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Loans, net and allowance for loan losses

9 Months Ended

Sep. 30, 2020

Loans, net and allowance for loan losses

Loans, net and allowance for loan losses

5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at September 30, 2020 and December 31, 2019 are summarized as follows. The Company had net deferred loan origination fees of $3,093 at September 30, 2020 due to the origination of $217.5 million of PPP loans and $7.0 million of SBA processing fees during 2020. At December 31, 2019, we had net deferred loan costs of $908.


		September 30, 2020		December 31, 2019
Commercial	$	698,612	$	522,957
Real estate:
Commercial		1,111,645		1,011,423
Residential		290,604		301,378
Consumer		87,602		102,482
Total	$	2,188,463	$	1,938,240

The PPP loans are included in the commercial loan classification and had an outstanding balance at September 30, 2020 of $217,478. The PPP loans are risk rated ‘Pass’ and do not carry an allowance for loan losses due to a 100% SBA guarantee. The outstanding balance is considered current at September 30, 2020.

The changes in the allowance for loan losses account by major classification of loan for the three and nine months ended September 30, 2020 and 2019 are summarized as follows:


			Real estate
September 30, 2020	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance July 1, 2020	$	8,487	$	13,855	$	3,567	$	1,048	$	26,957
Charge-offs		(1,354)		(66)		(71)		(51)		(1,542)
Recoveries		51		14		9		45		119
Provisions		1,271		(5)		(159)		(57)		1,050
Ending balance	$	8,455	$	13,798	$	3,346	$	985	$	26,584

			Real estate
September 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance July 1, 2019	$	6,142	$	11,042	$	3,615	$	1,131	$	21,930
Charge-offs		(26)		(34)		(104)		(144)		(308)
Recoveries		12				11		47		70
Provisions		(205)		762		34		109		700
Ending balance	$	5,923	$	11,770	$	3,556	$	1,143	$	22,392


			Real estate
September 30, 2020	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2020	$	6,888	$	11,496	$	3,226	$	1,067	$	22,677
Charge-offs		(2,339)		(113)		(206)		(299)		(2,957)
Recoveries		349		14		22		129		514
Provisions		3,557		2,401		304		88		6,350
Ending balance	$	8,455	$	13,798	$	3,346	$	985	$	26,584

			Real estate
September 30, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2019	$	5,516	$	10,736	$	3,892	$	1,235	$	21,379
Charge-offs		(113)		(383)		(406)		(356)		(1,258)
Recoveries		22				27		122		171
Provisions		498		1,417		43		142		2,100
Ending balance	$	5,923	$	11,770	$	3,556	$	1,143	$	22,392

The Company’s allowance for loan losses increased $3.9 million or 17.2% in 2020, due largely to the adjustment during the first six months of 2020 of several qualitative factors in our allowance for loan losses methodology, which reflected economic decline and expectation of increased credit losses due to COVID-19’s adverse impact on economic and business operating conditions. The allowance for loan losses equaled $26.6 million or 1.21% of loans, net at September 30, 2020 compared to $22.7 million or 1.17% of loans, net, at December 31, 2019. Excluding PPP loans that do not carry an allowance for loan losses due to a 100% government guarantee, the ratio equaled 1.35% at September 30, 2020. Loans charged-off, net of recoveries, for the nine months ended September 30, 2020, equaled $2.4 million or 0.16% of average loans, compared to $1.1 million or 0.08% of average loans for the comparable period last year. The increase in charge-offs was due to a partial write-down of a non-accrual commercial relationship of $0.9 million and additional

charge-offs of $0.9 million related to small business lines of credit originated in our Greater Delaware Valley market. Loans charged-off, net of recoveries, for the three months ended September 30, 2020, equaled $1.4 million or 0.26% of average loans, compared to $0.2 million or 0.05% of average loans for the comparable period last year. The increase in charge-offs was due to a partial write-down of a non-accrual commercial relationship of $0.9 million and additional charge-offs of $0.5 million related to small business lines of credit originated in our Greater Delaware Valley market

The allocation of the allowance for loan losses and the related loans by major classifications of loans at September 30, 2020 and December 31, 2019 is summarized as follows:


			Real estate
September 30, 2020	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	8,455	$	13,798	$	3,346	$	985	$	26,584
Ending balance: individually evaluated for impairment		1,113		179		92				1,384
Ending balance: collectively evaluated for impairment	$	7,342	$	13,619	$	3,254	$	985	$	25,200
Loans receivable:
Ending balance	$	698,612	$	1,111,645	$	290,604	$	87,602	$	2,188,463
Ending balance: individually evaluated for impairment		4,739		4,161		1,779		103		10,782
Ending balance: collectively evaluated for impairment	$	693,873	$	1,107,484	$	288,825	$	87,499	$	2,177,681



			Real estate
December 31, 2019	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	6,888	$	11,496	$	3,226	$	1,067	$	22,677
Ending balance: individually evaluated for impairment		363		279		135				777
Ending balance: collectively evaluated for impairment	$	6,525	$	11,217	$	3,091	$	1,067	$	21,900
Loans receivable:
Ending balance	$	522,957	$	1,011,423	$	301,378	$	102,482	$	1,938,240
Ending balance: individually evaluated for impairment		4,658		3,048		2,153		261		10,120
Ending balance: collectively evaluated for impairment	$	518,299	$	1,008,375	$	299,225	$	102,221	$	1,928,120

The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:

●

Pass- A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss nor designated as Special Mention.

●

Special Mention- A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan

or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.

●

Substandard- A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

●

Doubtful – A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

●

Loss- A loan classified as Loss is considered uncollectible and of such little value that its continuance as bankable loan is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at September 30, 2020 and December 31, 2019:


			Special
September 30, 2020	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	676,627	$	11,162	$	10,823	$	$	698,612
Real estate:
Commercial		1,089,882		12,429		9,334			1,111,645
Residential		287,267		149		3,188			290,604
Consumer		87,478				124			87,602
Total	$	2,141,254	$	23,740	$	23,469	$	$	2,188,463


			Special
December 31, 2019	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	513,994	$	3,837	$	5,126	$	$	522,957
Real estate:
Commercial		993,645		2,508		15,270			1,011,423
Residential		298,449		597		2,332			301,378
Consumer		102,145				337			102,482
Total	$	1,908,233	$	6,942	$	23,065	$	$	1,938,240

The increase in special mention loans from December 31, 2019 to September 30, 2020 is primarily associated with the reclassification of two large commercial real estate credits and two large commercial credits. One commercial real estate credit totaled $3.8 million and was downgraded to special mention due to the loss of major tenants, while the second credit totals $4.5 million and is related to the hospitality industry and is experiencing financial difficulties due to COVID-19. The commercial credits relate to a $6.8 million relationship which is experiencing short-term cash flow issues while the other credit totaling $2.1 million has experienced financial difficulties directly related to COVID-19. The decrease to commercial real estate substandard loans resulted from the payoff of a $5.1 million commercial real estate construction loan that had experienced significant construction delays. The increase to substandard commercial loans resulted primarily from a $4.2 million relationship experiencing cash flow and capital issues. We expect this credit to be satisfied based on the financial strength of the guarantors.

Information concerning nonaccrual loans by major loan classification at September 30, 2020 and December 31, 2019 is summarized as follows:


		September 30, 2020		December 31, 2019
Commercial	$	4,259	$	3,336
Real estate:
Commercial		2,834		2,765
Residential		1,168		1,148
Consumer		103		261
Total	$	8,364	$	7,510

The major classifications of loans by past due status are summarized as follows:


					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
September 30, 2020	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	425	$	114	$	4,259	$	4,798	$	693,814	$	698,612
Real estate:
Commercial		503		293		2,833		3,629		1,108,016		1,111,645
Residential		313		56		1,221		1,590		289,014		290,604	$	52
Consumer		264		70		103		437		87,165		87,602
Total	$	1,505	$	533	$	8,416	$	10,454	$	2,178,009	$	2,188,463	$	52

The increase in the greater than 90 day category was due to a net increase in nonaccrual loans which are included in the category. Three large commercial loans added to non-accrual were partially offset by a partial charge-off of a non-accrual commercial relationship. The three loans added all have been individually measured for impairment and have specific reserves allocated.


