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Loans, net and allowance for credit losses

9 Months Ended

Sep. 30, 2024

Loans, net and allowance for credit losses

Loans, net and allowance for credit losses

7. Loans, net and allowance for credit losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at September 30, 2024 and December 31, 2023 are summarized as follows. The Company had net deferred loan origination fees of $1.0 million and $0.4 million at September 30, 2024 and December 31, 2023, respectively. Included in total loans at September 30, 2024 were $1.2 billion in loans acquired as part of the acquisition of FNCB effective July 1, 2024.



(Dollars in thousands)			September 30, 2024		December 31, 2023
Commercial and Industrial		$	699,912		$	368,411
Municipal			190,167			175,304
Total			890,079			543,715
Real estate
Commercial			2,309,588			1,863,118
Residential			550,590			360,803
Total			2,860,178			2,223,921
Consumer
Indirect Auto			130,380			75,389
Consumer Other			15,580			6,872
Total			145,960			82,261

Equipment Financing			173,466
Total		$	4,069,683		$	2,849,897

Allowance for Credit Losses

The ACL represents the estimated amount considered necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to loans receivable and held to maturity securities measured at amortized cost. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. The allowance is established through a provision for credit losses that is charged against income. The methodology for determining the ACL for loans is considered a critical accounting estimate by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the

recorded ACL. The ACL related to loans receivable and held to maturity debt securities is reported separately as a contra-asset on the consolidated balance sheets. The expected credit loss for unfunded lending commitments and unfunded loan commitments is reported on the consolidated balance sheets in other liabilities while the provision for credit losses related to unfunded commitments is reported in other noninterest expense in the consolidated statements of income (loss) and comprehensive income (loss).

The Company made an accounting policy election to exclude accrued interest receivable from the amortized cost basis of loans, available for sale securities, and held to maturity securities. Accrued interest receivable on loans is reported as a component of accrued interest receivable on the Consolidated Balance Sheets, totaled $15.1 million and $10.6 million at September 30, 2024 and 2023 and is excluded from the estimate of credit losses. Accrued interest receivable on available for sale securities and held to maturity securities, also a component of accrued interest receivable on the Consolidated Balance Sheets, and totaled $2.5 million and $175 thousand, respectively, at September 30, 2024 and is excluded from the estimate of credit losses, as the Company has a policy to charge off accrued interest deemed uncollectible in a timely manner. At September 30, 2023, accrued interest receivable on available for sale securities and held to maturity securities was $1.6 million and $185 thousand, respectively.

The following tables present the changes in and period end balance of the allowance for credit losses at September 30, 2024 and 2023. The tables identify the valuation allowances attributable to specifically identified impairments on individually evaluated loans, including those acquired with deteriorated credit quality. The tables include the underlying balance of loans receivable applicable to each category as of those dates.


		September 30, 2024
								Real estate									Equipment
(Dollars in thousands)		Commercial			Municipal			Commercial			Residential			Consumer			Financing			Total
Allowance for credit losses:
Beginning Balance July 1, 2024		$	2,171		$	711		$	15,156		$	4,230		$	855		$			$	23,123
Merger-related adjustments - Non PCD Loans*			2,259			502			4,149			1,785			1,470			4,163			14,328
Merger-related adjustments PCD Loans			337			71			371			468			320			274			1,841
Charge-offs			(5)						(26)						(444)			(58)			(533)
Recoveries			10						70			4			310			58			452
(Credits) provisions			(162)			(321)			2,172			(1,241)			(528)			210			130
Ending balance		$	4,610		$	963		$	21,892		$	5,246		$	1,983		$	4,647		$	39,341

* See Note 2 - Business Combination and the initial provision for non-PCD loans.

		September 30, 2023
								Real estate									Equipment
(Dollars in thousands)		Commercial			Municipal			Commercial			Residential			Consumer			Financing			Total
Allowance for loan losses:
Beginning Balance July 1, 2023		$	2,751		$	827		$	14,961		$	3,767		$	912		$			$	23,218
Charge-offs															(65)						(65)
Recoveries			4									3			16						23
(Credits) provisions			(504)			40			134			128			36						(166)
Ending balance		$	2,251		$	867		$	15,095		$	3,898		$	899		$			$	23,010


