Peoples Bancorp Earnings 2018-09-30
PEBO 10Q Quarterly Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
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, 2018
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: 0-16772
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 | |||||||
(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) | ||||||||
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 filer o | Accelerated filer x | Non-accelerated filer o | Smaller reporting company o | Emerging growth company o |
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 ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o
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: 19,555,775 common shares, without par value, at November 6, 2018.
Table of Contents | |
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PART I
ITEM 1. FINANCIAL STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2018 | December 31, 2017 | |||||
(Dollars in thousands) | (Unaudited) | |||||
Assets | ||||||
Cash and due from banks | $ | 60,567 | $ | 58,121 | ||
Interest-bearing deposits in other banks | 34,606 | 14,073 | ||||
Total cash and cash equivalents | 95,173 | 72,194 | ||||
Available-for-sale investment securities, at fair value (amortized cost of $819,431 at September 30, 2018 and $797,732 at December 31, 2017) (a) | 793,325 | 795,187 | ||||
Held-to-maturity investment securities, at amortized cost (fair value of $37,095 at September 30, 2018 and $41,213 at December 31, 2017) | 37,790 | 40,928 | ||||
Other investment securities (a) | 43,044 | 38,371 | ||||
Total investment securities | 874,159 | 874,486 | ||||
Loans, net of deferred fees and costs | 2,707,727 | 2,357,137 | ||||
Allowance for loan losses | (19,879 | ) | (18,793 | ) | ||
Net loans | 2,687,848 | 2,338,344 | ||||
Loans held for sale | 4,776 | 2,510 | ||||
Bank premises and equipment, net of accumulated depreciation | 57,527 | 52,510 | ||||
Bank owned life insurance | 68,439 | 62,176 | ||||
Goodwill | 151,673 | 133,111 | ||||
Other intangible assets | 11,728 | 11,465 | ||||
Other assets | 51,766 | 34,890 | ||||
Total assets | $ | 4,003,089 | $ | 3,581,686 | ||
Liabilities | ||||||
Deposits: | ||||||
Non-interest-bearing | $ | 617,447 | $ | 556,010 | ||
Interest-bearing | 2,423,676 | 2,174,320 | ||||
Total deposits | 3,041,123 | 2,730,330 | ||||
Short-term borrowings | 296,830 | 209,491 | ||||
Long-term borrowings | 111,099 | 144,019 | ||||
Accrued expenses and other liabilities | 49,747 | 39,254 | ||||
Total liabilities | 3,498,799 | 3,123,094 | ||||
Stockholders’ equity | ||||||
Preferred stock, no par value, 50,000 shares authorized, no shares issued at September 30, 2018 and December 31, 2017 | — | — | ||||
Common stock, no par value, 24,000,000 shares authorized, 20,119,194 shares issued at September 30, 2018 and 18,952,385 shares issued at December 31, 2017, including shares in treasury | 386,142 | 345,412 | ||||
Retained earnings (b) | 152,976 | 134,362 | ||||
Accumulated other comprehensive loss, net of deferred income taxes (b) | (20,590 | ) | (5,215 | ) | ||
Treasury stock, at cost, 609,250 shares at September 30, 2018 and 702,449 shares at December 31, 2017 | (14,238 | ) | (15,967 | ) | ||
Total stockholders’ equity | 504,290 | 458,592 | ||||
Total liabilities and stockholders’ equity | $ | 4,003,089 | $ | 3,581,686 | ||
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of equity investment securities (including those held in participant accounts in the Peoples Bancorp Inc. Nonqualified Deferred Compensation Plan) from available-for-sale investment securities to other investment securities. At December 31, 2017, $7.8 million of equity investment securities were included in available-for-sale investment securities.
(b) As of January 1, 2018, Peoples adopted ASU 2014-09 (which resulted in a reduction to retained earnings and an increase in other liabilities of $3.1 million, net of federal income taxes, to reflect uncompleted contracts in the initial application of the guidance) and 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
3
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
(Dollars in thousands, except per share data) | 2018 | 2017 | 2018 | 2017 | |||||||||
Interest income: | |||||||||||||
Interest and fees on loans | $ | 33,355 | $ | 26,370 | $ | 91,486 | $ | 76,133 | |||||
Interest and dividends on taxable investment securities | 5,577 | 5,615 | 17,057 | 15,280 | |||||||||
Interest on tax-exempt investment securities | 613 | 701 | 1,891 | 2,257 | |||||||||
Other interest income | 86 | 42 | 192 | 83 | |||||||||
Total interest income | 39,631 | 32,728 | 110,626 | 93,753 | |||||||||
Interest expense: | |||||||||||||
Interest on deposits | 4,018 | 1,865 | 9,332 | 5,081 | |||||||||
Interest on short-term borrowings | 1,617 | 369 | 3,760 | 853 | |||||||||
Interest on long-term borrowings | 672 | 1,274 | 2,043 | 3,564 | |||||||||
Total interest expense | 6,307 | 3,508 | 15,135 | 9,498 | |||||||||
Net interest income | 33,324 | 29,220 | 95,491 | 84,255 | |||||||||
Provision for loan losses | 1,302 | 1,086 | 4,473 | 2,657 | |||||||||
Net interest income after provision for loan losses | 32,022 | 28,134 | 91,018 | 81,598 | |||||||||
Non-interest income: | |||||||||||||
Insurance income | 3,388 | 3,345 | 11,412 | 10,861 | |||||||||
Trust and investment income | 3,110 | 2,838 | 9,410 | 8,497 | |||||||||
Electronic banking income | 2,890 | 2,544 | 8,460 | 7,692 | |||||||||
Deposit account service charges | 2,652 | 2,407 | 7,160 | 7,130 | |||||||||
Mortgage banking income | 1,060 | 535 | 2,380 | 1,389 | |||||||||
Bank owned life insurance income | 495 | 482 | 1,460 | 1,471 | |||||||||
Commercial loan swap fees | 355 | 76 | 617 | 995 | |||||||||
Net gain (loss) on asset disposals and other transactions | 12 | (25 | ) | (319 | ) | 81 | |||||||
Net gain (loss) on investment securities | — | 1,861 | (146 | ) | 2,219 | ||||||||
Other non-interest income (a) | 391 | 383 | 2,143 | 1,499 | |||||||||
Total non-interest income | 14,353 | 14,446 | 42,577 | 41,834 | |||||||||
Non-interest expense: | |||||||||||||
Salaries and employee benefit costs | 17,908 | 15,141 | 51,923 | 45,686 | |||||||||
Net occupancy and equipment expense | 2,850 | 2,619 | 8,519 | 7,980 | |||||||||
Electronic banking expense | 1,552 | 1,403 | 4,409 | 4,293 | |||||||||
Data processing and software expense | 1,408 | 1,092 | 4,089 | 3,330 | |||||||||
Professional fees | 1,395 | 1,393 | 6,135 | 4,532 | |||||||||
