously charged-off commercial loan. The first nine months of 2018 included a charge-off of $827,000 on an acquired commercial loan relationship.
2019.
Additional information regarding changes in the allowance for loancredit losses and loan credit quality can be found later in this discussion under the caption “FINANCIAL CONDITION - Allowance for LoanCredit Losses.”
Net (Losses) Gains Included in Total Non-Interest Income
Net (losses) gains include gains and losses on investment securities, asset disposals and other transactions, which are recognized in total non-interest income. The following table details Peoples’ net (losses) gains:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, |
| (Dollars in thousands) | | 2019 | 2018 |
| Net gain (loss) on investment securities | $ | 97 |
| $ | (57 | ) | $ | — |
| | $ | 70 |
| $ | (146 | ) |
| | | | | | | |
| Net (loss) gain on asset disposals and other transactions: | | | | | | |
| Net (loss) gain on other assets | $ | (73 | ) | $ | (274 | ) | $ | 12 |
| | $ | (504 | ) | $ | (239 | ) |
| Net (loss) gain on OREO | (5 | ) | (24 | ) | — |
| | (54 | ) | 9 |
|
| Net loss on debt extinguishment | — |
| — |
| — |
| | — |
| (13 | ) |
| Net gain (loss) on other transactions | — |
| 5 |
| — |
| | 5 |
| (76 | ) |
| Net (loss) gain on asset disposals and other transactions | $ | (78 | ) | $ | (293 | ) | $ | 12 |
|
| $ | (553 | ) | $ | (319 | ) |
| | | | | | | | | | | | | | |
| | Three Months Ended | | | | | |
| | March 31,
2020 | December 31,
2019 | March 31,
2019 | | | |
| (Dollars in thousands) | | | | | | |
| Net gain on investment securities | $ | 319 | | $ | 94 | | $ | 30 | | | | |
| | | | | | |
| Net loss on asset disposals and other transactions: | | | | | | |
| Net loss on other assets | $ | (70) | | $ | (188) | | $ | (157) | | | | |
| Net loss on OREO | (17) | | (44) | | (25) | | | | |
| | | | | | |
| | | | | | |
| Net gain on other transactions | — | | 3 | | — | | | | |
| Net loss on asset disposals and other transactions | $ | (87) | | $ | (229) | | $ | (182) | | | | |
During the secondfirst quarter of 2020, Peoples sold investment securities to lock in gains. Net losses on other assets during the first quarter of 2020 and the linked quarter were driven by net losses on repossessed assets. Net loss on other assets during the first quarter of 2019 losses included $253,000$118,000 of write-offs of fixed assets acquired from First Prestonsburg. Net losses during the year-to-date period through September 30, 2019 were driven by the write-offs of fixed assets acquired from First Prestonsburg and market value write-downs related to closed offices that were held for sale. For the first nine months of 2018, losses were primarily associated with write-offs of fixed assets acquired from ASB of $203,000.
Total Non-Interest Income, Excluding Net Gains and Losses
Electronic banking ("e-banking")Insurance income comprised the largest portion of the thirdfirst quarter 20192020 total non-interest income. The following table details Peoples' e-bankinginsurance income:
| | | | | | | | | | | | | | |
| | Three Months Ended | | | | | |
| | March 31,
2020 | December 31,
2019 | March 31,
2019 | | | |
| (Dollars in thousands) | | | | | | |
| | | | | | |
| | | | | | |
| Property and casualty insurance commissions | 2,590 | | 2,645 | | 2,674 | | | | |
| | | | | | |
| | | | | | |
| Life and health insurance commissions | 102 | | 513 | | 359 | | | | |
| Performance-based commissions | 1,291 | | 35 | | 1,419 | | | | |
| Other fees and charges | 147 | | 116 | | 169 | | | | |
| Insurance income | $ | 4,130 | | $ | 3,309 | | $ | 4,621 | | | | |
Revenue related to performance-based commissions is primarily recognized in the first quarter of each year and is a core component of insurance income. The decline in life and health insurance commissions compared to the fourth quarter of 2019 was related to the timing of recognition of premiums.
Peoples' electronic banking ("e-banking") services include ATM and debit cards, direct deposit services, internet and mobile banking, and remote deposit capture and serve as alternative delivery channels to traditional sales offices for providing services to clients. The following table details Peoples' e-banking income:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | | |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, | | March 31,
2020 | December 31,
2019 | March 31,
2019 | | |
| (Dollars in thousands) | | 2019 | 2018 | (Dollars in thousands) | | | |
| Interchange fees | $ | 2,842 |
| $ | 2,747 |
| $ | 2,464 |
| | $ | 8,032 |
| $ | 7,248 |
| |
| Promotional and usage income | 735 |
| 520 |
| 426 |
| | 1,799 |
| 1,212 |
| |
| | E-banking income | $ | 3,577 |
| $ | 3,267 |
| $ | 2,890 |
| | $ | 9,831 |
| $ | 8,460 |
| E-banking income | $ | 3,280 | | $ | 3,849 | | $ | 2,987 | | | |
Peoples' e-banking revenueincome is derived largely from ATM and debit cards, as other services are mainly provided at no charge to the customers. The amount of e-banking income is largely dependent on the timing and volume of customer activity. The increasesdecrease in e-banking income compared to the linked quarter was driven by the reduced usage of debit cards, which is typically higher in all comparisons werethe fourth quarter of each year and was negatively impacted during the first quarter of 2020 by the stay-at-home orders put in place in Peoples' markets at the end of the quarter related to COVID-19. The increase in e-banking income compared to the first quarter of 2019 was the result of the increased usage of debit cards by more customers, which includes the impact of additional cardholders obtained in the acquisition of First Prestonsburg.
Peoples' fiduciary and brokerage revenues continued to be based primarily upon the value of assets under administration and management, with additional income generated from transaction commissions, cross-selling of products and additional retirement plan
services business. The following table details Peoples' insurance income:tables detail Peoples’ trust and investment income and related assets under administration and management:
| | | | | | | | | | | | | | |
| | Three Months Ended | | | | | |
| | March 31,
2020 | December 31,
2019 | March 31,
2019 | | | |
| (Dollars in thousands) | | | | | | |
| Fiduciary income | $ | 1,622 | | $ | 1,667 | | $ | 1,636 | | | | |
| Brokerage income | 1,160 | | 1,147 | | 965 | | | | |
| Employee benefits fees | 480 | | 627 | | 511 | | | | |
| Trust and investment income | $ | 3,262 | | $ | 3,441 | | $ | 3,112 | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, |
| (Dollars in thousands) | | 2019 | 2018 |
| Property and casualty insurance commissions | $ | 2,542 |
| $ | 3,060 |
| $ | 2,603 |
| | $ | 7,875 |
| $ | 7,982 |
|
| Deferred income from property and casualty insurance commissions | 64 |
| (380 | ) | 11 |
| | 85 |
| (126 | ) |
| Total property and casualty insurance commissions | 2,606 |
| 2,680 |
| 2,614 |
| | 7,960 |
| 7,856 |
|
| Life and health insurance commissions | 466 |
| 464 |
| 454 |
| | 1,401 |
| 1,413 |
|
| Deferred income from life and health insurance commissions | 101 |
| 162 |
| 91 |
| | 151 |
| 272 |
|
| Total life and health insurance commissions | 567 |
| 626 |
| 545 |
| | 1,552 |
| 1,685 |
|
| Performance-based commissions | 74 |
| 2 |
| 98 |
| | 1,495 |
| 1,448 |
|
| Other fees and charges | 139 |
| 178 |
| 131 |
| | 486 |
| 423 |
|
| Insurance income | $ | 3,386 |
| $ | 3,486 |
| $ | 3,388 |
| | $ | 11,493 |
| $ | 11,412 |
|
Property and casualty insurance commissions duringEmployee benefits income for the secondfirst quarter of 2020 declined compared to the fourth quarter of 2019 includedprimarily due to a large policy renewal for whichdecrease in the related income was deferred overassets under administration and management at the lifeend of the contract. Fluctuations in deferred incomefirst quarter of 2020 resulting from property and casualty, and life and health insurance commissions during the first nine months of 2019, compared to 2018, were driven by timing in revenue recognition upon the satisfaction of related benefit obligations. For more information regarding the recognition of insurance income, refer to "Note 11 Revenue" of the Notes to the Unaudited Consolidated Financial Statements.market decline.
| | | | | | | | | | | | | | | | | |
| | March 31,
2020 | December 31,
2019 | September 30,
2019 | June 30,
2019 | March 31,
2019 |
| (Dollars in thousands) | | | | | |
| Assets under administration and management: | | | | | |
| Trust | $ | 1,385,161 | | $ | 1,572,933 | | $ | 1,504,036 | | $ | 1,501,110 | | $ | 1,471,422 | |
| Brokerage | 816,260 | | 944,002 | | 904,191 | | 887,745 | | 863,286 | |
| Total | $ | 2,201,421 | | $ | 2,516,935 | | $ | 2,408,227 | | $ | 2,388,855 | | $ | 2,334,708 | |
| Quarterly average | $ | 2,425,849 | | $ | 2,458,770 | | $ | 2,397,515 | | $ | 2,356,121 | | $ | 2,312,098 | |
Deposit account service charges are based on the recovery of costs associated with services provided. The following table details Peoples' deposit account service charges:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | | |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, | | March 31,
2020 | December 31,
2019 | March 31,
2019 | | |
| (Dollars in thousands) | | 2019 | 2018 | (Dollars in thousands) | | | |
| Overdraft and non-sufficient funds fees | $ | 1,970 |
| $ | 1,746 |
| $ | 1,800 |
| | $ | 5,149 |
| $ | 4,823 |
| Overdraft and non-sufficient funds fees | $ | 1,649 | | $ | 1,920 | | $ | 1,433 | | | |
| Account maintenance fees | 1,049 |
| 1,012 |
| 691 |
| | 2,813 |
| 2,012 |
| Account maintenance fees | 980 | | 1,019 | | 752 | | | |
| Other fees and charges | 214 |
| 219 |
| 161 |
| | 589 |
| 325 |
| Other fees and charges | 191 | | 210 | | 156 | | | |
| Deposit account service charges | $ | 3,233 |
| $ | 2,977 |
| $ | 2,652 |
| | $ | 8,551 |
| $ | 7,160 |
| Deposit account service charges | $ | 2,820 | | $ | 3,149 | | $ | 2,341 | | | |
The amount of deposit account service charges, particularly fees for overdrafts and non-sufficient funds, is largely dependent on the timing and volume of customer activity. Management periodically evaluates its cost recovery fees to ensure they are reasonable based on operational costs and similar to fees charged in Peoples' markets by competitors. IncomeThe decline in the first quarter of 2020 in overdraft and non-sufficient funds fees from deposit account service charges were up compared to the linkedfourth quarter of 2019 was primarily due to seasonality of customer activity combined with a disruption of customer activity at the additional accounts acquired from First Prestonsburg.end of the first quarter of 2020 as a result of the developments related to COVID-19. Income from deposit account service charges for the first nine monthsquarter of 20192020 were up compared to a year agothe year-ago quarter primarily due to the ASB and First Prestonsburg acquisitions,acquisition, coupled with changes in fee schedules. Peoplesfully implemented a new deposit account fee scheduleschedules which were put in place in March 2019, and it is anticipated that the higher deposit fees associated with the new fee schedule will diminish somewhat over time.
Peoples' fiduciary and brokerage revenues continued to be based primarily upon the value of assets under administration and management, with additional income generated from transaction commissions, cross-selling of products and additional retirement plan services business. The following tables detail Peoples’ trust and investment income and related assets under administration and management:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, |
| (Dollars in thousands) | | 2019 | 2018 |
| Fiduciary | $ | 1,621 |
| $ | 1,837 |
| $ | 1,626 |
| | $ | 5,094 |
| $ | 5,000 |
|
| Brokerage | 1,048 |
| 1,038 |
| 999 |
| | 3,051 |
| 2,951 |
|
| Employee benefits | 536 |
| 526 |
| 485 |
| | 1,573 |
| 1,459 |
|
| Trust and investment income | $ | 3,205 |
| $ | 3,401 |
| $ | 3,110 |
| | $ | 9,718 |
| $ | 9,410 |
|
Fiduciary income for the third quarter of 2019 declined compared to the second quarter of 2019 primarily due to seasonal tax return revenue received annually in the second quarter. Employee benefits in 2019 have increased compared to the second quarter of 2019 and the nine months of 2018 due to the continued growth of our business that administers 401k plans for businesses.
|
| | | | | | | | | | | | | | | |
| | September 30,
2019 | June 30,
2019 | March 31,
2019 | December 31,
2018 | September 30,
2018 |
| (Dollars in thousands) |
| Assets under administration and management: | | | | | |
| Trust | $ | 1,504,036 |
| $ | 1,501,110 |
| $ | 1,471,422 |
| $ | 1,384,113 |
| $ | 1,489,810 |
|
| Brokerage | 904,191 |
| 887,745 |
| 863,286 |
| 849,188 |
| 914,172 |
|
| Total | $ | 2,408,227 |
| $ | 2,388,855 |
| $ | 2,334,708 |
| $ | 2,233,301 |
| $ | 2,403,982 |
|
| Quarterly average | $ | 2,397,515 |
| $ | 2,356,121 |
| $ | 2,312,098 |
| $ | 2,316,201 |
| $ | 2,378,676 |
|
The following table details the other items included within Peoples' total non-interest income:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, | | March 31,
2020 | December 31,
2019 | March 31,
2019 | |
| (Dollars in thousands) | | 2019 | 2018 | (Dollars in thousands) | |
| | Mortgage banking income | $ | 1,204 |
| $ | 1,000 |
| $ | 1,060 |
| | $ | 2,992 |
| $ | 2,380 |
| Mortgage banking income | $ | 750 | | $ | 1,336 | | $ | 788 | | |
| Bank owned life insurance income | | Bank owned life insurance income | 582 | | 968 | | 485 | | |
| Commercial loan swap fees | 772 |
| 516 |
| 355 |
| | 1,434 |
| 617 |
| Commercial loan swap fees | 244 | | 794 | | 146 | | |
| Bank owned life insurance income | 487 |
| 490 |
| 495 |
| | 1,462 |
| 1,460 |
| |
| Other non-interest income | 510 |
| 502 |
| 391 |
| | 2,113 |
| 2,143 |
| Other non-interest income | 437 | | 452 | | 1,101 | | |
Mortgage banking income is comprised mostly of net gains from the origination and sale of real estate loans in the secondary market, and servicing income for loans sold with servicing retained. As a result, the amount of income recognized by Peoples is largely dependent on customer demand and long-term interest rates for residential real estate loans offered in the secondary market. The increasesdecrease in mortgage banking income from the secondfourth quarter of 2019 and the third quarter of 2018 werewas mainly due to higher salesa seasonal decline combined with a disruption of real estate loans. Interest rates declined during the third quarter of 2019, resulting in increased customer demand, primarily due to customers refinancing to take advantageactivity as a result of the lower rates. For the first nine months of 2019, compareddevelopments related to the same period in 2018, the increase inCOVID-19 pandemic. Additionally, mortgage banking income was due to increased customer demand, which was driven by the decline in mortgage interest rates during the period. Also contributing to the increase were the loans originated by thefirst quarter of 2020 included a $182,000 write-down of mortgage origination operation acquired as part of the ASB acquisition.servicing rights.
In the thirdfirst quarter of 2019,2020, Peoples sold approximately $31.7$22.0 million in loans to the secondary market with servicing retained and sold approximately $15.6$14.0 million in loans with servicing released, compared to approximately $24.9$27.8 million and $11.4$17.6 million,
respectively, in the linked quarter, and approximately $20.6$13.7 million and $19.2 million, respectively, in the third quarter of 2018. For the first nine months of 2019, Peoples sold approximately $70.4 million in loans to the secondary market with servicing retained and sold approximately $37.8 million in loans with servicing released, compared to approximately $49.9 million and $38.1$10.9 million, respectively, in the first nine monthsquarter of 2018.2019. The volume of sales has a direct impact on the amount of mortgage banking income.
2020 included the recognition of an additional $109,000 of tax-free death benefits during the fourth quarter of 2019 that exceeded the cash surrender value of the insurance policies, compared to $482,000 during the fourth quarter of 2019, and none in the first quarter of 2019.
Commercial loan swap fees are largely dependent on timing, interest rates, and the volume of customer activity. Commercial loan swap fees declined from a record high in the linked quarter, reflecting a typically slower first quarter and the impact of COVID-19, which slowed customer demand late in the first quarter of 2020. The increase in all comparisonscompared to the first quarter of 2019 was driven by slightly higher customer demand, given the currentlow rate environment and the favorable longer term rates that customers can lock in by utilizing a swap.
ForOther non-interest income for the first nine monthsquarter of 2019 other non-interest income included an increase in income from equity investment securities of $620,000 compared to the same period of 2018. The increase in income from equity investment securities was driven by $787,000 of income related to the sale of restricted Class B Visa stock during 2019, which had been held at a carrying cost and fair value of zero due to the litigation liability associated with the stock. For the first nine monthsquarter of 2019 compared to the same period of 2018, other non-interest income also included a decline in Small Business Administration income of $474,000.2019.
Non-Interest Expense
Salaries and employee benefit costs remain Peoples' largest non-interest expense, accounting for over one-half of total non-interest expense. The following table details Peoples' salaries and employee benefit costs:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | | |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, | | March 31,
2020 | December 31,
2019 | March 31,
2019 | | |
| (Dollars in thousands) | | 2019 | 2018 | (Dollars in thousands) | | | |
| Base salaries and wages | $ | 12,592 |
| $ | 14,353 |
| $ | 11,889 |
| | $ | 38,819 |
| $ | 34,917 |
| Base salaries and wages | $ | 12,696 | | $ | 13,016 | | $ | 11,874 | | | |
| Sales-based and incentive compensation | 2,986 |
| 3,096 |
| 3,125 |
| | 8,691 |
| 8,364 |
| Sales-based and incentive compensation | 2,662 | | 3,159 | | 2,609 | | | |
| Employee benefits | 1,869 |
| 1,966 |
| 1,880 |
| | 6,525 |
| 4,909 |
| Employee benefits | 2,544 | | 1,972 | | 2,690 | | | |
| Stock-based compensation | | Stock-based compensation | 1,383 | | 567 | | 1,208 | | | |
| Payroll taxes and other employment costs | 1,256 |
| 1,208 |
| 1,036 |
| | 3,841 |
| 3,255 |
| Payroll taxes and other employment costs | 1,362 | | 950 | | 1,377 | | | |
| Stock-based compensation | 950 |
| 930 |
| 580 |
| | 3,088 |
| 2,090 |
| |
| Deferred personnel costs | (722 | ) | (729 | ) | (602 | ) | | (2,007 | ) | (1,612 | ) | Deferred personnel costs | (729) | | (761) | | (556) | | | |
| Salaries and employee benefit costs | $ | 18,931 |
| $ | 20,824 |
| $ | 17,908 |
| | $ | 58,957 |
| $ | 51,923 |
| Salaries and employee benefit costs | $ | 19,918 | | $ | 18,903 | | $ | 19,202 | | | |
| Full-time equivalent employees: | | |
| | | Full-time equivalent employees: | | | | | |
| Actual at end of period | 910 |
| 918 |
| 849 |
| | 910 |
| 849 |
| Actual at end of period | 898 | | 900 | | 859 | | | |
| Average during the period | 913 |
| 906 |
| 860 |
| | 897 |
| 832 |
| Average during the period | 898 | | 910 | | 869 | | | |
The increase in full-time equivalent employees in 2019 compared to 2018 was mainly due to additional employees from the First Prestonsburg acquisition.
In allboth comparisons, base salaries and wages were impacted by merit increases which includedand the continued movement towards a $15 per hour minimum wage throughout the company.Peoples' organization. The $15 per hour minimum wage began beingwas phased in duringbeginning in 2018 and is expected to bewas largely implemented byas of January 1, 2020. BaseCompared to the linked quarter, these increases were offset by a decline in severance expense of $257,000 and additional expense during the fourth quarter of 2019 related to employees who carried paid-time-off balances into 2020. Compared to the first quarter of 2019, base salaries and wages were also impacted by the additional employees, primarily as a result of the First Prestonsburg acquisition in 2019 and the ASB acquisition in 2018. Base salaries and wages included no acquisition-related expenses during the third quarter of 2019, compared to $2.2 million (mainly severance and change in control costs) during the second quarter of 2019, and $450,000 during the third quarter of 2018.April 2019.
The decrease in sales-based and incentive compensation for the thirdfirst quarter of 2019,2020 compared to the secondfourth quarter of 2019, was due to lower sales-based compensation from insurance, partially offset by higher sales-based compensation from mortgage banking.The decrease in sales-based and incentive compensation for the third quarter of 2019, compared to the third quarter of 2018, was related to overall company performance measures used in calculating incentive awards, partially offset by highercombined with lower sales-based compensation from mortgage banking and trust and investments.Compared toreflecting the first nine monthsreduced volume of 2018,real estate loans for sale in the increase in sales-based and incentive compensation for the first nine months of 2019 was driven by higher sales-based compensation from mortgage banking. The increase in mortgage banking compared to the first nine months of 2018 was largely attributable to the recent increase in customer demand as interest rates declined, coupled with the mortgage origination operation acquired as part of the ASB acquisition.secondary market.
The increase in employee benefits for the first quarter of 2020, compared to the linked quarter, was primarily due to annual contributions to employee health benefit accounts which resulted in an expense of $427,000. These contributions occur primarily in the nine-month period comparisonfirst quarter of each year. Additionally, Peoples' 401(k) contributions increased $174,000 compared to the linked quarter due to 401(k) contributions for employees who reached maximum contributions during 2019, which reset at January 1, 2020, as well as a higher percentage match (from 4% match to 5%) incentive. Compared to the first quarter of 2019, the decline in employee benefits was impacteddriven by the First Prestonsburg and ASB acquisitions, and includedlower medical insurance costs, partially offset by an increase in medical insurance costs of $1.5 million due primarilyexpense related to higher medical claims and an increase in the number of participants in the insurance plan.
The increases in payroll taxes and other employment costs for periods in 2019 compared to those in 2018 primarily reflected the increases in base salaries and wages.
The increases in stock-based compensation401(k) contributions compared to the 2018 periods were driven by higher expense relatedfirst quarter of 2019.
Stock-based compensation is generally recognized over the vesting period, which generally ranges from immediate vesting to stock grantsvesting at the end of three years, adjusted for an estimate of the portion of awards that will be forfeited. At the vesting date, an adjustment is made to retirement eligible grantees combined with Peoples' improved performance during recent years. The majorityincrease or reverse expense for the amount of grants are expensed over a three-year vesting period, withactual forfeitures compared to the exception of those made to retirement eligible grantees.estimate. Stock grants to retirement eligible grantees are expensed either immediately or over a shorter period than three years. The majority of Peoples' stock-based compensation is attributable to annual equity-based incentive awards to employees, which are awarded in the first quarter of each year and are based upon Peoples achieving certain performance goals during the prior year. The $1.4 million of stock-based
compensation for the first quarter of 2020, which was an increase of $816,000 compared to the fourth quarter of 2019, included $464,000 of expense related to stock grants to retirement eligible individuals, and $349,000 of expense related to the annual vesting of prior stock grants.
