Peoples Bancorp Earnings 2019-03-31
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 March 31, 2019
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 | |||||||
(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: 20,692,615 common shares, without par value, at April 30, 2019.
Table of Contents | |
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PART I
ITEM 1. FINANCIAL STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2019 | December 31, 2018 | |||||
(Dollars in thousands) | (Unaudited) | |||||
Assets | ||||||
Cash and cash equivalents: | ||||||
Cash and due from banks | $ | 59,334 | $ | 61,775 | ||
Interest-bearing deposits in other banks | 22,738 | 15,837 | ||||
Total cash and cash equivalents | 82,072 | 77,612 | ||||
Available-for-sale investment securities, at fair value (amortized cost of $806,641 at March 31, 2019 and $804,655 at December 31, 2018) | 802,570 | 791,891 | ||||
Held-to-maturity investment securities, at amortized cost (fair value of $36,066 at March 31, 2019 and $36,963 at December 31, 2018) | 35,606 | 36,961 | ||||
Other investment securities | 41,449 | 42,985 | ||||
Total investment securities | 879,625 | 871,837 | ||||
Loans, net of deferred fees and costs (a) | 2,737,580 | 2,728,778 | ||||
Allowance for loan losses | (20,939 | ) | (20,195 | ) | ||
Net loans | 2,716,641 | 2,708,583 | ||||
Loans held for sale | 2,191 | 5,470 | ||||
Bank premises and equipment, net of accumulated depreciation | 55,890 | 56,542 | ||||
Bank owned life insurance | 69,419 | 68,934 | ||||
Goodwill | 151,245 | 151,245 | ||||
Other intangible assets | 9,997 | 10,840 | ||||
Other assets | 50,039 | 40,391 | ||||
Total assets | $ | 4,017,119 | $ | 3,991,454 | ||
Liabilities | ||||||
Deposits: | ||||||
Non-interest-bearing | $ | 628,464 | $ | 607,877 | ||
Interest-bearing | 2,508,949 | 2,347,588 | ||||
Total deposits | 3,137,413 | 2,955,465 | ||||
Short-term borrowings | 191,363 | 356,198 | ||||
Long-term borrowings | 105,995 | 109,644 | ||||
Accrued expenses and other liabilities | 47,227 | 50,007 | ||||
Total liabilities | 3,481,998 | 3,471,314 | ||||
Stockholders’ equity | ||||||
Preferred stock, no par value, 50,000 shares authorized, no shares issued at March 31, 2019 and December 31, 2018 | — | — | ||||
Common stock, no par value, 24,000,000 shares authorized, 20,130,076 shares issued at March 31, 2019 and 20,124,378 shares issued at December 31, 2018, including shares in treasury | 385,427 | 386,814 | ||||
Retained earnings | 168,847 | 160,346 | ||||
Accumulated other comprehensive loss, net of deferred income taxes | (7,497 | ) | (12,933 | ) | ||
Treasury stock, at cost, 492,380 shares at March 31, 2019 and 601,289 shares at December 31, 2018 | (11,656 | ) | (14,087 | ) | ||
Total stockholders’ equity | 535,121 | 520,140 | ||||
Total liabilities and stockholders’ equity | $ | 4,017,119 | $ | 3,991,454 | ||
(a) Also referred to throughout the document as "total loans" and "loans held for investment."
See Notes to the Unaudited Consolidated Financial Statements
3
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended | ||||||
March 31, | ||||||
(Dollars in thousands, except per share data) | 2019 | 2018 | ||||
Interest income: | ||||||
Interest and fees on loans | $ | 34,053 | $ | 26,881 | ||
Interest and dividends on taxable investment securities | 5,810 | 5,650 | ||||
Interest on tax-exempt investment securities | 537 | 643 | ||||
Other interest income | 176 | 52 | ||||
Total interest income | 40,576 | 33,226 | ||||
Interest expense: | ||||||
Interest on deposits | 4,844 | 2,213 | ||||
Interest on short-term borrowings | 1,173 | 968 | ||||
Interest on long-term borrowings | 645 | 686 | ||||
Total interest expense | 6,662 | 3,867 | ||||
Net interest income | 33,914 | 29,359 | ||||
(Recoveries of) provision for loan losses | (263 | ) | 1,983 | |||
Net interest income after (recoveries of) provision for loan losses | 34,177 | 27,376 | ||||
Non-interest income: | ||||||
Insurance income | 4,621 | 4,655 | ||||
Trust and investment income | 3,112 | 3,068 | ||||
Electronic banking income | 2,987 | 2,785 | ||||
Deposit account service charges | 2,341 | 2,120 | ||||
Mortgage banking income | 788 | 351 | ||||
Bank owned life insurance income | 485 | 468 | ||||
Commercial loan swap fees | 146 | 116 | ||||
Net gain on investment securities | 30 | 1 | ||||
Net (loss) gain on asset disposals and other transactions | (182 | ) | 74 | |||
Other non-interest income (a) | 1,101 | 1,331 | ||||
Total non-interest income | 15,429 | 14,969 | ||||
Non-interest expense: | ||||||
Salaries and employee benefit costs | 19,135 | 15,990 | ||||
Net occupancy and equipment expense | 2,978 | 2,866 | ||||
Electronic banking expense | 1,577 | 1,528 | ||||