		September 30, 2024
								Real estate									Equipment
(Dollars in thousands)		Commercial			Municipal			Commercial			Residential			Consumer			Financing			Total
Allowance for credit losses:
Beginning Balance January 1, 2024		$	2,272		$	788		$	14,153		$	3,782		$	900					$	21,895
Merger-related adjustments - Non PCD Loans*			2,259			502			4,149			1,785			1,470			4,163			14,328
Merger-related adjustments PCD Loans			337			71			371			468			320			274			1,841
Charge-offs			(51)						(27)						(640)			(58)			(776)
Recoveries			90						70			8			393			58			619
(Credits) provisions			(297)			(398)			3,176			(797)			(460)			210			1,434
Ending balance		$	4,610		$	963		$	21,892		$	5,246		$	1,983		$	4,647		$	39,341

* See Note 2 - Business Combination and the initial provision for non-PCD loans.

		September 30, 2023
								Real estate									Equipment
(Dollars in thousands)		Commercial			Municipal			Commercial			Residential			Consumer			Financing			Total
Allowance for credit losses:
Beginning Balance January 1, 2023		$	4,365		$	1,247		$	17,915		$	3,072		$	873		$			$	27,472
Impact of adopting ASC 326			(1,683)			747			(3,344)			967			30						(3,283)
Beginning Balance January 1, 2023			2,682			1,994			14,571			4,039			903						24,189
Charge-offs			(4)												(213)						(217)
Recoveries			9						1			22			109						141
(Credits) provisions			(436)			(1,127)			523			(163)			100						(1,103)
Ending balance		$	2,251		$	867		$	15,095		$	3,898		$	899		$			$	23,010

The following table represents the allowance for credit losses by major classification of loan and whether the loans were individually or collectively evaluated and collateral dependent by class of loans at September 30, 2024 and December 31, 2023.


		September 30, 2024
								Real estate									Equipment
(Dollars in thousands)		Commercial			Municipal			Commercial			Residential			Consumer			Financing			Total
Allowance for credit losses:
Ending balance		$	4,610		$	963		$	21,892		$	5,246		$	1,983		$	4,647		$	39,341
Ending balance: individually evaluated			8						400												408
Ending balance: collectively evaluated			4,602			963			21,492			5,246			1,983			4,647			38,933
Loans receivable:
Ending balance		$	699,912		$	190,167		$	2,309,588		$	550,590		$	145,960		$	173,466		$	4,069,683
Individually evaluated - collateral dependent - real estate			4,180						11,145			4,883						851			21,059
Individually evaluated - collateral dependent - non-real estate			7																		7
Collectively evaluated			695,725			190,167			2,298,443			545,707			145,960			172,615			4,048,617


		December 31, 2023
								Real estate									Equipment
(Dollars in thousands)		Commercial			Municipal			Commercial			Residential			Consumer			Financing			Total
Allowance for loan losses:
Ending balance		$	2,272		$	788		$	14,153		$	3,782		$	900		$			$	21,895
Ending balance: individually evaluated for impairment			10						21												31
Ending balance: collectively evaluated for impairment			2,262			788			14,132			3,782			900						21,864
Loans receivable:
Ending balance		$	368,411		$	175,304		$	1,863,118		$	360,803		$	82,261		$			$	2,849,897
Individually evaluated - collateral dependent - real estate			7						2,974			1,749									4,730
Individually evaluated - collateral dependent - non-real estate			10																		10
Collectively evaluated			368,394			175,304			1,860,144			359,054			82,261						2,845,157

Nonaccrual Loans

The following table presents the Company’s nonaccrual loans, including non-PCD nonaccrual loans, at September 30, 2024 and December 31, 2023.



			September 30, 2024
			Total			Nonaccrual with			Nonaccrual with
			Nonaccrual			an Allowance for			no Allowance for
(Dollars in thousands)			Loans			Credit Losses			Credit Losses
Commercial		$	4,180		$	351		$	3,829
Municipal
Real estate:
Commercial			11,146			2,620			8,526
Residential			4,321						4,321
Consumer			451						451
Equipment Financing			851						851
Total		$	20,949		$	2,971		$	17,978



			December 31, 2023
			Total			Nonaccrual with			Nonaccrual with
			Nonaccrual			an Allowance for			no Allowance for
(Dollars in thousands)			Loans			Credit Losses			Credit Losses
Commercial		$	10		$	10		$
Municipal
Real estate:
Commercial			2,974			1,170			1,804
Residential			760						760
Consumer			218						218
Total		$	3,962		$	1,180		$	2,782

Interest income recorded on nonaccrual loans was $887 thousand and $11 thousand for the three months ended September 30, 2024 and September 30, 2023, respectively. Interest income recorded on nonaccrual loans was $961 thousand and $426 thousand for the nine months ended September 30, 2024 and September 30, 2023, respectively.