The increase in payroll taxes and other employment costs, compared to the linked quarter, included higher social security and unemployment taxes. Certain higher earners reached their individual taxable earnings limit for social security and unemployment taxes prior to or during the fourth quarter of 2019. Those limits reset at the beginning of the new calendar year, resulting in a higher expense during the first quarter of 2020 compared to the fourth quarter of 2019.
Deferred personnel costs represent the portion of current period salaries and employee benefit costs considered to be direct loan origination costs. These costs are capitalized and recognized over the life of the loan as a yield adjustment in interest income. As a result, the amount of deferred personnel costs for each period corresponds directly with the volume of loan originations, coupled with the average deferred costs per loan that are updated annually at the beginning of each year, which increased in 2020 compared to 2019.
The increase in full-time equivalent employees compared to the first quarter of 2019 was mainly due to additional employees from the First Prestonsburg acquisition.
Peoples' net occupancy and equipment expense was comprised of the following:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | |
| | March 31,
2020 | December 31,
2019 | March 31,
2019 | | | |
| (Dollars in thousands) | | | | | | |
| Depreciation | $ | 1,455 | | $ | 1,508 | | $ | 1,249 | | | | |
| Repairs and maintenance costs | 757 | | 728 | | 770 | | | | |
| Net rent expense | 305 | | 302 | | 288 | | | | |
| Property taxes, utilities and other costs | 637 | | 685 | | 671 | | | | |
| Net occupancy and equipment expense | $ | 3,154 | | $ | 3,223 | | $ | 2,978 | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, |
| (Dollars in thousands) | | 2019 | 2018 |
| Depreciation | $ | 1,451 |
| $ | 1,494 |
| $ | 1,237 |
| | $ | 4,194 |
| $ | 3,704 |
|
| Repairs and maintenance costs | 803 |
| 715 |
| 697 |
| | 2,288 |
| 2,203 |
|
| Net rent expense | 182 |
| 250 |
| 264 |
| | 720 |
| 709 |
|
| Property taxes, utilities and other costs | 662 |
| 673 |
| 652 |
| | 2,006 |
| 1,903 |
|
| Net occupancy and equipment expense | $ | 3,098 |
| $ | 3,132 |
| $ | 2,850 |
| | $ | 9,208 |
| $ | 8,519 |
|
ForCompared to the first quarter of 2019, periods, net occupancy and equipment expense was impacted by the costsincreased depreciation related to investments in technological infrastructure and equipment (mainly ATMs), and the addition of nineadditional full-service bank branches from the First Prestonsburg acquisition, partially offset by a reduction in ATM repairs and maintenance costs resulting from a new vendor servicing agreement.six of which are owned.
The following table details the other items included in total non-interest expense:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | |
| | March 31,
2020 | December 31,
2019 | March 31,
2019 | | | |
| (Dollars in thousands) | | | | | | |
| E-banking expense | $ | 1,865 | | $ | 1,846 | | $ | 1,577 | | | | |
| Data processing and software expense | 1,752 | | 1,648 | | 1,545 | | | | |
| Professional fees | 1,693 | | 1,931 | | 1,276 | | | | |
| Franchise tax expense | 882 | | 797 | | 705 | | | | |
| Amortization of other intangible assets | 729 | | 888 | | 694 | | | | |
| Foreclosed real estate and other loan expenses | 578 | | 632 | | 255 | | | | |
| Marketing expense | 473 | | 573 | | 594 | | | | |
| Communication expense | 280 | | 318 | | 278 | | | | |
| FDIC insurance (credits) premiums | (5) | | (150) | | 371 | | | | |
| Other non-interest expense | 3,006 | | 2,912 | | 2,385 | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, |
| (Dollars in thousands) | | 2019 | 2018 |
| Electronic banking expense | $ | 2,070 |
| $ | 1,693 |
| $ | 1,552 |
| | $ | 5,340 |
| $ | 4,409 |
|
| Data processing and software expense | 1,572 |
| 1,567 |
| 1,408 |
| | 4,684 |
| 4,089 |
|
| Professional fees | 1,544 |
| 2,344 |
| 1,395 |
| | 5,164 |
| 6,135 |
|
| Amortization of other intangible assets | 953 |
| 824 |
| 862 |
| | 2,471 |
| 2,477 |
|
| Franchise tax expense | 797 |
| 772 |
| 616 |
| | 2,274 |
| 1,874 |
|
| Marketing expense | 634 |
| 490 |
| 456 |
| | 1,718 |
| 1,437 |
|
| Foreclosed real estate and other loan expenses | 600 |
| 469 |
| 373 |
| | 1,324 |
| 923 |
|
| Communication expense | 268 |
| 317 |
| 305 |
| | 863 |
| 949 |
|
| FDIC insurance expense | — |
| 381 |
| 391 |
| | 752 |
| 1,173 |
|
| Other non-interest expense | 2,526 |
| 6,063 |
| 2,713 |
| | 10,974 |
| 11,113 |
|
Electronic bankingE-banking expense was up in each comparisoncompared to the first quarter of 2019 due to ancustomers completing a higher volume of transactions using their debit cards, and Peoples' Internet and mobile banking service. The increase in expenses related to Peoples' Internet and mobile banking services was driven by increases in customer accounts and customer usage of mobile and online banking tools, which were impacteddriven by the acquisition of First Prestonsburg in April 2019, as well as the annual increase in the cost of each unit of service in Internet and ASB acquisitions.mobile banking.
The increase in data processing and software expense compared to prior periods was driven by systems and software upgrades and overall growth, which included: the implementation of enhanced functionalities for Peoples' core banking system, including making certain mobile banking tools available to customers; increases in customer accounts and customer usage of mobile and online banking tools; software upgrades; and additional network capacity and security features. Data processing and software expense included $93,000 of acquisition-related expenses in the first nine months of 2019, and $59,000 in the first nine months of 2018.
Professional fees decreased from the secondfourth quarter of 2019, driven by a decline in acquisition-related expenses of $566,000, combined with additional consulting work performed during second quarter of 2019 that was not duplicated in the third quarter of 2019. Professional fees were up compared to the third quarter of 2018, primarily due to higher legal expenses. Professional fees were down compared to the first nine months of 2018, mainly due to lower legal expensesexpenses. Compared to the first quarter of 2019, professional fees were up due to recruiting fees and consulting work performed during the first nine monthsquarter of 2018 compared to the first nine months of 2019.2020.
Peoples' amortization of other intangible assets is driven by acquisition-related activity. Amortization of other intangible assets for the thirdfirst quarter of 2020 declined compared to the fourth quarter of 2019 was up comparedas a result of the declining amortization from previous
acquisitions. Compared to the secondfirst quarter of 2019, amortization of intangible assets increased mainly due to additional information that was obtained during the three months ended September 30, 2019, which resulted in additional amortization given further refinement of the core deposit intangible asset related to the acquisition of First Prestonsburg.
Peoples is subject to state franchise taxes, which are based largely on Peoples' equity, in the states where Peoples has a physical presence. Franchise tax expense also includes the Ohio Financial Institution Tax ("FIT"), which is a business privilege tax that is imposed on financial institutions organized for profit and doing business in Ohio. The Ohio FIT is based on the total equity capital in proportion to the taxpayer's gross receipts in Ohio.Ohio as of the most recent year-end. Expenses related to state franchise taxes, which includes Ohio FIT, increased in the first quarter of 2020 compared to the fourth quarter of 2019 due to higher equity as of December 31, 2019 compared to 2018December 31, 2018. Expenses related to state franchise taxes increased in the first quarter of 2020 compared to the first quarter of 2019 primarily due to additional equity fromtaxes in Kentucky as a result of the issuance of common shares related to the acquisitions of First Prestonsburg and ASB and from operating results.acquisition in 2019.
Marketing expense increaseddecreased compared to the secondfourth quarter of 2019 and the thirdfirst quarter of 2018,2019, due to the timing of product marketing campaigns. Additionally, marketingMarketing expense was higher during the three and nine months ended September 30, 2019 due to overall increases in spending onincluded brand awareness and product marketing campaigns due to Peoples' expanded footprint as a result of the First Prestonsburg acquisition in 2019 and the ASB acquisition in 2018.2019.
Foreclosed real estate and other loan expenses increased in all comparisonscompared to the first quarter of 2019 primarily due to the increase in costs related to the higher production of residential real estate mortgage loans sold to the secondary market, which were driven by customer demand resulting from the decline in interest rates during the thirdlatter half of 2019 and the first quarter of 2020. Higher credit bureau expense and dealer participation payments related to higher indirect consumer lending for the quarter also contributed to the increase.
Peoples recognized credits to its FDIC insurance premiums related to its quarterly assessments during the first quarter of 2020 and the fourth quarter of 2019, combined with loans originated bycompared to an expense during the mortgage origination operation acquired as partfirst quarter of 2019. The FDIC insurance premiums credits were related to the level of the ASB acquisition.
Peoples' FDIC insurance expense declined infederal Deposit Insurance Fund ("DIF") that continued to be above the first nine months of 2019 and netted to zero during the third quarter of 2019, as the deposit insurance fund had reached its target threshold for smaller banks with total consolidated assets of less than $10 billion to recognize a credit to their insurance expense. This resulted in a reversal of Peoples' second quarter 2019 accrued expense, which was offset then by the third quarter accrual.credits. Peoples cannot reasonably anticipate any future recognition of credits, as the deposit insurance fundDIF is analyzed on a quarterly basis, and is the premise for receiving credits.
Other non-interest expense for the thirdfirst quarter of 2019 declined $3.5 million2020 increased $621,000 compared to the linked quarter and $187,000 compared to the thirdfirst quarter of 2018.2019. The decreases wereincrease was primarily due to acquisition-relatedpension settlement charges of $368,000 and expenses of $93,000 in the current quarter compared$135,000 related to $3.7 million (mainly contract termination fees) in the linked quarter, and $163,000 in the third quarter of 2018. The decline in other non-interest expense for the first nine months of 2019 compared to the same period of 2018 of $139,000 was due to small decreases across multiple line items of expense (fraud charges, director fees and stock expense, checking and savings charge-offs and printing and supplies expense). Acquisition-related expensesCOVID-19 included in other non-interest expense during the first quarter of 2020, for which there were $3.9 millionno similar expenses in the first quarter of 2019. COVID-19 expenses consisted of a $100,000 donation to Peoples' employee hardship and $3.6 milliondisaster relief fund and technology costs related to remote access for employees.
Income Tax Expense (Benefit)
Peoples recorded an income tax benefit of $156,000 for the first nine months of 2019 and 2018, respectively.
Income Tax Expense
Income tax expense was $3.3 million for the third quarter of 2019,2020, compared to $2.2an expense of $2.8 million for the linked quarter and $2.8an expense of $3.4 million for the thirdfirst quarter of 2018.2019. The increases in income tax expense compared tobenefit during the linked quarter and thirdfirst quarter of 2018 were primarily due to higher pre-tax income.
For2020 was driven by a pretax net loss, which was the first nine monthsresult of 2019, Peoplesa $17.0 million provision for credit losses recorded income tax expense of $8.9 million, compared to $6.2 million for the same period in the prior year, and the effective tax rate for the first nine months of 2019 was 18.6%, compared to 16.1% for the first nine months of 2018. The year-over-year increase in income tax expense was primarily due to higher pre-tax income. The first nine months of 2019 included a tax benefit of $195,000 recorded for the vesting of restricted stock during the period. The first nine months of 2018 included an $805,000 valuation allowance release, as well as a tax benefit of $314,000 recorded for the vesting of restricted stock during the period.quarter.
Additional information regarding income taxes can be found in "Note 12 Income Taxes" of the Notes to the Consolidated Financial Statements included in Peoples' 20182019 Form 10-K.
Pre-Provision Net Revenue (non-US GAAP)
Pre-provision net revenue ("PPNR") has become a key financial measure used by state and federal bank regulatory agencies when assessing the capital adequacy of financial institutions. PPNR is defined as net interest income plus total non-interest income, (excluding all gains and losses) minus total non-interest expense while excluding the recovery of, or provision for, loan losses and all gains and losses, included in earnings.minus total non-interest expense. As a result, PPNR represents the earnings capacity that can be either retained in order to build capital or used to absorb unexpected losses and preserve existing capital. This ratio represents a non-US GAAP financial measure since it excludes the provision for loancredit losses and all gains and/or losses included in earnings.
The following table provides a reconciliation of this non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:
| | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | |
| March 31,
2020 | December 31,
2019 | March 31,
2019 | | | |
| (Dollars in thousands) | | | | | | |
| Pre-provision net revenue: | | | | | | |
| (Loss) income before income taxes | $ | (921) | | $ | 17,627 | | $ | 17,746 | | | | |
| Add: provision for credit losses (a) | 16,969 | | 1,136 | | — | | | | |
| | | | | | |
| Add: net loss on OREO | 17 | | 44 | | 25 | | | | |
| | | | | | |
| Add: net loss on other assets | 70 | | 188 | | 157 | | | | |
| | | | | | |
| | | | | | |
| Less: recovery of credit losses (a) | — | | — | | 263 | | | | |
| Less: net gain on investment securities | 319 | | 94 | | 30 | | | | |
| | | | | | |
| Less: gain on other transactions | — | | 3 | | — | | | | |
| Pre-provision net revenue | $ | 15,816 | | $ | 18,898 | | $ | 17,635 | | | | |
| | | | | | |
| | | | | | |
| Total average assets | $ | 4,381,627 | | $ | 4,350,414 | | $ | 3,985,621 | | | | |
| Pre-provision net revenue to total average assets (annualized) | 1.45 | % | 1.72 | % | 1.79 | % | | | |
| | | | | | |
| Weighted-average common shares outstanding - diluted | 20,538,214 | 20,559,127 | 19,508,868 | | | |
| Pre-provision net revenue per common share - diluted | $0.77 | $0.91 | $0.90 | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, |
| (Dollars in thousands) | | 2019 | 2018 |
| Pre-provision net revenue: | | | | | | |
| Income before income taxes | $ | 18,149 |
| $ | 11,836 |
| $ | 15,546 |
| | $ | 47,731 |
| $ | 38,574 |
|
| Add: provision for loan losses | 1,005 |
| 626 |
| 1,302 |
| | 1,368 |
| 4,473 |
|
| Add: loss on debt extinguishment | — |
| — |
| — |
| | — |
| 13 |
|
| Add: net loss on OREO | 5 |
| 24 |
| — |
| | 54 |
| — |
|
| Add: net loss on investment securities | — |
| 57 |
| — |
| | 57 |
| 146 |
|
| Add: net loss on other assets | 73 |
| 274 |
| — |
| | 504 |
| 239 |
|
| Add: net loss on other transactions | — |
| — |
| — |
| | — |
| 76 |
|
| Less: net gain on OREO | — |
| — |
| — |
| | — |
| 9 |
|
| Less: net gain on investment securities | 97 |
| — |
| — |
| | 127 |
| — |
|
| Less: net gain on other assets | — |
| — |
| 12 |
| | — |
| — |
|
| Less: gain on other transactions | — |
| 5 |
| — |
| | 5 |
| — |
|
| Pre-provision net revenue | $ | 19,135 |
| $ | 12,812 |
| $ | 16,836 |
| | $ | 49,582 |
| $ | 43,512 |
|
| Total average assets | $ | 4,311,389 |
| $ | 4,239,779 |
| $ | 3,998,254 |
| | $ | 4,179,663 |
| $ | 3,832,554 |
|
| Pre-provision net revenue to total average assets (a) | 1.76 | % | 1.21 | % | 1.67 | % | | 1.59 | % | 1.52 | % |
| (a) Presented on an annualized basis. | | | | | | |
The decline in PPNR, and the ratio of PPNR, and PPNR per diluted common share to total average assets increased in the third quarter of 2019 compared to the linked quarter, due primarily to higher income before income taxes reflecting lower acquisition-related expenses. Compared to the third quarter of 2018, the increase in PPNR and PPNR to total average assetsboth comparisons was driven by higher net interest income. PPNRthe impact of traditional seasonal factors, combined with the recent developments related to COVID-19 and the ratioreactions of PPNR to total average assets forgovernmental authorities, individuals and businesses, and the first nine months of 2019, compared toimpact on the first nine months of 2018, increased primarily due to higher net interest income, with both periods beingeconomy, which negatively impacted by acquisition-relatedrevenues while expenses of $7.2 million for the first nine months of 2019 and $6.9 million for the first nine months of 2018.increased.
Core Non-Interest Expense (non-US GAAP)
Core non-interest expense is a financial measure used to evaluate Peoples' recurring expense stream. This measure is non-US GAAP since it excludes the impact of all acquisition-related expenses, and pension settlement charges.charges, severance expenses, and COVID-19 expenses.
The following tables provide reconciliations of this non-US GAAP measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, | | March 31,
2020 | December 31,
2019 | March 31,
2019 | |
| (Dollars in thousands) | | 2019 | 2018 | (Dollars in thousands) | |
| | Core non-interest expense: | | | | Core non-interest expense: | | | |
| Total non-interest expense | $ | 32,993 |
| $ | 38,876 |
| $ | 30,829 |
| | $ | 103,729 |
| $ | 95,021 |
| Total non-interest expense | $ | 34,325 | | $ | 33,521 | | $ | 31,860 | | |
| | Less: acquisition-related expenses | 199 |
| 6,770 |
| 675 |
| | 7,222 |
| 6,880 |
| Less: acquisition-related expenses | 30 | | 65 | | 253 | | |
| Less: pension settlement charges | — |
| — |
| 176 |
| | — |
| 176 |
| Less: pension settlement charges | 368 | | — | | — | | |
| Less: severance expenses | | Less: severance expenses | 13 | | 270 | | — | | |
| | Less: COVID-19 expenses | | Less: COVID-19 expenses | 140 | | — | | — | | |
| Core non-interest expense | $ | 32,794 |
| $ | 32,106 |
| $ | 29,978 |
| | $ | 96,507 |
| $ | 87,965 |
| Core non-interest expense | $ | 33,774 | | $ | 33,186 | | $ | 31,607 | | |
Efficiency Ratio (non-US GAAP)
The efficiency ratio is a key financial measure used to monitor performance. The efficiency ratio is calculated as total non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus total non-interest income excluding net gains and losses. This measure is non-US GAAP since it excludes amortization of other intangible assets and all gains and/or losses included in earnings, and uses fully tax-equivalent net interest income.
The following table provides a reconciliation of this non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | | |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, | | March 31,
2020 | December 31,
2019 | March 31,
2019 | | |
| (Dollars in thousands) | | 2019 | 2018 | (Dollars in thousands) | | | |
| | | | | | |
| Efficiency ratio: | | | | Efficiency ratio: | | |
| Total non-interest expense | $ | 32,993 |
| $ | 38,876 |
| $ | 30,829 |
| | $ | 103,729 |
| $ | 95,021 |
| Total non-interest expense | $ | 34,325 | | $ | 33,521 | | $ | 31,860 | | | |
| Less: amortization of other intangible assets | 953 |
| 824 |
| 862 |
| | 2,471 |
| 2,477 |
| Less: amortization of other intangible assets | 729 | | 888 | | 694 | | | |
| Adjusted total non-interest expense | $ | 32,040 |
| $ | 38,052 |
| $ | 29,967 |
| | $ | 101,258 |
| $ | 92,544 |
| Adjusted total non-interest expense | $ | 33,596 | | $ | 32,633 | | $ | 31,166 | | | |
| | | | | | |
| Total non-interest income | $ | 16,393 |
| $ | 15,289 |
| $ | 14,353 |
| | $ | 47,111 |
| $ | 42,577 |
| Total non-interest income | $ | 15,737 | | $ | 17,163 | | $ | 15,429 | | | |
| Less: net gain (loss) on investment securities | 97 |
| (57 | ) | — |
| | 70 |
| (146 | ) | |
| Less: net (loss) gain on asset disposals and other transactions | (78 | ) | (293 | ) | 12 |
| | (553 | ) | (319 | ) | |
| Less: net gain on investment securities | | Less: net gain on investment securities | 319 | | 94 | | 30 | | | |
| Less: net loss on asset disposals and other transactions | | Less: net loss on asset disposals and other transactions | (87) | | (229) | | (182) | | | |
| Total non-interest income excluding net gains and losses | $ | 16,374 |
| $ | 15,639 |
| $ | 14,341 |
| | $ | 47,594 |
| $ | 43,042 |
| Total non-interest income excluding net gains and losses | $ | 15,505 | | $ | 17,298 | | $ | 15,581 | | | |
| | | | | | |
| Net interest income | $ | 35,754 |
| $ | 36,049 |
| $ | 33,324 |
| | $ | 105,717 |
| $ | 95,491 |
| Net interest income | $ | 34,636 | | $ | 35,121 | | $ | 33,914 | | | |
| Add: fully tax-equivalent adjustment (a) | 314 |
| 267 |
| 221 |
| | 781 |
| 670 |
| Add: fully tax-equivalent adjustment (a) | 272 | | 287 | | 200 | | | |
| Net interest income on a fully tax-equivalent basis | $ | 36,068 |
| $ | 36,316 |
| $ | 33,545 |
| | $ | 106,498 |
| $ | 96,161 |
| Net interest income on a fully tax-equivalent basis | $ | 34,908 | | $ | 35,408 | | $ | 34,114 | | | |
| | | | | | |
| Adjusted revenue | $ | 52,442 |
| $ | 51,955 |
| $ | 47,886 |
| | $ | 154,092 |
| $ | 139,203 |
| Adjusted revenue | $ | 50,413 | | $ | 52,706 | | $ | 49,695 | | | |
| | | | | | |
| Efficiency ratio | 61.10 | % | 73.24 | % | 62.58 | % | | 65.71 | % | 66.48 | % | Efficiency ratio | 66.64 | % | 61.92 | % | 62.71 | % | | |
| | | | | | |
| Efficiency ratio adjusted for non-core items: | | | | Efficiency ratio adjusted for non-core items: | | |
| Core non-interest expense | $ | 32,794 |
| $ | 32,106 |
| $ | 29,978 |
| | $ | 96,507 |
| $ | 87,965 |
| Core non-interest expense | $ | 33,774 | | $ | 33,186 | | $ | 31,607 | | | |
| Less: amortization of other intangible assets | 953 |
| 824 |
| 862 |
| | 2,471 |
| 2,477 |
| Less: amortization of other intangible assets | 729 | | 888 | | 694 | | | |
| Adjusted core non-interest expense | $ | 31,841 |
| $ | 31,282 |
| $ | 29,116 |
| | $ | 94,036 |
| $ | 85,488 |
| Adjusted core non-interest expense | $ | 33,045 | | $ | 32,298 | | $ | 30,913 | | | |
| | | | | | |
| Total non-interest income excluding net gains and losses | $ | 16,374 |
| $ | 15,639 |
| $ | 14,341 |
| | $ | 47,594 |
| $ | 43,042 |
| |
| Core non-interest income excluding net gains and losses | | Core non-interest income excluding net gains and losses | $ | 15,505 | | $ | 17,298 | | $ | 15,581 | | | |
| Net interest income on a fully tax-equivalent basis | 36,068 |
| 36,316 |
| 33,545 |
| | 106,498 |
| 96,161 |
| Net interest income on a fully tax-equivalent basis | 34,908 | | 35,408 | | 34,114 | | | |
| Adjusted revenue | $ | 52,442 |
| $ | 51,955 |
| $ | 47,886 |
| | $ | 154,092 |
| $ | 139,203 |
| Adjusted revenue | $ | 50,413 | | $ | 52,706 | | $ | 49,695 | | | |
| | | | | | |
| Efficiency ratio adjusted for non-core items | 60.72 | % | 60.21 | % | 60.80 | % | | 61.03 | % | 61.41 | % | Efficiency ratio adjusted for non-core items | 65.55 | % | 61.28 | % | 62.21 | % | | |
(a) Based on a 21% statutory federal corporate income tax rate.