Data processing and software expense | 1,545 | 1,322 | ||||
Professional fees | 1,276 | 1,718 | ||||
Franchise tax expense | 705 | 644 | ||||
Amortization of other intangible assets | 694 | 754 | ||||
Marketing expense | 594 | 325 | ||||
FDIC insurance expense | 371 | 366 | ||||
Communication expense | 278 | 344 | ||||
Foreclosed real estate and other loan expenses | 255 | 228 | ||||
Other non-interest expense | 2,452 | 2,136 | ||||
Total non-interest expense | 31,860 | 28,221 | ||||
Income before income taxes | 17,746 | 14,124 | ||||
Income tax expense | 3,377 | 2,383 | ||||
Net income | $ | 14,369 | $ | 11,741 | ||
Earnings per common share - basic | $ | 0.74 | $ | 0.64 | ||
Earnings per common share - diluted | $ | 0.73 | $ | 0.64 | ||
Weighted-average number of common shares outstanding - basic | 19,366,008 | 18,126,089 | ||||
Weighted-average number of common shares outstanding - diluted | 19,508,868 | 18,256,035 | ||||
Cash dividends declared | $ | 5,868 | $ | 4,771 | ||
Cash dividends declared per common share | $ | 0.30 | $ | 0.26 | ||
(a) As of January 1, 2018, Peoples adopted ASU 2016-01, resulting in realized and unrealized gains on equity investment securities recorded in other non-interest income of $809,000 and $460,000 for the three months ended March 31, 2019 and March 31, 2018, respectively.
See Notes to the Unaudited Consolidated Financial Statements
4
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended | ||||||
March 31, | ||||||
(Dollars in thousands) | 2019 | 2018 | ||||
Net income | $ | 14,369 | $ | 11,741 | ||
Other comprehensive income (loss): | ||||||
Available-for-sale investment securities: | ||||||
Gross unrealized holding gain (loss) arising during the period | 8,725 | (10,113 | ) | |||
Related tax (expense) benefit | (1,832 | ) | 3,178 | |||
Less: reclassification adjustment for net gain included in net income | 30 | 1 | ||||
Related tax expense | (6 | ) | — | |||
Amounts reclassified out of accumulated other comprehensive loss per ASU 2016-01 (a) | — | (5,020 | ) | |||
Net effect on other comprehensive income (loss) | 6,869 | (11,956 | ) | |||
Defined benefit plans: | ||||||
Net gain arising during the period | 2 | — | ||||
Amortization of unrecognized loss and service cost on benefit plans | 17 | 26 | ||||
Related tax expense | (4 | ) | (6 | ) | ||
Net effect on other comprehensive income | 15 | 20 | ||||
Cash flow hedges: | ||||||
Net (loss) gain arising during the period | (1,833 | ) | 1,378 | |||
Related tax benefit (expense) | 385 | (289 | ) | |||
Net effect on other comprehensive (loss) income | (1,448 | ) | 1,089 | |||
Total other comprehensive income (loss), net of tax | 5,436 | (10,847 | ) | |||
Total comprehensive income | $ | 19,805 | $ | 894 | ||
(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, 2018 | $ | 386,814 | $ | 160,346 | $ | (12,933 | ) | $ | (14,087 | ) | $ | 520,140 | |||
Net income | — | 14,369 | — | — | 14,369 | ||||||||||
Other comprehensive income, net of tax | — | — | 5,436 | — | 5,436 | ||||||||||
Cash dividends declared | — | (5,868 | ) | — | — | (5,868 | ) | ||||||||
Reissuance of treasury stock for common share awards | (2,761 | ) | — | — | 2,761 | — | |||||||||
Reissuance of treasury stock for deferred compensation plan for Boards of Directors | — | — | — | 2 | 2 | ||||||||||
Repurchase of treasury stock in connection with employee incentive plan and under compensation plan for Boards of Directors | — | — | — | (450 | ) | (450 | ) | ||||||||
Common shares issued under dividend reinvestment plan | 181 | — | — | — | 181 | ||||||||||
Common shares issued under compensation plan for Boards of Directors | 40 | — | — | 118 | 158 | ||||||||||
Stock-based compensation | 1,153 | — | — | — | 1,153 | ||||||||||
Balance, March 31, 2019 | $ | 385,427 | $ | 168,847 | $ | (7,497 | ) | $ | (11,656 | ) | $ | 535,121 | |||
See Notes to the Unaudited Consolidated Financial Statements
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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended | ||||||
March 31, | ||||||
(Dollars in thousands) | 2019 | 2018 | ||||
Net cash provided by operating activities | $ | 6,279 | $ | 11,669 | ||
Investing activities: | ||||||
Available-for-sale investment securities: | ||||||
Purchases | (37,462 | ) | (44,359 | ) | ||
Proceeds from sales | 7,425 | — | ||||
Proceeds from principal payments, calls and prepayments | 25,799 | 29,582 | ||||
Held-to-maturity investment securities: | ||||||
Proceeds from principal payments | 1,277 | 1,184 | ||||
Other investment securities: | ||||||
Purchases | (246 | ) | (198 | ) | ||
Proceeds from sales | 2,694 | 110 | ||||
Net increase in loans held for investment | (6,811 | ) | (46,404 | ) | ||
Net expenditures for premises and equipment | (1,584 | ) | (1,476 | ) | ||