Amortization of other intangible assets | 862 | 869 | 2,477 | 2,603 | |||||||||
Franchise tax expense | 616 | 583 | 1,874 | 1,750 | |||||||||
Marketing expense | 456 | 488 | 1,437 | 1,122 | |||||||||
FDIC insurance expense | 391 | 449 | 1,173 | 1,339 | |||||||||
Foreclosed real estate and other loan expenses | 373 | 214 | 923 | 589 | |||||||||
Communication expense | 305 | 334 | 949 | 1,134 | |||||||||
Other non-interest expense | 2,713 | 1,973 | 11,113 | 6,211 | |||||||||
Total non-interest expense | 30,829 | 26,558 | 95,021 | 80,569 | |||||||||
Income before income taxes | 15,546 | 16,022 | 38,574 | 42,863 | |||||||||
Income tax expense | 2,821 | 5,127 | 6,216 | 13,393 | |||||||||
Net income | $ | 12,725 | $ | 10,895 | $ | 32,358 | $ | 29,470 | |||||
Earnings per common share - basic | $ | 0.65 | $ | 0.60 | $ | 1.70 | $ | 1.62 | |||||
Earnings per common share - diluted | $ | 0.65 | $ | 0.60 | $ | 1.69 | $ | 1.61 | |||||
Weighted-average number of common shares outstanding - basic | 19,325,457 | 18,056,202 | 18,875,290 | 18,043,692 | |||||||||
Weighted-average number of common shares outstanding - diluted | 19,466,865 | 18,213,533 | 19,004,087 | 18,199,959 | |||||||||
Cash dividends declared | $ | 5,472 | $ | 4,020 | $ | 15,709 | $ | 11,299 | |||||
Cash dividends declared per common share | $ | 0.28 | $ | 0.22 | $ | 0.82 | $ | 0.62 | |||||
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in a reduction to other non-interest income of $16,000 for the three months ended September 30, 2018 and a gain to other non-interest income of $208,000 for the nine months ended September 30, 2018.
See Notes to the Unaudited Consolidated Financial Statements
4
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
(Dollars in thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||
Net income | $ | 12,725 | $ | 10,895 | $ | 32,358 | $ | 29,470 | |||||
Other comprehensive income: | |||||||||||||
Available-for-sale investment securities: | |||||||||||||
Gross unrealized holding (loss) gain arising during the period | (5,813 | ) | (236 | ) | (18,587 | ) | 5,448 | ||||||
Related tax benefit (expense) | 1,221 | 83 | 3,904 | (1,906 | ) | ||||||||
Less: reclassification adjustment for net gain (loss) included in net income | — | 1,861 | (146 | ) | 2,219 | ||||||||
Related tax (expense) benefit | — | (652 | ) | 31 | (777 | ) | |||||||
Amounts reclassified out of accumulated other comprehensive loss per ASU 2016-01 (a) | — | — | (5,020 | ) | — | ||||||||
Related tax benefit | — | — | 1,054 | — | |||||||||
Net effect on other comprehensive (loss) income | (4,592 | ) | (1,362 | ) | (18,534 | ) | 2,100 | ||||||
Defined benefit plans: | |||||||||||||
Net gain (loss) arising during the period | 1,177 | (1 | ) | 1,177 | (1 | ) | |||||||
Related tax expense | (247 | ) | — | (247 | ) | — | |||||||
Amortization of unrecognized loss and service cost on benefit plans | 28 | 25 | 80 | 72 | |||||||||
Related tax expense | (6 | ) | (9 | ) | (17 | ) | (25 | ) | |||||
Recognition of loss due to settlement and curtailment | 176 | — | 176 | — | |||||||||
Related tax expense | (37 | ) | — | (37 | ) | — | |||||||
Net effect on other comprehensive income | 1,091 | 15 | 1,132 | 46 | |||||||||
Cash flow hedges: | |||||||||||||
Net gain (loss) arising during the period | 651 | (63 | ) | 2,566 | (832 | ) | |||||||
Related tax (expense) benefit | (137 | ) | 22 | (539 | ) | 291 | |||||||
Net effect on other comprehensive income (loss) | 514 | (41 | ) | 2,027 | (541 | ) | |||||||
Total other comprehensive (loss) income, net of tax expense | (2,987 | ) | (1,388 | ) | (15,375 | ) | 1,605 | ||||||
Total comprehensive income | $ | 9,738 | $ | 9,507 | $ | 16,983 | $ | 31,075 | |||||
(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
5
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||
Common Stock | Retained Earnings | Treasury Stock | |||||||||||||
(Dollars in thousands) | |||||||||||||||
Balance, December 31, 2017 | $ | 345,412 | $ | 134,362 | $ | (5,215 | ) | $ | (15,967 | ) | $ | 458,592 | |||
Amounts reclassified out of retained earnings, net of tax, per ASU 2014-09 | — | (3,055 | ) | — | — | (3,055 | ) | ||||||||
Net income | — | 32,358 | — | — | 32,358 | ||||||||||
Other comprehensive income (loss), net of tax | — | 5,020 | (15,375 | ) | — | (10,355 | ) | ||||||||
Cash dividends declared | — | (15,709 | ) | — | — | (15,709 | ) | ||||||||
Exercise of stock appreciation rights | (2 | ) | — | — | 2 | — | |||||||||
Reissuance of treasury stock for common share awards | (2,674 | ) | — | — | 2,674 | — | |||||||||
Reissuance of treasury stock for deferred compensation plan for Boards of Directors | — | — | — | 46 | 46 | ||||||||||
Repurchase of treasury stock in connection with employee incentive plan and under compensation plan for Boards of Directors | — | — | — | (1,271 | ) | (1,271 | ) | ||||||||
Common shares issued under dividend reinvestment plan | 497 | — | — | — | 497 | ||||||||||
Common shares issued under compensation plan for Boards of Directors | 85 | — | — | 157 | 242 | ||||||||||
Common shares issued under employee stock purchase plan | 68 | — | — | 121 | 189 | ||||||||||
Stock-based compensation expense | 1,858 | — | — | — | 1,858 | ||||||||||
Issuance of common shares related to acquisition of ASB Financial Corp. ("ASB") | 40,898 | — | — | — | 40,898 | ||||||||||
Balance, September 30, 2018 | $ | 386,142 | $ | 152,976 | $ | (20,590 | ) | $ | (14,238 | ) | $ | 504,290 | |||
See Notes to the Unaudited Consolidated Financial Statements
6
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended | ||||||
September 30, | ||||||
(Dollars in thousands) | 2018 | 2017 | ||||
Net cash provided by operating activities | $ | 50,263 | $ | 45,852 | ||
Investing activities: | ||||||
Available-for-sale investment securities: | ||||||
Purchases | (120,492 | ) | (140,791 | ) | ||
Proceeds from sales | 14,489 | 7,381 | ||||
Proceeds from principal payments, calls and prepayments | 93,336 | 111,315 | ||||
Held-to-maturity investment securities: | ||||||
Purchases | — | (1,310 | ) | |||
Proceeds from principal payments | 3,521 | 1,997 | ||||
Other investment securities: | ||||||
Purchases | (2,547 | ) | — | |||
Proceeds from sales | 7,544 | — | ||||
Net increase in loans held for investment | (113,433 | ) | (99,829 | ) | ||
Net expenditures for bank premises and equipment | (3,660 | ) | (3,016 | ) | ||
Proceeds from sales of other real estate owned | 265 | 494 | ||||
Business acquisitions, net of cash received | 4,695 | (450 | ) | |||
