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Loans, net and allowance for loan losses

3 Months Ended

Mar. 31, 2021

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 March 31, 2021 and December 31, 2020 are summarized as follows. The Company had net deferred loan origination fees of $2,684 and

$2,058 at March 31, 2021 and December 31, 2020, respectively. The increase is due in part to net fees from $100.0 million of PPP loans originated during the first three months of 2021.


		March 31, 2021		December 31, 2020
Commercial	$	677,090	$	679,286
Real estate:
Commercial		1,150,567		1,137,990
Residential		273,226		277,414
Consumer		78,651		83,292
Total	$	2,179,534	$	2,177,982

The PPP loans are included in the commercial loan classification and had an outstanding balance at March 31, 2021 of $200,774 comprised of $99,984 originated during 2021 as part of round two and $100,790 remaining from loans originated during 2020 under round one of the program. 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 March 31, 2021.

The changes in the allowance for loan losses account by major classification of loan for the three months ended March 31, 2021 and 2020 are summarized as follows:


			Real estate
March 31, 2021	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Beginning Balance January 1, 2021	$	8,734	$	14,559	$	3,129	$	922	$	27,344
Charge-offs		(15)		(96)		(22)		(62)		(195)
Recoveries		61		58		1		14		134
Provisions (credits)		(565)		182		(114)		(3)		(500)
Ending balance	$	8,215	$	14,703	$	2,994	$	871	$	26,783

			Real estate
March 31, 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		(650)				(54)		(94)		(798)
Recoveries		267				10		30		307
Provisions		1,464		1,511		442		83		3,500
Ending balance	$	7,969	$	13,007	$	3,624	$	1,086	$	25,686

The Company’s allowance for loan losses decreased $0.6 million or 2.1% during the first three months of 2021, due primarily to a $0.5 million release from allowance for loan losses in the current period resulting from improved credit quality and a slight decrease in non-PPP loan balances. The allowance for loan losses equaled $26.8 million or 1.23% of loans, net at March 31, 2021 compared to $27.3 million or 1.26% of loans, net, at December 31, 2020. Excluding PPP loans that do not carry an allowance for loan losses due to a 100% government guarantee, the ratio equaled 1.35% at March 31, 2021. Loans charged-off, net of recoveries, for the three months ended March 31, 2021, equaled less than $0.1 million or 0.01% of average loans, compared to $0.5 million or 0.10% of average loans for the comparable period last year. The decrease to charge-offs in the current period resulted from improved credit quality; the year ago period included a $0.6 million fully charged-off commercial credit.

The allocation of the allowance for loan losses and the related loans by major classifications of loans at March 31, 2021 and December 31, 2020 is summarized as follows:


			Real estate
March 31, 2021	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	8,215	$	14,703	$	2,994	$	871	$	26,783
Ending balance: individually evaluated for impairment		697		108		64				869
Ending balance: collectively evaluated for impairment	$	7,518	$	14,595	$	2,930	$	871	$	25,914
Loans receivable:
Ending balance	$	677,090	$	1,150,567	$	273,226	$	78,651	$	2,179,534
Ending balance: individually evaluated for impairment		2,651		3,990		1,543		94		8,278
Ending balance: collectively evaluated for impairment	$	674,439	$	1,146,577	$	271,683	$	78,557	$	2,171,256



			Real estate
December 31, 2020	Commercial		Commercial		Residential		Consumer		Total
Allowance for loan losses:
Ending balance	$	8,734	$	14,559	$	3,129	$	922	$	27,344
Ending balance: individually evaluated for impairment		947		180		75				1,202
Ending balance: collectively evaluated for impairment	$	7,787	$	14,379	$	3,054	$	922	$	26,142
Loans receivable:
Ending balance	$	679,286	$	1,137,990	$	277,414	$	83,292	$	2,177,982
Ending balance: individually evaluated for impairment		4,297		3,952		1,546		111		9,906
Ending balance: collectively evaluated for impairment	$	674,989	$	1,134,038	$	275,868	$	83,181	$	2,168,076

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 March 31, 2021 and December 31, 2020:


			Special
March 31, 2021	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	660,558	$	13,728	$	2,804	$	$	677,090
Real estate:
Commercial		1,123,315		17,615		9,637			1,150,567
Residential		269,856		619		2,751			273,226
Consumer		78,556				95			78,651
Total	$	2,132,285	$	31,962	$	15,287	$	$	2,179,534


			Special
December 31, 2020	Pass		Mention		Substandard		Doubtful	Total
Commercial	$	660,559	$	14,305	$	4,422	$	$	679,286
Real estate:
Commercial		1,107,699		17,517		12,774			1,137,990
Residential		274,327		144		2,943			277,414
Consumer		83,215				77			83,292
Total	$	2,125,800	$	31,966	$	20,216	$	$	2,177,982

The decrease to substandard commercial loans resulted primarily from a $1.5 million relationship that was paid off during the period ended March 31, 2021. The decrease in substandard commercial real estate loans resulted from a refinance of a credit related to the hospitality industry that is secured by a seventy-five percent SBA guarantee.

