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 JuneSeptember 30, 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
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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)  
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Shares, without par valuePEBOThe Nasdaq Stock Market

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 CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 20,698,57120,690,480 common shares, without par value, at July 31,October 29, 2019.


Table of Contents
  



2

Table of Contents

PART I
ITEM 1.  FINANCIAL STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
2019
December 31,
2018
September 30,
2019
December 31,
2018
(Dollars in thousands)(Unaudited) (Unaudited) 
Assets  
Cash and cash equivalents:  
Cash and due from banks$56,731
$61,775
$68,399
$61,775
Interest-bearing deposits in other banks36,692
15,837
53,050
15,837
Total cash and cash equivalents93,423
77,612
121,449
77,612
Available-for-sale investment securities, at fair value (amortized cost of $910,431 at June 30, 2019 and $804,655 at December 31, 2018)919,364
791,891
Held-to-maturity investment securities, at amortized cost (fair value of $35,747 at June 30, 2019 and $36,963 at December 31, 2018)34,839
36,961
Available-for-sale investment securities, at fair value (amortized cost of $976,286 at September 30, 2019 and $804,655 at December 31, 2018)988,035
791,891
Held-to-maturity investment securities, at amortized cost (fair value of $34,893 at September 30, 2019 and $36,963 at December 31, 2018)33,829
36,961
Other investment securities43,508
42,985
43,045
42,985
Total investment securities997,711
871,837
1,064,909
871,837
Loans, net of deferred fees and costs (a)2,833,533
2,728,778
2,850,316
2,728,778
Allowance for loan losses(21,357)(20,195)(21,585)(20,195)
Net loans2,812,176
2,708,583
2,828,731
2,708,583
Loans held for sale5,928
5,470
4,522
5,470
Bank premises and equipment, net of accumulated depreciation64,451
56,542
63,338
56,542
Bank owned life insurance69,909
68,934
70,396
68,934
Goodwill163,292
151,245
166,494
151,245
Other intangible assets13,471
10,840
12,632
10,840
Other assets56,015
40,391
63,677
40,391
Total assets$4,276,376
$3,991,454
$4,396,148
$3,991,454
Liabilities  
Deposits:  
Non-interest-bearing$643,058
$607,877
$677,232
$607,877
Interest-bearing2,720,555
2,347,588
2,679,970
2,347,588
Total deposits3,363,613
2,955,465
3,357,202
2,955,465
Short-term borrowings186,457
356,198
288,150
356,198
Long-term borrowings85,691
109,644
84,194
109,644
Accrued expenses and other liabilities61,593
50,007
78,069
50,007
Total liabilities3,697,354
3,471,314
3,807,615
3,471,314
Stockholders’ equity  
Preferred stock, no par value, 50,000 shares authorized, no shares issued at June 30, 2019 and December 31, 2018

Common stock, no par value, 24,000,000 shares authorized, 21,142,256 shares issued at June 30, 2019 and 20,124,378 shares issued at December 31, 2018, including shares in treasury418,950
386,814
Preferred stock, no par value, 50,000 shares authorized, no shares issued at September 30, 2019 and December 31, 2018

Common stock, no par value, 24,000,000 shares authorized, 21,149,122 shares issued at September 30, 2019 and 20,124,378 shares issued at December 31, 2018, including shares held in treasury420,070
386,814
Retained earnings171,410
160,346
179,238
160,346
Accumulated other comprehensive income (loss), net of deferred income taxes316
(12,933)1,089
(12,933)
Treasury stock, at cost, 489,802 shares at June 30, 2019 and 601,289 shares at December 31, 2018(11,654)(14,087)
Treasury stock, at cost, 493,742 shares at September 30, 2019 and 601,289 shares at December 31, 2018(11,864)(14,087)
Total stockholders’ equity579,022
520,140
588,533
520,140
Total liabilities and stockholders’ equity$4,276,376
$3,991,454
$4,396,148
$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