(Investment in) return of limited partnership and tax credit funds | (5,399 | ) | 6 | |||
Net cash used in investing activities | (121,681 | ) | (124,203 | ) | ||
Financing activities: | ||||||
Net increase (decrease) in non-interest-bearing deposits | 31,950 | (9,575 | ) | |||
Net increase in interest-bearing deposits | 79,761 | 164,513 | ||||
Net increase (decrease) in short-term borrowings | 2,515 | (111,890 | ) | |||
Proceeds from long-term borrowings | — | 54,403 | ||||
Payments on long-term borrowings | (3,092 | ) | (3,823 | ) | ||
Cash dividends paid | (15,266 | ) | (10,855 | ) | ||
Repurchase of treasury stock in connection with employee incentive plan and compensation plan for Boards of Directors to be held as treasury stock | (1,271 | ) | (411 | ) | ||
Proceeds from issuance of common shares | 24 | 8 | ||||
Contingent consideration payments made after a business combination | (224 | ) | (122 | ) | ||
Net cash provided by financing activities | 94,397 | 82,248 | ||||
Net increase in cash and cash equivalents | 22,979 | 3,897 | ||||
Cash and cash equivalents at beginning of period | 72,194 | 66,146 | ||||
Cash and cash equivalents at end of period | $ | 95,173 | $ | 70,043 | ||
See Notes to the Unaudited Consolidated Financial Statements
7
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, 2017 (“Peoples' 2017 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 of the Notes to the Consolidated Financial Statements included in Peoples’ 2017 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, 2018 for potential recognition or disclosure in these consolidated financial statements. In the opinion of management, these 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, 2017, contained herein, has been derived from the audited Consolidated Balance Sheet included in Peoples’ 2017 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.
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.
Accounting Standards Update ("ASU") 2018-14 - Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): This update modifies the disclosure requirements for employees that sponsor defined benefit pension or other postretirement plans. This update will remove some current disclosure requirements and require an explanation of the reasons for significant gains and losses related to changes in the benefit obligation, the projected benefit obligation and fair value of plan assets for plans with projected benefit obligations in excess of plan assets, and the accumulated benefit obligation and fair value of plan assets for plans with accumulated benefit obligations in excess of plan assets. This ASU will become effective for interim and annual reporting periods beginning after December 15, 2020 (effective January 1, 2021 for Peoples). Peoples is currently reviewing this update and will adopt this new accounting guidance as required. This new accounting guidance is not expected to have a material impact on Peoples' consolidated financial statements.
ASU 2018-13 - Fair Value Measurement (Topic 820): The amendment in this update modify the disclosure requirements for fair value measurements. The amendment removes, modifies and adds to required disclosures related to certain fair value measurements. This ASU will become effective for interim and annual reporting periods beginning after December 15, 2019 (effective January 1, 2020 for Peoples). Peoples is currently reviewing the impact of this update and will adopt this new accounting guidance as required. This new accounting guidance is not expected to have a material impact on Peoples' consolidated financial statements.
ASU 2016-02 - Leases (Topic 842): There are aspects of this new accounting guidance that are still being interpreted and the FASB has issued updates to certain aspects of the guidance to address implementation issues. The FASB issued an update in January 2018 (ASU 2018-01) and two in July of 2018 (ASU 2018-10 and 2018-11), which are to provide transparency and comparability and clarify several areas of the guidance. ASU 2018-01 provides an optional transition practical expedient to not evaluate land easements that exist or expired before the entity's adoption of Topic 842, and were not previously accounted for as leases. ASU 2018-10 provides several areas of improvement and clarification to the original standard, including:
• | optional practical expedient that affects entities with land easements that existed or expired before the adoption, |
• | a rate implicit in the lease of zero should be used when applying the definition, |
8
• | requirements about lease classification reassessments related to modified terms and conditions, |
• | accounting for the exercise by a lessee of an option to extend or terminate the lease or to purchase, |
• | re-measurement of variable lease payments using the index or rate at the measurement date, |
• | period covered by a lessor-only option to terminate the lease is included in the lease term, |
• | operating leases acquired as part of a previous business combination classified as direct financing leases or sales-type leases, |
• | adjustments to earnings rather than equity when applying retrospectively to prior reporting period, and |
• | determining loss allowance of the net investment in the lease, including cash flow. |
ASU 2018-11 addresses comparative reporting at adoption, including an option to apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. It also includes the options of separating components of lease contracts, accounting for non-lease components with the lease if the lease is classified as an operating lease and the timing of components are the same. Under ASU 2016-02 and the related updates, a lessee will be required to recognize assets and liabilities for leases with terms of more than 12 months. These ASUs will become effective for interim and annual reporting periods affected beginning after December 15, 2018 (effective January 1, 2019 for Peoples). Peoples is currently identifying the population of leases that will be impacted by ASU 2016-02, and assessing the impact of the guidance provided in the subsequent updates, and will adopt this new accounting guidance as required. Peoples expects to recognize a one-time cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the new standard is effective. This new accounting guidance is not expected to have a material impact on Peoples' consolidated financial statements.