The improvement in the efficiency ratio compared toand the linked quarter was driven by a decrease in acquisition-related expenses of $6.6 million. The efficiency ratio adjusted for non-core items increased comparedfor the first quarter of 2020 were negatively impacted by traditional seasonal factors, combined with the recent developments related to COVID-19 and the linked quarter primarily due to the lackreactions of growth in net interest income givengovernmental authorities, individuals and businesses, and the impact ofon the rate environment, offset partially by growtheconomy. These factors drove the decline in earnings assets. The efficiency ratio adjusted for non-core items improved compared to the third quarter of 2018, mostly due to higher net interest income and increased fee revenue. Management is targeting an efficiency ratio of 60% to 62% for the full year of 2019, after excluding acquisition-relatedrevenue, while expenses and other non-core expenses.increased.
Return on Average Assets Adjusted for Non-Core Items Ratio (non-US GAAP)
In addition to return on average assets, management uses return on average assets adjusted for non-core items to monitor performance. The return on average assets ratio adjusted for non-core items ratio represents a non-US GAAP financial measure since it excludes the after-tax impact of all gains and losses, acquisition-related expenses, pension settlement charges, severance expenses, and acquisition-related expenses.COVID-19 expenses..
The following table provides a reconciliation of this non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, | | March 31,
2020 | December 31,
2019 | March 31,
2019 | |
| (Dollars in thousands) | | 2019 | 2018 | (Dollars in thousands) | |
| | | | | | |
| Annualized net income adjusted for non-core items: | | | |
| Net income | $ | 14,868 |
| $ | 9,598 |
| $ | 12,725 |
| | $ | 38,835 |
| $ | 32,358 |
| |
| Add: net loss on investment securities | — |
| 57 |
| — |
| | — |
| 146 |
| |
| Less: tax effect of net loss on investment securities (a) | — |
| 12 |
| — |
| | — |
| 31 |
| |
| Annualized net (loss) income adjusted for non-core items: | | Annualized net (loss) income adjusted for non-core items: | |
| Net (loss) income | | Net (loss) income | $ | (765) | | $ | 14,860 | | $ | 14,369 | | |
| | Less: net gain on investment securities | 97 |
| — |
| — |
| | 70 |
| — |
| Less: net gain on investment securities | 319 | | 94 | | 30 | | |
| Add: tax effect of net gain on investment securities (a) | 20 |
| — |
| — |
| | 15 |
| — |
| Add: tax effect of net gain on investment securities (a) | 67 | | 20 | | 6 | | |
| Add: net loss on asset disposals and other transactions | 78 |
| 293 |
| — |
| | 553 |
| 319 |
| Add: net loss on asset disposals and other transactions | 87 | | 229 | | 182 | | |
| Less: tax effect of net loss on asset disposals and other transactions (a) | 16 |
| 62 |
| — |
| | 116 |
| 67 |
| Less: tax effect of net loss on asset disposals and other transactions (a) | 18 | | 48 | | 38 | | |
| Less: net gain on asset disposals and other transactions (a) | — |
| — |
| 12 |
| | — |
| — |
| |
| Add: tax effect of net loss on asset disposals and other transactions (a) | — |
| — |
| 3 |
| | — |
| — |
| |
| | Add: acquisition-related expenses | 199 |
| 6,770 |
| 675 |
| | 7,222 |
| 6,880 |
| Add: acquisition-related expenses | 30 | | 65 | | 253 | | |
| Less: tax effect of acquisition-related expenses (a) | 42 |
| 1,422 |
| 142 |
| | 1,517 |
| 1,445 |
| Less: tax effect of acquisition-related expenses (a) | 6 | | 14 | | 53 | | |
| Add: pension settlement charges (a) | — |
| — |
| 176 |
| | — |
| 176 |
| |
| Add: pension settlement charges | | Add: pension settlement charges | 368 | | — | | — | | |
| Less: tax effect of pension settlement charges (a) | — |
| — |
| 37 |
| | — |
| 37 |
| Less: tax effect of pension settlement charges (a) | 77 | | — | | — | | |
| Less: release of deferred tax asset valuation allowance | — |
| — |
| — |
| | — |
| 805 |
| |
| Net income adjusted for non-core items | $ | 15,010 |
| $ | 15,222 |
| $ | 13,388 |
| | $ | 44,922 |
| $ | 37,494 |
| |
| Add: severance expenses | | Add: severance expenses | 13 | | 270 | | — | | |
| Less: tax effect of severance expenses (a) | | Less: tax effect of severance expenses (a) | 3 | | 57 | | — | | |
| Add: COVID-19 expenses | | Add: COVID-19 expenses | 140 | | — | | — | | |
| Less: tax effect of COVID-19 (a) | | Less: tax effect of COVID-19 (a) | 29 | | — | | — | | |
| | Net (loss) income adjusted for non-core items (after tax) | | Net (loss) income adjusted for non-core items (after tax) | $ | (512) | | $ | 15,231 | | $ | 14,689 | | |
| Days in the period | 92 |
| 91 |
| 92 |
| | 273 |
| 273 |
| Days in the period | 91 | | 92 | | 90 | | |
| Days in the year | 365 |
| 365 |
| 365 |
| | 365 |
| 365 |
| Days in the year | 366 | | 365 | | 365 | | |
| Annualized net income | $ | 58,987 |
| $ | 38,497 |
| $ | 50,485 |
| | $ | 51,922 |
| $ | 43,263 |
| |
| Annualized net income adjusted for non-core items | $ | 59,551 |
| $ | 61,055 |
| $ | 53,115 |
| | $ | 60,061 |
| $ | 50,129 |
| |
| Annualized net (loss) income | | Annualized net (loss) income | $ | (3,077) | | $ | 58,955 | | $ | 58,274 | | |
| Annualized net (loss) income adjusted for non-core items (after tax) | | Annualized net (loss) income adjusted for non-core items (after tax) | $ | (2,059) | | $ | 60,427 | | $ | 59,572 | | |
| Return on average assets: | | | | Return on average assets: | | |
| Annualized net income | $ | 58,987 |
| $ | 38,497 |
| $ | 50,485 |
| | $ | 51,922 |
| $ | 43,263 |
| |
| Annualized net (loss) income | | Annualized net (loss) income | $ | (3,077) | | $ | 58,955 | | $ | 58,274 | | |
| Total average assets | 4,311,389 |
| 4,239,779 |
| 3,998,254 |
| | 4,179,663 |
| 3,832,554 |
| Total average assets | 4,381,627 | | 4,350,414 | | 3,985,621 | | |
| Return on average assets | 1.37 | % | 0.91 | % | 1.26 | % | | 1.24 | % | 1.13 | % | Return on average assets | (0.07) | % | 1.36 | % | 1.46 | % | |
| Return on average assets adjusted for non-core items: | Return on average assets adjusted for non-core items: | | | Return on average assets adjusted for non-core items: | |
| Annualized net income adjusted for non-core items | $ | 59,551 |
| $ | 61,055 |
| $ | 53,115 |
| | $ | 60,061 |
| $ | 50,129 |
| |
| Annualized net (loss) income adjusted for non-core items (after tax) | | Annualized net (loss) income adjusted for non-core items (after tax) | $ | (2,059) | | $ | 60,427 | | $ | 59,572 | | |
| Total average assets | 4,311,389 |
| 4,239,779 |
| 3,998,254 |
| | 4,179,663 |
| 3,832,554 |
| Total average assets | 4,381,627 | | 4,350,414 | | 3,985,621 | | |
| Return on average assets adjusted for non-core items | 1.38 | % | 1.44 | % | 1.33 | % | | 1.44 | % | 1.31 | % | Return on average assets adjusted for non-core items | (0.05) | % | 1.39 | % | 1.49 | % | |
(a) Based on a 21% statutory federal corporate income tax rate.
The returnnegative returns on average assets increased in the third quarter of 2019 compared to the linked quarter, driven by a decline in acquisition-related expenses of $6.6 million compared to the linked quarter, partially offset by higher average assets, which resulted from the First Prestonsburg acquisition. The decline in the returnand on average assets adjusted for non-core items in the thirdfirst quarter of 2019 compared to the linked quarter was2020 were driven by the increase in average assets, combined with the slight decline in net interest income. The increases in return on average assets and return on average assets adjusted$17.0 million provision for non-core items comparedcredit losses recorded for expected credit losses due to the thirdeconomic downturn related to the impacts of COVID-19 pandemic during the quarter and first nine monthsthe resulting impact on the economic assumptions used in estimating the allowance of 2018, which were impacted bycredit losses under the First Prestonsburg acquisition, and the ASB acquisitionCECL model. Future provisioning will be directly related to changes in the nine month comparison, were driven by higher net interest income, higher non-interest income,economic assumptions, mainly U.S. and a lower provision for loan losses, partially offset by an increase in average assets.Ohio unemployment levels and Ohio Gross Domestic Product, as well as other credit quality indicators.
Return on Average Tangible Equity Ratio (non-US GAAP)
The return on average tangible equity ratio is a key financial measure used to monitor performance. The return on tangible equityThis ratio is calculated as annualized net (loss) income (less the after-tax impact of amortization of other intangible assets) divided by tangible equity. The return on tangible equity is calculated as net income (less the after-tax impact of amortization of other intangible assets) divided byaverage tangible equity. This measure is non-US GAAP since it excludes amortization of other intangible assets from earnings and the impact of goodwill and other intangible assets acquired through acquisitions on total stockholders' equity.
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | September 30,
2019 | June 30,
2019 | September 30,
2018 | | September 30, | | March 31,
2020 | December 31,
2019 | March 31,
2019 | |
| (Dollars in thousands) | | 2019 | 2018 | (Dollars in thousands) | |
| Annualized net income excluding amortization of other intangible assets: | | | |
| Net income | $ | 14,868 |
| $ | 9,598 |
| $ | 12,725 |
| | $ | 38,835 |
| $ | 32,358 |
| |
| Annualized net (loss) income excluding amortization of other intangible assets: | | Annualized net (loss) income excluding amortization of other intangible assets: | |
| Net (loss) income | | Net (loss) income | $ | (765) | | $ | 14,860 | | $ | 14,369 | | |
| Add: amortization of other intangible assets | 953 |
| 824 |
| 862 |
| | 2,471 |
| 2,477 |
| Add: amortization of other intangible assets | 729 | | 888 | | 694 | | |
| Less: tax effect of amortization of other intangible assets (a) | 200 |
| 173 |
| 181 |
| | 519 |
| 520 |
| Less: tax effect of amortization of other intangible assets (a) | 153 | | 186 | | 146 | | |
| Net income excluding amortization of other intangible assets | $ | 15,621 |
| $ | 10,249 |
| $ | 13,406 |
| | $ | 40,787 |
| $ | 34,315 |
| |
| Net (loss) income excluding amortization of other intangible assets | | Net (loss) income excluding amortization of other intangible assets | $ | (189) | | $ | 15,562 | | $ | 14,917 | | |
| Days in the period | 92 |
| 91 |
| 92 |
| | 273 |
| 273 |
| Days in the period | 91 | | 92 | | 90 | | |
| Days in the year | 365 |
| 365 |
| 365 |
| | 365 |
| 365 |
| Days in the year | 366 | | 365 | | 365 | | |
| Annualized net income | $ | 58,987 |
| $ | 38,497 |
| $ | 50,485 |
| | $ | 51,922 |
| $ | 43,263 |
| |
| Annualized net income excluding amortization of other intangible assets | $ | 61,975 |
| $ | 41,109 |
| $ | 53,187 |
| | $ | 54,532 |
| $ | 45,879 |
| |
| Annualized net (loss) income | | Annualized net (loss) income | $ | (3,077) | | $ | 58,955 | | $ | 58,274 | | |
| Annualized net (loss) income excluding amortization of other intangible assets | | Annualized net (loss) income excluding amortization of other intangible assets | $ | (760) | | $ | 61,741 | | $ | 60,497 | | |
| Average tangible equity: | Average tangible equity: | | | | Average tangible equity: | | | |
| Total average stockholders' equity | $ | 583,269 |
| $ | 564,992 |
| $ | 501,785 |
| | $ | 557,702 |
| $ | 482,138 |
| Total average stockholders' equity | $ | 596,246 | | $ | 591,112 | | $ | 524,196 | | |
| Less: average goodwill and other intangible assets | 179,487 |
| 175,169 |
| 163,615 |
| | 172,175 |
| 156,540 |
| Less: average goodwill and other intangible assets | 177,984 | | 178,163 | | 161,673 | | |
| Average tangible equity | $ | 403,782 |
| $ | 389,823 |
| $ | 338,170 |
| | $ | 385,527 |
| $ | 325,598 |
| Average tangible equity | $ | 418,262 | | $ | 412,949 | | $ | 362,523 | | |
| Return on average stockholders' equity ratio: | Return on average stockholders' equity ratio: | | | | Return on average stockholders' equity ratio: | | | |
| Annualized net income | $ | 58,987 |
| $ | 38,497 |
| $ | 50,485 |
| | $ | 51,922 |
| $ | 43,263 |
| |
| Annualized net (loss) income | | Annualized net (loss) income | $ | (3,077) | | $ | 58,955 | | $ | 58,274 | | |
| Average stockholders' equity | $ | 583,269 |
| $ | 564,992 |
| $ | 501,785 |
| | $ | 557,702 |
| $ | 482,138 |
| Average stockholders' equity | $ | 596,246 | | $ | 591,112 | | $ | 524,196 | | |
| Return on average stockholders' equity | 10.11 | % | 6.81 | % | 10.06 | % | | 9.31 | % | 8.97 | % | Return on average stockholders' equity | (0.52) | % | 9.97 | % | 11.12 | % | |
| Return on average tangible equity ratio: | Return on average tangible equity ratio: | | | Return on average tangible equity ratio: | |
| Annualized net income excluding amortization of other intangible assets | $ | 61,975 |
| $ | 41,109 |
| $ | 53,187 |
| | $ | 54,532 |
| $ | 45,879 |
| |
| Annualized net (loss) income excluding amortization of other intangible assets | | Annualized net (loss) income excluding amortization of other intangible assets | $ | (760) | | $ | 61,741 | | $ | 60,497 | | |
| Average tangible equity | $ | 403,782 |
| $ | 389,823 |
| $ | 338,170 |
| | $ | 385,527 |
| $ | 325,598 |
| Average tangible equity | $ | 418,262 | | $ | 412,949 | | $ | 362,523 | | |
| Return on average tangible equity | 15.35 | % | 10.55 | % | 15.73 | % | | 14.14 | % | 14.09 | % | Return on average tangible equity | (0.18) | % | 14.95 | % | 16.69 | % | |
(a) Based on a 21% statutory federal corporate income tax rate.
Compared to the linked quarter, the returnThe negative returns on average stockholders' equity and on average tangible stockholders' equity ratios during the first quarter of 2020 were up, primarily due to the decline in acquisition-related costs compared$17.0 million provision for credit losses recorded for expected credit losses due to the secondeconomic downturn related to the COVID-19 pandemic during the quarter and the resulting impact on the economic assumptions used in estimating the allowance of credit losses under the CECL model, which resulted in a net loss for the first quarter of 2019. Compared to the third quarter of 2018, the return on average stockholders' equity and on average tangible stockholders' equity ratios were impacted by the First Prestonsburg acquisition, which increased capital. The return on average stockholders' equity and the return on average tangible stockholders' equity ratios increased in the first nine months of 2019 compared to the first nine months of 2018, reflecting an increase in net income, which was partially offset by dividends declared and paid during the
2020.
period. Compared to the first nine months of 2018, these ratios were also impacted by the First Prestonsburg acquisition and, to a lesser extent, the ASB acquisition, which increased capital.
FINANCIAL CONDITION
Cash and Cash Equivalents
At September 30, 2019,March 31, 2020, Peoples' interest-bearing deposits in other banks increased $37.2$45.2 million from December 31, 2018.2019. The total cash and cash equivalent balance included $9.9$34.6 million of excess cash reserves being maintained at the FRB of Cleveland at September 30, 2019,March 31, 2020, compared to $11.2$15.6 million at December 31, 2018.2019. The amount of excess cash reserves maintained is dependent upon Peoples' daily liquidity position, which is driven primarily by changes in deposit and loan balances.
Through the first ninethree months of 2019,2020, Peoples' total cash and cash equivalents increased $43.8$48.5 million as Peoples' net cash provided used in investing activities of $23.8$51.1 million was less than the sum of net cash provided by operatingfinancing and financingoperating activities of $52.5$81.3 million and $15.1$18.2 million, respectively. Peoples' investing activities reflected a net decrease of $12.0$32.3 million in loans and $246.6$72.9 million in purchases of available-for-sale investment securities, which were partially offset by $206.5$68.7 million in net proceeds from sales, principal payments, calls and prepayments on available-for-sale and held-to-maturity investment securities. Financing activities included a $143.7$107.0 million net increase in deposits and $50.0 million of proceeds from long-term borrowings, offset partially by a decrease of $105.6$57.3 million in short-term borrowings, as well as $19.2the purchase of $10.2 million of treasury stock under the share repurchase program and $6.9 million of cash dividends paid.
Further information regarding the management of Peoples' liquidity position can be found later in this discussion under “Interest Rate Sensitivity and Liquidity.”
Investment Securities
The following table provides information regarding Peoples’ investment portfolio:
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | March 31,
2020 | December 31,
2019 | September 30,
2019 | June 30,
2019 | March 31,
2019 |
| Available-for-sale securities, at fair value: | | | | | |
| Obligations of: | | | | | | | | | | |
| | | | | |
| U.S. government sponsored agencies | $ | 6,361 | | $ | 8,209 | | $ | 12,145 | | $ | 19,051 | | $ | — | |
| States and political subdivisions | 108,812 | | 114,104 | | 115,613 | | 125,418 | | 84,827 | |
| Residential mortgage-backed securities | 823,893 | | 791,009 | | 835,172 | | 748,132 | | 706,976 | |
| Commercial mortgage-backed securities | 17,061 | | 18,088 | | 20,461 | | 22,664 | | 6,649 | |
| Bank-issued trust preferred securities | 4,708 | | 4,691 | | 4,644 | | 4,099 | | 4,118 | |
| | | | | |
| | | | | |
| | | | | |
| Total fair value | $ | 960,835 | | $ | 936,101 | | $ | 988,035 | | $ | 919,364 | | $ | 802,570 | |
| Total amortized cost | $ | 932,179 | | $ | 929,395 | | $ | 976,286 | | $ | 910,431 | | $ | 806,641 | |
| Net unrealized gain (loss) | $ | 28,656 | | $ | 6,706 | | $ | 11,749 | | $ | 8,933 | | $ | (4,071) | |
| Held-to-maturity securities, at amortized cost: | | | | | |
| Obligations of: | | | | | | | |
| States and political subdivisions (a) | 3,838 | | $ | 4,346 | | $ | 4,395 | | $ | 4,398 | | $ | 4,401 | |
| Residential mortgage-backed securities | 29,070 | | 21,494 | | 22,412 | | 23,335 | | 28,348 | |
| Commercial mortgage-backed securities | 5,830 | | 5,907 | | 7,022 | | 7,106 | | 2,857 | |
| Total amortized cost | $ | 38,738 | | $ | 31,747 | | $ | 33,829 | | $ | 34,839 | | $ | 35,606 | |
| Other investment securities | $ | 46,924 | | $ | 42,730 | | $ | 43,045 | | $ | 43,508 | | $ | 41,449 | |
| Total investment securities: | | | | | | |
| Amortized cost | $ | 1,017,841 | | $ | 1,003,872 | | $ | 1,053,160 | | $ | 988,778 | | $ | 883,696 | |
| Carrying value | $ | 1,046,497 | | $ | 1,010,578 | | $ | 1,064,909 | | $ | 997,711 | | $ | 879,625 | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | | | | | |
| (Dollars in thousands) | September 30,
2019 | June 30,
2019 | March 31,
2019 | December 31,
2018 | September 30,
2018 |
| Available-for-sale securities, at fair value: | | | | |
| Obligations of: | | | | | |
| U.S. government sponsored agencies | $ | 12,145 |
| $ | 19,051 |
| $ | — |
| $ | — |
| $ | — |
|
| States and political subdivisions | 115,613 |
| 125,418 |
| 84,827 |
| 88,587 |
| 93,790 |
|
| Residential mortgage-backed securities | 835,172 |
| 748,132 |
| 706,976 |
| 692,608 |
| 688,656 |
|
| Commercial mortgage-backed securities | 20,461 |
| 22,664 |
| 6,649 |
| 6,707 |
| 6,713 |
|
| Bank-issued trust preferred securities | 4,644 |
| 4,099 |
| 4,118 |
| 3,989 |
| 4,166 |
|
| Total fair value | $ | 988,035 |
| $ | 919,364 |
| $ | 802,570 |
| $ | 791,891 |
| $ | 793,325 |
|
| Total amortized cost | $ | 976,286 |
| $ | 910,431 |
| $ | 806,641 |
| $ | 804,655 |
| $ | 819,431 |
|
| Net unrealized gain (loss) | $ | 11,749 |
| $ | 8,933 |
| $ | (4,071 | ) | $ | (12,764 | ) | $ | (26,106 | ) |
| Held-to-maturity securities, at amortized cost: | | | | |
| Obligations of: |
|
|
|
| | | |
| States and political subdivisions | $ | 4,395 |
| $ | 4,398 |
| $ | 4,401 |
| $ | 4,403 |
| $ | 4,451 |
|
| Residential mortgage-backed securities | 22,412 |
| 23,335 |
| 28,348 |
| 29,044 |
| 29,765 |
|
| Commercial mortgage-backed securities | 7,022 |
| 7,106 |
| 2,857 |
| 3,514 |
| 3,574 |
|
| Total amortized cost | $ | 33,829 |
| $ | 34,839 |
| $ | 35,606 |
| $ | 36,961 |
| $ | 37,790 |
|
| Other investment securities | $ | 43,045 |
| $ | 43,508 |
| $ | 41,449 |
| $ | 42,985 |
| $ | 43,044 |
|
| Total investment securities: |
|
| | | | |
| Amortized cost | $ | 1,053,160 |
| $ | 988,778 |
| $ | 883,696 |
| $ | 884,601 |
| $ | 900,265 |
|
| Carrying value | $ | 1,064,909 |
| $ | 997,711 |
| $ | 879,625 |
| $ | 871,837 |
| $ | 874,159 |
|
At September 30, 2019,March 31, 2020, available-for-sale securities were up compared to June 30,December 31, 2019 as Peoples deployed excess liquidityprimarily due to increases in investmentfair value driven by overall declines in market interest rates during the first quarter of 2020. Compared to December 31, 2019, the increase in held-to-maturity securities was driven by purchases during the quarter. The increases in investment securities at September 30, 2019March 31, 2020 compared to March 31, 2019 and prior periods was driven by the investment securities acquired in the First Prestonsburg acquisition,
combined with increases in fair value driven by overall declines in market interest rates during the laterlatter half of 2019 and the first nine monthsquarter of 2019. In the First Prestonsburg acquisition, Peoples acquired investment securities totaling $139.7 million and subsequently sold $65.1 million of acquired available-for-sale investment securities. In April and May of 2019, $53.7 million of the proceeds were reinvested.2020.