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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, June 30,September 30, September 30,
(Dollars in thousands, except per share data)20192018 2019201820192018 20192018
Interest income:      
Interest and fees on loans$36,660
$31,250
 $70,713
$58,131
$36,522
$33,355
 $107,235
$91,486
Interest and dividends on taxable investment securities5,969
5,830
 11,779
11,480
5,891
5,577
 17,670
17,057
Interest on tax-exempt investment securities729
635
 1,266
1,278
690
613
 1,956
1,891
Other interest income263
54
 439
106
506
86
 945
192
Total interest income43,621
37,769
 84,197
70,995
43,609
39,631
 127,806
110,626
Interest expense:      
Interest on deposits5,719
3,101
 10,563
5,314
6,159
4,018
 16,722
9,332
Interest on short-term borrowings1,233
1,175
 2,406
2,143
1,150
1,617
 3,556
3,760
Interest on long-term borrowings620
685
 1,265
1,371
546
672
 1,811
2,043
Total interest expense7,572
4,961
 14,234
8,828
7,855
6,307
 22,089
15,135
Net interest income36,049
32,808
 69,963
62,167
35,754
33,324
 105,717
95,491
Provision for loan losses626
1,188
 363
3,171
1,005
1,302
 1,368
4,473
Net interest income after provision for loan losses35,423
31,620
 69,600
58,996
34,749
32,022
 104,349
91,018
Non-interest income:      
Electronic banking income3,577
2,890
 9,831
8,460
Insurance income3,486
3,369
 8,107
8,024
3,386
3,388
 11,493
11,412
Deposit account service charges3,233
2,652
 8,551
7,160
Trust and investment income3,401
3,232
 6,513
6,300
3,205
3,110
 9,718
9,410
Electronic banking income3,267
2,785
 6,254
5,570
Deposit account service charges2,977
2,388
 5,318
4,508
Mortgage banking income1,000
969
 1,788
1,320
1,204
1,060
 2,992
2,380
Commercial loan swap fees772
355
 1,434
617
Bank owned life insurance income490
497
 975
965
487
495
 1,462
1,460
Commercial loan swap fees516
146
 662
262
Net loss on investment securities(57)(147) (27)(146)
Net loss on asset disposals and other transactions(293)(405) (475)(331)
Net gain (loss) on investment securities97

 70
(146)
Net (loss) gain on asset disposals and other transactions(78)12
 (553)(319)
Other non-interest income502
421
 1,603
1,752
510
391
 2,113
2,143
Total non-interest income15,289
13,255
 30,718
28,224
16,393
14,353

47,111
42,577
Non-interest expense:      
Salaries and employee benefit costs20,824
18,025
 40,026
34,015
18,931
17,908
 58,957
51,923
Net occupancy and equipment expense3,132
2,803
 6,110
5,669
3,098
2,850
 9,208
8,519
Professional fees2,344
3,022
 3,620
4,740
Electronic banking expense1,693
1,407
 3,270
2,857
2,070
1,552
 5,340
4,409
Data processing and software expense1,567
1,359
 3,112
2,681
1,572
1,408
 4,684
4,089
Professional fees1,544
1,395
 5,164
6,135
Amortization of other intangible assets824
861
 1,518
1,615
953
862
 2,471
2,477
Franchise tax expense772
614
 1,477
1,258
797
616
 2,274
1,874
Marketing expense490
656
 1,084
981
634
456
 1,718
1,437
FDIC insurance expense381
416
 752
782
Foreclosed real estate and other loan expenses469
338
 724
550
600
373
 1,324
923
Communication expense317
300
 595
644
268
305
 863
949
FDIC insurance expense
391
 752
1,173
Other non-interest expense6,063
6,170
 8,448
8,400
2,526
2,713
 10,974
11,113
Total non-interest expense38,876
35,971
 70,736
64,192
32,993
30,829
 103,729
95,021
Income before income taxes11,836
8,904
 29,582
23,028
18,149
15,546
 47,731
38,574
Income tax expense2,238
1,012
 5,615
3,395
3,281
2,821
 8,896
6,216
Net income$9,598
$7,892
 $23,967
$19,633
$14,868
$12,725
 $38,835
$32,358
Earnings per common share - basic$0.47
$0.41
 $1.20
$1.05
$0.72
$0.65
 $1.93
$1.70
Earnings per common share - diluted$0.46
$0.41
 $1.19
$1.04
$0.72
$0.65
 $1.91
$1.69
Weighted-average number of common shares outstanding - basic20,277,028
19,160,728
 19,824,035
18,646,266
20,415,245
19,325,457
 20,023,271
18,875,290
Weighted-average number of common shares outstanding - diluted20,442,366
19,293,381
 19,972,350
18,773,169
20,595,769
19,466,865
 20,178,634
19,004,087
Cash dividends declared$7,035
$5,466
 $12,903
$10,237
$7,040
$5,472
 $19,943
$15,709
Cash dividends declared per common share$0.34
$0.28
 $0.64
$0.54
$0.34
$0.28
 $0.98
$0.82
See Notes to the Unaudited Consolidated Financial Statements