Proceeds from sales of other real estate owned | 2 | 104 | ||||
Return of limited partnership and tax credit funds | 1 | 1 | ||||
Net cash used in investing activities | (8,905 | ) | (61,456 | ) | ||
Financing activities: | ||||||
Net increase in non-interest-bearing deposits | 20,587 | 14,794 | ||||
Net increase in interest-bearing deposits | 161,293 | 68,050 | ||||
Net decrease in short-term borrowings | (168,023 | ) | (26,016 | ) | ||
Payments on long-term borrowings | (503 | ) | (587 | ) | ||
Cash dividends paid | (5,719 | ) | (4,741 | ) | ||
Repurchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors to be held as treasury stock | (450 | ) | (1,056 | ) | ||
Proceeds from issuance of common shares | 3 | 2 | ||||
Contingent consideration payments made after a business combination | (102 | ) | (224 | ) | ||
Net cash provided by financing activities | 7,086 | 50,222 | ||||
Net increase in cash and cash equivalents | 4,460 | 435 | ||||
Cash and cash equivalents at beginning of period | 77,612 | 72,194 | ||||
Cash and cash equivalents at end of period | $ | 82,072 | $ | 72,629 | ||
Supplemental cash flow information: | ||||||
Interest paid | 6,499 | 2,914 | ||||
Income taxes paid | — | 30 | ||||
Supplemental noncash disclosures: | ||||||
Transfers from loans to other real estate owned | 14 | — | ||||
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, 2018 (“Peoples' 2018 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’ 2018 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 March 31, 2019 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, 2018, contained herein, has been derived from the audited Consolidated Balance Sheet included in Peoples’ 2018 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 when received, which typically occurs, for the most part, during the first quarter of each year. For the three months ended March 31, 2019 and 2018, the amount of performance-based insurance commissions recognized totaled $1.4 million and $1.3 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’ 2018 Form 10-K.
Accounting Standards Update ("ASU") 2017-04 - Intangibles - Goodwill and Other (Topic 350): Simplifying 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 value of goodwill to measure a goodwill impairment charge. This accounting guidance 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.
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. ASU 2018-19 clarified that receivables arising from operating leases are not within the scope of Subtopic 326-20, and should be accounted for according to Topic 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. 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
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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 has a committee that meets regularly to monitor progress and oversee the project. Peoples has implemented a third-party software solution, and is utilizing the tool to run test calculations throughout 2019 in anticipation of the full implementation at the beginning of 2020. Peoples will complete model validation during 2019, and is currently refining the economic forecasting process, documenting accounting policies, reviewing business processes and evaluating potential changes to the control environment. Peoples is presently 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. The impact of the 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, which is described in Note 1 Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Peoples' 2018 Form 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 Consolidated Balance Sheets by level in the fair value hierarchy.
Recurring Fair Value Measurements at Reporting Date | |||||||||||||||||||
March 31, 2019 | December 31, 2018 | ||||||||||||||||||
(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 | $ | — | $ | 84,827 | $ | — | $ | — | $ | 88,587 | $ | — | |||||||
Residential mortgage-backed securities | — | 706,976 | — | — | 692,608 | — | |||||||||||||
Commercial mortgage-backed securities | — | 6,649 | — | — | 6,707 | — | |||||||||||||
Bank-issued trust preferred securities | — | 4,118 | — | — | 3,989 | — | |||||||||||||
Total available-for-sale securities | — | 802,570 | — | — | 791,891 | — | |||||||||||||
Equity investment securities | 109 | 190 | — | 94 | 183 | — | |||||||||||||
Derivative assets (a) | — | 5,521 | — | — | 4,544 | — | |||||||||||||
Liabilities: | |||||||||||||||||||
Derivative liabilities (b) | $ | — | $ | 6,404 | $ | — | $ | — | $ | 3,562 | $ | — | |||||||
(a) Included in Other assets on the Consolidated Balance Sheets. For additional information, see Note 9 Derivative Financial Instruments of the Notes to the Unaudited Consolidated Financial Statements.