Additional information regarding Peoples' investment portfolio can be found in "Note 3 Investment Securities" of the Notes to the Unaudited Consolidated Financial Statements.
Loans
The following table provides information regarding outstanding loan balances:
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | March 31,
2020 | December 31,
2019 | September 30,
2019 | June 30,
2019 | March 31,
2019 |
| Originated loans: | | | | | |
| Construction | $ | 106,415 | | $ | 83,283 | | $ | 100,338 | | $ | 102,904 | | $ | 116,992 | |
| Commercial real estate, other | 707,339 | | 671,576 | | 659,103 | | 641,061 | | 630,679 | |
| Commercial real estate | 813,754 | | 754,859 | | 759,441 | | 743,965 | | 747,671 | |
| Commercial and industrial | 611,791 | | 622,175 | | 564,279 | | 548,460 | | 558,070 | |
| Residential real estate | 293,078 | | 314,935 | | 308,964 | | 299,173 | | 297,667 | |
| Home equity lines of credit | 91,344 | | 93,013 | | 92,910 | | 90,374 | | 90,831 | |
| Consumer, indirect | 418,022 | | 417,127 | | 423,217 | | 419,595 | | 410,172 | |
| Consumer, direct | 71,230 | | 70,852 | | 72,699 | | 72,209 | | 69,710 | |
| Consumer | 489,252 | | 487,979 | | 495,916 | | 491,804 | | 479,882 | |
| Deposit account overdrafts | 610 | | 878 | | 1,081 | | 676 | | 518 | |
| Total originated loans | $ | 2,299,829 | | $ | 2,273,839 | | $ | 2,222,591 | | $ | 2,174,452 | | $ | 2,174,639 | |
| Acquired loans (a): | | | | | |
| Construction | $ | 4,450 | | $ | 5,235 | | $ | 4,435 | | $ | 6,775 | | $ | 7,966 | |
| Commercial real estate, other | 190,478 | | 161,662 | | 171,096 | | 201,909 | | 171,785 | |
| Commercial real estate | 194,928 | | 166,897 | | 175,531 | | 208,684 | | 179,751 | |
| Commercial and industrial | 42,739 | | 40,818 | | 43,961 | | 51,506 | | 34,837 | |
| Residential real estate | 332,288 | | 346,541 | | 358,053 | | 348,439 | | 308,137 | |
| Home equity lines of credit | 36,667 | | 39,691 | | 41,942 | | 41,262 | | 38,084 | |
| Consumer, indirect | 44 | | 58 | | 67 | | 90 | | 111 | |
| Consumer, direct | 4,942 | | 5,681 | | 8,171 | | 9,100 | | 2,021 | |
| Consumer | 4,986 | | 5,739 | | 8,238 | | 9,190 | | 2,132 | |
| Total acquired loans | $ | 611,608 | | $ | 599,686 | | $ | 627,725 | | $ | 659,081 | | $ | 562,941 | |
| Total loans | $ | 2,911,437 | | $ | 2,873,525 | | $ | 2,850,316 | | $ | 2,833,533 | | $ | 2,737,580 | |
| | | | | |
| | | | | |
| | | | | |
| Percent of loans to total loans: | | | | | |
| Construction | 3.8 | % | 3.1 | % | 3.8 | % | 3.9 | % | 4.6 | % |
| Commercial real estate, other | 30.8 | % | 29.0 | % | 29.1 | % | 29.7 | % | 29.3 | % |
| Commercial real estate | 34.6 | % | 32.1 | % | 32.9 | % | 33.6 | % | 33.9 | % |
| Commercial and industrial | 22.5 | % | 23.1 | % | 21.3 | % | 21.2 | % | 21.7 | % |
| Residential real estate | 21.5 | % | 23.0 | % | 23.4 | % | 22.9 | % | 22.1 | % |
| Home equity lines of credit | 4.4 | % | 4.6 | % | 4.7 | % | 4.6 | % | 4.7 | % |
| Consumer, indirect | 14.4 | % | 14.5 | % | 14.9 | % | 14.8 | % | 15.0 | % |
| Consumer, direct | 2.6 | % | 2.7 | % | 2.8 | % | 2.9 | % | 2.6 | % |
| Consumer | 17.0 | % | 17.2 | % | 17.7 | % | 17.7 | % | 17.6 | % |
| | | | | |
| Total percentage | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Residential real estate loans being serviced for others | $ | 503,158 | | $ | 496,802 | | $ | 488,724 | | $ | 473,443 | | $ | 464,575 | |
| | | | | |
|
| | | | | | | | | | | | | | | |
| (Dollars in thousands) | September 30,
2019 | June 30,
2019 | March 31,
2019 | December 31,
2018 | September 30,
2018 |
| Gross originated loans: | | | | | |
| Commercial real estate, construction | $ | 100,338 |
| $ | 102,904 |
| $ | 116,992 |
| $ | 124,013 |
| $ | 103,562 |
|
| Commercial real estate, other | 659,103 |
| 641,061 |
| 630,679 |
| 632,200 |
| 630,720 |
|
| Commercial real estate | 759,441 |
| 743,965 |
| 747,671 |
| 756,213 |
| 734,282 |
|
| Commercial and industrial | 564,279 |
| 548,460 |
| 558,070 |
| 530,207 |
| 510,591 |
|
| Residential real estate | 308,964 |
| 299,173 |
| 297,667 |
| 296,860 |
| 299,768 |
|
| Home equity lines of credit | 92,910 |
| 90,374 |
| 90,831 |
| 93,326 |
| 92,892 |
|
| Consumer, indirect | 423,217 |
| 419,595 |
| 410,172 |
| 407,167 |
| 396,701 |
|
| Consumer, direct | 72,699 |
| 72,209 |
| 69,710 |
| 71,674 |
| 72,601 |
|
| Consumer | 495,916 |
| 491,804 |
| 479,882 |
| 478,841 |
| 469,302 |
|
| Deposit account overdrafts | 1,081 |
| 676 |
| 518 |
| 583 |
| 649 |
|
| Total originated loans | $ | 2,222,591 |
| $ | 2,174,452 |
| $ | 2,174,639 |
| $ | 2,156,030 |
| $ | 2,107,484 |
|
| Gross acquired loans (a): | | | | | |
| Commercial real estate, construction | $ | 4,435 |
| $ | 6,775 |
| $ | 7,966 |
| $ | 12,404 |
| $ | 13,050 |
|
| Commercial real estate, other | 171,096 |
| 201,909 |
| 171,785 |
| 184,711 |
| 191,993 |
|
| Commercial real estate | 175,531 |
| 208,684 |
| 179,751 |
| 197,115 |
| 205,043 |
|
| Commercial and industrial | 43,961 |
| 51,506 |
| 34,837 |
| 35,537 |
| 41,188 |
|
| Residential real estate | 358,053 |
| 348,439 |
| 308,137 |
| 296,937 |
| 308,178 |
|
| Home equity lines of credit | 41,942 |
| 41,262 |
| 38,084 |
| 40,653 |
| 42,961 |
|
| Consumer, indirect | 67 |
| 90 |
| 111 |
| 136 |
| 161 |
|
| Consumer, direct | 8,171 |
| 9,100 |
| 2,021 |
| 2,370 |
| 2,712 |
|
| Consumer | 8,238 |
| 9,190 |
| 2,132 |
| 2,506 |
| 2,873 |
|
| Total acquired loans | $ | 627,725 |
| $ | 659,081 |
| $ | 562,941 |
| $ | 572,748 |
| $ | 600,243 |
|
| Total loans | $ | 2,850,316 |
| $ | 2,833,533 |
| $ | 2,737,580 |
| $ | 2,728,778 |
| $ | 2,707,727 |
|
| Average total loans | $ | 2,837,834 |
| $ | 2,830,558 |
| $ | 2,734,592 |
| $ | 2,718,620 |
| $ | 2,717,200 |
|
| Average allowance for loan losses | (21,620 | ) | (21,311 | ) | (20,406 | ) | (20,079 | ) | (19,584 | ) |
| Average loans, net of average allowance for loan losses | $ | 2,816,214 |
| $ | 2,809,247 |
| $ | 2,714,186 |
| $ | 2,698,541 |
| $ | 2,697,616 |
|
| Percent of loans to total loans: | | | | | |
| Commercial real estate, construction | 3.8 | % | 3.9 | % | 4.6 | % | 5.1 | % | 4.3 | % |
| Commercial real estate, other | 29.1 | % | 29.7 | % | 29.3 | % | 29.9 | % | 30.4 | % |
| Commercial real estate | 32.9 | % | 33.6 | % | 33.9 | % | 35.0 | % | 34.7 | % |
| Commercial and industrial | 21.3 | % | 21.2 | % | 21.7 | % | 20.7 | % | 20.3 | % |
| Residential real estate | 23.4 | % | 22.9 | % | 22.1 | % | 21.8 | % | 22.5 | % |
| Home equity lines of credit | 4.7 | % | 4.6 | % | 4.7 | % | 4.9 | % | 5.0 | % |
| Consumer, indirect | 14.9 | % | 14.8 | % | 15.0 | % | 14.9 | % | 14.7 | % |
| Consumer, direct | 2.8 | % | 2.9 | % | 2.6 | % | 2.7 | % | 2.8 | % |
| Consumer | 17.7 | % | 17.7 | % | 17.6 | % | 17.6 | % | 17.5 | % |
| Deposit account overdrafts (b) | NM |
| NM |
| NM |
| NM |
| NM |
|
| Total percentage | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Residential real estate loans being serviced for others | $ | 488,724 |
| $ | 473,443 |
| $ | 464,575 |
| $ | 461,256 |
| $ | 458,999 |
|
| |
(a) | (a) Includes all loans acquired, and related loan discount recorded as part of acquisition accounting, 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). |
As of September 30, 2019, balances in loan accounts acquired from First Prestonsburg totaled $115.9 million, including $53.0 million in residential real estate loans, $36.4 million in commercial real estate loans, $13.7 million in commercial and industrial loans, $6.7 million in consumer, direct loans, and $6.1 million in home equity lines of credit.
Period-end total loan balances at September 30, 2019March 31, 2020 increased $16.8$37.9 million, or 2% annualized, compared to June 30, 2019, $121.5 million, or 6%5% annualized, compared to December 31, 2018,2019, and $142.6$173.9 million, or 5%6%, compared to September 30, 2018. Originated loan balances were up $48.1 million, or 9% annualized, compared to June 30, 2019, $66.6 million, or 4% annualized, compared to DecemberMarch 31, 2018, and $115.1 million, or 5%, compared to September 30, 2018. Loan originations during the first nine months of 2019 were higher than in the prior year for the same period, however, significantly higher loan paydowns experienced during the first nine months of 2019 minimized the impact of the increased production on loan growth compared to December 31, 2018 and September 30, 2018.2019.
The increase compared to June 30,December 31, 2019 was driven by residential real estategrowth in originated and acquired commercial and industrial loan growth of $19.4 million and $8.3 million, respectively. During the third quarter of 2019, Peoples purchased $9.8 million of 1-4 family first lien mortgages, which had the largest impact on residential real estate loan growth compared to June 30, 2019balances, and originated construction loan balances. These increases were partially offset by declines in originated and acquired residential real estate loan balances and originated commercial and industrial loan balances.
The increase compared to March 31, 2019 was driven by originated loan balances, which increased $125.2 million, or 6%. The increase in originated loan balances compared to March 31, 2019, was driven by growth in originated commercial real estate loans of $12.8 million and construction loans of $4.9 million. Compared to December 31, 2018, commercial loan balances were up $24.1and originated commercial and industrial loan balances, partially offset by a decline in originated construction loan balances. Acquired loan balances increased $48.7 million, or 2% annualized,9%, driven by loans acquired from First Prestonsburg and the purchase of residential real estate loans increased $73.2 million, or 16% annualized, and consumer indirect loans were up $16.0 million, or 5% annualized. The increase in residential real estate loans compared to December 31, 2018, included the purchaseloans.
Loan Concentration
Peoples categorizes its commercial loans according to standard industry classifications and monitors for concentrations in a single industry or multiple industries that could be impacted by changes in economic conditions in a similar manner. Peoples' commercial lending activities continue to be spread over a diverse range of businesses from all sectors of the economy, with no single industry comprising over 10% of Peoples' total loan portfolio.
Loans secured by commercial real estate, including commercial construction loans, continued to comprise the largest portion of Peoples' loan portfolio. The following table provides information regarding the largest concentrations of commercial real estate loans within the loan portfolio at September 30, 2019:March 31, 2020:
| | | | | | | | | | | | | | |
| (Dollars in thousands) | Outstanding Balance | Loan Commitments | Total Exposure | % of Total |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Construction: | | | | | | | | |
| Assisted living facilities and nursing homes | $ | 29,020 | | $ | 32,719 | | $ | 61,739 | | 31.5 | % |
| Apartment complexes | 24,780 | | 24,450 | | 49,230 | | 25.1 | % |
| Educational services | 18,623 | | — | | 18,623 | | 9.5 | % |
| Mixed used facilities | 6,650 | | 663 | | 7,313 | | 3.7 | % |
| Land development | 4,786 | | 2,161 | | 6,947 | | 3.5 | % |
| Retail | 3,431 | | 2,363 | | 5,794 | | 3.0 | % |
| Land only | 5,031 | | 851 | | 5,882 | | 3.0 | % |
| Residential property | 1,880 | | 3,386 | | 5,266 | | 2.7 | % |
| Office buildings | 3,178 | | 2,176 | | 5,354 | | 2.7 | % |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other (a) | 13,486 | | 16,593 | | 29,977 | | 15.3 | % |
| Total construction | $ | 110,865 | | $ | 85,362 | | $ | 196,125 | | 100.0 | % |
(a) All other outstanding balances are less than 2% of the total loan portfolio.
|
| | | | | | | | | | | |
| (Dollars in thousands) | Outstanding Balance | Loan Commitments | Total Exposure | % of Total |
| Commercial real estate, construction: | | | | |
| Apartment complexes | $ | 23,041 |
| $ | 31,693 |
| $ | 54,734 |
| 27.5 | % |
| Assisted living facilities and nursing homes | 20,491 |
| 24,736 |
| 45,227 |
| 22.8 | % |
| Office buildings | 18,892 |
| 3,564 |
| 22,456 |
| 11.3 | % |
| Educational services | — |
| 19,895 |
| 19,895 |
| 10.0 | % |
| Mixed used facilities | 14,722 |
| 3,684 |
| 18,406 |
| 9.3 | % |
| Retail | 3,213 |
| 2,616 |
| 5,829 |
| 2.9 | % |
| Industrial | 5,123 |
| — |
| 5,123 |
| 2.6 | % |
| Land Only | 4,183 |
| 1,057 |
| 5,240 |
| 2.6 | % |
| Residential property | 1,788 |
| 3,011 |
| 4,799 |
| 2.4 | % |
| Land Development | 2,265 |
| 1,917 |
| 4,182 |
| 2.1 | % |
| Other (a) | 11,055 |
| 1,838 |
| 12,893 |
| 6.5 | % |
| Total commercial real estate, construction | $ | 104,773 |
| $ | 94,011 |
| $ | 198,784 |
| 100.0 | % |
| |
(a) | All other outstanding balances are less than 2% of the total loan portfolio. |
| | | | | | | | | | | | | | |
| (Dollars in thousands) | Outstanding Balance | Loan Commitments | Total Exposure | % of Total |
| Commercial real estate, other: | | | | |
| Office buildings and complexes: | | | | | | |
| Owner occupied | $ | 74,850 | | $ | 3,180 | | $ | 78,030 | | 8.9 | % |
| Non-owner occupied | 66,680 | | 4,126 | | 70,806 | | 8.1 | % |
| Total office buildings and complexes | 141,530 | | 7,306 | | 148,836 | | 17.0 | % |
| Mixed-use facilities: | | | | |
| Owner occupied | 58,394 | | 1,493 | | 59,887 | | 6.9 | % |
| Non-owner occupied | 42,580 | | 532 | | 43,112 | | 4.9 | % |
| Total mixed-use facilities | 100,974 | | 2,025 | | 102,999 | | 11.8 | % |
| Retail facilities: | | | | | | | |
| Owner occupied | 39,005 | | 612 | | 39,617 | | 4.5 | % |
| Non-owner occupied | 56,931 | | 98 | | 57,029 | | 6.5 | % |
| Total retail facilities | 95,936 | | 710 | | 96,646 | | 11.0 | % |
| Apartment complexes | 83,031 | | 4,596 | | 87,627 | | 10.0 | % |
| Warehouse facilities | 64,935 | | 6,528 | | 71,463 | | 8.2 | % |
| Light industrial facilities: | | | | | |
| Owner occupied | 45,602 | | 1,078 | | 46,680 | | 5.3 | % |
| Non-owner occupied | 22,235 | | 1,088 | | 23,323 | | 2.7 | % |
| Total light industrial facilities | 67,837 | | 2,166 | | 70,003 | | 8.0 | % |
| Lodging and lodging related | 52,396 | | 846 | | 53,242 | | 6.1 | % |
| Assisted living facilities and nursing homes | 42,710 | | 250 | | 42,960 | | 4.9 | % |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Land only | 18,611 | | 1,679 | | 20,290 | | 2.3 | % |
| Day care facilities: | | | | |
| Owner occupied | 16,143 | | 544 | | 16,687 | | 1.9 | % |
| Non-owner occupied | 2,288 | | — | | 2,288 | | 0.3 | % |
| Total day care facilities | 18,431 | | 544 | | 18,975 | | 2.2 | % |
| Health care facilities: | | | | |
| Owner occupied | 8,539 | | 140 | | 8,679 | | 1.0 | % |
| Non-owner occupied | 9,859 | | 2 | | 9,861 | | 1.1 | % |
| Total health care facilities | 18,398 | | 142 | | 18,540 | | 2.1 | % |
| Gas station facilities: | | | | | | | | |
| Owner occupied | 12,718 | | — | | 12,718 | | 1.5 | % |
| Non-owner occupied | 4,543 | | — | | 4,543 | | 0.5 | % |
| Total gas station facilities | 17,261 | | — | | 17,261 | | 2.0 | % |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other (a) | 175,767 | | 4,281 | | 125,046 | | 14.4 | % |
| Total commercial real estate, other | $ | 897,817 | | $ | 31,073 | | $ | 873,888 | | 100.0 | % |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
(a) All other outstanding balances are less than 2% of the total loan portfolio.
|
| | | | | | | | | | | |
| (Dollars in thousands) | Outstanding Balance | Loan Commitments | Total Exposure | % of Total |
| Commercial real estate, other: | | | | |
| Office buildings and complexes: | | | | |
| Owner occupied | $ | 69,033 |
| $ | 2,943 |
| $ | 71,976 |
| 8.3 | % |
| Non-owner occupied | 56,487 |
| 3,094 |
| 59,581 |
| 6.9 | % |
| Total office buildings and complexes | 125,520 |
| 6,037 |
| 131,557 |
| 15.2 | % |
| Mixed-use facilities: | | | | |
| Owner occupied | 47,421 |
| 338 |
| 47,759 |
| 5.5 | % |
| Non-owner occupied | 63,796 |
| 595 |
| 64,391 |
| 7.5 | % |
| Total mixed-use facilities | 111,217 |
| 933 |
| 112,150 |
| 13.0 | % |
| Apartment complexes | 72,594 |
| 1,005 |
| 73,599 |
| 8.5 | % |
| Retail facilities: | | | | |
| Owner occupied | 28,805 |
| 561 |
| 29,366 |
| 3.4 | % |
| Non-owner occupied | 39,189 |
| 98 |
| 39,287 |
| 4.6 | % |
| Total retail facilities | 67,994 |
| 659 |
| 68,653 |
| 8.0 | % |
| Light industrial facilities: | | | | |
| Owner occupied | 46,639 |
| 163 |
| 46,802 |
| 5.4 | % |
| Non-owner occupied | 17,908 |
| 1,088 |
| 18,996 |
| 2.2 | % |
| Total light industrial facilities | 64,547 |
| 1,251 |
| 65,798 |
| 7.6 | % |
| Warehouse facilities | 61,346 |
| 4,166 |
| 65,512 |
| 7.6 | % |
| Lodging and lodging related | 33,710 |
| — |
| 33,710 |
| 3.9 | % |
| Assisted living facilities and nursing homes | 27,353 |
| 291 |
| 27,644 |
| 3.2 | % |
| Other (a) | 265,918 |
| 18,804 |
| 284,722 |
| 33.0 | % |
| Total commercial real estate, other | $ | 830,199 |
| $ | 33,146 |
| $ | 863,345 |
| 100.0 | % |
| |
(a) | All other outstanding balances are less than 2% of the total loan portfolio. |
Peoples' commercial lending activities continue to focus on lending opportunities inside its primary and secondary market areas within Ohio, Kentucky and West Virginia and Kentucky.Virginia. In all other states, the aggregate outstanding balances of commercial loans in each state were not material at either September 30, 2019March 31, 2020 or December 31, 2018.2019.
COVID-19 Loan Impacts
Small Business Administration Paycheck Protection Program
In March 2020, the CARES Act created a new loan guarantee program called the PPP targeted to provide small businesses with support to cover payroll and certain other expenses. Loans made under the PPP are fully guaranteed by the SBA. The PPP loans also afford borrowers forgiveness up to the principal amount of the PPP covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll or to make certain mortgage interest, lease and utility payments, and certain other criteria are satisfied. The SBA will reimburse PPP lenders for any amount of a PPP covered loan that is forgiven, and PPP lenders will not be held liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness. Peoples is a PPP participating lender, and has authorized approximately $480 million of loans through May 1, 2020. Peoples will continue to provide PPP loans, to the extent that increases are made to the program.
JobsOhio Partnership
Peoples has also been selected to partner with JobsOhio, a private nonprofit organization charged with economic development. JobsOhio will provide a 90% guarantee on the first $25 million of increased exposure to small businesses, where customers may obtain up to $200,000 of additional financing, subject to certain eligibility requirements.
Payment Relief and Loan Modifications
Peoples is also providing relief solutions to consumer and commercial borrowers. For consumer borrowers, Peoples is providing interest-only payment options to customers for a period of up to 90 days, with the ability to extend if needed and qualifications are met. Peoples is also providing forbearance to its consumer borrowers which allows to defer their principal and interest payments for up to 90 days for non-residential real estate consumer loans and up to 180 days for residential real estate consumer loans. As of May 1, 2020, Peoples had approved forbearance or payment relief for 1,137 customers, for loan balances of $39 million, and executed forbearance or payment relief for over 819 consumer loan customers, with loan balances of nearly $22 million, in obtaining relief through forbearance programs or deferred payments.