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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
    
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, June 30,September 30, September 30,
(Dollars in thousands)20192018 2019201820192018 20192018
Net income$9,598
$7,892
 $23,967
$19,633
$14,868
$12,725
 $38,835
$32,358
Other comprehensive income (loss):      
Available-for-sale investment securities:      
Gross unrealized holding gain (loss) arising during the period12,947
(2,661) 21,672
(12,774)2,913
(5,813) 24,585
(18,587)
Related tax (expense) benefit(2,719)559
 (4,551)3,737
(612)1,221
 (5,163)4,958
Less: reclassification adjustment for net gain included in net income(57)(147) (27)(146)
Related tax benefit12
31
 6
31
Less: reclassification adjustment for net gain (loss) included in net income97

 70
(146)
Related tax (expense) benefit(21)
 (15)31
Amounts reclassified out of accumulated other comprehensive loss per ASU 2016-01 (a)

 
(5,020)

 
(5,020)
Net effect on other comprehensive income (loss)10,273
(1,986) 17,142
(13,942)2,225
(4,592) 19,367
(18,534)
Defined benefit plans:      
Net gain arising during the period

 2

2
1,177
 4
1,177
Related tax expense(1)(247) (1)(247)
Amortization of unrecognized loss and service cost on benefit plans20
26
 37
52
17
28
 54
80
Related tax expense(3)(6) (11)(17)
Recognition of loss due to settlement and curtailment
176
 
176
Related tax expense(4)(5) (8)(11)
(37) 
(37)
Net effect on other comprehensive income16
21
 31
41
15
1,091
 46
1,132
Cash flow hedges:      
Net (loss) gain arising during the period(3,134)537
 (4,967)1,915
(1,857)651
 (6,824)2,566
Related tax benefit (expense)658
(113) 1,043
(402)390
(137) 1,433
(539)
Net effect on other comprehensive (loss) income(2,476)424
 (3,924)1,513
(1,467)514
 (5,391)2,027
Total other comprehensive income (loss), net of tax7,813
(1,541) 13,249
(12,388)773
(2,987) 14,022
(15,375)
Total comprehensive income$17,411
$6,351
 $37,216
$7,245
$15,641
$9,738
 $52,857
$16,983
(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



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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
 Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Accumulated Other Comprehensive (Loss) Income Total Stockholders' Equity
Common StockRetained EarningsTreasury StockCommon StockRetained EarningsTreasury Stock
(Dollars in thousands)
Balance, December 31, 2018$386,814
$160,346
$(12,933)$(14,087)$520,140
$386,814
$160,346
$(12,933)$(14,087)$520,140
Net income
23,967


23,967

38,835


38,835
Other comprehensive income, net of tax

13,249

13,249


14,022

14,022
Cash dividends declared
(12,903)

(12,903)
(19,943)

(19,943)
Reissuance of treasury stock for common share awards(2,821)

2,821

(2,951)

2,951

Reissuance of treasury stock for deferred compensation plan for Boards of Directors


53
53



53
53
Repurchase of treasury stock in connection with employee incentive plan and under compensation plan for Boards of Directors


(684)(684)


(790)(790)
Common shares repurchased under share repurchase program


(431)(431)
Common shares issued under dividend reinvestment plan384



384
678



678
Common shares issued under compensation plan for Boards of Directors52


157
209
65


196
261
Common shares issued under employee stock purchase plan28


86
114
83


244
327
Stock-based compensation2,056



2,056
2,944



2,944
Issuance of common shares related to merger with First Prestonsburg Bancshares Inc.32,437