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(b) Included in Other liabilities on the 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 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 Unaudited Consolidated Balance Sheets by level in the fair value hierarchy.
Non-Recurring Fair Value Measurements at Reporting Date | |||||||||||||||||||
March 31, 2019 | December 31, 2018 | ||||||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||
Impaired loans | $ | — | $ | — | $ | 27,200 | $ | — | $ | — | $ | 24,129 | |||||||
Other real estate owned ("OREO") | — | — | 81 | — | — | 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 March 31, 2019, impaired loans with an aggregate principal balance of $33.2 million were outstanding and reported at fair value of $27.2 million. For the three months ended March 31, 2019, Peoples recognized an increase of $752,000 in the specific reserve on impaired loans, through the allowance for loan losses.
Other Real Estate Owned ("OREO"): 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 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).
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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.
Fair Value Measurements of Other Financial Instruments | ||||||||||||||
(Dollars in thousands) | Fair Value Hierarchy Level | March 31, 2019 | December 31, 2018 | |||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||
Assets: | ||||||||||||||
Cash and cash equivalents | 1 | $ | 82,072 | $ | 82,072 | $ | 77,612 | $ | 77,612 | |||||
Held-to-maturity investment securities: | ||||||||||||||
Obligations of: | ||||||||||||||
States and political subdivisions | 2 | 4,401 | 4,965 | 4,403 | 4,896 | |||||||||
Residential mortgage-backed securities | 2 | 28,348 | 28,276 | 29,044 | 28,603 | |||||||||
Commercial mortgage-backed securities | 2 | 2,857 | 2,825 | 3,514 | 3,464 | |||||||||
Total held-to-maturity securities | 35,606 | 36,066 | 36,961 | 36,963 | ||||||||||
Other investment securities: | ||||||||||||||
Federal Home Loan Bank ("FHLB") stock | 2 | 27,586 | 27,586 | 29,367 | 29,367 | |||||||||
Federal Reserve Bank ("FRB") stock | 2 | 12,294 | 12,294 | 12,294 | 12,294 | |||||||||
Nonqualified deferred compensation | 2 | 1,210 | 1,210 | 987 | 987 | |||||||||
United Bankers' Bancorporation Inc. ("UBB") stock | 2 | 60 | 60 | 60 | 60 | |||||||||
Other investment securities (a) | 41,150 | 41,150 | 42,708 | 42,708 | ||||||||||
Net loans | 3 | 2,716,641 | 2,884,562 | 2,708,583 | 2,907,537 | |||||||||
Loans held for sale | 2 | 2,191 | 2,069 | 5,470 | 5,492 | |||||||||
Bank owned life insurance | 3 | 69,419 | 69,419 | 68,934 | 68,934 | |||||||||
Servicing rights (b) | 3 | 2,507 | 3,973 | 2,655 | 4,568 | |||||||||
Liabilities: | ||||||||||||||
Deposits | 2 | $ | 3,137,413 | $ | 3,149,980 | $ | 2,955,465 | $ | 2,953,452 | |||||
Short-term borrowings | 2 | 191,363 | 191,259 | 356,198 | 349,994 | |||||||||
Long-term borrowings | 2 | 105,995 | 104,285 | 109,644 | 107,696 | |||||||||
(a) Other investment securities, as reported on the Consolidated Balance Sheets, also includes equity investment securities for 2018, 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 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).
Held-to-Maturity 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.
Other Investment Securities: Other investment securities are measured at their respective redemption values (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
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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 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).
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).
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 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 | ||||||||
March 31, 2019 | ||||||||||||
Obligations of: | ||||||||||||
States and political subdivisions | $ | 83,822 | $ | 1,240 | $ | (235 | ) | $ | 84,827 | |||
Residential mortgage-backed securities | 711,917 | 4,034 | (8,975 | ) | 706,976 | |||||||
Commercial mortgage-backed securities | 6,706 | — | (57 | ) | 6,649 | |||||||
Bank-issued trust preferred securities | 4,196 | 116 | (194 | ) | 4,118 | |||||||
Total available-for-sale securities | $ | 806,641 | $ | 5,390 | $ | (9,461 | ) | $ | 802,570 | |||
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 March 31, 2019 and December 31, 2018, were attributed to changes in market interest rates and spreads since the securities were purchased.