In addition, for commercial borrowers who meet certain criteria, Peoples is providing principal and interest deferrals, and increased financing. As of May 1, 2020, Peoples had approved $534 million of loan modifications to commercial loan customers. Peoples will continue to work with its customers in identifying relief solutions during this economic downturn.
Portfolio Exposure
Peoples has evaluated its portfolio exposure to certain industries most impacted by the COVID-19 pandemic, which includes restaurants, lodging and lodging related businesses, floorplans, office and retail facilities, as well as daycare facilities. Peoples has been proactive in working with clients within these industries, and is keeping in close communication. Peoples has made loan modifications, when it is prudent to do so, and is monitoring early warnings signs of risk within these industry segments. These segments comprise approximately 70% of the total commercial loan modifications approved in response to COVID-19.
Below is a table detailing Peoples' outstanding balance of loans within certain industries that have been impacted:
| | | | | | | | | | | | | | |
| (Dollars in thousands) | Outstanding Balance | % of Total Loans | Loan-to-Value | Total Commitment |
| Restaurants | $ | 157,485 | | 5.4 | % | 62.1 | % | $ | 171,051 | |
| Multifamily | 117,175 | | 4.0 | % | 60.1 | % | 146,225 | |
| Floorplans (a) | 96,536 | | 3.3 | % | 100.0 | % | 128,350 | |
| Assisted living facilities and nursing homes | 79,515 | | 2.7 | % | 72.9 | % | 111,084 | |
| Lodging and lodging related | 70,605 | | 2.4 | % | 64.8 | % | 82,203 | |
| Total | $ | 521,316 | | 17.8 | % | | $ | 638,913 | |
(a) Individual units financed under dealer floor plan agreements are generally financed in line with industry standards at 100% of manufacturer invoice, auction cost, or wholesale value.
Approximately 77% of Peoples' outstanding balance to restaurants is to McDonald's franchise operators, which have additional guarantor support, as well as corporate assistance with rent and service fee deferments. Of the remaining outstanding balance of restaurant loans, approximately 20% are enhanced with SBA guarantees. As of May 1, 2020, Peoples had modified approximately $129 million of restaurant loans. Peoples approved $121 million in modifications to McDonald’s operators and $8 million to non-McDonald’s operators. The total portfolio outstanding balances of non-McDonald’s operators was $37 million at March 31, 2020.
In addition, for multifamily loans, Peoples has sponsors with extensive experience and substantial liquidity. The top five relationships, in terms of aggregate credit exposures, account for 40% of the portfolio balances. The top five relationships consist of five properties with an average loan-to-value of 68%. Peoples' commercial loan policy for this specific property type is a maximum loan-to-value of 80%. These relationships have average liquidity greater than $1 million. Additional support is provided by guarantor strength on the majority of these relationships. The largest loan in the portfolio accounts for 14% of the portfolio balance. The loan has notable guarantor support, with a reported unencumbered liquidity level of more than $200 million.
For floorplan loans, Peoples has a robust monitoring and audit process, and performs collateral audits frequently.
Approximately 80% of the assisted living facilities and nursing homes are private pay and are not dependent upon Medicare, and as of May 1, 2020, Peoples had no requests from these customers for relief.
The majority of Peoples' lodging and lodging related outstanding balances are larger established franchises. The top five relationships, in terms of aggregate credit exposures, account for 84% of the portfolio balance. The top five relationships consist of six properties with an average loan-to-value of 56%. Peoples' commercial loan policy for this specific property type is a maximum loan-to-value of 65%. These relationships have average liquidity of greater than $1 million. Additional support is provided by guarantor strength on the majority of these relationships. As of May 1, 2020, Peoples had modified approximately $70 million of lodging and lodging related loans.
Peoples' exposure to energy loans was not material at March 31, 2020. Energy loan balances were $6.1 million, or less than 1% of total loans, as of March 31, 2020, with a total commitment of $8.7 million. Peoples' energy loans are mostly operators with support services for oil and gas companies.
Allowance for LoanCredit Losses
The amount of the allowance for loancredit losses at the end of each period represents management's estimate of expected losses from existing loans based upon its quarterly analysis of the loan portfolio. While this process involves allocations being made to specific loans and pools of loans, the entire allowance is available for all losses incurredexpected within the loan portfolio.
The following details management's allocation of the allowance for loancredit losses:
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | March 31,
2020 | December 31,
2019 | September 30,
2019 | June 30,
2019 | March 31,
2019 |
| Commercial real estate | $ | 13,884 | | $ | 7,333 | | $ | 8,466 | | $ | 8,245 | | $ | 8,297 | |
| Commercial and industrial | 8,743 | | 8,432 | | 7,162 | | 7,197 | | 6,743 | |
| Total commercial | 22,627 | | 15,765 | | 15,628 | | 15,442 | | 15,040 | |
| Residential real estate | 5,744 | | 1,191 | | 1,162 | | 1,184 | | 1,213 | |
| Home equity lines of credit | 1,695 | | 546 | | 567 | | 598 | | 608 | |
| Consumer, indirect | 10,878 | | 2,937 | | 3,247 | | 3,172 | | 3,133 | |
| Consumer, direct | 1,803 | | 294 | | 339 | | 342 | | 351 | |
| Consumer | 12,681 | | 3,231 | | 3,586 | | 3,514 | | 3,484 | |
| Deposit account overdrafts | 86 | | 94 | | 128 | | 86 | | 61 | |
| Originated allowance for credit losses | 42,833 | | 20,827 | | 21,071 | | 20,824 | | 20,406 | |
| | | | | |
| | | | | |
Acquired allowance for credit losses(1) | — | | 729 | | 514 | | 533 | | 533 | |
Allowance for credit losses(2) | $ | 42,833 | | $ | 21,556 | | $ | 21,585 | | $ | 21,357 | | $ | 20,939 | |
| As a percent of total loans | 1.47 | % | 0.75 | % | 0.76 | % | 0.75 | % | 0.76 | % |
|
| | | | | | | | | | | | | | | |
| (Dollars in thousands) | September 30,
2019 | June 30,
2019 | March 31,
2019 | December 31,
2018 | September 30,
2018 |
| Commercial real estate | $ | 8,466 |
| $ | 8,245 |
| $ | 8,297 |
| $ | 8,003 |
| $ | 7,966 |
|
| Commercial and industrial | 7,162 |
| 7,197 |
| 6,743 |
| 6,178 |
| 6,138 |
|
| Total commercial | 15,628 |
| 15,442 |
| 15,040 |
| 14,181 |
| 14,104 |
|
| Residential real estate | 1,162 |
| 1,184 |
| 1,213 |
| 1,214 |
| 999 |
|
| Home equity lines of credit | 567 |
| 598 |
| 608 |
| 618 |
| 708 |
|
| Consumer, indirect | 3,247 |
| 3,172 |
| 3,133 |
| 3,214 |
| 3,423 |
|
| Consumer, direct | 339 |
| 342 |
| 351 |
| 351 |
| 395 |
|
| Consumer | 3,586 |
| 3,514 |
| 3,484 |
| 3,565 |
| 3,818 |
|
| Deposit account overdrafts | 128 |
| 86 |
| 61 |
| 81 |
| 95 |
|
| Originated allowance for loan losses | 21,071 |
| 20,824 |
| 20,406 |
| 19,659 |
| 19,724 |
|
| Acquired allowance for loan losses | 514 |
| 533 |
| 533 |
| 536 |
| 155 |
|
| Allowance for loan losses | $ | 21,585 |
| $ | 21,357 |
| $ | 20,939 |
| $ | 20,195 |
| $ | 19,879 |
|
| As a percent of total loans | 0.76 | % | 0.75 | % | 0.76 | % | 0.74 | % | 0.73 | % |
March 31, 2020, Peoples calculated the allowance for credit losses using the current expected credit loss model, while previous periods used the incurred loss model.
At September 30, 2019,March 31, 2020, the allowance for loan losses was $21.6$42.8 million, compared to $20.2$21.6 million at December 31, 20182019 and $19.9$20.9 million at September 30, 2018.March 31, 2019. The ratio of the allowance for loan losses as a percent of total loans was 0.76%1.47% at September 30, 2019,March 31, 2020, compared to 0.74%0.75% at December 31, 20182019 and 0.73%0.76% at September 30, 2018. The ratio includes all acquired loans, from both First Prestonsburg and previous acquisitions since 2012,March 31, 2019. Peoples implemented ASU 2016-13 on January 1, 2020, which resulted in an increase of $627.7$5.8 million andin allowance for acquired loan losses of $514,000.credit losses. The remaining significant increase in the allowance for loancredit losses over time was mainly the result of loan growth. Comparedat March 31, 2020 compared to December 31, 20182019 was mostly due to the recent COVID-19 pandemic, and September 30, 2018, the increasesresulting impact to 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 March 31, 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 loancredit losses were also impacted by increases in the reserve on impaired loans.at March 31, 2020.
The significant allocations ofAdditional information regarding Peoples' allowance for loancredit losses to commercial loans reflect the higher credit risk associated with this type of lending and the size of this loan categorycan be found in relationship to the entire loan portfolio. The allowance allocated to the residential real estate and consumer loan categories is based upon Peoples' allowance methodology for homogeneous pools of loans. The fluctuations in these allocations have been directionally consistent with the changes in loan quality, loss experience and loan balances in these categories.
The current allowance for loan loss calculation will be replaced as of January 1, 2020 with a new model, referred to as the Current Expected Credit Loss ("CECL") model. For additional information see "Note 1 Summary of Significant Accounting Policies" and "Note 4 Loans" of the Notes to the Unaudited Consolidated Financial Statements.
The following table summarizes Peoples’ net charge-offs and recoveries:
| | | | Three Months Ended | | Three Months Ended | |
| (Dollars in thousands) | September 30,
2019 | June 30,
2019 | March 31,
2019 | December 31,
2018 | September 30,
2018 | (Dollars in thousands) | March 31,
2020 | December 31,
2019 | September 30,
2019 | June 30,
2019 | March 31,
2019 |
| Gross charge-offs: | | | | | | Gross charge-offs: | | | | |
| | Commercial real estate, other | $ | — |
| $ | 43 |
| $ | 113 |
| $ | — |
| $ | — |
| Commercial real estate, other | $ | 10 | | $ | — | | $ | — | | $ | 43 | | $ | 113 | |
| | Commercial and industrial | 261 |
| — |
| 63 |
| — |
| — |
| Commercial and industrial | 937 | | 738 | | 261 | | — | | 63 | |
| Residential real estate | 81 |
| 67 |
| 109 |
| 64 |
| 66 |
| Residential real estate | 118 | | 55 | | 81 | | 67 | | 109 | |
| Home equity lines of credit | 36 |
| — |
| 9 |
| 40 |
| 10 |
| Home equity lines of credit | 14 | | 10 | | 36 | | — | | 9 | |
| Consumer, indirect | 447 |
| 346 |
| 473 |
| 548 |
| 488 |
| Consumer, indirect | 721 | | 563 | | 447 | | 346 | | 473 | |
| Consumer, direct | 54 |
| 33 |
| 63 |
| 61 |
| 78 |
| Consumer, direct | 62 | | 61 | | 54 | | 33 | | 63 | |
| Consumer | 501 |
| 379 |
| 536 |
| 609 |
| 566 |
| Consumer | 783 | | 624 | | 501 | | 379 | | 536 | |
| Deposit account overdrafts | 283 |
| 176 |
| 173 |
| 234 |
| 311 |
| Deposit account overdrafts | 213 | | 219 | | 283 | | 176 | | 173 | |
| Total gross charge-offs | $ | 1,162 |
| $ | 665 |
| $ | 1,003 |
| $ | 947 |
| $ | 953 |
| Total gross charge-offs | $ | 2,075 | | $ | 1,646 | | $ | 1,162 | | $ | 665 | | $ | 1,003 | |
| Recoveries: | | Recoveries: | | | | | | | | | | |
| | Commercial real estate, other | $ | 86 |
| $ | 2 |
| $ | 10 |
| $ | 2 |
| $ | 15 |
| Commercial real estate, other | $ | 116 | | $ | 53 | | $ | 86 | | $ | 2 | | $ | 10 | |
| | Commercial and industrial | 81 |
| 228 |
| 1,784 |
| 8 |
| 10 |
| Commercial and industrial | 1,204 | | 322 | | 81 | | 228 | | 1,784 | |
| Residential real estate | 87 |
| 102 |
| 31 |
| 133 |
| 32 |
| Residential real estate | 57 | | 9 | | 87 | | 102 | | 31 | |
| Home equity lines of credit | 8 |
| 1 |
| 1 |
| 2 |
| 3 |
| Home equity lines of credit | 1 | | 1 | | 8 | | 1 | | 1 | |
| Consumer, indirect | 67 |
| 47 |
| 115 |
| 71 |
| 131 |
| Consumer, indirect | 125 | | 41 | | 67 | | 47 | | 115 | |
| Consumer, direct | 5 |
| 27 |
| 13 |
| 25 |
| 31 |
| Consumer, direct | 14 | | 7 | | 5 | | 27 | | 13 | |
| Consumer | 72 |
| 74 |
| 128 |
| 96 |
| 162 |
| Consumer | 139 | | 48 | | 72 | | 74 | | 128 | |
| Deposit account overdrafts | 51 |
| 50 |
| 56 |
| 45 |
| 44 |
| Deposit account overdrafts | 60 | | 48 | | 51 | | 50 | | 56 | |
| Total recoveries | $ | 385 |
| $ | 457 |
| $ | 2,010 |
| $ | 286 |
| $ | 266 |
| Total recoveries | $ | 1,577 | | $ | 481 | | $ | 385 | | $ | 457 | | $ | 2,010 | |
| Net charge-offs (recoveries): | | Net charge-offs (recoveries): | | | | | | | | | | |
| | Commercial real estate, other | $ | (86 | ) | $ | 41 |
| $ | 103 |
| $ | (2 | ) | $ | (15 | ) | Commercial real estate, other | $ | (106) | | $ | (53) | | $ | (86) | | $ | 41 | | $ | 103 | |
| | Commercial and industrial | 180 |
| (228 | ) | (1,721 | ) | (8 | ) | (10 | ) | Commercial and industrial | (267) | | 416 | | 180 | | (228) | | (1,721) | |
| Residential real estate | (6 | ) | (35 | ) | 78 |
| (69 | ) | 34 |
| Residential real estate | 61 | | 46 | | (6) | | (35) | | 78 | |
| Home equity lines of credit | 28 |
| (1 | ) | 8 |
| 38 |
| 7 |
| Home equity lines of credit | 13 | | 9 | | 28 | | (1) | | 8 | |
| Consumer, indirect | 380 |
| 299 |
| 358 |
| 477 |
| 357 |
| Consumer, indirect | 596 | | 522 | | 380 | | 299 | | 358 | |
| Consumer, direct | 49 |
| 6 |
| 50 |
| 36 |
| 47 |
| Consumer, direct | 48 | | 54 | | 49 | | 6 | | 50 | |
| Consumer | 429 |
| 305 |
| 408 |
| 513 |
| 404 |
| Consumer | 644 | | 576 | | 429 | | 305 | | 408 | |
| Deposit account overdrafts | 232 |
| 126 |
| 117 |
| 189 |
| 267 |
| Deposit account overdrafts | 153 | | 171 | | 232 | | 126 | | 117 | |
| Total net charge-offs (recoveries) | $ | 777 |
| $ | 208 |
| $ | (1,007 | ) | $ | 661 |
| $ | 687 |
| Total net charge-offs (recoveries) | $ | 498 | | $ | 1,165 | | $ | 777 | | $ | 208 | | $ | (1,007) | |
| Ratio of net charge-offs (recoveries) to average total loans (annualized): | Ratio of net charge-offs (recoveries) to average total loans (annualized): | Ratio of net charge-offs (recoveries) to average total loans (annualized): | |
| | Commercial real estate, other | | Commercial real estate, other | (0.01) | % | — | % | (0.01) | % | 0.01 | % | 0.02 | % |
| Commercial real estate | (0.01 | )% | 0.01 | % | 0.02 | % | — | % | — | % | Commercial real estate | (0.01) | % | (0.01) | % | (0.01) | % | 0.01 | % | 0.02 | % |
| Commercial and industrial | 0.03 | % | (0.03 | )% | (0.26 | )% | — | % | — | % | Commercial and industrial | (0.04) | % | 0.06 | % | 0.03 | % | (0.03) | % | (0.26) | % |
| Residential real estate | — | % | — | % | 0.01 | % | (0.01 | )% | — | % | Residential real estate | 0.01 | % | 0.01 | % | — | % | — | % | 0.01 | % |
| Home equity lines of credit | — | % | — | % | — | % | — | % | — | % | |
| | Consumer, indirect | 0.05 | % | 0.03 | % | 0.05 | % | 0.07 | % | 0.05 | % | Consumer, indirect | 0.08 | % | 0.07 | % | 0.05 | % | 0.03 | % | 0.05 | % |
| Consumer, other | 0.01 | % | — | % | 0.01 | % | 0.01 | % | 0.01 | % | Consumer, other | 0.01 | % | 0.01 | % | 0.01 | % | — | % | 0.01 | % |
| Consumer | 0.06 | % | 0.03 | % | 0.06 | % | 0.08 | % | 0.06 | % | Consumer | 0.09 | % | 0.08 | % | 0.06 | % | 0.03 | % | 0.06 | % |
| Deposit account overdrafts | 0.03 | % | 0.02 | % | 0.02 | % | 0.03 | % | 0.04 | % | Deposit account overdrafts | 0.02 | % | 0.02 | % | 0.03 | % | 0.02 | % | 0.02 | % |
| Total | 0.11 | % | 0.03 | % | (0.15 | )% | 0.10 | % | 0.10 | % | Total | 0.07 | % | 0.16 | % | 0.11 | % | 0.03 | % | (0.15) | % |
Each with "--%" not meaningful.
Net charge-offs during the thirdfirst quarter of 20192020 continued to be low as a result of relatively strongstable asset quality metrics. During the second quarterThe first quarters of 2020 and 2019 net charge-offs had remained relatively low, as gross charge-offs were down compared to prior periods. The netincluded recoveries during the first quarter of 2019 were driven by the recognition of a$1.2 million and $1.8 million, recoveryrespectively, recorded on a previously charged-off commercial loan. During the fourth quarter of 2018, the net charge-offs decreased as Peoples' asset quality remained stable. For the third quarter of 2019 compared to the third quarter of 2018, the ratio of net charge-offs to average total loans was relatively low.