32,437
32,437



32,437
Balance, June 30, 2019$418,950
$171,410
$316
$(11,654)$579,022
Balance, September 30, 2019$420,070
$179,238
$1,089
$(11,864)$588,533
 
See Notes to the Unaudited Consolidated Financial Statements





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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months EndedNine Months Ended
June 30,September 30,
(Dollars in thousands)2019201820192018
Net cash provided by operating activities$18,821
$27,499
$52,528
$50,263
Investing activities:  
Available-for-sale investment securities:  
Purchases(116,433)(81,441)(246,563)(120,492)
Proceeds from sales72,481
14,489
72,706
14,489
Proceeds from principal payments, calls and prepayments70,728
60,088
130,860
93,336
Held-to-maturity investment securities:  
Proceeds from principal payments1,984
2,627
2,939
3,521
Other investment securities:  
Purchases(376)(1,089)(1,420)(2,547)
Proceeds from sales3,872
7,111
5,415
7,544
Proceeds from insurance claim26

26

Net decrease (increase) in loans held for investment29,219
(92,582)11,993
(113,433)
Net expenditures for premises and equipment(1,233)(2,721)(2,758)(3,660)
Proceeds from sales of other real estate owned143
265
221
265
Business acquisitions, net of cash received7,795
4,695
7,813
4,695
Investment in limited partnership and tax credit funds(44)(399)(5,021)(5,399)
Net cash provided by (used in) investing activities68,162
(88,957)
Net cash used in investing activities(23,789)(121,681)
Financing activities: 
 
 
 
Net (decrease) increase in non-interest-bearing deposits(23,318)364
Net increase in non-interest-bearing deposits10,856
31,950
Net increase in interest-bearing deposits173,571
19,705
132,795
79,761
Net (decrease) increase in short-term borrowings(207,329)66,412
(105,636)2,515
Payments on long-term borrowings(849)(1,062)(2,388)(3,092)
Cash dividends paid(12,467)(10,001)(19,212)(15,266)
Repurchase of treasury stock under share repurchase program(431)
Repurchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors to be held as treasury stock(684)(1,143)(790)(1,271)
Proceeds from issuance of common shares6
15
6
24
Contingent consideration payments made after a business combination(102)(224)
Net cash (used in) provided by financing activities(71,172)74,066
Contingent consideration payments made after a business acquisition(102)(224)
Net cash provided by financing activities15,098
94,397
Net increase in cash and cash equivalents15,811
12,608
43,837
22,979
Cash and cash equivalents at beginning of period77,612
72,194
77,612
72,194
Cash and cash equivalents at end of period$93,423
$84,802
$121,449
$95,173
  
Supplemental cash flow information:  
Interest paid13,765
8,765
21,902
13,758
Income taxes paid6,150
6,065
10,050
6,735
Supplemental noncash disclosures:  
Transfers from loans to other real estate owned49
16
153
59
 
 See Notes to the Unaudited Consolidated Financial Statements



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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”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”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 JuneSeptember 30, 2019 for potential recognition or disclosure in these unaudited consolidated financial statements.  In the opinion of management, these unaudited 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 Risk Management, Inc., a wholly-owned subsidiary of Peoples, was formed on August 22, 2019, and is a Nevada-based captive insurance company which insures against certain risks unique to the operations of Peoples and for which insurance may not be currently available or economically feasible. Peoples Risk Management, Inc. pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among all participants. Peoples Risk Management, Inc. is subject to the regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance.
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 investment 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


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probable a loss has been incurred. Accordingly, Peoples expects that the adoption of the CECL model will materially affect how the allowance for loancredit losses is determined and could require significant increases to the allowance for loancredit losses. Moreover, the CECL model may create more volatility in the level of Peoples' allowance for loan losses.credit losses and credit loss expense. If required to materially increase the level of allowance for loancredit losses for any reason, such increase could adversely affect Peoples' business, financial condition and results of operations.