ASU 2018-09 - Codification Improvements: This update has been issued to address suggestions received from stakeholders on the Codification and to make other incremental improvements to GAAP. The improvements facilitate Codification updates for technical corrections, clarifications, and other minor improvements. The amendments in this update that do not require transition guidance became effective upon issuance of this update and did not have an impact on Peoples' consolidated financial statements. Many of the amendments in this update do have transition guidance with effective dates for annual periods beginning after December 15, 2018 (effective January 1, 2019 for Peoples). Peoples will adopt this new accounting guidance as required, and it is not expected to have a material impact on Peoples' consolidated financial statements.
ASU 2018-07 - Compensation - Stock Compensation (Topic 718): This update has been issued as part of a simplification initiative which will expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees and improve aspects of the accounting for non-employee share-based payment transactions. The amendments will be effective for interim and annual reporting periods beginning after December 15, 2018 (effective January 1, 2019 for Peoples). Peoples will adopt this new accounting guidance as required, and it is not expected to have a material impact on Peoples' consolidated financial statements.
ASU 2018-06 - Codification Improvements (Topic 942): This update has been issued to increase stakeholders' awareness of the improvements to Topic 942, Financial Services - Depository and Lending. This update supersedes outdated guidance related to the Office of the Comptroller of the Currency's Banking Circular 202, Accounting for Net Deferred Tax Charges. The amendments became effective May 7, 2018, and did not have an impact on Peoples' consolidated financial statements.
ASU 2018-05 - Income Taxes (Topic 740): The amendments in this ASU clarify required disclosures in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting under ASC 740 for certain income tax effects of the Tax Cuts and Jobs Act for the reporting period. As of December 31, 2017, Peoples partially completed the accounting for the income tax effects of the enactment of the Tax Cuts and Jobs Act; however, in certain cases, Peoples made reasonable estimates of the effects of a reduced federal corporate income tax rate on its existing deferred tax balances. In other cases, Peoples has not been able to make a reasonable estimate and continued to account for those items based on its existing accounting under ASC 740, and the provisions of the tax laws that were in effect immediately prior to enactment of the Tax Cuts and Jobs Act. In all cases, Peoples will continue to make and refine its calculations during the one-year re-measurement period permitted under this ASU as additional analysis is completed. In addition, these estimates may be affected as Peoples gains a more thorough understanding of the new tax reform legislation.
ASU 2018-02 - Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Peoples early adopted ASU 2018-02, reclassifying income tax effects of the Tax Cuts and Jobs Act of $0.9 million from accumulated other comprehensive loss to retained earnings as of December 31, 2017.
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ASU 2017-12 - Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The objective of the amendments in this ASU is to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships, and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components, and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The FASB issued an update in October of 2018, providing an eligible U.S. benchmark interest rate for purposes of applying hedge accounting. The amendments will be effective for interim and annual reporting periods beginning after December 15, 2018 (effective January 1, 2019 for Peoples). Peoples will adopt this new accounting guidance as required, and it is not expected to have a material impact on Peoples' consolidated financial statements.
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 be required to present certain financial assets carried at amortized cost, such as loans held-for-investment and held-to-maturity debt securities, at the net amount expected to be collected.
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. This measurement will 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 current US GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, Peoples expects that the adoption of the CECL model will materially affect how the allowance for loan losses is determined and could require significant increases to the allowance for loan losses. Moreover, the CECL model may create more volatility in the level of Peoples' allowance for loan losses. If required to materially increase the level of allowance for loan losses for any reason, such increase could adversely affect Peoples' business, financial condition and results of operations.
The new CECL standard will become effective for interim and annual reporting periods beginning after December 15, 2019 (effective January 1, 2020 for Peoples). Peoples continues to make progress on the design and development of estimation methodologies, current and future data requirements, and is in the process of implementing a technological solution to assist in the future calculations under the new methodology. Peoples is currently evaluating the impact that the CECL model will have on Peoples' financial statements and expects to recognize a one-time cumulative-effect adjustment to the allowance for loan loss provision 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 issued at the end of 2016. Peoples believes that the adoption of the standard will result in an overall increase in the allowance for loan losses; however, the magnitude of the increase at adoption will depend on relevant data at the adoption date, including the characteristics of the loan portfolio, macroeconomic conditions and forecasts. Peoples has not yet determined the magnitude of any such one-time cumulative-effect adjustment or of the overall impact of the new standard on Peoples' financial condition or results of operations.
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 intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:
Level 1: Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. government and agency securities actively traded in over-the-counter markets.
Level 2: Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from, or corroborated by, observable market data. This category generally includes certain U.S. government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.
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Level 3: Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investment securities, retained interests from securitizations, and certain collateralized debt obligations.
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 Consolidated Balance Sheets by level in the fair value hierarchy.
Recurring Fair Value Measurements at Reporting Date | |||||||||||||||||||
September 30, 2018 | December 31, 2017 | ||||||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | |||||||||||||||||||
Available-for-sale investment securities: | |||||||||||||||||||
Obligations of: | |||||||||||||||||||
States and political subdivisions | $ | — | $ | 93,790 | $ | — | $ | — | $ | 101,569 | $ | — | |||||||
Residential mortgage-backed securities | — | 688,656 | — | — | 673,664 | — | |||||||||||||
Commercial mortgage-backed securities | — | 6,713 | — | — | 6,976 | — | |||||||||||||
Bank-issued trust preferred securities | — | 4,166 | — | — | 5,129 | — | |||||||||||||
Equity investment securities (a) | — | — | — | 7,694 | 155 | — | |||||||||||||
Total available-for-sale securities | — | 793,325 | — | 7,694 | 787,493 | — | |||||||||||||
Held-to-maturity investment securities: | |||||||||||||||||||
Obligations of: | |||||||||||||||||||
States and political subdivisions | $ | — | $ | 4,889 | $ | — | $ | — | $ | 4,417 | $ | — | |||||||
Residential mortgage-backed securities | — | 28,718 | — | — | 32,227 | — | |||||||||||||
Commercial mortgage-backed securities | — | 3,488 | — | — | 4,569 | — | |||||||||||||
Total held-to-maturity securities | — | 37,095 | — | — | 41,213 | — | |||||||||||||
Equity investment securities (a) | 104 | 174 | — | — | — | — | |||||||||||||
Loans held for sale | — | 4,776 | — | — | 2,510 | — | |||||||||||||
Derivative assets (b) | — | 8,766 | — | — | 4,594 | — | |||||||||||||
Liabilities: | |||||||||||||||||||
Derivative liabilities (c) | $ | — | $ | 4,871 | $ | — | $ | — | $ | 3,241 | $ | — | |||||||
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of equity investment securities from available-for-sale investment securities to other investment securities. As of December 31, 2017, equity investment securities had a net unrealized gain of $6.5 million.