The following table details Peoples’ nonperforming assets:
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | March 31,
2020 | December 31,
2019 | September 30,
2019 | June 30,
2019 | March 31,
2019 |
| Loans 90+ days past due and accruing (a): | | | | | |
| Construction | $ | — | | $ | — | | $ | — | | $ | 230 | | $ | — | |
| Commercial real estate, other | — | | 907 | | 582 | | 557 | | 15 | |
| Commercial real estate | — | | 907 | | 582 | | 787 | | 15 | |
| Commercial and industrial | 806 | | 155 | | 572 | | 261 | | 50 | |
| Residential real estate | 557 | | 2,677 | | 3,095 | | 2,291 | | 963 | |
| Home equity lines of credit | 143 | | 108 | | 183 | | 53 | | 42 | |
| Consumer, indirect | — | | — | | — | | — | | 4 | |
| Consumer, direct | 37 | | 85 | | 83 | | 57 | | — | |
| Consumer | 37 | | 85 | | 83 | | 57 | | 4 | |
| Total loans 90+ days past due and accruing | $ | 1,543 | | $ | 3,932 | | $ | 4,515 | | $ | 3,449 | | $ | 1,074 | |
| Nonaccrual loans (a): | | | | | | | | | | |
| Construction | $ | 99 | | 411 | | $ | 230 | | $ | 688 | | $ | 703 | |
| Commercial real estate, other | 9,167 | | 6,699 | | 6,723 | | 6,427 | | 6,459 | |
| Commercial real estate | 9,266 | | 7,110 | | 6,953 | | 7,115 | | 7,162 | |
| Commercial and industrial | 4,408 | | 1,824 | | 883 | | 1,748 | | 1,719 | |
| Residential real estate | 6,156 | | 4,471 | | 4,237 | | 3,868 | | 4,479 | |
| Home equity lines of credit | 978 | | 955 | | 893 | | 1,001 | | 1,065 | |
| Consumer, indirect | 637 | | 629 | | 568 | | 383 | | 440 | |
| Consumer, direct | 122 | | 48 | | 55 | | 13 | | 17 | |
| Consumer | 759 | | 677 | | 623 | | 396 | | 457 | |
| Total nonaccrual loans | $ | 21,567 | | $ | 15,037 | | $ | 13,589 | | $ | 14,128 | | $ | 14,882 | |
| Nonaccrual troubled debt restructurings ("TDRs"): | | | | | |
| | | | | |
| Commercial real estate, other | $ | 410 | | $ | 102 | | $ | 112 | | $ | 122 | | $ | 127 | |
| Commercial and industrial | 602 | | 331 | | 332 | | 332 | | 332 | |
| Residential real estate | 2,484 | | 1,890 | | 1,770 | | 1,664 | | 1,389 | |
| Home equity lines of credit | 174 | | 210 | | 194 | | 193 | | 195 | |
| Consumer, indirect | 197 | | 211 | | 203 | | 152 | | 159 | |
| Consumer, direct | 48 | | — | | — | | — | | 5 | |
| Consumer | 245 | | 211 | | 203 | | 152 | | 164 | |
| Total nonaccrual TDRs | $ | 3,915 | | $ | 2,744 | | $ | 2,611 | | $ | 2,463 | | $ | 2,207 | |
| Total nonperforming loans ("NPLs") | $ | 27,025 | | $ | 21,713 | | $ | 20,715 | | $ | 20,040 | | $ | 18,163 | |
| OREO: | | | | | | | | | | |
| Commercial | $ | 145 | | $ | 145 | | $ | 145 | | $ | — | | $ | — | |
| Residential | $ | 81 | | $ | 82 | | $ | 144 | | $ | 123 | | $ | 81 | |
| Total OREO | $ | 226 | | $ | 227 | | $ | 289 | | $ | 123 | | $ | 81 | |
| Total nonperforming assets ("NPAs") | $ | 27,251 | | $ | 21,940 | | $ | 21,004 | | $ | 20,163 | | $ | 18,244 | |
| Criticized loans (b) | $ | 90,881 | | $ | 96,830 | | $ | 100,434 | | $ | 97,016 | | $ | 89,812 | |
| Classified loans (c) | 68,787 | | 66,154 | | 58,938 | | 63,048 | | 47,327 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | | | | | |
| (Dollars in thousands) | September 30,
2019 | June 30,
2019 | March 31,
2019 | December 31,
2018 | September 30,
2018 |
| Loans 90+ days past due and accruing: | | | | | |
| Commercial real estate, construction | $ | — |
| $ | 230 |
| $ | — |
| $ | — |
| $ | 401 |
|
| Commercial real estate, other | 582 |
| 557 |
| 15 |
| 801 |
| 60 |
|
| Commercial real estate | 582 |
| 787 |
| 15 |
| 801 |
| 461 |
|
| Commercial and industrial | 572 |
| 261 |
| 50 |
| 18 |
| — |
|
| Residential real estate | 3,095 |
| 2,291 |
| 963 |
| 1,430 |
| 1,338 |
|
| Home equity lines of credit | 183 |
| 53 |
| 42 |
| 7 |
| 84 |
|
| Consumer, indirect | — |
| — |
| 4 |
| — |
| 2 |
|
| Consumer, direct | 83 |
| 57 |
| — |
| — |
| — |
|
| Consumer | 83 |
| 57 |
| 4 |
| — |
| 2 |
|
| Total loans 90+ days past due and accruing | $ | 4,515 |
| $ | 3,449 |
| $ | 1,074 |
| $ | 2,256 |
| $ | 1,885 |
|
| Nonaccrual loans: | | | | | |
| Commercial real estate, construction | $ | 230 |
| $ | 688 |
| $ | 703 |
| $ | 710 |
| $ | 725 |
|
| Commercial real estate, other | 6,723 |
| 6,427 |
| 6,459 |
| 6,730 |
| 6,751 |
|
| Commercial real estate | 6,953 |
| 7,115 |
| 7,162 |
| 7,440 |
| 7,476 |
|
| Commercial and industrial | 883 |
| 1,748 |
| 1,719 |
| 1,304 |
| 939 |
|
| Residential real estate | 4,237 |
| 3,868 |
| 4,479 |
| 4,075 |
| 3,725 |
|
| Home equity lines of credit | 893 |
| 1,001 |
| 1,065 |
| 1,023 |
| 796 |
|
| Consumer, indirect | 568 |
| 383 |
| 440 |
| 324 |
| 286 |
|
| Consumer, direct | 55 |
| 13 |
| 17 |
| 56 |
| 14 |
|
| Consumer | 623 |
| 396 |
| 457 |
| 380 |
| 300 |
|
| Total nonaccrual loans | $ | 13,589 |
| $ | 14,128 |
| $ | 14,882 |
| $ | 14,222 |
| $ | 13,236 |
|
| Nonaccrual troubled debt restructurings ("TDRs"): | | | | | |
| Commercial real estate, other | $ | 112 |
| $ | 122 |
| $ | 127 |
| $ | 154 |
| $ | 186 |
|
| Commercial and industrial | 332 |
| 332 |
| 332 |
| 405 |
| 430 |
|
| Residential real estate | 1,770 |
| 1,664 |
| 1,389 |
| 1,951 |
| 2,087 |
|
| Home equity lines of credit | 194 |
| 193 |
| 195 |
| 210 |
| 160 |
|
| Consumer, indirect | 203 |
| 152 |
| 159 |
| 156 |
| 119 |
|
| Consumer, direct | — |
| — |
| 5 |
| — |
| 17 |
|
| Consumer | 203 |
| 152 |
| 164 |
| 156 |
| 136 |
|
| Total nonaccrual TDRs | $ | 2,611 |
| $ | 2,463 |
| $ | 2,207 |
| $ | 2,876 |
| $ | 2,999 |
|
| Total nonperforming loans ("NPLs") | $ | 20,715 |
| $ | 20,040 |
| $ | 18,163 |
| $ | 19,354 |
| $ | 18,120 |
|
| OREO: | | | | | |
| Commercial | $ | 145 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Residential | $ | 144 |
| $ | 123 |
| $ | 81 |
| $ | 94 |
| $ | 106 |
|
| Total OREO | $ | 289 |
| $ | 123 |
| $ | 81 |
| $ | 94 |
| $ | 106 |
|
| Total nonperforming assets ("NPAs") | $ | 21,004 |
| $ | 20,163 |
| $ | 18,244 |
| $ | 19,448 |
| $ | 18,226 |
|
| Criticized loans (a) | $ | 100,434 |
| $ | 97,016 |
| $ | 89,812 |
| $ | 114,188 |
| $ | 118,703 |
|
| Classified loans (b) | 58,938 |
| 63,048 |
| 47,327 |
| 43,818 |
| 49,058 |
|
|
| | | | | | | | | | |
| (Dollars in thousands) | September 30,
2019 | June 30,
2019 | March 31,
2019 | December 31,
2018 | September 30,
2018 |
| Asset Quality Ratios: | | | | | |
| NPLs as a percent of total loans (c)(d) | 0.73 | % | 0.71 | % | 0.66 | % | 0.71 | % | 0.67 | % |
| NPAs as a percent of total assets (c)(d) | 0.48 | % | 0.47 | % | 0.45 | % | 0.49 | % | 0.46 | % |
| NPAs as a percent of total loans and OREO (c)(d) | 0.74 | % | 0.71 | % | 0.67 | % | 0.71 | % | 0.67 | % |
| Allowance for loan losses as a percent of NPLs (c) | 104.20 | % | 106.57 | % | 115.28 | % | 104.35 | % | 109.71 | % |
| Criticized loans as a percent of total loans (a)(c) | 3.52 | % | 3.42 | % | 3.28 | % | 4.18 | % | 4.38 | % |
| Classified loans as a percent of total loans (b)(c) | 2.07 | % | 2.23 | % | 1.73 | % | 1.61 | % | 1.81 | % |
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | March 31,
2020 | December 31,
2019 | September 30,
2019 | June 30,
2019 | March 31,
2019 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Asset Quality Ratios: | | | | | |
| NPLs as a percent of total loans (d)(e) | 0.93 | % | 0.75 | % | 0.73 | % | 0.71 | % | 0.66 | % |
| NPAs as a percent of total assets (d)(e) | 0.61 | % | 0.50 | % | 0.48 | % | 0.47 | % | 0.45 | % |
| NPAs as a percent of total loans and OREO (d)(e) | 0.94 | % | 0.76 | % | 0.74 | % | 0.71 | % | 0.67 | % |
| Allowance for loan losses as a percent of NPLs (d) | 158.49 | % | 99.28 | % | 104.20 | % | 106.57 | % | 115.28 | % |
| Criticized loans as a percent of total loans (b)(d) | 3.12 | % | 3.37 | % | 3.52 | % | 3.42 | % | 3.28 | % |
| Classified loans as a percent of total loans (c)(d) | 2.36 | % | 2.30 | % | 2.07 | % | 2.23 | % | 1.73 | % |
(a) 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.
(b) Includes loans categorized as special mention, substandard or doubtful.
(b)(c) Includes loans categorized as substandard or doubtful.
(c) (d) Data presented as of the end of the period indicated.
(d)(e) Nonperforming loans include loans 90+ days past due and accruing, troubled debt restructuringsTDRs and nonaccrual loans. Nonperforming assets include nonperforming loans and OREO.
The increasenew accounting for purchased credit deteriorated loans under ASU 2016-13 resulted in nonperforming assetsthe movement of $841,000, or 4%, compared to June 30, 2019, was due to several smaller acquired relationships that have become$3.9 million of loans from the 90+ days past due and are stillaccruing 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 remaining increases in nonperforming assets compared to December 31, 2019 and March 31, 2019, were primarily due to a $1.5 million commercial relationship and several smaller commercial relationships being placed on nonaccrual. The increase in nonperforming assets at September 30, 2019March 31, 2020 compared to March 31, 2019 as well as previous periods, was also partially due to acquired loans from First Prestonsburg, which comprised $1.5 million of nonperforming assets at September 30, 2019, with the remainder due to smaller relationships that have become 90+ days past due and are still accruing. Classified loans, which are those categorized as substandard or doubtful, declined $4.1 million, or 7%, compared to June 30, 2019, due to paydowns on several relationships. The increase in classified loans during the second quarter of 2019 was largely related to acquired First Prestonsburg loans, coupled with downgrades of two commercial loan relationships totaling $8.5 million during the second quarter of 2019. Prestonsburg.
Criticized loans, which are those categorized as special mention, substandard or doubtful, increased $3.4decreased $5.9 million, or 4%6%, compared to June 30,December 31, 2019. The increasedecline was mostly due to two relationships being downgraded, which were partially offset bypaydowns and upgrades of several loans.loans during the quarter. The increase in criticized loans during the second quarter ofcompared to March 31, 2019 was largely related to acquired First Prestonsburg loans.loans, partially offset by the upgrade of several commercial relationships. Classified loans, which are those categorized as substandard or doubtful, increased $2.6 million, or 4%, compared to December 31, 2019, driven by the downgrade of a commercial loan relationship totaling $3.6 million. The increase in classified loans compared to March 31, 2019 was driven by the downgrades of four commercial loan relationships totaling $18.8 million.
Deposits
The following table details Peoples’ deposit balances:
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | March 31,
2020 | December 31,
2019 | September 30,
2019 | June 30,
2019 | March 31,
2019 |
| Non-interest-bearing deposits (a) | $ | 727,266 | | $ | 671,208 | | $ | 677,232 | | $ | 643,058 | | $ | 628,464 | |
| Interest-bearing deposits: | | | | | |
| Interest-bearing demand accounts (a) | 637,011 | | 635,720 | | 622,496 | | 610,464 | | 572,316 | |
| Savings accounts | 527,295 | | 521,914 | | 526,372 | | 526,746 | | 477,824 | |
| Retail certificates of deposit ("CDs") | 487,153 | | 490,830 | | 488,942 | | 497,221 | | 404,186 | |
| Money market deposit accounts | 485,999 | | 469,893 | | 441,989 | | 428,213 | | 403,642 | |
| Governmental deposit accounts | 400,184 | | 293,908 | | 337,941 | | 331,754 | | 363,636 | |
| Brokered CDs | 133,522 | | 207,939 | | 262,230 | | 326,157 | | 287,345 | |
| Total interest-bearing deposits | 2,671,164 | | 2,620,204 | | 2,679,970 | | 2,720,555 | | 2,508,949 | |
| Total deposits | $ | 3,398,430 | | $ | 3,291,412 | | $ | 3,357,202 | | $ | 3,363,613 | | $ | 3,137,413 | |
| | | | | |
|
| | | | | | | | | | | | | | | |
| (Dollars in thousands) | September 30,
2019 | June 30,
2019 | March 31,
2019 | December 31,
2018 | September 30,
2018 |
| Non-interest-bearing deposits (a) | $ | 677,232 |
| $ | 643,058 |
| $ | 628,464 |
| $ | 607,877 |
| $ | 617,447 |
|
| Interest-bearing deposits: | | | | | |
| Interest-bearing demand accounts (a) | 622,496 |
| 610,464 |
| 572,316 |
| 573,702 |
| 547,172 |
|
| Savings accounts | 526,372 |
| 526,746 |
| 477,824 |
| 468,500 |
| 473,240 |
|
| Retail certificates of deposit ("CDs") | 488,942 |
| 497,221 |
| 404,186 |
| 394,335 |
| 402,309 |
|
| Money market deposit accounts | 441,989 |
| 428,213 |
| 403,642 |
| 379,878 |
| 391,377 |
|
| Governmental deposit accounts | 337,941 |
| 331,754 |
| 363,636 |
| 267,319 |
| 344,320 |
|
| Brokered CDs | 262,230 |
| 326,157 |
| 287,345 |
| 263,854 |
| 265,258 |
|
| Total interest-bearing deposits | 2,679,970 |
| 2,720,555 |
| 2,508,949 |
| 2,347,588 |
| 2,423,676 |
|
| Total deposits | $ | 3,357,202 |
| $ | 3,363,613 |
| $ | 3,137,413 |
| $ | 2,955,465 |
| $ | 3,041,123 |
|
| |
(a) | The sum of amounts presented is considered total demand deposits. |
At September 30, 2019,March 31, 2020, period-end deposits decreased $6.4 million, compared to June 30, 2019, and increased $401.7were up $107.0 million, or 14%,3% compared to December 31, 2018,2019, and $316.1increased $261.0 million, or 10%8%, compared to September 30, 2018.March 31, 2019. Compared to June 30,December 31, 2019, higher-rate brokered CDs and retail CDs declined and were partially offsetthe majority of the increase was seasonal, driven by increasesan increase in non-interest-bearing, money market and lower-cost interest-bearing demand deposit account balances. Brokered CDs and retail CDs were down $63.9 million, or 20%, and $8.3 million, or 2%, respectively.governmental deposits of $106.3 million. Non-interest-bearing deposit account balances increased $34.2grew $56.1 million, or 5%8%, while money market deposit accounts and interest-bearing demand deposit accountsbrokered CDs were up $13.8down $74.4 million, or 3%36%, and $12.0 million, or 2%, respectively.compared to the linked quarter. The increase in non-interest-bearing deposit account balances was primarily driven by two customer relationships that maintained balances that were higher than at June 30, 2019 and it is
anticipated these balances will decline by year-end. The increaseperiod-end deposits compared to DecemberMarch 31, 2018 and September 30, 20182019 was primarily driven by the deposits acquired in the First Prestonsburg acquisition.
Over the balances in deposit accounts acquired from First Prestonsburg totaled $214.0 million, including $62.3 millionpast four quarters, Peoples has reduced its reliance on higher-rate brokered CDs, which include one-way buy Certificate of interest-bearing demand accounts, $54.0 millionDeposit Account Registry Services. This was partially offset by the issuance of retail90-day brokered CDs $53.1 millionto fund interest rate swaps. During each of savings accounts, $30.1 million of non-interest-bearing demand accounts,the fourth and $14.5 million of money market accounts.
During the third quarter of 2019, Peoples issued $10.0 million of 90-day brokered CDs to fund one $10.0 million interest rate swap with a notional value of $10.0 million. During the second quarter of 2019, Peoples issued $30.0 million of 90-day brokered CDs to fund three $10.0 million interest rate swaps with a notional value in the aggregate of $30.0 million. The brokered CDs issued in the second quarter of 2019 matured in the third quarter. The CDs were replaced with 90-day brokered CDs. The swaps will pay a fixed rate of interest while receiving three-month LIBOR, which offsets the rate on the brokered CDs. The brokered CDs willare expected to be extended every 90 days through the maturity dates of the swaps.
Total demand deposit accounts comprised 39%40% of total deposits at September 30,both March 31, 2020 and December 31, 2019, compared to 37% of total deposits at June 30, 2019, 38% at March 31, 2019, 40% at December 31, 2018, and 38% at September 30, 2018.2019. Peoples continues its deposit strategy of growing low-cost core deposits, such as checking and savings accounts, and relying on higher-cost, non-core deposits, such as brokered CDs when deposits are not available in Peoples' footprint.
Borrowed Funds
The following table details Peoples’ short-term and long-term borrowings:
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | March 31,
2020 | December 31,
2019 | September 30,
2019 | June 30,
2019 | March 31,
2019 |
| Short-term borrowings: | | | | | |
| Overnight borrowings | $ | 64,000 | | $ | 141,000 | | $ | 106,000 | | $ | — | | $ | 24,000 | |
| FHLB 90-day advances | 110,000 | | 110,000 | | 110,000 | | 117,200 | | 110,000 | |
| Current portion of long-term FHLB advances | 45,000 | | 23,009 | | 23,069 | | 23,129 | | 13,188 | |
| Retail repurchase agreements | 40,661 | | 42,968 | | 49,081 | | 46,128 | | 44,175 | |
| | | | | |
| Total short-term borrowings | $ | 259,661 | | $ | 316,977 | | $ | 288,150 | | $ | 186,457 | | $ | 191,363 | |
| Long-term borrowings: | | | | | | | | | | |
| FHLB advances | $ | 125,300 | | $ | 75,672 | | $ | 76,785 | | $ | 78,324 | | $ | 98,670 | |
| | | | | |
| | | | | |
| | | | | |
| Junior subordinated debt securities | 7,491 | | 7,451 | | 7,409 | | 7,367 | | 7,325 | |
| Total long-term borrowings | $ | 132,791 | | $ | 83,123 | | $ | 84,194 | | $ | 85,691 | | $ | 105,995 | |
| Total borrowed funds | $ | 392,452 | | $ | 400,100 | | $ | 372,344 | | $ | 272,148 | | $ | 297,358 | |
|
| | | | | | | | | | | | | | | |
| (Dollars in thousands) | September 30,
2019 | June 30,
2019 | March 31,
2019 | December 31,
2018 | September 30,
2018 |
| Short-term borrowings: | | | | | |
| FHLB overnight borrowings | $ | 106,000 |
| $ | — |
| $ | 24,000 |
| $ | 165,000 |
| $ | 102,000 |
|
| FHLB 90-day advances | 110,000 |
| 117,200 |
| 110,000 |
| 110,000 |
| 100,000 |
|
| Current portion of long-term FHLB advances | 23,069 |
| 23,129 |
| 13,188 |
| 30,000 |
| 30,000 |
|
| Retail repurchase agreements | 49,081 |
| 46,128 |
| 44,175 |
| 51,202 |
| 64,840 |
|
| Unamortized debt issuance cost (a) | — |
| — |
| — |
| (4 | ) | (10 | ) |
| Total short-term borrowings | $ | 288,150 |
| $ | 186,457 |
| $ | 191,363 |
| $ | 356,198 |
| $ | 296,830 |
|
| Long-term borrowings: | | | | | |
| FHLB advances | $ | 76,785 |
| $ | 78,324 |
| $ | 98,670 |
| $ | 102,361 |
| $ | 103,860 |
|
| Junior subordinated debt securities | 7,409 |
| 7,367 |
| 7,325 |
| 7,283 |
| 7,239 |
|
| Total long-term borrowings | $ | 84,194 |
| $ | 85,691 |
| $ | 105,995 |
| $ | 109,644 |
| $ | 111,099 |
|
| Total borrowed funds | $ | 372,344 |
| $ | 272,148 |
| $ | 297,358 |
| $ | 465,842 |
| $ | 407,929 |
|
| |
(a) | Unamortized debt issuance cost was related to the cost associated with the Credit Agreement with Raymond James Bank, N.A., which was a short-term obligation that was terminated as of April 3, 2019. |
Peoples' short-term FHLB advances generally consist of overnight borrowings are maintained in connection with the management of Peoples' daily liquidity position. Borrowed funds, in total, which include overnight borrowings, are mainly a function of loan growth and changes in total deposit balances. The increasedecrease in overnight borrowings of $106.0$141.0 million as of September 30, 2019March 31, 2020 compared to June 30,December 31, 2019, was primarily tied to the growth in earning assetsdeposits during the quarter. As of September 30, 2019,March 31, 2020, Peoples had sixteenseventeen effective interest rate swaps, with an aggregate notional value of $150.0$160.0 million, $110.0 million of which were funded by FHLB 90-day advances, which are expected to extendbe extended every 90 days through the maturity dates of the swaps. The remaining $40.0$50.0 million of interest rate swaps were funded by 90-day brokered CDs, which willare also expected to be extended every 90 days through the maturity dates of the swaps. Peoples continually evaluates the overall balance sheet position given the interest rate environment. Long-termDuring the first quarter of 2020, Peoples borrowed $50.0 million of long-term FHLB advances declined at June 30, 2019 comparedputable, non-amortizing fixed-rates advances. Compared to March 31, 2019, due to transfers to short-term borrowings. At March 31, 2019 compared to December 31, 2018, long-termthe increase in FHLB advances declined due towas partially offset by principal payments.
Additional information regarding Peoples' interest rate swaps can be found in "Note 9 Derivative Financial Instruments" of the Notes to the UnconsolidatedUnaudited Consolidated Financial Statements.
Capital/Stockholders’ Equity
At September 30, 2019,March 31, 2020, capital levels for both Peoples and Peoples Bank remained substantially higher than the minimum amounts needed to be considered "well capitalized" institutions under applicable banking regulations. These higher capital levels reflect Peoples' desire to maintain a strong capital position. In order to avoid limitations on dividends,
equity repurchases and compensation, Peoples must exceed the three minimum required ratios by at least the capital conservation buffer. The capital conservation buffer was phased in from 0.625% beginning January 1, 2016 toof 2.50% by January 1, 2019, and, which applies to the common equity tier 1 ("CET1") ratio, the tier 1 capital ratio and the total risk-based capital ratio. At September 30, 2019,March 31, 2020, Peoples had a capital conservation buffer of 7.18%, compared to 2.50% for the fully phased-in capital conservation buffer required at January 1, 2019.7.38%. As such, Peoples exceeded the minimum ratios including the capital conservation buffer at September 30, 2019.March 31, 2020.
The following table details Peoples' risk-based capital levels and corresponding ratios:
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | March 31,
2020 | December 31,
2019 | September 30,
2019 | June 30,
2019 | March 31,
2019 |
| Capital Amounts: | | | | | | |
| Common Equity Tier 1 | $ | 415,768 | | $ | 427,415 | | $ | 417,468 | | $ | 410,978 | | $ | 389,394 | |
| Tier 1 | 423,259 | | 434,866 | | 424,877 | | 418,345 | | 396,719 | |
| Total (Tier 1 and Tier 2) | 459,727 | | 456,422 | | 446,462 | | 439,702 | | 417,658 | |
| Net risk-weighted assets | $ | 2,988,263 | | $ | 2,930,355 | | $ | 2,933,848 | | $ | 2,903,386 | | $ | 2,788,935 | |
| Capital Ratios: | | | | | |
| Common Equity Tier 1 | 13.91 | % | 14.59 | % | 14.23 | % | 14.16 | % | 13.96 | % |
| Tier 1 | 14.16 | % | 14.84 | % | 14.48 | % | 14.41 | % | 14.22 | % |
| Total (Tier 1 and Tier 2) | 15.38 | % | 15.58 | % | 15.22 | % | 15.14 | % | 14.98 | % |
| Tier 1 leverage ratio | 10.06 | % | 10.41 | % | 10.28 | % | 10.26 | % | 10.31 | % |
|
| | | | | | | | | | | | | | | |
| (Dollars in thousands) | September 30,
2019 | June 30,
2019 | March 31,
2019 | December 31,
2018 | September 30,
2018 |
| Capital Amounts: | |
| | | | |
| Common Equity Tier 1 | $ | 417,468 |
| $ | 410,979 |
| $ | 389,394 |
| $ | 378,855 |
| $ | 367,537 |
|
| Tier 1 | 424,877 |
| 418,347 |
| 396,719 |
| 386,138 |
| 374,776 |
|
| Total (Tier 1 and Tier 2) | 446,462 |
| 439,704 |
| 417,658 |
| 406,333 |
| 394,655 |
|
| Net risk-weighted assets | $ | 2,941,193 |
| $ | 2,903,387 |
| $ | 2,788,935 |
| $ | 2,773,383 |
| $ | 2,764,951 |
|
| Capital Ratios: | | | | | |
| Common Equity Tier 1 | 14.19 | % | 14.16 | % | 13.96 | % | 13.66 | % | 13.29 | % |
| Tier 1 | 14.45 | % | 14.41 | % | 14.22 | % | 13.92 | % | 13.55 | % |
| Total (Tier 1 and Tier 2) | 15.18 | % | 15.14 | % | 14.98 | % | 14.65 | % | 14.27 | % |
| Leverage ratio | 10.28 | % | 10.26 | % | 10.31 | % | 9.99 | % | 9.69 | % |
During the first quarter of 2020, Peoples repurchased 436,137, or $10.2 million, of common shares pursuant to a previously authorized Rule 10b5-1 plan. Peoples continues to evaluate repurchases under its program as appropriate, based on market conditions and other relevant factors. At March 31, 2020, Peoples continued to have strong capital levels. Peoples is closely monitoring capital levels, in light of the COVID-19 pandemic, and the potential impact of its effect upon future earnings. Peoples has stress tested its capital metrics, and will continue to adjust capital levers as necessary to ensure adequate capital is maintained.