Information concerning nonaccrual loans by major loan classification at March 31, 2021 and December 31, 2020 is summarized as follows:


		March 31, 2021		December 31, 2020
Commercial	$	2,198	$	3,822
Real estate:
Commercial		3,311		3,262
Residential		825		922
Consumer		94		111
Total	$	6,428	$	8,117

The decrease to non-accrual loans since year end was due to the $1.5 million payoff of a specific commercial relationship.

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
March 31, 2021	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	150			$	2,198	$	2,348	$	674,742	$	677,090
Real estate:
Commercial		343	$	57		3,311		3,711		1,146,856		1,150,567
Residential		1,444				996		2,440		270,786		273,226	$	171
Consumer		151		37		94		282		78,369		78,651
Total	$	2,088	$	94	$	6,599	$	8,781	$	2,170,753	$	2,179,534	$	171

Improved credit quality resulted in lower levels of past due loans from year end. The addition of one residential mortgage resulted in the increase to loans greater than 90 days and accruing.


					Greater								Loans > 90
	30-59 Days		60-89 Days		than 90		Total Past						Days and
December 31, 2020	Past Due		Past Due		Days		Due		Current		Total Loans		Accruing
Commercial	$	73			$	3,822	$	3,895	$	675,391	$	679,286
Real estate:
Commercial		344	$	134		3,262		3,740		1,134,250		1,137,990
Residential		2,072		480		993		3,545		273,869		277,414	$	71
Consumer		374		63		111		548		82,744		83,292
Total	$	2,863	$	677	$	8,188	$	11,728	$	2,166,254	$	2,177,982	$	71

The following tables summarize information concerning impaired loans as of and for the three months ended March 31, 2021 and March 31, 2020, and as of and for the year ended December 31, 2020 by major loan classification:


							For the Quarter Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
March 31, 2021	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	673	$	1,108			$	1,462	$	4
Real estate:
Commercial		3,280		4,051				2,826		6
Residential		1,121		1,241				1,104		6
Consumer		94		105				103
Total		5,168		6,505				5,495		16
With an allowance recorded:
Commercial		1,978		2,041		697		2,012		5
Real estate:
Commercial		710		796		108		1,145		4
Residential		422		457		64		441		4
Consumer
Total		3,110		3,294		869		3,598		13
Total impaired loans
Commercial		2,651		3,149		697		3,474		9
Real estate:
Commercial		3,990		4,847		108		3,971		10
Residential		1,543		1,698		64		1,545		10
Consumer		94		105				103
Total	$	8,278	$	9,799	$	869	$	9,093	$	29


							For the Year Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2020	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	2,251	$	3,421			$	2,915	$	30
Real estate:
Commercial		2,372		2,964				2,148		28
Residential		1,086		1,263				1,223		21
Consumer		111		121				167
Total		5,820		7,769				6,453		79
With an allowance recorded:
Commercial		2,046		2,094		947		2,038		17
Real estate:
Commercial		1,580		1,710		180		1,687		36
Residential		460		482		75		624		13
Consumer
Total		4,086		4,286		1,202		4,349		66
Total impaired loans
Commercial		4,297		5,515		947		4,953		47
Real estate:
Commercial		3,952		4,674		180		3,835		64
Residential		1,546		1,745		75		1,847		34
Consumer		111		121				167
Total	$	9,906	$	12,055	$	1,202	$	10,802	$	145


							For the Quarter Ended
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
March 31, 2020	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial	$	3,706	$	4,249			$	3,672	$	16
Real estate:
Commercial		2,263		2,574				2,091		5
Residential		1,129		1,369				1,424		5
Consumer		201		219				231
Total		7,299		8,411				7,418		26
With an allowance recorded:
Commercial		1,956		1,974	$	764		1,488		6
Real estate:
Commercial		1,263		1,924		270		1,197
Residential		706		735		192		571		4
Consumer
Total		3,925		4,633		1,226		3,256		10
Total impaired loans
Commercial		5,662		6,223		764		5,160		22
Real estate:
Commercial		3,526		4,498		270		3,288		5
Residential		1,835		2,104		192		1,995		9
Consumer		201		219				231
Total	$	11,224	$	13,044	$	1,226	$	10,674	$	36

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 $2,740 at March 31 2021, $2,818 at December 31, 2020 and $2,140 at March 31, 2020.

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.

There were no loans modified as troubled debt restructurings during the three months ended March 31, 2021 and 2020.

During the three months ended March 31, 2021, there were no payment defaults on troubled debt restructurings. During the three months ended March 31, 2020, there was one payment default on a residential real estate loan in the amount of $52.

The Company received a significant number of requests to modify loan terms and/or defer principal and/or interest payments, and agreed to many such deferrals during 2020. The federal banking regulators issued guidance and encouraged 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 applied this guidance. Similarly, FASB 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 COVID-19 related requests for temporary modifications to the repayment structure for borrower loans. As of March 31, 2021, six commercial loans and fifteen consumer loans not classified as TDRs remain on deferral with principal balances aggregating $1.3 million, representing less than 0.1% of loans outstanding.