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The gross gains and gross losses realized by Peoples from sales of available-for-sale securities for the periods ended March 31 were as follows:
Three Months Ended | ||||||
March 31, | ||||||
(Dollars in thousands) | 2019 | 2018 | ||||
Gross gains realized | $ | 30 | $ | 2 | ||
Gross losses realized | — | 1 | ||||
Net gain realized | $ | 30 | $ | 1 | ||
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 | ||||||||||||||||
March 31, 2019 | ||||||||||||||||||||||||
Obligations of: | ||||||||||||||||||||||||
States and political subdivisions | $ | — | $ | — | — | $ | 11,886 | $ | 235 | 8 | $ | 11,886 | $ | 235 | ||||||||||
Residential mortgage-backed securities | 14,171 | 93 | 28 | 476,571 | 8,882 | 147 | 490,742 | 8,975 | ||||||||||||||||
Commercial mortgage-backed securities | — | — | — | 6,653 | 57 | 3 | 6,653 | 57 | ||||||||||||||||
Bank-issued trust preferred securities | — | — | — | 1,805 | 194 | 2 | 1,805 | 194 | ||||||||||||||||
Total | $ | 14,171 | $ | 93 | 28 | $ | 496,915 | $ | 9,368 | 160 | $ | 511,086 | $ | 9,461 | ||||||||||
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 value on a quarterly basis. At March 31, 2019, 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 March 31, 2019 and December 31, 2018 were largely attributable to changes in market interest rates and spreads since the securities were purchased.
At March 31, 2019, 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 $214,000 and $146,000, 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.
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 March 31, 2019 were primarily attributable to the subordinated nature of the debt.
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The table below presents the amortized cost, fair value and total weighted-average yield of available-for-sale securities by contractual maturity at March 31, 2019. 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 | $ | 889 | $ | 15,450 | $ | 23,997 | $ | 43,486 | $ | 83,822 | |||||
Residential mortgage-backed securities | 2 | 11,925 | 62,267 | 637,723 | 711,917 | ||||||||||
Commercial mortgage-backed securities | — | 5,625 | — | 1,081 | 6,706 | ||||||||||
Bank-issued trust preferred securities | — | — | 4,196 | — | 4,196 | ||||||||||
Total available-for-sale securities | $ | 891 | $ | 33,000 | $ | 90,460 | $ | 682,290 | $ | 806,641 | |||||
Fair value | |||||||||||||||
Obligations of: | |||||||||||||||
States and political subdivisions | $ | 887 | $ | 15,504 | $ | 24,388 | $ | 44,048 | $ | 84,827 | |||||
Residential mortgage-backed securities | 2 | 11,865 | 61,313 | 633,796 | 706,976 | ||||||||||
Commercial mortgage-backed securities | — | 5,588 | — | 1,061 | 6,649 | ||||||||||
Bank-issued trust preferred securities | — | — | 4,118 | — | 4,118 | ||||||||||
Total available-for-sale securities | $ | 889 | $ | 32,957 | $ | 89,819 | $ | 678,905 | $ | 802,570 | |||||
Total weighted-average yield | 2.26 | % | 2.53 | % | 2.75 | % | 3.00 | % | 2.95 | % | |||||
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 | ||||||||
March 31, 2019 | ||||||||||||
Obligations of: | ||||||||||||
States and political subdivisions | $ | 4,401 | $ | 564 | $ | — | $ | 4,965 | ||||
Residential mortgage-backed securities | 28,348 | 340 | (412 | ) | 28,276 | |||||||
Commercial mortgage-backed securities | 2,857 | — | (32 | ) | 2,825 | |||||||
Total held-to-maturity securities | $ | 35,606 | $ | 904 | $ | (444 | ) | $ | 36,066 | |||
December 31, 2018 | ||||||||||||
Obligations of: | ||||||||||||
States and political subdivisions | $ | 4,403 | $ | 493 | $ | — | $ | 4,896 | ||||
Residential mortgage-backed securities | 29,044 | 191 | (632 | ) | 28,603 | |||||||
Commercial mortgage-backed securities | 3,514 | — | (50 | ) | 3,464 | |||||||
Total held-to-maturity securities | $ | 36,961 | $ | 684 | $ | (682 | ) | $ | 36,963 | |||
There were no gross gains or gross losses realized by Peoples from sales of held-to-maturity securities for the three months ended March 31, 2019 and 2018.