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 Peoples 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 table presents the amortized cost of loans and gross charge-offs by year of origination and by 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, 2024 and December 31, 2023:


		As of September 30, 2024
(Dollars in thousands)			2024			2023			2022			2021			2020			Prior			Revolving Loans Amortized Cost Basis			Revolving Loans Converted to Term			Total
Commercial
Pass		$	54,824		$	85,532		$	80,128		$	90,107		$	40,718		$	107,295		$	219,160		$	7		$	677,771
Special Mention			1,352			1,136			701			458			2,449			1,464			1,806						9,366
Substandard			-			1,010			2,352			442			1,178			687			7,106						12,775
Total Commercial			56,176			87,678			83,181			91,007			44,345			109,446			228,072			7			699,912

Municipal
Pass			5,249			6,180			51,520			100,817			10,347			15,999			55						190,167
Special Mention
Substandard
Total Municipal			5,249			6,180			51,520			100,817			10,347			15,999			55						190,167

Commercial real estate
Pass			136,530			188,333			660,675			536,817			163,176			563,148			6,553			137			2,255,369
Special Mention						2,342			950			3,708			1,351			25,304			99						33,754
Substandard						501			5,686			6,054			155			8,069									20,465
Total Commercial real estate			136,530			191,176			667,311			546,579			164,682			596,521			6,652			137			2,309,588

Residential real estate
Pass			23,736			34,797			78,746			125,726			52,640			111,597			121,174			308			548,724
Special Mention
Substandard						4			60			186			301			1,311			4						1,866
Total Residential real estate			23,736			34,801			78,806			125,912			52,941			112,908			121,178			308			550,590

Consumer
Pass			25,689			41,912			44,430			21,337			5,009			6,303			1,034						145,714
Special Mention
Substandard						102			20			66			51			5			2						246
Total Consumer			25,689			42,014			44,450			21,403			5,060			6,308			1,036						145,960

Equipment Financing
Pass			50,596			72,636			46,005			2,443															171,680
Special Mention						710			417																		1,127
Substandard						659																					659
Total Equipment Financing			50,596			74,005			46,422			2,443															173,466

Total Loans		$	297,976		$	435,854		$	971,690		$	888,161		$	277,375		$	841,182		$	356,993		$	452		$	4,069,683

Gross charge-offs
Commercial		$			$	41		$			$	2		$			$	8		$			$			$	51
Municipal
Commercial real estate																		27									27
Residential real estate
Consumer			90			143			186			125			22			74									640
Equipment Financing						58																					58
Total Gross charge-offs		$	90		$	242		$	186		$	127		$	22		$	109		$			$			$	776



		As of December 31, 2023
(Dollars in thousands)			2023			2022			2021			2020			2019			Prior			Revolving Loans Amortized Cost Basis			Revolving Loans Converted to Term			Total
Commercial
Pass		$	9,856		$	38,172		$	28,127		$	29,966		$	44,551		$	82,190		$	131,536		$	650		$	365,048
Special Mention						876			182									49			832						1,939
Substandard			15			19			42						33			534			781						1,424
Total Commercial			9,871			39,067			28,351			29,966			44,584			82,773			133,149			650			368,411

Municipal
Pass			1,888			48,095			94,791			10,804			16			19,652			58						175,304
Special Mention
Substandard
Total Municipal			1,888			48,095			94,791			10,804			16			19,652			58						175,304

Commercial real estate
Pass			156,277			553,754			491,506			143,068			153,426			351,142						117			1,849,290
Special Mention						1,299									360			2,761									4,420
Substandard			169			1,338			1,520			160			697			5,524									9,408
Total Commercial real estate			156,446			556,391			493,026			143,228			154,483			359,427						117			1,863,118

Residential real estate
Pass			17,385			52,093			65,280			27,118			16,652			84,652			83,507			13,490			360,177
Special Mention
Substandard			4									329						288			5						626
Total Residential real estate			17,389			52,093			65,280			27,447			16,652			84,940			83,512			13,490			360,803