					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
December 31, 2019	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	75			$	3,036	$	3,111	$	519,846	$	522,957
Real estate:
Commercial		926	$	175		2,765		3,866		1,007,557		1,011,423
Residential		2,164		1,227		1,526		4,917		296,461		301,378	$	378
Consumer		523		123		261		907		101,575		102,482
Total	$	3,688	$	1,525	$	7,588	$	12,801	$	1,925,439	$	1,938,240	$	378

The following tables summarize information concerning impaired loans as of and for the three and nine months ended September 30, 2020 and September 30, 2019, and as of and for the year ended December 31, 2019 by major loan classification:


							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
September 30, 2020	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	2,060	$	3,032			$	2,491	$	3	$	3,081	$	28
Real estate:
Commercial		2,146		2,749				2,094		3		2,092		25
Residential		1,068		1,219				1,092		5		1,258		15
Consumer		103		119				132				181
Total		5,377		7,119				5,809		11		6,612		68
With an allowance recorded:
Commercial		2,679		2,713		1,113		2,583		6		2,036		12
Real estate:
Commercial		2,015		2,254		179		2,232		18		1,714		18
Residential		711		795		92		761		3		666		10
Consumer
Total		5,405		5,762		1,384		5,576		27		4,416		40
Total impaired loans
Commercial		4,739		5,745		1,113		5,074		9		5,117		40
Real estate:
Commercial		4,161		5,003		179		4,326		21		3,806		43
Residential		1,779		2,014		92		1,853		8		1,924		25
Consumer		103		119				132				181
Total	$	10,782	$	12,881	$	1,384	$	11,385	$	38	$	11,028	$	108


							For the Year Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2019	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	3,638	$	4,175			$	3,907	$	63
Real estate:
Commercial		1,918		2,205				2,385		38
Residential		1,718		2,060				1,362		25
Consumer		261		274				233
Total		7,535		8,714				7,887		126
With an allowance recorded:
Commercial		1,020		1,038		363		1,012		32
Real estate:
Commercial		1,130		1,811		279		1,050		10
Residential		435		450		135		1,408		29
Consumer								20
Total		2,585		3,299		777		3,490		71
Total impaired loans
Commercial		4,658		5,213		363		4,919		95
Real estate:
Commercial		3,048		4,016		279		3,435		48
Residential		2,153		2,510		135		2,770		54
Consumer		261		274				253
Total	$	10,120	$	12,013	$	777	$	11,377	$	197


							This Quarter				Year-to-Date
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
September 30, 2019	Investment		Balance		Allowance		Investment		Recognized		Investment		Recognized
With no related allowance:
Commercial	$	3,766	$	4,272			$	4,131	$	18	$	3,974	$	52
Real estate:
Commercial		2,981		3,219				2,969		8		2,501		31
Residential		1,644		1,974				1,132		6		1,273		17
Consumer		262		275				257				226
Total		8,653		9,740				8,489		32		7,974		100
With an allowance recorded:
Commercial		1,006		1,008	$	394		1,213		9		1,010		21
Real estate:
Commercial		622		1,103		225		766				1,030		10
Residential		806		813		196		1,234		8		1,651		26
Consumer												20
Total		2,434		2,924		815		3,213		17		3,711		57
Total impaired loans
Commercial		4,772		5,280		394		5,344		27		4,984		73
Real estate:
Commercial		3,603		4,322		225		3,735		8		3,531		41
Residential		2,450		2,787		196		2,366		14		2,924		43
Consumer		262		275				257				246
Total	$	11,087	$	12,664	$	815	$	11,702	$	49	$	11,685	$	157

Loan Modifications/Troubled Debt Restructurings/COVID-19

Included in the commercial loan and commercial and residential real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $3,004 at September 30 2020, $2,193 at December 31, 2019 and $2,262 at September 30, 2019.

Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:

●

Rate Modification - A modification in which the interest rate is changed to a below market rate.

●

Term Modification - A modification in which the maturity date, timing of payments or frequency of payments is changed.