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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 | ||||||||||||||||
March 31, 2019 | ||||||||||||||||||||||||
Residential mortgage-backed securities | $ | — | $ | — | — | $ | 11,925 | $ | 412 | 4 | $ | 11,925 | $ | 412 | ||||||||||
Commercial mortgage-backed securities | — | — | — | 2,825 | 32 | 1 | 2,825 | 32 | ||||||||||||||||
Total | $ | — | $ | — | — | $ | 14,750 | $ | 444 | 5 | $ | 14,750 | $ | 444 | ||||||||||
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 March 31, 2019. 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 | $ | — | $ | 306 | $ | 2,983 | $ | 1,112 | $ | 4,401 | |||||
Residential mortgage-backed securities | — | 416 | 7,992 | 19,940 | 28,348 | ||||||||||
Commercial mortgage-backed securities | — | — | — | 2,857 | 2,857 | ||||||||||
Total held-to-maturity securities | $ | — | $ | 722 | $ | 10,975 | $ | 23,909 | $ | 35,606 | |||||
Fair value | |||||||||||||||
Obligations of: | |||||||||||||||
States and political subdivisions | $ | — | $ | 308 | $ | 3,538 | $ | 1,119 | $ | 4,965 | |||||
Residential mortgage-backed securities | — | 414 | 8,232 | 19,630 | 28,276 | ||||||||||
Commercial mortgage-backed securities | — | — | — | 2,825 | 2,825 | ||||||||||
Total held-to-maturity securities | $ | — | $ | 722 | $ | 11,770 | $ | 23,574 | $ | 36,066 | |||||
Total weighted-average yield | — | % | 2.43 | % | 2.90 | % | 2.78 | % | 2.81 | % | |||||
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.
The following table summarizes the carrying value of Peoples' other investment securities:
(Dollars in thousands) | March 31, 2019 | December 31, 2018 | ||||
FHLB stock | $ | 27,586 | $ | 29,367 | ||
FRB stock | 12,294 | 12,294 | ||||
Nonqualified deferred compensation | 1,210 | 987 | ||||
Equity investment securities | 299 | 277 | ||||
UBB stock | 60 | 60 | ||||
Total other investment securities | $ | 41,449 | $ | 42,985 | ||
During the first quarter of 2019, Peoples redeemed $1.8 million of FHLB stock to be in compliance with requirements of the FHLB of Cincinnati.
During the three months ended March 31, 2019, Peoples recorded the change in the fair value of equity investment securities held at March 31, 2019 in other non-interest income, resulting in unrealized gains of $22,000. During the three
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months ended March 31, 2018, Peoples recorded the change in the fair value of equity investment securities held at March 31, 2018 in other non-interest income, resulting in unrealized losses of $460,000. Net realized gains on sales of equity investment securities, included in other non-interest income during the first three 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 $0 due to the litigation liability associated with the stock.
At March 31, 2019, Peoples' investment in equity investment securities was comprised largely of common stocks issued by various unrelated bank holding companies. There were no equity investment securities of a single issuer that exceeded 10% of Peoples' stockholders' equity.
Pledged Securities
Peoples had pledged available-for-sale investment securities with carrying values of $500.8 million and $430.0 million at March 31, 2019 and December 31, 2018, respectively, and held-to-maturity investment securities with carrying values of $16.2 million and $16.9 million at March 31, 2019 and December 31, 2018, 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 $58.0 million and $60.1 million at March 31, 2019 and December 31, 2018, respectively, and held-to-maturity securities with carrying values of $16.1 million and $16.7 million at March 31, 2019 and December 31, 2018, 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 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, 2019 | December 31, 2018 | ||||
Originated loans: | ||||||
Commercial real estate, construction | $ | 116,992 | $ | 124,013 | ||
Commercial real estate, other | 630,679 | 632,200 | ||||
Commercial real estate | 747,671 | 756,213 | ||||
Commercial and industrial | 558,070 | 530,207 | ||||
Residential real estate | 297,667 | 296,860 | ||||
Home equity lines of credit | 90,831 | 93,326 | ||||
Consumer, indirect | 410,172 | 407,167 | ||||
Consumer, direct | 69,710 | 71,674 | ||||
Consumer | 479,882 | 478,841 | ||||
Deposit account overdrafts | 518 | 583 | ||||
Total originated loans | $ | 2,174,639 | $ | 2,156,030 | ||
Acquired loans: | ||||||
Commercial real estate, construction | $ | 7,966 | $ | 12,404 | ||
Commercial real estate, other | 171,785 | 184,711 | ||||
Commercial real estate | 179,751 | 197,115 | ||||
Commercial and industrial | 34,837 | 35,537 | ||||
Residential real estate | 308,137 | 296,937 | ||||
Home equity lines of credit | 38,084 | 40,653 | ||||
Consumer, indirect | 111 | 136 | ||||
Consumer, direct | 2,021 | 2,370 | ||||
Consumer | 2,132 | 2,506 | ||||
Total acquired loans | $ | 562,941 | $ | 572,748 | ||
Loans, net of deferred fees and costs | $ | 2,737,580 | $ | 2,728,778 | ||
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Peoples has acquired various loans through business combinations for which there was, at acquisition, evidence of deterioration of credit quality since origination, and for which it was probable that all contractually required payments would not be collected. The carrying amounts of these purchased credit impaired loans included in the loan balances above are summarized as follows:
(Dollars in thousands) | March 31, 2019 | December 31, 2018 | ||||
Commercial real estate | $ | 11,076 | $ | 11,955 | ||
Commercial and industrial | 1,251 | 1,287 | ||||
Residential real estate | 19,275 | 20,062 | ||||
Consumer | 57 | 58 | ||||
Total outstanding balance | $ | 31,659 | $ | 33,362 | ||
Net carrying amount | $ | 20,884 | $ | 22,475 | ||
Changes in the accretable yield for purchased credit impaired loans for the three months ended March 31 were as follows:
(Dollars in thousands) | March 31, 2019 | March 31, 2018 | ||||
Balance, beginning of period | $ | 8,955 | $ | 6,704 | ||
Accretion | (484 | ) | (412 | ) | ||
Balance, March 31 | $ | 8,471 | $ | 6,292 | ||
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.