(b) Included in Other assets on the Consolidated Balance Sheets. For additional information, see Note 9 of the Notes to the Unaudited Consolidated Financial Statements.
(c) Included in Other liabilities on the Consolidated Balance Sheets. For additional information, see Note 9 of the Notes to the Unaudited Consolidated Financial Statements.
Investment Securities Available-for-Sale and Held-to-Maturity: 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.
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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).
Loans Held for Sale: Loans originated and intended to be sold in the secondary market, generally one-to-four 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 are significant inputs in arriving at the fair value (Level 2).
Derivative Assets and Liabilities: Derivative assets and liabilities are recognized on the Consolidated Balance Sheets at their fair value within other assets/liabilities. 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 Consolidated Balance Sheets by level in the fair value hierarchy.
Non-Recurring Fair Value Measurements at Reporting Date | |||||||||||||||||||
September 30, 2018 | December 31, 2017 | ||||||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||
Impaired loans | $ | — | $ | — | $ | 25,038 | $ | — | $ | — | $ | 20,602 | |||||||
Other real estate owned (OREO) | — | — | 106 | — | — | 208 | |||||||||||||
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, 2018, impaired loans had an aggregate outstanding principal balance of $31.3 million. For the three and nine months ended September 30, 2018, Peoples recognized a reduction in the specific reserve on impaired loans, through the allowance for loan losses, of $182,000 and $153,000, respectively.
Other Real Estate Owned: Other real estate owned ("OREO"), included in Other assets on the 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 selling costs. 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 Consolidated Balance Sheets.
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Fair Value Measurements of Other Financial Instruments | ||||||||||||||
(Dollars in thousands) | Fair Value Hierarchy Level | September 30, 2018 | December 31, 2017 | |||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||
Assets: | ||||||||||||||
Cash and cash equivalents | 1 | $ | 95,173 | $ | 95,173 | $ | 72,194 | $ | 72,194 | |||||
Other investment securities: | ||||||||||||||
Federal Home Loan Bank ("FHLB") stock | 2 | 29,368 | 29,368 | 28,132 | 28,132 | |||||||||
Federal Reserve Bank ("FRB") stock | 2 | 12,294 | 12,294 | 10,179 | 10,179 | |||||||||
Nonqualified deferred compensation (a) | 2 | 1,044 | 1,044 | — | — | |||||||||
Federal Home Loan Mortgage Corp ("FHLMC") stock | 2 | 60 | 60 | 60 | 60 | |||||||||
Total other investment securities | 42,766 | 42,766 | 38,371 | 38,371 | ||||||||||
Loans, net of deferred fees and costs | 3 | 2,687,848 | 2,780,292 | 2,338,344 | 2,274,194 | |||||||||
Bank owned life insurance | 3 | 68,439 | 68,439 | 62,176 | 62,176 | |||||||||
Bank premises and equipment, net of accumulated depreciation | 3 | 57,527 | 57,527 | 52,510 | 52,510 | |||||||||
Servicing rights (b) | 3 | 2,682 | 2,682 | 2,305 | 2,305 | |||||||||
Liabilities: | ||||||||||||||
Deposits | 2 | $ | 3,041,123 | $ | 3,029,072 | $ | 2,730,330 | $ | 2,730,071 | |||||
Short-term borrowings | 2 | 296,830 | 295,542 | 209,491 | 209,628 | |||||||||
Long-term borrowings | 2 | 111,099 | 101,779 | 144,019 | 142,108 | |||||||||
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of equity investment securities (including those held in participant accounts in the Peoples Bancorp Inc. Nonqualified Deferred Compensation Plan) from available-for-sale investment securities to other investment securities.
(b) Included in Other intangible assets on the Consolidated Balance Sheets. Servicing rights are carried at the lower of cost or market 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-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).
Other Investment Securities: 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 as Other investment securities on the Consolidated Balance Sheets and consist primarily of shares of the FHLB of Cincinnati and the FRB of Cleveland. Other investment securities are measured at their respective redemption values (Level 2).
Loans, Net of Deferred Fees and Costs: 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.
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.
Bank Premises and Equipment, Net of Accumulated Depreciation: Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets owned. Major improvements to leased facilities are capitalized and included in bank premises at cost less accumulated depreciation, which is calculated on the straight-line method over the lesser of the remaining term of the leased facility or the estimated economic life of the improvement (Level 3).
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Servicing Rights ("SRs"): SRs are recorded at fair value at the time of the sale of the loans to the third-party investor. Peoples follows the amortization method for the subsequent measurement of each class of separately recognized servicing assets and liabilities. Under the amortization method, Peoples amortizes the value of servicing assets or liabilities in proportion to, and over the period of, estimated net servicing income or net servicing loss, and assesses servicing assets or liabilities for impairment or increased obligation based on the fair value at each reporting date. The fair value of the SRs 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).
Deposits: The fair value of fixed maturity certificates of deposit 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 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, deposit base, banking center networks, 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 | ||||||||
September 30, 2018 | ||||||||||||
Obligations of: | ||||||||||||
States and political subdivisions | $ | 94,014 | $ | 585 | $ | (809 | ) | $ | 93,790 | |||
Residential mortgage-backed securities | 714,360 | 1,558 | (27,262 | ) | 688,656 | |||||||
Commercial mortgage-backed securities | 6,861 | — | (148 | ) | 6,713 | |||||||
Bank-issued trust preferred securities | 4,196 | 132 | (162 | ) | 4,166 | |||||||
Total available-for-sale securities | $ | 819,431 | $ | 2,275 | $ | (28,381 | ) | $ | 793,325 | |||
December 31, 2017 | ||||||||||||
Obligations of: | ||||||||||||
States and political subdivisions | $ | 100,039 | $ | 1,786 | $ | (256 | ) | $ | 101,569 | |||
Residential mortgage-backed securities | 684,100 | 2,582 | (13,018 | ) | 673,664 | |||||||
Commercial mortgage-backed securities | 7,004 | 11 | (39 | ) | 6,976 | |||||||
Bank-issued trust preferred securities | 5,195 | 141 | (207 | ) | 5,129 | |||||||
Equity investment securities (a) | 1,394 | 6,520 | (65 | ) | 7,849 | |||||||
Total available-for-sale securities | $ | 797,732 | $ | 11,040 | $ | (13,585 | ) | $ | 795,187 | |||
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of equity investment securities from available-for-sale
investment securities to other investment securities.