●

Payment Modification - A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

●

Combination Modification - Any other type of modification, including the use of multiple categories above.

The following tables provide the number of loans modified in a troubled debt restructuring and the pre- and post-modification recorded investment by class of receivable:


		2020

	For the Three Months Ended September 30,				For the Nine Monthe Ended September 30,
			Pre-Modification	Post-Modification			Pre-Modification		Post-Modification
	Number	Recorded		Recorded	Number		Recorded		Recored
	of Loans	Investment		Investment	of Loans		Investment		Investment
Commercial real estate		$		$	3	$	1,073	$	1,073
Commercial and industrial					1		12		12
Total		$		$	4	$	1,085	$	1,085

2019

For the Three Months Ended September 30,

For the Nine Monthe Ended September 30,

Pre-Modification

Post-Modification

Pre-Modification

Post-Modification

Number

Recorded

Number

Recorded

Recored

of Loans

Investment

of Loans

Investment

Commercial real estate

340

300

Total

340

300

During the nine months ended September 30, 2020, there was one payment default on a residential real estate loan in the amount of $52. During the three months ended September 30, 2019, there were no payment defaults on troubled debt restructurings and one commercial real estate loan paid-off totaling $332. During the nine months ended September 30, 2019, there were payment defaults on two restructured commercial real estate loans with balances totaling $335 which were subsequently charged-off.

The Company has received a significant number of requests to modify loan terms and/or defer principal and/or interest payments, and has agreed to many such deferrals. The federal banking regulators issued guidance and are encouraging banks to work prudently with, and provide short-term payment accommodations to borrowers affected by COVID-

19. Section 4013 of the CARES Act includes a provision for the Company to opt out of applying the troubled debt restructuring (“TDR”) guidance for certain loan modifications and specified that such modifications made on loans that were current as of December 31, 2019 do not need to be classified as TDRs. Peoples has applied this guidance. Similarly, FASB has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs.

Beginning in March 2020, the Company began receiving requests for temporary modifications to the repayment structure for borrower loans. As of June 30, 2020, the Company had 479 commercial loan and 512 consumer loan temporary modifications with principal balances totaling $330,119. As of October 30, 2020, 25 commercial loans and 36 consumer loans remain on deferral with principal balances of $23,747.

The following table provides information as of September 30, 2020 and June 30,2020 with respect to the Company’s payment deferrals granted on commercial loans by North American Industry Classification System (“NAICS”) categories:


September 30, 2020 NAICS category	Number of Loans		Balance	Percentage of Total Loan Portfolio		Percentage of Tier 1 Capital (Bank)
Lessors of Nonresidential Buildings	6	$	4,256	0.2	%	1.5	%
Lessors of Residential Buildings and Dwellings	10		10,162	0.5		3.7
Hotels and Motels	8		8,594	0.4		3.1
Full-Service Restaurants	1		597	0		0.2
Limited-Service Restaurants
Gasoline Stations with Convenience Stores
Construction and Mining	13		9,717	0.4		3.5
Assisted Living Facilities for the Elderly	2		6,319	0.3		2.3
Colleges, Universities, and Professional Schools
All Others	27		8,679	0.4		3.1
	67	$	48,324	2.2	%	17.5	%


June 30, 2020 NAICS category	Number of Loans		Balance	Percentage of Total Loan Portfolio		Percentage of Tier 1 Capital (Bank)
Lessors of Nonresidential Buildings	65	$	71,899	3.3	%	26.9	%
Lessors of Residential Buildings and Dwellings	64		53,564	2.5		19.9
Hotels and Motels	27		39,261	1.8		14.5
Full-Service Restaurants	33		27,783	1.3		10.3
Limited-Service Restaurants	8		11,829	0.5		4.4
Gasoline Stations with Convenience Stores	18		12,422	0.6		4.6
Construction and Mining	13		9,718	0.4		3.6
Assisted Living Facilities for the Elderly	2		6,319	0.3		2.3
Colleges, Universities, and Professional Schools	1		6,301	0.3		2.3
All Others	248		67,674	3.1		24.9
	479	$	306,770	14.1	%	113.7	%