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 loans pledged under this blanket collateral agreement totaled $500.3 million and $505.7 million at March 31, 2019 and December 31, 2018, respectively. Peoples also pledges commercial loans to secure borrowings with the FRB of Cleveland. The outstanding balances of these loans totaled $182.5 million and $180.9 million at March 31, 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.
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The recorded investments in loans on nonaccrual status and loans delinquent for 90 days or more and accruing were as follows:
Nonaccrual Loans | Loans 90+ Days Past Due and Accruing | ||||||||||||
(Dollars in thousands) | March 31, 2019 | December 31, 2018 | March 31, 2019 | December 31, 2018 | |||||||||
Originated loans: | |||||||||||||
Commercial real estate, construction | $ | 703 | $ | 710 | $ | — | $ | — | |||||
Commercial real estate, other | 6,273 | 6,565 | — | 786 | |||||||||
Commercial real estate | 6,976 | 7,275 | — | 786 | |||||||||
Commercial and industrial | 2,015 | 1,673 | — | — | |||||||||
Residential real estate | 4,098 | 4,105 | 239 | 398 | |||||||||
Home equity lines of credit | 520 | 596 | 42 | 7 | |||||||||
Consumer, indirect | 599 | 480 | 4 | — | |||||||||
Consumer, direct | 22 | 56 | — | — | |||||||||
Consumer | 621 | 536 | 4 | — | |||||||||
Total originated loans | $ | 14,230 | $ | 14,185 | $ | 285 | $ | 1,191 | |||||
Acquired loans: | |||||||||||||
Commercial real estate, other | $ | 313 | $ | 319 | $ | 15 | $ | 15 | |||||
Commercial and industrial | 36 | 36 | 50 | 18 | |||||||||
Residential real estate | 1,770 | 1,921 | 724 | 1,032 | |||||||||
Home equity lines of credit | 740 | 637 | — | — | |||||||||
Total acquired loans | $ | 2,859 | $ | 2,913 | $ | 789 | $ | 1,065 | |||||
Total loans | $ | 17,089 | $ | 17,098 | $ | 1,074 | $ | 2,256 | |||||
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The following table presents the aging of the recorded investment in past due loans:
Loans Past Due | Current Loans | Total Loans | |||||||||||||||||
(Dollars in thousands) | 30 - 59 days | 60 - 89 days | 90 + Days | Total | |||||||||||||||
March 31, 2019 | |||||||||||||||||||
Originated loans: | |||||||||||||||||||
Commercial real estate, construction | $ | — | $ | — | $ | 703 | $ | 703 | $ | 116,289 | $ | 116,992 | |||||||
Commercial real estate, other | 466 | 149 | 6,066 | 6,681 | 623,998 | 630,679 | |||||||||||||
Commercial real estate | 466 | 149 | 6,769 | 7,384 | 740,287 | 747,671 | |||||||||||||
Commercial and industrial | 1,641 | 4,228 | 1,118 | 6,987 | 551,083 | 558,070 | |||||||||||||
Residential real estate | 3,339 | 1,074 | 2,347 | 6,760 | 290,907 | 297,667 | |||||||||||||
Home equity lines of credit | 406 | 123 | 428 | 957 | 89,874 | 90,831 | |||||||||||||
Consumer, indirect | 2,291 | 189 | 216 | 2,696 | 407,476 | 410,172 | |||||||||||||
Consumer, direct | 204 | 24 | 5 | 233 | 69,477 | 69,710 | |||||||||||||
Consumer | 2,495 | 213 | 221 | 2,929 | 476,953 | 479,882 | |||||||||||||
Deposit account overdrafts | — | — | — | — | 518 | 518 | |||||||||||||
Total originated loans | $ | 8,347 | $ | 5,787 | $ | 10,883 | $ | 25,017 | $ | 2,149,622 | $ | 2,174,639 | |||||||
Acquired loans: | |||||||||||||||||||
Commercial real estate, construction | $ | 503 | $ | 330 | $ | — | $ | 833 | $ | 7,133 | $ | 7,966 | |||||||
Commercial real estate, other | 2,130 | 5 | 233 | 2,368 | 169,417 | 171,785 | |||||||||||||
Commercial real estate | 2,633 | 335 | 233 | 3,201 | 176,550 | 179,751 | |||||||||||||
Commercial and industrial | 309 | 96 | 86 | 491 | 34,346 | 34,837 | |||||||||||||
Residential real estate | 6,451 | 680 | 1,586 | 8,717 | 299,420 | 308,137 | |||||||||||||
Home equity lines of credit | 168 | — | 623 | 791 | 37,293 | 38,084 | |||||||||||||
Consumer, indirect | — | — | — | — | 111 | 111 | |||||||||||||