The unrealized losses related to residential mortgage-backed securities at September 30, 2018 and December 31, 2017, were attributed to changes in market interest rates and spreads since the securities were purchased.
At December 31, 2017, Peoples' investment in equity investment securities was comprised largely of common stocks issued by various unrelated bank holding companies.
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The gross gains and gross losses realized by Peoples from sales of available-for-sale securities for the periods ended September 30 were as follows:
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
(Dollars in thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||
Gross gains realized | $ | — | $ | 1,877 | $ | 5 | $ | 2,235 | |||||
Gross losses realized | — | 16 | 151 | 16 | |||||||||
Net gain (loss) realized | $ | — | $ | 1,861 | $ | (146 | ) | $ | 2,219 | ||||
The cost of investment securities sold, and any resulting gain or loss, was 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 | ||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||
Obligations of: | ||||||||||||||||||||||||
States and political subdivisions | $ | 30,112 | $ | 224 | 52 | $ | 9,480 | $ | 585 | 6 | $ | 39,592 | $ | 809 | ||||||||||
Residential mortgage-backed securities | 224,049 | 5,503 | 113 | 405,124 | 21,759 | 128 | 629,173 | 27,262 | ||||||||||||||||
Commercial mortgage-backed securities | 3,127 | 44 | 1 | 3,587 | 104 | 2 | 6,714 | 148 | ||||||||||||||||
Bank-issued trust preferred securities | — | — | — | 1,838 | 162 | 2 | 1,838 | 162 | ||||||||||||||||
Total | $ | 257,288 | $ | 5,771 | 166 | $ | 420,029 | $ | 22,610 | 138 | $ | 677,317 | $ | 28,381 | ||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Obligations of: | ||||||||||||||||||||||||
States and political subdivisions | $ | 16,985 | $ | 89 | 18 | $ | 5,308 | $ | 167 | 1 | $ | 22,293 | $ | 256 | ||||||||||
Residential mortgage-backed securities | 274,998 | 3,462 | 77 | 291,812 | 9,556 | 88 | 566,810 | 13,018 | ||||||||||||||||
Commercial mortgage-backed securities | 2,487 | 23 | 1 | 1,274 | 16 | 1 | 3,761 | 39 | ||||||||||||||||
Bank-issued trust preferred securities | — | — | — | 2,792 | 207 | 3 | 2,792 | 207 | ||||||||||||||||
Equity investment securities (a) | 276 | 1 | 1 | 112 | 64 | 1 | 388 | 65 | ||||||||||||||||
Total | $ | 294,746 | $ | 3,575 | 97 | $ | 301,298 | $ | 10,010 | 94 | $ | 596,044 | $ | 13,585 | ||||||||||
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of equity investment securities from available-for-sale investment securities to other investment securities.
Management systematically evaluates available-for-sale investment securities for other-than-temporary declines in fair value on a quarterly basis. At September 30, 2018, management concluded no individual securities were other-than-temporarily impaired since 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, 2018 and December 31, 2017 were largely attributable to changes in market interest rates and spreads since the securities were purchased.
At September 30, 2018, 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 two 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 $217,000 and $145,000, 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 number of loans remaining in these securities.
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The unrealized losses with respect to the two bank-issued trust preferred securities that had been in an unrealized loss position for twelve months or more at September 30, 2018 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, 2018. 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: | |||||||||||||||
States and political subdivisions | $ | 714 | $ | 12,538 | $ | 26,289 | $ | 54,473 | $ | 94,014 | |||||
Residential mortgage-backed securities | 994 | 12,898 | 46,292 | 654,176 | 714,360 | ||||||||||
Commercial mortgage-backed securities | — | 5,678 | — | 1,183 | 6,861 | ||||||||||
Bank-issued trust preferred securities | — | — | 4,196 | — | 4,196 | ||||||||||
Total available-for-sale securities | $ | 1,708 | $ | 31,114 | $ | 76,777 | $ | 709,832 | $ | 819,431 | |||||
Fair value | |||||||||||||||
Obligations of: | |||||||||||||||
States and political subdivisions | $ | 713 | $ | 12,489 | $ | 26,184 | $ | 54,404 | $ | 93,790 | |||||
Residential mortgage-backed securities | 990 | 12,590 | 44,656 | 630,420 | 688,656 | ||||||||||
Commercial mortgage-backed securities | — | 5,548 | — | 1,165 | 6,713 | ||||||||||
Bank-issued trust preferred securities | — | — | 4,166 | — | 4,166 | ||||||||||
Total available-for-sale securities | $ | 1,703 | $ | 30,627 | $ | 75,006 | $ | 685,989 | $ | 793,325 | |||||
Total weighted-average yield | 2.52 | % | 2.78 | % | 3.38 | % | 2.84 | % | 2.88 | % | |||||
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 | ||||||||
September 30, 2018 | ||||||||||||
Obligations of: | ||||||||||||
States and political subdivisions | $ | 4,451 | $ | 438 | $ | — | $ | 4,889 | ||||
Residential mortgage-backed securities | 29,765 | 79 | (1,126 | ) | 28,718 | |||||||
Commercial mortgage-backed securities | 3,574 | — | (86 | ) | 3,488 | |||||||
Total held-to-maturity securities | $ | 37,790 | $ | 517 | $ | (1,212 | ) | $ | 37,095 | |||
December 31, 2017 | ||||||||||||
Obligations of: | ||||||||||||
States and political subdivisions | $ | 3,810 | $ | 607 | $ | — | $ | 4,417 | ||||
Residential mortgage-backed securities | 32,487 | 269 | (529 | ) | 32,227 | |||||||
Commercial mortgage-backed securities | 4,631 | — | (62 | ) | 4,569 | |||||||
Total held-to-maturity securities | $ | 40,928 | $ | 876 | $ | (591 | ) | $ | 41,213 | |||
There were no gross gains or gross losses realized by Peoples from sales of held-to-maturity securities for the three and nine months ended September 30, 2018 and 2017.