In addition to the implementation of ASU 2016-13 and the repurchase of common shares during the first quarter of 2020, Peoples' capital ratios at September 30, 2019 increasedMarch 31, 2020 compared to December 31, 2019, were impacted by dividends declared of $7.0 million and the linkednet loss of $765,000 during the first quarter of 2020. During 2019, Peoples' capital ratios increased primarily due to earnings, during the third quarter of 2019, which exceeded the dividends declared and paid during the quarter by $7.8 million.paid. Peoples' capital ratios at June 30, 2019 increased compared to the linked quarter due to earnings during the second quarter of 2019, which exceeded the dividends declared and paid during the quarter by $2.6 million. The capital ratios at June 30,March 31, 2019 were also impacted by the increase in risk-weighted assets, which was largely attributable to the First Prestonsburg acquisition. The capital ratios increased at March 31, 2019 compared to December 31, 2018 due to increased equity as earnings exceeded the dividends declared. Peoples' capital ratios at December 31, 2018 increased compared to September 30, 2018 due primarily to increased earnings, which was largely driven by loan growth.
In addition to traditional capital measurements, management uses tangible capital measures to evaluate the adequacy of Peoples' stockholders' equity. Such ratios represent non-US GAAP financial measures since their calculation removes the impact of goodwill and other intangible assets acquired through acquisitions on amounts reported in the Unaudited Consolidated Balance Sheets. Management believes this information is useful to investors since it facilitates the comparison of Peoples' operating performance, financial condition and trends to peers, especially those without a similar level of intangible assets to that of Peoples. Further, intangible assets generally are difficult to convert into cash, especially during a financial crisis, and could decrease substantially in value should there be deterioration in the overall franchise value. As a result, tangible equity represents a conservative measure of the capacity for Peoples to incur losses but remain solvent.
The following table reconciles the calculation of these non-US GAAP financial measures to amounts reported in Peoples' Unaudited Consolidated Financial Statements:
| | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | March 31,
2020 | December 31,
2019 | September 30,
2019 | June 30,
2019 | March 31,
2019 |
| Tangible equity: | | | | | |
| Total stockholders' equity | $ | 583,721 | | $ | 594,393 | | $ | 588,533 | | $ | 579,022 | | $ | 535,121 | |
| Less: goodwill and other intangible assets | 177,447 | | 177,503 | | 179,126 | | 176,763 | | 161,242 | |
| Tangible equity | $ | 406,274 | | $ | 416,890 | | $ | 409,407 | | $ | 402,259 | | $ | 373,879 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Tangible assets: | | | | | | | | | | |
| Total assets | $ | 4,469,120 | | $ | 4,354,165 | | $ | 4,396,148 | | $ | 4,276,376 | | $ | 4,017,119 | |
| Less: goodwill and other intangible assets | 177,447 | | 177,503 | | 179,126 | | 176,763 | | 161,242 | |
| Tangible assets | $ | 4,291,673 | | $ | 4,176,662 | | $ | 4,217,022 | | $ | 4,099,613 | | $ | 3,855,877 | |
| | | | | |
| Tangible book value per common share: | | | | | | | | | |
| Tangible equity | $ | 406,274 | | $ | 416,890 | | $ | 409,407 | | $ | 402,259 | | $ | 373,879 | |
| Common shares outstanding | 20,346,843 | | 20,698,941 | | 20,700,630 | | 20,696,041 | | 19,681,692 | |
| | | | | |
| Tangible book value per common share | $ | 19.97 | | $ | 20.14 | | $ | 19.78 | | $ | 19.44 | | $ | 19.00 | |
| | | | | |
| Tangible equity to tangible assets ratio: | | | | | |
| Tangible equity | $ | 406,274 | | $ | 416,890 | | $ | 409,407 | | $ | 402,259 | | $ | 373,879 | |
| Tangible assets | $ | 4,291,673 | | $ | 4,176,662 | | $ | 4,217,022 | | $ | 4,099,613 | | $ | 3,855,877 | |
| | | | | |
| Tangible equity to tangible assets | 9.47 | % | 9.98 | % | 9.71 | % | 9.81 | % | 9.70 | % |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | | | | | |
| (Dollars in thousands) | September 30,
2019 | June 30,
2019 | March 31,
2019 | December 31,
2018 | September 30,
2018 |
| Tangible equity: | | | | | |
| Total stockholders' equity | $ | 588,533 |
| $ | 579,022 |
| $ | 535,121 |
| $ | 520,140 |
| $ | 504,290 |
|
| Less: goodwill and other intangible assets | 179,126 |
| 176,763 |
| 161,242 |
| 162,085 |
| 163,401 |
|
| Tangible equity | $ | 409,407 |
| $ | 402,259 |
| $ | 373,879 |
| $ | 358,055 |
| $ | 340,889 |
|
| Tangible assets: | | | | | |
| Total assets | $ | 4,396,148 |
| $ | 4,276,376 |
| $ | 4,017,119 |
| $ | 3,991,454 |
| $ | 4,003,089 |
|
| Less: goodwill and other intangible assets | 179,126 |
| 176,763 |
| 161,242 |
| 162,085 |
| 163,401 |
|
| Tangible assets | $ | 4,217,022 |
| $ | 4,099,613 |
| $ | 3,855,877 |
| $ | 3,829,369 |
| $ | 3,839,688 |
|
| Tangible book value per common share: | | | | |
| Tangible equity | $ | 409,407 |
| $ | 402,259 |
| $ | 373,879 |
| $ | 358,055 |
| $ | 340,889 |
|
| Common shares outstanding | 20,700,630 |
| 20,696,041 |
| 19,681,692 |
| 19,565,029 |
| 19,550,014 |
|
| Tangible book value per common share | $ | 19.78 |
| $ | 19.44 |
| $ | 19.00 |
| $ | 18.30 |
| $ | 17.44 |
|
| Tangible equity to tangible assets ratio: | | | | |
| Tangible equity | $ | 409,407 |
| $ | 402,259 |
| $ | 373,879 |
| $ | 358,055 |
| $ | 340,889 |
|
| Tangible assets | $ | 4,217,022 |
| $ | 4,099,613 |
| $ | 3,855,877 |
| $ | 3,829,369 |
| $ | 3,839,688 |
|
| Tangible equity to tangible assets | 9.71 | % | 9.81 | % | 9.70 | % | 9.35 | % | 8.88 | % |
Tangible book value per common share declined at March 31, 2020 compared to December 31, 2019, due to the decrease in tangible equity, partially offset by the decline in common shares outstanding resulting from the repurchase of common shares. The decline in the tangible equity to tangible assets ratio at March 31, 2020 compared to December 31, 2019, was a result of asset growth, driven primarily by an increase in cash and cash equivalents, combined with the decrease in tangible equity. During 2019, the primary contributor to the increaseincreases in tangible book value per common share at September 30, 2019 comparedand the tangible equity to June 30, 2019,tangible assets ratio was net income, partially offset by dividends paid. The slight decline in the tangible equity to tangible assets ratio at September 30, 2019 compared to June 30, 2019, was a result of asset growth, driven primarily by an increase in the investment securities portfolio. The increase inTangible book value per common share and the tangible equity to tangible assets ratio at June 30, 2019 compared to March 31, 2019, was due largely to the issuance of equity in the form of common shares in connection withwere also impacted by the First Prestonsburg acquisition, combined with higher retained earnings and other comprehensive income, given the increase in the market value of available-for-sale investment securities, during the second quarter of 2019, offset partially by higher tangible assets attributable primarily to the First Prestonsburg acquisition. The increase in thewhich increased tangible equity, tocommon shares outstanding, and tangible assets ratio at March 31, 2018 compared to December 31, 2018 and September 30, 2018, was the result of higher retained earnings, combined with an increase in the market value of available-for-sale investment securities.assets.
Interest Rate Sensitivity and Liquidity
While Peoples is exposed to various business risks, the risks relating to interest rate sensitivity and liquidity are major risks that can materially impact future results of operations and financial condition due to their complexity and dynamic nature. The objective of Peoples' asset-liability management function is to measure and manage these risks in order to optimize net interest income within the constraints of prudent capital adequacy, liquidity and safety. This objective requires Peoples to focus on interest rate risk exposure and adequate liquidity through its management of the mix of assets and liabilities, their related cash flows and the rates earned and paid on those assets and liabilities. Ultimately, the asset-liability management function is intended to guide management in the acquisition and disposition of earning assets and selection of appropriate funding sources.
Interest Rate Risk
Interest rate risk ("IRR") is one of the most significant risks arising in the normal course of business of financial services companies like Peoples. IRR is the potential for economic loss due to future interest rate changes that can impact the earnings stream, as well as market values, of financial assets and liabilities. Peoples' exposure to IRR is due primarily to differences in the maturity or repricing of earning assets and interest-bearing liabilities. In addition, other factors, such as prepayments of loans and investment securities, or early withdrawal of deposits, can affect Peoples' exposure to IRR and increase interest costs or reduce revenue streams.
Peoples has assigned overall management of IRR to its Asset-Liability Committee (the “ALCO”), which has established an IRR management policy that sets minimum requirements and guidelines for monitoring and managing the
level of IRR. The methods used by ALCO to assess IRR remain largely unchanged from those disclosed in Peoples' 20182019 Form 10-K.
The following table shows the estimated changes in net interest income and the economic value of equity based upon a standard, parallel shock analysis with balances held constant (dollars in thousands):
| | | Increase (Decrease) in Interest Rate | Estimated Increase (Decrease) in Net Interest Income | | Estimated Increase (Decrease) in Economic Value of Equity | Increase (Decrease) in Interest Rate | Estimated Increase (Decrease) in Net Interest Income | | | Estimated Increase (Decrease) in Economic Value of Equity | |
| (in Basis Points) | September 30, 2019 | | December 31, 2018 | | September 30, 2019 | | December 31, 2018 | (in Basis Points) | March 31, 2020 | | | December 31, 2019 | | | March 31, 2020 | | | December 31, 2019 | |
| 300 | $ | 16,897 |
| | 13.0 | % | | $ | 7,351 |
| 5.5 | % | | $ | 79,690 |
| | 7.4 | % | | $ | (22,088 | ) | (2.1 | )% | 300 | $ | 27,315 | | | 23.1 | % | | $ | 14,806 | | 11.2 | % | | $ | 239,503 | | | 23.8 | % | | $ | 35,743 | | 3.2 | % |
| 200 | 13,889 |
| | 10.7 | % | | 5,780 |
| 4.3 | % | | 84,199 |
| | 7.8 | % | | (7,191 | ) | (0.7 | )% | 200 | 21,966 | | | 18.6 | % | | 12,063 | | 9.1 | % | | 205,089 | | | 20.4 | % | | 45,651 | | 4.0 | % |
| 100 | 9,205 |
| | 7.1 | % | | 3,588 |
| 2.7 | % | | 59,470 |
| | 5.5 | % | | 3,926 |
| 0.4 | % | 100 | 13,172 | | | 11.1 | % | | 7,895 | | 6.0 | % | | 107,683 | | | 10.7 | % | | 39,137 | | 3.5 | % |
| (100) | (12,630 | ) | | (9.7 | )% | | (9,075 | ) | (6.8 | )% | | (70,881 | ) | | (6.6 | )% | | (44,512 | ) | (4.2 | )% | (100) | (7,451) | | | (6.3) | % | | (12,524) | | (9.5) | % | | (69,697) | | | (6.9) | % | | (63,964) | | (5.7) | % |
| (200) | (21,147 | ) | | (16.3 | )% | | (23,712 | ) | (17.6 | )% | | (122,534 | ) | | (11.3 | )% | | (130,769 | ) | (12.4 | )% | |
|
Estimated changes in net interest income and economic value of equity are partially driven by assumptions regarding the rate at which non-maturity deposits will reprice given a move in short-term interest rates as well as assumptions regarding prepayment speeds on mortgage-backed securities. Peoples takes a historically conservative approach when determining what repricing rates (i.e. deposit betas) are used and what prepayment speeds are used in modeling interest rate risk. These assumptions are monitored closely by Peoples on an ongoing basis. The actual deposit betas experienced by Peoples recently in the repricing of non-maturity deposits are lower than those used in Peoples' current interest rate risk model. While Peoples has benefited from this trend in the past, the changing interest rate environment poses potential risks to continued growth in net interest income.
With respect to investment prepayment speeds, the assumptions used are projectingthe results of a third-party prepayment model which projects the rate thatat which the underlying mortgages prepayprepay. These prepayment speeds effect the amount forecasted for cash flow reinvestment, premium amortization, and cash flows are reinvested,discount accretion assumed in interest rate risk modeling results. This prepayment activity is generally as athe result of refinancing activity. This activity and tends to increase as longer term interest rates decline, much like the current environment. The assumptions in the interest rate risk model could be incorrect, leading to either a lower or higher impact on net interest income. Peoples generally takes a more conservative approach regarding prepayment speed assumptions.
While parallel interest rate shock scenarios are useful in assessing the level of IRR inherent in the balance sheet, interest rates typically move in a nonparallel manner with differences in the timing, direction and magnitude of changes in short-term and long-term interest rates. Thus, any benefit that might occur as a result of the Federal Reserve Board increasing short-term interest rates in the future could be offset by an inverse movement in long-term rates, and vice versa. For this reason, Peoples considers other interest rate scenarios in addition to analyzing the impact of parallel yield curve shifts. This includesThese include various flattening and steepening scenarios in which short-term and long-term rates move in different directions with varying magnitude. Peoples believes these scenarios to be more reflective of how interest rates change versus the severe parallel rate shocks described above. At September 30, 2019, the U.S. Treasury and LIBOR swap curves were inverted for certain tenors. Given the shape of market yield curves at September 30, 2019,March 31, 2020, consideration of the bear steepener and bull steepener scenario yieldsflattener scenarios provide insights which were not captured by parallel shifts. These scenarios were evaluated as the current environment suggests these may be possible outcomes for the trajectory of interest rates.
The key insight presented by the bullbear steepener scenario highlights the risk to net interest income and the economic value of equity when long-term yieldsshort-term rates remain constant while short-termlong-term rates fall.rise. In such a scenario, Peoples’ fundingPeoples' deposit and borrowing costs, which are correlated with short-term rates, declineremain constant, while asset yields, which are correlated with long-term rates, rise. Increased asset yields largely driven by higher rates on floating rate loans would not be offset by increases in deposit or funding costs; resulting in an increased amount of net interest income and higher net interest margin.
The bull flattener scenario highlights the risk to net interest income and the economic value of equity when short-term rates remain constant.constant while long-term rates fall. In such a scenario, Peoples’ deposit and borrowing costs, which are correlated with short-term rates, remain constant while asset yields, which are correlated with long-term rates, fall. Asset yields driven lower by increased investment securities premium amortization and lower rates on floating rate loans would not be offset by reductions in deposit or funding costs; resulting in a decreased amount of net interest income and lower net interest margin.
Peoples has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate cash flowsamounts from a counterparty in exchange for Peoples making fixed payments. The swaps are funded through either rolling 90-day FHLB advances or rolling 90-day brokered certificates of deposit, the rate on which is hedged by receipt of the three-month LIBOR component of the swaps. The net result is that, given interest rates are near historical lows, Peoples can obtain funding at swap rates which are significantly lower than rates available on alternative sources of funding, especially overnight and shorter term funding. As of September 30, 2019,March 31, 2020, Peoples has entered into sixteenseventeen interest rate swap contracts with an aggregate notional value of $150.0$160.0 million. Additional information regarding Peoples’ interest rate swaps can be found in “Note 14 Derivative Financial Instruments” of the Notes to the UnconsolidatedUnaudited Consolidated Financial Statement included in this Form 10-Q.
At September 30, 2019,March 31, 2020, Peoples' consolidated balance sheetUnaudited Consolidated Balance Sheet was positioned to benefit from rising interest rates in terms of potential impact on net interest income.income and the economic value of equity. The table above illustrates this point as changes to net interest income increase in the rising rate scenarios. TheWhile the heavy concentration of floating rate loans remains the largest contributor to the level of asset sensitivity, the increase in asset sensitivity from December 31, 20182019 was largely attributable to the additional interest rate swaps added in the second and third quarters of 2019. While parallel interest rate shock scenarios are useful in assessing the levelgreater forecasted impacts of interest rate risk inherentmovements on the amount of premium amortization in the balance sheet, interest rates typically move ininvestment portfolio. The table also illustrates a non-parallel manner with differences in the timing, direction, and magnitude of changes in short-term
and long-term interest rates. Thus, any benefit that might occur as a result of the Federal Reserve lowering short-term interest rates in the future could be offset by a greatersignificant reduction in long-term interest rates.rate risk as evidenced by the change in the modeled impact of rising interest rates on the economic value of equity. The reduction is largely attributable to increased forecasted base case investment portfolio prepayments, which shortens the effective duration of assets and, ultimately, equity.
As interest rates across the yield curve have fallen, Peoples has experienced and will most likely continue to experience net interest margin compression. The confluence of lower LIBOR rates and increased investment securities prepayment speeds has created further headwinds which prevent margin expansion. Peoples should experience positive impacts from retail CDs and term
borrowings maturing and re-pricing lower, the expiration of promotional and contractual interest rates, and recently implemented non-maturity deposit rate reductions should begin to materialize over the next one to two quarters.
Liquidity
In addition to IRR management, another major objective of the ALCO is to maintain a sufficient level of liquidity. The methods used by the ALCO to monitor and evaluate the adequacy of Peoples Bank's liquidity position remain unchanged from those disclosed in Peoples' 20182019 Form 10-K.
At September 30, 2019,March 31, 2020, Peoples Bank had liquid assets of $286.6$249.8 million, which represented 5.9%5.0% of total assets and unfunded loan commitments. This amount exceeded the minimum level by $189.0$150.4 million, or 3.9%3.0% of total loans and unfunded commitments, currently required under Peoples' liquidity policy. Peoples also had an additional $112.1$106.8 million of unpledged investment securities not included in the measurement of liquid assets.
Management believes the current balance of cash and cash equivalents, and anticipated cash flows from the investment portfolio, along with the availability of other funding sources, will allow Peoples to meet anticipated cash obligations, as well as special needs and off-balance sheet commitments.
The COVID-19 pandemic presents a unique set of challenges and considerations which necessitate an abundance of caution when addressing liquidity risk. Management has taken action intended to ensure that liquidity levels are more than sufficient to meet the challenges posed by the current environment. Steps taken, before March 31, 2020 and after, to reinforce Peoples' liquidity position include, but are not limited to, the pledging of additional loan and investment securities collateral to counterparties in exchange for additional borrowing capacity, accumulation of larger than normal cash reserves, and purchasing of short-term brokered deposits. At March 31, 2020 Peoples had $1.03 billion of loans and investment securities pledged to secure borrowing capacities with the Federal Reserve of Cleveland and Federal Home Loan Bank of Cincinnati. As of April 30, 2020, loans and investment securities pledged to these counterparties had increased by $129.8 million to $1.16 billion to secure additional borrowing capacity. Additionally, Peoples plans to utilize the Federal Reserve's Paycheck Protection Program Liquidity Facility (PPPLF) to fund originations under the PPP.
Since March 31, 2020, there has been an increase in deposit balances due to the influx of funds from government stimulus, the PPP and other government actions. At the same time, we have experienced a decrease in the utilization rate for commercial lines of credit, which is related to the increase in cash flow to certain companies, mainly from PPP proceeds. The utilization percentage for consumer line of credit products has been relatively steady. Peoples anticipates that deposit balances will decline over time as the funds are used for intended business purposes and the commercial line of credit utilization percentage should revert back to normal averages as time progresses.
Off-Balance Sheet Activities and Contractual Obligations
In the normal course of business, Peoples is a party to financial instruments with off-balance sheet risk necessary to meet the financing needs of Peoples' customers. These financial instruments include commitments to extend credit and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract amounts of these instruments express the extent of involvement Peoples has in these financial instruments.
Loan Commitments and Standby Letters of Credit
Loan commitments are made to accommodate the financial needs of Peoples' customers. Standby letters of credit are instruments issued by Peoples Bank guaranteeing the beneficiary payment by Peoples Bank in the event of default by Peoples Bank's customer in the performance of an obligation or service. Historically, most loan commitments and standby letters of credit expire unused. Peoples Bank's exposure to credit loss in the event of nonperformance by the counter-party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. Peoples Bank uses the same underwriting standards in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties.
Peoples Bank routinely engages in activities that involve, to varying degrees, elements of risk that are not reflected in whole or in part in the Unaudited Consolidated Financial Statements. These activities are part of Peoples Bank's normal course of business and include traditional off-balance sheet credit-related financial instruments, interest rate contracts and commitments to make additional capital contributions in low-income housing tax credit investments. Traditional off-balance sheet credit-related financial instruments continue to represent the most significant off-balance sheet exposure.
The following table details the total contractual amount of loan commitments and standby letters of credit:
| | (Dollars in thousands) | September 30,
2019 | June 30,
2019 | March 31,
2019 | December 31,
2018 | September 30,
2018 | (Dollars in thousands) | March 31,
2020 | December 31,
2019 | September 30,
2019 | June 30,
2019 | March 31,
2019 |
| Home equity lines of credit | $ | 110,127 |
| $ | 106,456 |
| $ | 103,343 |
| $ | 101,265 |
| $ | 101,651 |
| Home equity lines of credit | $ | 113,605 | | $ | 112,464 | | $ | 110,127 | | $ | 106,456 | | $ | 103,343 | |
| Unadvanced construction loans | 87,063 |
| 95,266 |
| 80,916 |
| 74,734 |
| 71,836 |
| Unadvanced construction loans | 97,153 | | 102,491 | | 87,063 | | 95,266 | | 80,916 | |
| Other loan commitments | 365,343 |
| 360,872 |
| 308,103 |
| 314,271 |
| 324,059 |
| Other loan commitments | 413,515 | | 353,137 | | 365,343 | | 360,872 | | 308,103 | |
| Loan commitments | $ | 562,533 |
| $ | 562,594 |
| $ | 492,362 |
| $ | 490,270 |
| $ | 497,546 |
| Loan commitments | $ | 624,273 | | $ | 568,092 | | $ | 562,533 | | $ | 562,594 | | $ | 492,362 | |
| Standby letters of credit | $ | 14,983 |
| $ | 14,658 |
| $ | 12,371 |
| $ | 10,214 |
| $ | 9,979 |
| Standby letters of credit | $ | 12,883 | | $ | 12,498 | | $ | 14,983 | | $ | 14,658 | | $ | 12,371 | |
Management does not anticipate that Peoples Bank’s current off-balance sheet activities will have a material impact on its future results of operations and financial condition based on historical experience and recent trends.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this Item 3 is provided under the caption “Interest Rate Sensitivity and Liquidity” under “ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” in this Quarterly Report on Form 10-Q, and is incorporated herein by reference.