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The 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 has engaged consultants to assist with the completion of certain aspects of the project plan. 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.environment and critically reviewing model output. Peoples intends to completecompleted a test run of its process, inclusive of the model, byat the end of the third quarter of 2019.
Based on current forecasted economic conditions and portfolio balances, Peoples estimates that the impact to the allowance for credit losses for certain portions of the implementation will result in an increase of approximately 25% to 35% of the September 30, 2019 pending any unforeseen circumstances or significant allowance for loan losses balance. This estimate includes the potential impact of modeled results for outstanding loans, impaired loans that are individually evaluated, qualitative factors and investment securities. Approximately two-thirds of the estimated increase is being driven by the establishment of an allowance for credit losses for acquired performing loans, which currently have a small allowance for loan losses. The remainder of the increase is being driven by the duration of longer term consumer loans. This estimate excludes the impact of the unfunded commitment liability and the increase in the allowance for credit losses related to purchased credit deteriorated loans. The impact of these items will be evaluated during the fourth quarter of 2019. The estimates provided are subject to change based upon many factors, including:
uncertainty around the economic conditions that will exist at implementation;
the composition, balance and risk characteristics of the loan portfolio at implementation;
changes to the requirements. modeling process based upon results of model validation and further process development and refinement; and
continued execution of the governance framework and review process.
Peoples expects to recognize a one-time cumulative-effect adjustment to the allowance for loan loss provision,credit losses, and related tax effect, 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 cumulative-effect adjustment will be based on the change in the allowance for credit losses for modeled results for outstanding loans, impaired loans that are individually evaluated, qualitative factors, investment securities and the unfunded commitment liability. The impact of the adoptionimplementation for purchased credit deteriorated loans will dependbe contemplated separately from the one-time cumulative-effect adjustment. Based on relevant datathe uncertainties around factors that may be present at implementation date, Peoples is in the adoption date, including the characteristicsprocess of the loan portfolio, macroeconomic conditions and forecasts. Peoples has not yet determineddetermining the magnitude of any such one-time cumulative-effect adjustment or of the overall impact of the new standard on Peoples' financial condition orand results of operations. There is a three-year phase-in option for regulatory capital effects of the one-time cumulative-effect adjustment, however, Peoples does not currently anticipate opting for the phase-in based upon preliminary projections, but could change its position once closer to implementation.
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.


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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 DateRecurring Fair Value Measurements at Reporting Date
June 30, 2019 December 31, 2018September 30, 2019 December 31, 2018
(Dollars in thousands)Level 1Level 2Level 3 Level 1Level 2Level 3Level 1Level 2Level 3 Level 1Level 2Level 3
Assets:      
Available-for-sale investment securities:      
Obligations of:      
U.S. government sponsored agencies$
$19,051
$
 $
$
$
$
$12,145
$
 $
$
$
States and political subdivisions
125,418

 
88,587


115,613

 
88,587

Residential mortgage-backed securities
748,132

 
692,608


835,172

 
692,608

Commercial mortgage-backed securities
22,664

 
6,707


20,461

 
6,707

Bank-issued trust preferred securities
4,099

 
3,989


4,644

 
3,989

Total available-for-sale securities
919,364

 
791,891


988,035

 
791,891

Equity investment securities111
188

 94
183

121
197

 94
183

Derivative assets (a)
9,972

 
4,544


14,301

 
4,544

Liabilities:      
Derivative liabilities (b)$
$14,020
$
 $
$3,562
$
$
$20,223
$
 $
$3,562
$
(a) Included in other assets on the Unaudited Consolidated Balance Sheets. For additional information, see "Note 9 Derivative Financial Instruments" of the Notes to the Unaudited Consolidated Financial Statements.
(b) Included in accrued expenses and other liabilities on the Unaudited 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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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 and accrued expenses and other liabilities, respectively. 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 DateNon-Recurring Fair Value Measurements at Reporting Date
June 30, 2019 December 31, 2018September 30, 2019 December 31, 2018
(Dollars in thousands)Level 1Level 2Level 3 Level 1Level 2Level 3Level 1Level 2Level 3 Level 1Level 2Level 3
Impaired loans$
$
$32,952
 $
$
$24,129
$
$
$28,300
 $
$
$24,129
Other real estate owned ("OREO")