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The following table presents a summary of held-to-maturity 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 | ||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||
Residential mortgage-backed securities | $ | 11,826 | $ | 182 | 6 | $ | 11,260 | $ | 944 | 3 | $ | 23,086 | $ | 1,126 | ||||||||||
Commercial mortgage-backed securities | — | — | — | 3,488 | 86 | 1 | 3,488 | 86 | ||||||||||||||||
Total | $ | 11,826 | $ | 182 | 6 | $ | 14,748 | $ | 1,030 | 4 | $ | 26,574 | $ | 1,212 | ||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Residential mortgage-backed securities | $ | 1,476 | $ | 4 | 2 | $ | 12,098 | $ | 525 | 3 | $ | 13,574 | $ | 529 | ||||||||||
Commercial mortgage-backed securities | — | — | — | 4,569 | 62 | 1 | 4,569 | 62 | ||||||||||||||||
Total | $ | 1,476 | $ | 4 | 2 | $ | 16,667 | $ | 587 | 4 | $ | 18,143 | $ | 591 | ||||||||||
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, 2018. 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: | |||||||||||||||
States and political subdivisions | $ | — | $ | 309 | $ | 2,982 | $ | 1,160 | $ | 4,451 | |||||
Residential mortgage-backed securities | — | 428 | 8,060 | 21,277 | 29,765 | ||||||||||
Commercial mortgage-backed securities | — | — | — | 3,574 | 3,574 | ||||||||||
Total held-to-maturity securities | $ | — | $ | 737 | $ | 11,042 | $ | 26,011 | $ | 37,790 | |||||
Fair value | |||||||||||||||
Obligations of: | |||||||||||||||
States and political subdivisions | $ | — | $ | 309 | $ | 3,410 | $ | 1,170 | $ | 4,889 | |||||
Residential mortgage-backed securities | — | 415 | 8,028 | 20,275 | 28,718 | ||||||||||
Commercial mortgage-backed securities | — | — | — | 3,488 | 3,488 | ||||||||||
Total held-to-maturity securities | $ | — | $ | 724 | $ | 11,438 | $ | 24,933 | $ | 37,095 | |||||
Total weighted-average yield | — | % | 2.97 | % | 3.08 | % | 2.70 | % | 2.82 | % | |||||
Other Investment Securities
Peoples' other investment securities on the Consolidated Balance Sheet consist largely of shares of FHLB of Cincinnati and FRB of Cleveland, and equity investment securities. As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of equity investment securities from available-for-sale investment securities to other investment securities.
The following table summarizes the carrying value of Peoples' other investment securities:
(Dollars in thousands) | September 30, 2018 | December 31, 2017 | ||||
FHLB stock | $ | 29,368 | $ | 28,132 | ||
FRB stock | 12,294 | 10,179 | ||||
Equity investment securities (a) | 278 | — | ||||
Other | 1,104 | 60 | ||||
Total other investment securities | $ | 43,044 | $ | 38,371 | ||
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of equity investment securities from available-for-sale investment
securities to other investment securities.
At September 30, 2018, there were no equity investment securities of a single issuer that exceeded 10% of Peoples' stockholders' equity.
17
Pledged Securities
Peoples had pledged available-for-sale investment securities with carrying values of $514.9 million and $522.7 million at September 30, 2018 and December 31, 2017, respectively, and held-to-maturity investment securities with carrying values of $17.1 million and $18.3 million at September 30, 2018 and December 31, 2017, respectively, 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 with carrying values of $61.8 million and $6.7 million at September 30, 2018 and December 31, 2017, respectively, and held-to-maturity securities with carrying values of $17.4 million and $19.9 million at September 30, 2018 and December 31, 2017, respectively, to secure additional borrowing capacity at the FHLB and the FRB.
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 northeastern Kentucky. Acquired loans consist of loans purchased in 2012 or thereafter. Loans that were acquired and subsequently re-underwritten, are reported as originated upon execution of such credit actions (for example, renewals and increases in lines of credit). The major classifications of loan balances (in each case, net of deferred fees and costs) excluding loans held for sale, were as follows:
(Dollars in thousands) | September 30, 2018 | December 31, 2017 | ||||
Originated loans: | ||||||
Commercial real estate, construction | $ | 103,562 | $ | 107,118 | ||
Commercial real estate, other | 630,720 | 595,447 | ||||
Commercial real estate | 734,282 | 702,565 | ||||
Commercial and industrial | 510,591 | 438,051 | ||||
Residential real estate | 299,768 | 304,523 | ||||
Home equity lines of credit | 92,892 | 88,902 | ||||
Consumer, indirect | 396,701 | 340,390 | ||||
Consumer, direct | 72,601 | 67,010 | ||||
Consumer | 469,302 | 407,400 | ||||
Deposit account overdrafts | 649 | 849 | ||||
Total originated loans | $ | 2,107,484 | $ | 1,942,290 | ||
Acquired loans: | ||||||
Commercial real estate, construction | $ | 13,050 | $ | 8,319 | ||
Commercial real estate, other | 191,993 | 165,120 | ||||
Commercial real estate | 205,043 | 173,439 | ||||
Commercial and industrial | 41,188 | 34,493 | ||||
Residential real estate | 308,178 | 184,864 | ||||
Home equity lines of credit | 42,961 | 20,575 | ||||
Consumer, indirect | 161 | 329 | ||||
Consumer, direct | 2,712 | 1,147 | ||||
Consumer | 2,873 | 1,476 | ||||
Total acquired loans | $ | 600,243 | $ | 414,847 | ||
Loans, net of deferred fees and costs | $ | 2,707,727 | $ | 2,357,137 | ||
18
Peoples has acquired various loans through business combinations for which there was, at acquisition, evidence of deterioration of credit quality since origination, and for which it was probable that all contractually required payments would not be collected. The carrying amounts of these purchased credit impaired loans included in the loan balances above are summarized as follows:
(Dollars in thousands) | September 30, 2018 | December 31, 2017 | ||||
Commercial real estate, other | $ | 12,812 | $ | 8,117 | ||
Commercial and industrial | 1,343 | 767 | ||||
Residential real estate | 20,488 | 19,532 | ||||
Consumer | 61 | 33 | ||||
Total outstanding balance | $ | 34,704 | $ | 28,449 | ||
Net carrying amount | $ | 23,639 | $ | 19,564 | ||
Changes in the accretable yield for purchased credit impaired loans for the nine months ended September 30 were as follows:
(Dollars in thousands) | September 30, 2018 | September 30, 2017 | ||||
Balance, beginning of period | $ | 6,704 | $ | 7,132 | ||
Reclassification from nonaccretable to accretable | 2,019 | 1,285 | ||||
Additions: | ||||||
ASB Financial Corp. (preliminary) | 2,047 | — | ||||
Accretion | (1,392 | ) | (1,279 | ) | ||
Balance, September 30 | $ | 9,378 | $ | 7,138 | ||
Peoples completes annual re-estimations of cash flows on acquired purchased credit impaired loans in August of each year. At the end of each quarter, Peoples evaluates factors to determine if a material change has occurred in acquired loans accounted for and if a re-estimation is needed. Factors evaluated to determine if a re-estimation is needed include changes in: risk ratings, maturity dates, charge-offs, payoffs, nonaccrual status and loans that have become past due. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly the amount of principal, expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Peoples evaluates changes quarterly and compares the new estimated cash flows to those at the previous cash flow re-estimation date and the related materiality of the changes, and when compared to the total loan portfolio, the differences in estimated cash flows at the most recent cash flow re-estimation date compared to the previous cash flow re-estimation date would not have a material impact on amounts recorded since the last re-estimation. Peoples completed a re-estimation of cash flows on purchased credit impaired loans in August 2018, resulting in the reclassification from nonaccretable to accretable yield 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 the amount of interest income and possibly the principal expected to be collected. In re-forecasting future estimated cash flows, credit loss expectations are adjusted as necessary.