Consumer, direct | 34 | 4 | — | 38 | 1,983 | 2,021 | |||||||||||||
Consumer | 34 | 4 | — | 38 | 2,094 | 2,132 | |||||||||||||
Total acquired loans | $ | 9,595 | $ | 1,115 | $ | 2,528 | $ | 13,238 | $ | 549,703 | $ | 562,941 | |||||||
Total loans | $ | 17,942 | $ | 6,902 | $ | 13,411 | $ | 38,255 | $ | 2,699,325 | $ | 2,737,580 | |||||||
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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 98.6% of Peoples' portfolio was considered “current” at March 31, 2019, compared to 98.5% at December 31, 2018.
Credit Quality Indicators
As discussed in Note 1 Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Peoples' 2018 Form 10-K, Peoples categorizes the majority of its loans into risk categories based upon an established risk grading matrix using a scale of 1 to 8. A description of the general characteristics of the risk grades used by Peoples is as follows:
“Pass” (grades 1 through 4): Loans in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan obligations. Loans in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the loan if required, for any weakness that may exist.
“Special Mention” (grade 5): Loans in this risk grade are the equivalent of the regulatory definition of “Other Assets Especially Mentioned.” Loans in this risk category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and/or reliance on a secondary source of repayment. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the loan or in Peoples' credit position.
“Substandard” (grade 6): Loans in this risk grade are inadequately protected by the borrower's current financial condition and payment capability or the collateral pledged, if any. Loans so classified have one or more well-defined weaknesses that jeopardize the orderly repayment of the loan. They are characterized by the distinct possibility that Peoples will sustain some loss if the deficiencies are not corrected.
“Doubtful” (grade 7): Loans in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of
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current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, classification of the loan as an estimated loss is deferred until its more exact status may be determined.
“Loss” (grade 8): Loans in this risk grade are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean a loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Charge-offs against the allowance for loan losses are taken 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.”
The following table summarizes the risk category of loans within Peoples' loan portfolio based upon the most recent analysis performed:
Pass Rated (Grades 1 - 4) | Special Mention (Grade 5) | Substandard (Grade 6) | Doubtful (Grade 7) | Not Rated | Total Loans | |||||||||||||
(Dollars in thousands) | ||||||||||||||||||
March 31, 2019 | ||||||||||||||||||
Originated loans: | ||||||||||||||||||
Commercial real estate, construction | $ | 114,901 | $ | — | $ | 1,454 | $ | — | $ | 637 | $ | 116,992 | ||||||
Commercial real estate, other | 611,063 | 9,969 | 9,615 | 32 | — | 630,679 | ||||||||||||
Commercial real estate | 725,964 | 9,969 | 11,069 | 32 | 637 | 747,671 | ||||||||||||
Commercial and industrial | 526,379 | 19,957 | 11,734 | — | — | 558,070 | ||||||||||||
Residential real estate | 14,002 | 259 | 11,682 | 171 | 271,553 | 297,667 | ||||||||||||
Home equity lines of credit | 17 | — | — | — | 90,814 | 90,831 | ||||||||||||
Consumer, indirect | 6 | — | — | — | 410,166 | 410,172 | ||||||||||||
Consumer, direct | 27 | — | — | — | 69,683 | 69,710 | ||||||||||||
Consumer | 33 | — | — | — | 479,849 | 479,882 | ||||||||||||
Deposit account overdrafts | — | — | — | — | 518 | 518 | ||||||||||||
Total originated loans | $ | 1,266,395 | $ | 30,185 | $ | 34,485 | $ | 203 | $ | 843,371 | $ | 2,174,639 | ||||||
Acquired loans: | ||||||||||||||||||