123
 

94


289
 

94


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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 JuneSeptember 30, 2019, impaired loans with an aggregate principal balance of $43.2$38.6 million were outstanding and reported at fair value of $33.0$28.3 million.  For the three and sixnine months ended JuneSeptember 30, 2019, Peoples recognized a reduction of $81,000 and an increase of $223,000 and $830,000$516,000 in the specific reserve on impaired loans, through the allowance for loan losses.
Other Real Estate Owned: 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 InstrumentsFair Value Measurements of Other Financial Instruments
(Dollars in thousands)Fair Value Hierarchy LevelJune 30, 2019 December 31, 2018Fair Value Hierarchy LevelSeptember 30, 2019 December 31, 2018
Carrying AmountFair Value Carrying AmountFair ValueCarrying AmountFair Value Carrying AmountFair Value
Assets:        
Cash and cash equivalents1$93,423
$93,423
 $77,612
$77,612
1$121,449
$121,449
 $77,612
$77,612
Held-to-maturity investment securities:        
Obligations of:        
States and political subdivisions24,398
4,880
 4,403
4,896
24,395
4,897
 4,403
4,896
Residential mortgage-backed securities223,335
23,451
 29,044
28,603
222,412
22,608
 29,044
28,603
Commercial mortgage-backed securities27,106
7,416
 3,514
3,464
27,022
7,388
 3,514
3,464
Total held-to-maturity securities 34,839
35,747
 36,961
36,963
 33,829
34,893
 36,961
36,963
Other investment securities:        
Federal Home Loan Bank ("FHLB") stock229,257
29,257
 29,367
29,367
227,716
27,716
 29,367
29,367
Federal Reserve Bank ("FRB") stock212,294
12,294
 12,294
12,294
213,310
13,310
 12,294
12,294
Nonqualified deferred compensation21,293
1,293
 987
987
21,336
1,336
 987
987
Other investment securities2365
365
 60
60
2365
365
 60
60
Other investment securities (a) 43,209
43,209
 42,708
42,708
 42,727
42,727
 42,708
42,708
Net loans32,812,176
3,076,717
 2,708,583
2,907,537
32,828,731
3,146,439
 2,708,583
2,907,537
Loans held for sale25,928
6,353
 5,470
5,492
24,522
4,824
 5,470
5,492
Bank owned life insurance369,909
69,909
 68,934
68,934
370,396
70,396
 68,934
68,934
Servicing rights (b)32,571
3,617
 2,655
4,568
32,684
3,439
 2,655
4,568
Liabilities:        
Deposits2$3,363,613
$3,335,686
 $2,955,465
$2,953,452
2$3,357,202
$3,377,795
 $2,955,465
$2,953,452
Short-term borrowings2186,457
187,337
 356,198
349,994
2288,150
289,776
 356,198
349,994
Long-term borrowings285,691
84,933
 109,644
107,696
284,194
84,261
 109,644
107,696
(a) Other investment securities, as reported on the Unaudited Consolidated Balance Sheets, also includes equity investment securities for 2019 and 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 Unaudited Consolidated Balance Sheets. Servicing rights are carried at the lower of cost or market value.


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 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-maturitynon-fixed-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 due to restrictions placed on their transferability (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 interest rate, credit and market factors in estimating the fair value of loans (Level 3). Fair values for loans are


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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 1-4 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, the 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.


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Note 3 Investment Securities 

Available-for-sale
The following table summarizes Peoples' available-for-sale investment securities:
(Dollars in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesFair ValueAmortized CostGross Unrealized GainsGross Unrealized LossesFair Value
June 30, 2019 
September 30, 2019 
Obligations of:  
U.S. government sponsored agencies$18,606
$445
$
$19,051
$11,714
$431
$
$12,145
States and political subdivisions122,809
2,721
(112)125,418
112,647
3,029
(63)115,613
Residential mortgage-backed securities742,164
8,770
(2,802)748,132
826,797
11,230
(2,855)835,172
Commercial mortgage-backed securities22,656
148
(140)22,664
20,432
137
(108)20,461
Bank-issued trust preferred securities4,196
100
(197)4,099
4,696
122
(174)4,644
Total available-for-sale securities$910,431
$12,184
$(3,251)$919,364
$976,286
$14,949
$(3,200)$988,035
December 31, 2018  
Obligations of:  
States and political subdivisions$88,358
$787
$(558)$88,587
$88,358
$787
$(558)$88,587
Residential mortgage-backed securities705,289
2,720
(15,401)692,608
705,289
2,720
(15,401)692,608
Commercial mortgage-backed securities6,812