ITEM 4 CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Peoples' management, with the participation of Peoples' President and Chief Executive Officer and Peoples’ Executive Vice President, Chief Financial Officer and Treasurer, has evaluated the effectiveness of Peoples’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2019.March 31, 2020. Based upon that evaluation, Peoples’ President and Chief Executive Officer and Peoples’ Executive Vice President, Chief Financial Officer and Treasurer have concluded that:
| |
(a) | information required to be disclosed by Peoples in this Quarterly Report on Form 10-Q and other reports Peoples files or submits under the Exchange Act would be accumulated and communicated to Peoples’ management, including its President and Chief Executive Officer and its Executive Vice President, Chief Financial Officer and Treasurer, as appropriate to allow timely decisions regarding required disclosure; |
| |
(b) | information required to be disclosed by Peoples in this Quarterly Report on Form 10-Q and other reports Peoples files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and |
| |
(c) | Peoples’ disclosure controls and procedures were effective as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. |
(a)information required to be disclosed by Peoples in this Quarterly Report on Form 10-Q and other reports Peoples files or submits under the Exchange Act would be accumulated and communicated to Peoples’ management, including its President and Chief Executive Officer and its Executive Vice President, Chief Financial Officer and Treasurer, as appropriate to allow timely decisions regarding required disclosure;
(b)information required to be disclosed by Peoples in this Quarterly Report on Form 10-Q and other reports Peoples files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and
(c)Peoples’ disclosure controls and procedures were effective as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control Over Financial Reporting
There were no changes in Peoples' internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during Peoples' fiscal quarter ended September 30, 2019,March 31, 2020, that have materially affected, or are reasonably likely to materially affect, Peoples’ internal control over financial reporting.
PART II
ITEM 1 LEGAL PROCEEDINGS
In the ordinary course of their respective businesses or operations, Peoples or one of its subsidiaries may be named as a plaintiff, a defendant, or a party to a legal proceeding or any of their respective properties may be subject to various pending and threatened legal proceedings and various actual and potential claims. In view of the inherent difficulty of predicting the outcome of such matters, Peoples cannot state what the eventual outcome of any such matters will be. However, based on management's current knowledge and after consultation with legal counsel, management believes these proceedings will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of Peoples.
ITEM 1A RISK FACTORS
The disclosures below supplement the risk factors previously disclosed under “ITEM 1A. RISK FACTORS” of Part I of Peoples’ 2019 Form 10-K.
The COVID-19 pandemic has adversely impacted Peoples' business and financial results, and the ultimate impact on both will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental and nongovernmental authorities in response to the pandemic.
The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other Federal Reserve monetary policy. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, lowered equity market valuations, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in Peoples' 2019 Form 10-K could be exacerbated and such effects could have a material adverse impact on Peoples has entered into interest rate swaps as partin a number of itsways related to credit, collateral, customer demand, funding, operations, interest rate risk, management strategy. Theseand human capital, as described in more detail below.
Credit Risk. Peoples' risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of the business of Peoples' commercial borrowers and the financial circumstances of Peoples' consumer borrowers. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, which may affect individuals, households and business differently, and decreased consumer confidence generally, all of which may cause Peoples' customers to be unable to make scheduled loan payments.
If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in Peoples' portfolio, Peoples could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover Peoples' exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with existing loans, the ability to liquidate the real estate collateral securing residential and commercial real estate loans, Peoples' ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of Peoples' lending and services, and the financial condition and credit risk of Peoples' customers, both commercial and consumer. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent Peoples from making business decisions or may result in a delay in taking certain remediation actions, such as foreclosure. In addition, Peoples has unfunded commitments to extend credit to customers. During a challenging economic environment like now, customers are more dependent on credit commitments and increased borrowings under these commitments could adversely impact Peoples' liquidity.
Furthermore, in an effort to support Peoples' communities during the pandemic, Peoples is participating in the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit Peoples' ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, Peoples is at the heightened risk of holding the loan at an unfavorable interest rate swapsas compared to the loans to customers that Peoples would have otherwise extended credit.
As described in Peoples' 2019 Form 10-K, on January 1, 2020, Peoples adopted ASU 2016-13, Financial Instruments - Credit Losses (“CECL”), which upon adoption resulted in a reduction to the retained earnings balance of $3.7 million, net of income tax, and a pre-tax increase to the allowance for loan losses of approximately $5.8 million. Due to the adoption of ASU 2016-13, Peoples' financial results may be negatively affected as soon as weak or deteriorating economic conditions are designatedforecasted and alter Peoples' expectations for credit losses. In addition, due to the expansion of the time horizon over which Peoples is required to estimate future credit losses under CECL, Peoples may experience increased volatility in future provisions for credit losses. Peoples may also experience a higher or more volatile provision for credit losses due to higher levels of non-performing loans and net charge-offs if commercial and consumer customers are unable to make scheduled loans payments.
Strategic Risk. Peoples' success may be affected by a variety of external factors that may affect the price or marketability of products and services, changes in interest rates that may increase funding costs, reduced demand for financial products due to economic conditions, and the various response of governmental and nongovernmental authorities. In recent weeks, the COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets. Furthermore, many of the governmental actions to curtail the spread of the virus have been directed toward curtailing household and business activity to contain COVID-19. These actions have been rapidly expanding in scope and intensity. For example, in many of Peoples' markets, local governments have acted to temporarily close or restrict the operations of most businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking products Peoples provides, including a decline in loan originations.
Operational Risk. Current and future restrictions on the access of Peoples' workforce to its facilities could limit Peoples' ability to meet customer service expectations and have a material adverse effect on operations. Peoples relies on business
processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties.
In response to COVID-19, Peoples has modified its business practices with a portion of employees working remotely from their homes to limit interruptions to operations as much as possible and to help reduce the risk of COVID-19 infecting entire departments. Reduced workforces which may be caused by, but not limited to, illness, quarantine, stay at home or other government mandates, or difficulties transitioning back to an in office environment, could result in an adverse impact to Peoples' operations and financial performance. Employees with health conditions putting them at higher risk of adverse effects from COVID-19 are working remotely. Peoples is encouraging virtual meetings and conference calls in place of in-person meetings, including the annual shareholders meeting which was held virtually this year. Additionally, travel has been restricted. Peoples is promoting social distancing, frequent hand washing and thorough disinfection of all surfaces. Peoples financial service location lobbies have been closed except for advance appointments only. Branch drive-ups, call center, ATMs and online/mobile banking services continue to operate and are the preferred option of service. Even with the precautions undertaken, the continued spread or prolonged impact of the COVID-19 could negatively impact the availability of key personnel or significant numbers of Peoples' staff, who are necessary to conduct Peoples' business.
Further, technology in employees’ homes may not be as robust as in Peoples' offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in the offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. These cybersecurity risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of Peoples' information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of Peoples' ability to perform critical functions, including wiring funds, all of which could expose Peoples to risks of data or financial loss, litigation and liability and could seriously disrupt operations and the operations of any impacted customers.
Moreover, Peoples relies on many third parties in business operations, including appraisers of real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. For example, loan origination could be delayed due to the limited availability of real estate appraisers for the underlying collateral. Loan closings could be delayed due to reductions in available staff in recording offices or the closing of courthouses in certain counties, which slows the process for title work, and mortgage and UCC filings in those counties. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect Peoples' operations.
Interest Rate Risk. Peoples' net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0% to 0.25%, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase Peoples' funding costs and negatively affect market risk mitigation strategies. Higher revenue volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in the fair market values of Peoples' assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of Peoples' assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on Peoples' net income, results of operations and financial condition. Low rates increase the risk in the U.S. of a negative interest rate environment in which interest rates drop below zero, either broadly or for some types of instruments. Such an occurrence would likely further reduce the interest Peoples earns on loans and other earning assets, while also likely requiring Peoples to pay to maintain its deposits with the Federal Reserve. Peoples' systems may not be able to adequately handle a negative interest rate environment and not all variable rate instruments are designed for such a circumstance. Peoples cannot predict the nature or timing of future changes in monetary policies in response to the outbreak or the precise effects that they may have on Peoples activities and financial results.
Liquidity Risk. Peoples' ability to access short-term funding or liquidity may be limited as a result of the impact of COVID-19 on local and global markets. This situation could further be exacerbated by a reduced deposit base either through customer withdrawals or non-renewal of term deposits. Market stress from the virus could result in reduced cash flow hedgesfrom earning assets including other-than-temporary impairment on investment securities and involvesustained repayment shortfalls on loans. It is possible that sources of wholesale funding such as the receiptFederal Home Loan Bank, the Federal Reserve Bank, or the brokered certificate of variable rate amounts fromdeposit market would no longer be accessible to fund daily liquidity needs.
Because there have been no comparable recent global pandemics that resulted in similar global impact, Peoples does not yet know the full extent of COVID-19’s effects on its business, operations, or the global economy as a counterparty in exchange for Peoples making fixed payments. Aswhole. Any future developments will be
highly uncertain and cannot be predicted, including the scope and duration of the hedging relationships willpandemic, the effectiveness of Peoples' work from home arrangements, third-party providers’ ability to support operations, and any actions taken by governmental authorities and other third parties in response to the pandemic and how quickly and to what extent normal economic and operating conditions can resume. Even after COVID-19 has subsided, Peoples may continue to be highly effectiveexperience material adverse impacts on its business as described above, ita result of the virus' global economic impact, including the availability of credit, adverse impacts on Peoples' liquidity and any recession that has not assumed that there will be no ineffectivenessoccurred or may occur in the hedging relationships. Additional information regarding Peoples' interest rate swaps can be found in "Note 14 Derivative Financial Instruments" of the Notes to the Consolidated Financial Statements included in Peoples' 2018 Form 10-K and "Note 9 Derivative Financial Instruments" of the Notes to the Unconsolidated Financial Statements in this Form 10-Q.future.
There have been no other material changes from those risk factors previously disclosed in “ITEM 1A. RISK FACTORS” of Part I of Peoples’ 20182019 Form 10-K. Those risk factors are not the only risks Peoples faces. Additional risks and uncertainties not currently known to management or that management currently deems to be immaterial also may materially adversely affect Peoples’ business, financial condition and/or operating results.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table details repurchases by Peoples and purchases by “affiliated purchasers” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, of Peoples’ common shares during the three months ended September 30, 2019:March 31, 2020:
| | | | | | | | | | | | | | | | | | | | |
| Period | (a) Total Number of Common Shares Purchased | | (b) Average Price Paid per Common Share | | (c) Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs (1) | (d) Maximum Number ( or Approximate Dollar Value) of Common Shares that May Yet Be Purchased Under the Plans or Programs (1) |
| January 1 – 31, 2020 | 530 | | (2) | $ | 34.70 | | (2) | — | | $ | 14,245,071 | |
| February 1 – 29, 2020 | 60,387 | | (1)(3) | $ | 30.94 | | (1)(3) | 39,296 | | $ | 39,328,468 | |
| March 1 – 31, 2020 | 397,742 | | (1)(2)(3) | $ | 22.78 | | (1)(2)(3) | 396,841 | | $ | 30,293,671 | |
| Total | 458,659 | | | $ | 23.87 | | | 436,137 | | $ | 30,293,671 | |
|
| | | | | | | | | | | | |
| Period | (a) Total Number of Common Shares Purchased | | (b) Average Price Paid per Common Share | | (c) Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs (1) | (d) Maximum Number ( or Approximate Dollar Value) of Common Shares that May Yet Be Purchased Under the Plans or Programs (1) |
July 1-31, 2019 (2) (3) | 1,248 |
|
| $ | 32.25 |
| | — |
| $ | 15,049,184 |
|
August 1-31, 2019 (2) | 988 |
| | 30.79 |
| | — |
| 15,049,184 |
|
September 1-30, 2019 (1) (3) | 14,657 |
| | 30.40 |
| | 14,175 |
| 14,618,757 |
|
| Total | 16,893 |
| | $ | 30.56 |
| | 14,175 |
| $ | 14,618,757 |
|
| |
(1) | On November 3, 2015, Peoples announced that on that same date, Peoples' Board of Directors authorized a share repurchase program authorizing Peoples to purchase up to $20.0 million of its outstanding common shares. 14,175 common shares were purchased under this share repurchase program during September 2019. |
| |
(2) | Information reported includes 705 common shares and 988 common shares withheld to satisfy income taxes associated with restricted common shares, which vested during July and August, respectively. |
| |
(3) | Information reported includes 543 common shares and 482 common shares purchased in open market transactions during July and September, respectively, by Peoples Bank under the Rabbi Trust Agreement. The Rabbi Trust Agreement establishes a rabbi trust that holds assets to provide funds for the payment of the benefits under the Peoples Bancorp Inc. Third Amended and Restated Deferred Compensation Plan for Directors of Peoples Bancorp Inc. and Subsidiaries. |
(1)On November 3, 2015, Peoples announced that on that same date, Peoples' Board of Directors authorized a share repurchase program authorizing Peoples to purchase up to an aggregate of $20 million of its outstanding common shares. Peoples repurchased 16,340 common shares for $498,000 under this share repurchase program during February 2020. On February 28, 2020, Peoples announced that on February 27, 2020, Peoples' Board of Directors authorized a share repurchase program authorizing Peoples to purchase up to an aggregate of $40 million of its outstanding common shares. The share repurchase program announced on February 28, 2020 replaced the previous repurchase program which was terminated on February 27, 2020. Peoples repurchased 22,956 and 396,841 common shares for $672,000 and $9.0 million under this share repurchase program during February and March 2020, respectively.
(2)Information reported includes 530 common shares and 544 common shares purchased in open market transactions during January and March, respectively, by Peoples Bank under the Rabbi Trust Agreement. The Rabbi Trust Agreement establishes a rabbi trust that holds assets to provide funds for the payment of the benefits under the Peoples Bancorp Inc. Third Amended and Restated Deferred Compensation Plan for Directors of Peoples Bancorp Inc. and Subsidiaries. (3)Information reported includes 21,091 common shares and 357 common shares withheld to satisfy income taxes associated with restricted common shares, which vested during February and March, respectively.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS
| | | | | | | | | | | | | | |
Exhibit
Number | | Description | Exhibit Location | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exhibit
| | Description
| | Exhibit Location
| | | | | | | | Agreement and Plan of Merger, dated as of October 23, 2017,29, 2018, as amended by Amendment No. 1, made and entered into as of December 18, 2018, between Peoples Bancorp Inc. and ASB Financial Corp.First Prestonsburg Bancshares Inc.+ | | Included as Annex A to the definitive proxy statement/prospectus which forms a part of the Registration Statement of Peoples Bancorp Inc. ("Peoples") on Form S-4/A (Registration No. 333-222054)333-228745) | | | | | | | 3.1(a) | | Agreement and Plan of Merger, dated as of October 29, 2018, as amended on December 18, 2018, between Peoples Bancorp Inc. and First Prestonsburg Bancshares Inc.+
| | Included as Annex A to the definitive proxy statement/prospectus which forms a part of the Registration Statement of Peoples on Form S-4/A (Registration No. 333-228745) | | | | | | 3.1(a) | | Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on May 3, 1993) P | | Incorporated herein by reference to Exhibit 3(a) to Peoples' Registration Statement on Form 8-B filed on July 20, 1993 (File No. 0-16772) | | | | | | | | Certificate of Amendment to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on April 22, 1994) | | Incorporated herein by reference to Exhibit 3.1(b) to Peoples' Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017 (File No. 0-16772) ("Peoples' September 30, 2017 Form 10-Q") | | | | | | | | Certificate of Amendment to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on April 9, 1996) | | Incorporated herein by reference to Exhibit 3.1(c) to Peoples' September 30, 2017 Form 10-Q | | | | | | | | Certificate of Amendment to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on April 23, 2003) | | Incorporated herein by reference to Exhibit 3(a) to Peoples’ Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 (File No. 0-16772) (“Peoples’ March 31, 2003 Form 10-Q”) | | | | | | | | Certificate of Amendment by Shareholders to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on January 22, 2009) | | Incorporated herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K dated and filed on January 23, 2009 (File No. 0-16772) | | | | | | | | Certificate of Amendment by Directors to Articles filed with the Ohio Secretary of State of the State of Ohio on January 28, 2009, evidencing adoption of amendments by the Board of Directors of Peoples Bancorp Inc. to Article FOURTH of the Amended Articles of Incorporation to establish express terms of Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value, of Peoples Bancorp Inc. | | Incorporated herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K dated and filed on February 2, 2009 (File No. 0-16772) | | | | | | | | Amended Articles of Incorporation of Peoples Bancorp Inc. (This document represents the Amended Articles of Incorporation of Peoples Bancorp Inc. in compiled form incorporating all amendments. The compiled document has not been filed with the Ohio Secretary of State.) | | Incorporated herein by reference to Exhibit 3.1(g) to Peoples’ Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (File No. 0-16772) | | | | | | | 3.2(a) | | Code of Regulations of Peoples Bancorp Inc. P | | Incorporated herein by reference to Exhibit 3(b) to Peoples’ Registration Statement on Form 8-B filed on July 20, 1993 (File No. 0-16772) | | | | | | | | Certified Resolutions Regarding Adoption of Amendments to Sections 1.03, 1.04, 1.05, 1.06, 1.08, 1.10, 2.03(C), 2.07, 2.08, 2.10 and 6.02 of the Code of Regulations of Peoples Bancorp Inc. by shareholders on April 10, 2003 | | Incorporated herein by reference to Exhibit 3(c) to Peoples’ March 31, 2003 Form 10-Q | | | | | | | | Certificate regarding adoption of amendments to Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.07, 3.08 and 3.11 of the Code of Regulations of Peoples Bancorp Inc. by shareholders on April 8, 2004 | | Incorporated herein by reference to Exhibit 3(a) to Peoples’ Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004 (File No. 0-16772) | | | | | | +Schedules and exhibits werehave been omitted pursuant to Item 601(b)(2) of SEC Regulation S-K, as in effect at the time of filing of the Agreement and Plan of Merger. A copy of any omitted schedules or exhibits will be furnished supplementally by Peoples Bancorp Inc. to the SEC on a confidential basis upon request. | | | | | PExhibitPeoples Bancorp Inc. filed this exhibit with the SEC in paper form originally and this exhibit has not been filed with the SEC in electronic format. | | | | | | | | | |
| | | | | | | | | | | | | | | Exhibit
Number | | Description | | Exhibit Location | | | | | | | | | | | | | | | | | | | | | Exhibit
| | Description
| | Exhibit Location
| | | | | | | | Certificate regarding adoption of amendments to Sections 2.06, 2.07, 3.01 and 3.04 of Peoples Bancorp Inc.’s Code of Regulations by the shareholders on April 13, 2006 | | Incorporated herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K dated and filed on April 14, 2006 (File No. 0-16772) | | | | | | | | Certificate regarding adoption of an amendment to Section 2.01 of Peoples Bancorp Inc.’s Code of Regulations by the shareholders on April 22, 2010 | | Incorporated herein by reference to Exhibit 3.2(e) to Peoples’ Quarterly Report on Form 10-Q/A (Amendment No. 1) for the quarterly period ended June 30, 2010 (File No. 0-16772) | | | | | | | | Certificate regarding Adoption of Amendment to Division (D) of Section 2.02 of the Code of Regulations of Peoples Bancorp Inc. by the Shareholders at the Annual Meeting of Shareholders on April 26, 2018 | | Incorporated herein by reference to Exhibit 3.1 to Peoples' Current Report on Form 8-K dated and filed on June 28, 2018 (File No. 0-16772) ("Peoples' June 28, 2018 Form 8-K") | | | | | | | | Code of Regulations of Peoples Bancorp Inc. (This document represents the Code of Regulations of Peoples Bancorp Inc. in compiled form incorporating all amendments.) | | Incorporated herein by reference to Exhibit 3.2 to Peoples' June 28, 2018 Form 8-K | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Summary of Peoples Bancorp Inc. AmendedAnnual Incentive Program for executive officers and Restated Nonqualified Deferred Compensation Plan (adopted effective July 11, 2019)other employees of Peoples Bancorp Inc. and subsidiaries of Peoples Bancorp Inc. [Effective beginning with the fiscal year beginning January 1, 2020] | | Incorporated herein by reference to Exhibit 10.3 to Peoples' QuarterlyAnnual Report on Form 10-Q10-K for the quarterly periodfiscal year ended June 30,December 31, 2019 (File No. 0-16772) ("Peoples 2019 Form 10-K") | | | | | | | | Summary of perquisites for Executive Officers of Peoples Bancorp Inc. | | Incorporated herein by reference to 10.4 to Peoples' 2019 Form 10-K | | | | | | | | Summary of Base Salaries for Named Executive Officers of Peoples Bancorp Inc. | | Filed herewith | | | | | | | | Summary of Compensation for Directors of Peoples Bancorp Inc. | | Incorporated herein by reference to Exhibit 10.6 to Peoples' 2019 Form 10-K | | | | | | | | Rule 13a-14(a)/15d-14(a) Certifications [President and Chief Executive Officer] | | Filed herewith | | | | | | | | Rule 13a-14(a)/15d-14(a) Certifications [Executive Vice President, Chief Financial Officer and Treasurer] | | Filed herewith | | | | | | | | Section 1350 Certifications | | Furnished herewith | | | | | | | 101.INS | | Inline XBRL Instance Document ## | | Submitted electronically herewith # | | | | | | | 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | Submitted electronically herewith # | | | | | | | 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | Submitted electronically herewith # | | | | | | | 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | Submitted electronically herewith # | | | | | | | 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | Submitted electronically herewith # | | | | | | | 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | Submitted electronically herewith # | | | | | | | 104 | | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) | | Submitted electronically herewith | | | | | | | | | | | | | | | | # Attached as Exhibit 101 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019March 31, 2020 of Peoples Bancorp Inc. are the following documents formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (Unaudited) at September 30, 2019March 31, 2020 (Unaudited) and December 31, 2018;2019; (ii) Consolidated Statements of IncomeOperations (Unaudited) for the three and nine months ended September 30, 2019March 31, 2020 and 2018;2019; (iii) Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2019March 31, 2020 and 2018;2019; (iv) Consolidated Statement of Stockholders' Equity (Unaudited) for the ninethree months ended September 30, 2019;March 31, 2020; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the ninethree months ended September 30, 2019March 31, 2020 and 2018;2019; and (vi) Notes to the Unaudited Consolidated Financial Statements. | | | | | | ## The instance document does not appear in the interactive data file because its XBRL tags are imbedded within the Inline XBRL document. | | | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | | | | | PEOPLES BANCORP INC. | | | | | | Date: | May 6, 2020 | By: /s/ | CHARLES W. SULERZYSKI | | | | Charles W. Sulerzyski | | | | President and Chief Executive Officer | | | | | | | | | | Date: | May 6, 2020 | | PEOPLES BANCORP INC. | | | | | Date: | October 30, 2019 | By: /s/ | CHARLES W. SULERZYSKI | | | | Charles W. Sulerzyski | | | | President and Chief Executive Officer | | | | | | | | | Date: | October 30, 2019 | By: /s/ | JOHN C. ROGERS | | | | John C. Rogers | | | | Executive Vice President, | | | | Chief Financial Officer and Treasurer |
|
