Commercial Lending
Commercial real estate and commercial and industrial loans ("commercial
loans"), including loans secured by commercial real estate, represented
the largest portion of Peoples Bank's total loan portfolio, comprising approximately
52.5% and 51.6% of total loans at December 31, 2015 and December 31, 2014, respectively.
Commercial lending inherently involves a significant degree of risk of loss
since commercial loan relationships generally involve larger loan balances than
other loan classes. Additionally, the primary source of repayment for commercial
loans is typically considered to be the cash flows of the borrower's business,
which can be susceptible to adverse changes in the economic conditions of the
general economy or within a specific industry.
Commercial Lending Practices. Loan terms include amortization schedules and
interest rates commensurate with the purpose of each loan, the identified source
of repayment and the risk involved. The majority of Peoples Bank's commercial
loans carry variable interest rates equal to an underlying index rate plus a
margin, although Peoples Bank also originates commercial loans with fixed interest
rates for periods generally ranging from 3 to 10 years.
Peoples Bank evaluates all loan relationships whose aggregate credit exposure
is greater than $5,000,000 on a quarterly basis and exposure greater than $1
million on an annual basis, for possible credit deterioration. This loan review
process provides Peoples Bank with opportunities to identify potential problem
loans and take proactive actions to assure repayment of the loan or minimize
Peoples Bank's risk of loss, such as reviewing the relationship more frequently
based upon the loan quality rating and aggregate outstanding exposure. Upon
detection of the reduced ability of a borrower to meet cash flow obligations,
the loan is reviewed for possible downgrade or placement on nonaccrual status.
Loan relationships whose aggregate credit exposure to Peoples Bank is equal
to or less than $1 million are reviewed on an event driven basis. Triggers for
review include knowledge of adverse events affecting the borrower's business,
receipt of financial statements indicating deteriorating credit quality or other
events.
Construction Loans
Peoples Bank originates various construction loans to provide temporary financing
during the construction phase for commercial and residential properties. Construction
financing is generally considered to involve the highest credit risk since Peoples
Bank is dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction and the estimated cost (including interest)
of construction. If the estimated construction cost proves to be inaccurate,
Peoples Bank may be required to advance funds beyond the amount originally committed
to enable completion of the project. If the estimate of value proves inaccurate,
Peoples Bank may be confronted, at or prior to the maturity of the loan, with
a property having a value insufficient to ensure full repayment, should the
borrower default. In the event a default on a construction loan occurs and foreclosure
follows, Peoples Bank must take control of the project and attempt to either
arrange for completion of construction or dispose of the unfinished project.
In certain cases, such as real estate development projects, repayment of construction
loans occurs as a result of subsequent sales of the developed real estate. Additional
risk exists as the developer may lack funds to pay the loan if the property
is not sold upon completion.
Construction Lending Practices. Peoples Bank's construction lending is focused
primarily on commercial and residential projects of select real estate developers
and homebuilders. These projects include the construction of office, retail
or industrial complexes, and real estate development for either residential
or commercial uses. The underwriting criteria for construction loans are generally
the same as for non-construction loans.
To mitigate the risk of construction lending, Peoples Bank requires periodic
site inspections, typically completed by an independent third party, to ensure
appropriate completion of the project prior to any disbursements. Construction
loans are structured to provide sufficient time to complete construction, giving
consideration to weather or other variables that influence completion time.
In general, Peoples Bank typically requires the term of its construction loans
to be less than three years.
Residential Real Estate Loans
While commercial loans comprise the largest portion of Peoples Bank's loan
portfolio, residential real estate lending remains a major focus of Peoples
Bank. The originated loans may either be retained in Peoples Bank's loan portfolio,
or sold into the secondary market.
Peoples Bank also had $2.0 million of residential real estate loans held for
sale and was servicing $390.4 million of loans, consisting primarily of one-to-four
family residential mortgages, previously sold in the secondary market. Peoples
Bank requires evidence of insurance at the time of the loan closing, and additionally,
has a blanket insurance policy to cover residential real estate loans that do
not include an insurance escrow account.
Peoples Bank originates both fixed-rate and adjustable-rate real estate loans.
Typically, Peoples Banks sells its longer-term fixed-rate real estate loans
in the secondary market, while retaining the servicing rights on those loans.
In select cases, Peoples Bank may retain certain fixed-rate real estate loans
or sell the loans without retaining the servicing rights.