Pledged Loans
Peoples pledges certain loans secured by 1-4 family and multifamily residential mortgages under a blanket collateral agreement to secure borrowings from the FHLB of Cincinnati. The amount of such pledged loans totaled $524.1 million and $487.2 million at September 30, 2018 and December 31, 2017, respectively. Peoples also pledges commercial loans to secure borrowings with the FRB of Cleveland. The outstanding balances of these loans totaled $198.9 million and $74.0 million at September 30, 2018 and December 31, 2017, respectively.
Nonaccrual and Past Due Loans
A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. A loan may be placed on nonaccrual status regardless of whether or not such loan is considered past due.
19
The recorded investments in loans on nonaccrual status and loans delinquent for 90 days or more and accruing were as follows:
Nonaccrual Loans | Loans 90+ Days Past Due and Accruing | ||||||||||||
(Dollars in thousands) | September 30, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||
Originated loans: | |||||||||||||
Commercial real estate, construction | $ | 725 | $ | 754 | $ | — | $ | — | |||||
Commercial real estate, other | 6,712 | 6,877 | — | — | |||||||||
Commercial real estate | 7,437 | 7,631 | — | — | |||||||||
Commercial and industrial | 1,308 | 739 | — | — | |||||||||
Residential real estate | 3,842 | 3,546 | 373 | 548 | |||||||||
Home equity lines of credit | 582 | 550 | 84 | 50 | |||||||||
Consumer, indirect | 405 | 256 | — | — | |||||||||
Consumer, direct | 31 | 39 | — | 16 | |||||||||
Consumer | 436 | 295 | — | 16 | |||||||||
Total originated loans | $ | 13,605 | $ | 12,761 | $ | 457 | $ | 614 | |||||
Acquired loans: | |||||||||||||
Commercial real estate, construction | $ | — | $ | — | $ | 401 | $ | — | |||||
Commercial real estate, other | 225 | 192 | 60 | 215 | |||||||||
Commercial real estate | 225 | 192 | 461 | 215 | |||||||||
Commercial and industrial | 61 | 259 | — | 45 | |||||||||
Residential real estate | 1,970 | 2,168 | 965 | 730 | |||||||||
Home equity lines of credit | 374 | 312 | — | 22 | |||||||||
Consumer, indirect | — | — | 2 | — | |||||||||
Total acquired loans | $ | 2,630 | $ | 2,931 | $ | 1,428 | $ | 1,012 | |||||
Total loans | $ | 16,235 | $ | 15,692 | $ | 1,885 | $ | 1,626 | |||||
20
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, 2018 | |||||||||||||||||||
Originated loans: | |||||||||||||||||||
Commercial real estate, construction | $ | — | $ | — | $ | 725 | $ | 725 | $ | 102,837 | $ | 103,562 | |||||||
Commercial real estate, other | 521 | 601 | 6,418 | 7,540 | 623,180 | 630,720 | |||||||||||||
Commercial real estate | 521 | 601 | 7,143 | 8,265 | 726,017 | 734,282 | |||||||||||||
Commercial and industrial | 624 | 865 | 988 | 2,477 | 508,114 | 510,591 | |||||||||||||
Residential real estate | 826 | 2,544 | 2,126 | 5,496 | 294,272 | 299,768 | |||||||||||||
Home equity lines of credit | 320 | 62 | 410 | 792 | 92,100 | 92,892 | |||||||||||||
Consumer, indirect | 2,308 | 222 | 220 | 2,750 | 393,951 | 396,701 | |||||||||||||
Consumer, direct | 289 | 5 | 20 | 314 | 72,287 | 72,601 | |||||||||||||
Consumer | 2,597 | 227 | 240 | 3,064 | 466,238 | 469,302 | |||||||||||||
Deposit account overdrafts | — | — | — | — | 649 | 649 | |||||||||||||
Total originated loans | $ | 4,888 | $ | 4,299 | $ | 10,907 | $ | 20,094 | $ | 2,087,390 | $ | 2,107,484 | |||||||
Acquired loans: | |||||||||||||||||||
Commercial real estate, construction | $ | 9 | $ | — | $ | 401 | $ | 410 | $ | 12,640 | $ | 13,050 | |||||||
Commercial real estate, other | 1,318 | 136 | 140 | 1,594 | 190,399 | 191,993 | |||||||||||||
Commercial real estate | 1,327 | 136 | 541 | 2,004 | 203,039 | 205,043 | |||||||||||||
Commercial and industrial | 1,263 | 15 | 20 | 1,298 | 39,890 | 41,188 | |||||||||||||
Residential real estate | 1,382 | 1,215 | 1,963 | 4,560 | 303,618 | 308,178 | |||||||||||||
Home equity lines of credit | 572 | 107 | 210 | 889 | 42,072 | 42,961 | |||||||||||||
Consumer, indirect | 5 | — | 2 | 7 | 154 | 161 | |||||||||||||
Consumer, direct | 19 | 12 | — | 31 | 2,681 | 2,712 | |||||||||||||
Consumer | 24 | 12 | 2 | 38 | 2,835 | 2,873 | |||||||||||||
Total acquired loans | $ | 4,568 | $ | 1,485 | $ | 2,736 | $ | 8,789 | $ | 591,454 | $ | 600,243 | |||||||
Total loans | $ | 9,456 | < | ||||||||||||||||