Consumer
Pass			27,053			30,307			12,460			5,441			3,107			2,981			694						82,043
Special Mention
Substandard						58			79			31			30			20									218
Total Consumer			27,053			30,365			12,539			5,472			3,137			3,001			694						82,261

Total Loans		$	212,647		$	726,011		$	693,987		$	216,917		$	218,872		$	549,793		$	217,413		$	14,257		$	2,849,897

Gross charge-offs
Commercial		$			$			$			$	21		$			$	33		$	4		$			$	58
Municipal
Commercial real estate																		2,598									2,598
Residential real estate
Consumer						95			101			69			49			55									369
Total Gross charge-offs		$			$	95		$	101		$	90		$	49		$	2,686		$	4		$			$	3,025

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


		September 30, 2024
								Greater												Loans > 90
		30-59 Days			60-89 Days			than 90			Total Past									Days and
(Dollars in thousands)		Past Due			Past Due			Days			Due			Current			Total Loans			Accruing
Commercial		$	762		$	173		$	841		$	1,776		$	698,136		$	699,912		$
Municipal															190,167			190,167
Real estate:
Commercial			2,226			206			8,799			11,231			2,298,357			2,309,588
Residential			1,153			1,136			4,056			6,345			544,245			550,590			558
Consumer			1,759			687			166			2,612			143,348			145,960			11
Equipment Financing			821			544						1,365			172,101			173,466
Total		$	6,721		$	2,746		$	13,862		$	23,329		$	4,046,354		$	4,069,683		$	569


		December 31, 2023
								Greater												Loans > 90
		30-59 Days			60-89 Days			than 90			Total Past									Days and
(Dollars in thousands)		Past Due			Past Due			Days			Due			Current			Total Loans			Accruing
Commercial		$	53		$	155		$	10		$	218		$	368,193		$	368,411		$
Municipal															175,304			175,304
Real estate:
Commercial			152			5			279			436			1,862,682			1,863,118
Residential			1,456			50			1,610			3,116			357,687			360,803			986
Consumer			1,069			285			85			1,439			80,822			82,261
Total		$	2,730		$	495		$	1,984		$	5,209		$	2,844,688		$	2,849,897		$	986

Allowance for Credit Losses on Off Balance Sheet Commitments

The following table presents the activity in the ACL on off balance sheet commitments, which include commitments to extend credit, unused portions of lines of credit and standby letters of credit, for the three and nine months ended September 30, 2024 and 2023:


			For the three months ended
(Dollars in thousands)			September 30, 2024			September 30, 2023
Beginning balance		$	334		$	93
Merger related adjustments			1,179
Credit to credit losses recorded in noninterest expense			(784)			(12)
Total allowance for credit losses on off balance sheet commitments		$	729		$	81

			For the nine months ended
(Dollars in thousands)			September 30, 2024			September 30, 2023
Beginning balance		$	43		$	179
Impact of adopting Topic 326						270
Merger related adjustments			1,179
Credit to credit losses recorded in noninterest expense			(493)			(368)
Total allowance for credit losses on off balance sheet commitments		$	729		$	81

The contractual amounts of off-balance sheet commitments at September 30, 2024 and 2023 are as follows:


(Dollars in thousands)		2024			2023
Commitments to extend credit		$	160,389		$	203,183
Unused portions of lines of credit			569,195			370,792
Standby letters of credit			61,943			62,181
		$	791,527		$	636,156

Modifications to Borrowers Experiencing Financial Difficulty

ASU 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) eliminated the accounting guidance for troubled debt restructurings while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. In accordance with the new guidance, the Company no longer evaluates loans with modifications made to borrowers experiencing financial difficulty individually for impairment, nor establishes a related specific reserve for such loans, but rather these loans are included in their respective portfolio segment and evaluated collectively for impairment to establish an ACL.

There were no modifications made to borrowers experiencing financial difficulty during the three months ended September 30, 2024. There was one modification made to a commercial and industrial loan with a borrower experiencing financial difficulty during the nine months ended September 30, 2024 which involved the deferral of the principal payment and the extension of the loan’s maturity date three months to September 16, 2024. The loan had an outstanding principal balance of $370 thousand at June 30, 2024. There were no loans made to borrowers that were modified during the three and nine months ended September 30, 2023.

During the three and nine months ended September 30, 2024 and September 30, 2023, there were no defaults on loan modifications made to borrowers experiencing financial difficulty.