Real Estate Lending Practices. Peoples Bank typically requires residential
real estate loan amounts to be no more than 80% of the purchase price or the
appraised value of the real estate securing the loan, whichever is lower, unless
private mortgage insurance is obtained by the borrower for the percentage exceeding
80%. In limited circumstances, Peoples Bank may lend up to 100% of the appraised
value of the real estate, although such lending currently is limited to loans
that qualify under established federally-backed rural housing programs. Numerous
risk factors attributable to real estate lending are considered during underwriting
for the purposes of establishing an interest rate commensurate with the inherent
risks of the loan.
Real estate loans are typically secured by first mortgages with evidence of
title in favor of Peoples Bank in the form of an attorney's opinion of the title
or a title insurance policy. Peoples Bank requires insurance, with Peoples Bank
named as the mortgagee and loss payee. Licensed appraisals are required for
all real estate loans, and are completed by an independent third party.
Home Equity Lines of Credit
Peoples Bank originates home equity lines of credit that provide consumers with
greater flexibility in financing personal expenditures. Peoples Bank currently
offers home equity lines of credit with a prime-based variable rate for the
entire 10-year term of the loan and fixed-rate installment loans with 5 to 15
year terms. Peoples Bank also offers a home equity line of credit whose terms
include a fixed rate for the first five years which converts to a variable interest
rate for the remaining five years. Of the total home equity loan portfolio,
there were 94.2% and 5.8% of variable interest rate and fixed interest rate
loans, respectively.
Home Equity Lending Practices. Home equity lines of credit are generally made
as second mortgages by Peoples Bank. The maximum amount of a home equity line
of credit is generally limited to 80% of the appraised value of the property
less the balance of the first mortgage. Peoples Bank may lend up to 90% of the
appraised value of the property (less the balance of the first mortgage) at
higher interest rates that are commensurate with the additional risk being assumed
in these situations. The home equity lines of credit are written with 5 to 15-year
terms and are subject to review upon request for renewal.
Consumer Lending
Peoples Bank's consumer lending activities primarily involve loans secured by
automobiles, boats, recreational vehicles and other personal property, as well
as unsecured loans and personal lines of credit. At December 31, 2015 and December
31, 2014, consumer loans comprised 11.3% of Peoples Bank's loan portfolio.
Consumer Lending Practices. Consumer loans generally involve more risk as to
collectability than real estate mortgage loans because of the type and nature
of the collateral or, in certain instances, the absence of collateral. As a
result, consumer lending collections are dependent upon the borrower's continued
financial stability, and are at more risk from adverse changes in personal circumstances.
In addition, application of various state and federal laws, including bankruptcy
and insolvency laws, could limit the amount that may be recovered under these
loans. Credit approval for consumer loans typically requires demonstration of
sufficiency of income to repay principal and interest due, stability of employment,
an established credit record and sufficient collateral for secured loans. It
is the policy of Peoples Bank to review its consumer loan portfolio monthly
and to charge-off loans that do not meet its ongoing standards, while strictly
adhering to all laws and regulations governing consumer lending. A qualified
compliance officer is responsible for monitoring regulatory compliance performance
and for advising and updating loan personnel.
Peoples Bank makes available optional credit life insurance, and accident and
health insurance to all qualified borrowers, thus reducing risk of loss when
a borrower's income is terminated or interrupted due to an accident, disability
or death.
Overdraft Privilege
Peoples Bank grants Overdraft Privilege to qualified customers. Overdraft Privilege
is a service that provides overdraft protection to retail deposit customers,
and select commercial deposit customers, by establishing an Overdraft Privilege
amount. After a 60-day waiting period to verify account activity, each new checking
account usually receives an Overdraft Privilege amount of either $400 or $700,
based on the type of account and other parameters such as previous charge-off
history or loan loss. Once established, customers are permitted to overdraw
their checking account at Peoples Bank's discretion, up to their Overdraft Privilege
limit, with each item being charged Peoples Bank's regular overdraft fee, with
a maximum of seven charges per day when the customer's account is overdrawn
more than $5. Customers repay the overdraft with their next deposit. Overdraft
Privilege is designed to allow Peoples Bank to fill the void between traditional
overdraft protection, such as a line of credit, and "check cashing stores".
Under federal banking regulations, Peoples Bank is required to obtain the consent
of its customers in order to apply Overdraft Privilege to ATM and one-time debit
card transactions. While Overdraft Privilege generates fee income, these fees
may be offset by loan loss provisioning necessary to ensure the maintenance
of an appropriate allowance for losses against overdrafts deemed uncollectable.
This allowance, along with the related provision and net charge-offs, is included
in Peoples Bank's allowance for loan losses.