(105)6,707
6,812

(105)6,707
Bank-issued trust preferred securities4,196
75
(282)3,989
4,196
75
(282)3,989
Total available-for-sale securities$804,655
$3,582
$(16,346)$791,891
$804,655
$3,582
$(16,346)$791,891

The unrealized losses related to residential mortgage-backed securities at JuneSeptember 30, 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 JuneSeptember 30 were as follows:
 
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, June 30,September 30, September 30,
(Dollars in thousands)20192018 2019201820192018 20192018
Gross gains realized$30
$3
 $60
$5
$97
$
 $157
$5
Gross losses realized87
150
 87
151


 87
151
Net losses realized$(57)$(147) $(27)$(146)$97
$
 $70
$(146)
The cost of investment securities sold, and any resulting gain or loss, waswere based on the specific identification method and recognized as of the trade date.


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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 TotalLess than 12 Months 12 Months or More Total
(Dollars in thousands)
Fair
Value
Unrealized LossNo. of Securities 
Fair
Value
Unrealized LossNo. of Securities 
Fair
Value
Unrealized Loss
Fair
Value
Unrealized LossNo. of Securities 
Fair
Value
Unrealized LossNo. of Securities 
Fair
Value
Unrealized Loss
June 30, 2019       
September 30, 2019       
Obligations of:              
States and political subdivisions$
$

 $8,020
$112
5
 $8,020
$112
$
$

 $2,632
$63
1
 $2,632
$63
Residential mortgage-backed securities17,932
154
7
 226,208
2,648
77
 244,140
2,802
176,740
1,267
41
 110,378
1,588
42
 287,118
2,855
Commercial mortgage-backed securities


 6,380
140
5
 6,380
140



 2,481
108
3
 2,481
108
Bank-issued trust preferred securities


 1,803
197
2
 1,803
197



 1,826
174
2
 1,826
174
Total$17,932
$154
7
 $242,411
$3,097
89
 $260,343
$3,251
$176,740
$1,267
41
 $117,317
$1,933
48
 $294,057
$3,200
December 31, 2018              
Obligations of:              
States and political subdivisions$10,173
$18
17
 $19,918
$540
20
 $30,091
$558
$10,173
$18
17
 $19,918
$540
20
 $30,091
$558
Residential mortgage-backed securities47,562
226
50
 517,335
15,175
170
 564,897
15,401
47,562
226
50
 517,335
15,175
170
 564,897
15,401
Commercial mortgage-backed securities


 6,707
105
3
 6,707
105



 6,707
105
3
 6,707
105
Bank-issued trust preferred securities


 1,718
282
2
 1,718
282



 1,718
282
2
 1,718
282
Total$57,735
$244
67
 $545,678
$16,102
195
 $603,413
$16,346
$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 JuneSeptember 30, 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 JuneSeptember 30, 2019 and December 31, 2018 were largely attributable to changes in market interest rates and spreads since the securities were purchased.
At JuneSeptember 30, 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 $211,000$208,000 and $147,000,$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 remaining number of loans underlying 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 JuneSeptember 30, 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 JuneSeptember 30, 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 Year1 to 5 Years5 to 10 YearsOver 10 YearsTotalWithin 1 Year1 to 5 Years5 to 10 YearsOver 10 YearsTotal
Amortized cost  
Obligations of:  
U.S. government sponsored agencies$
$2,984
$14,644
$978
$18,606
$
$1,992
$9,722
$
$11,714
States and political subdivisions4,234
31,186
44,207
43,182
122,809
3,769
28,595
42,723
37,560
112,647
Residential mortgage-backed securities1
1,919
60,647
679,597
742,164
1
1,703
66,677
758,416
826,797
Commercial mortgage-backed securities
17,107
1,848
3,701
22,656

15,858
989
3,585
20,432
Bank-issued trust preferred securities

4,196

4,196


4,696

4,696
Total available-for-sale securities$4,235
$53,196
$125,542
$727,458
$910,431
$3,770
$48,148
$124,807
$799,561
$976,286
Fair value  
Obligations of:  
U.S. government sponsored agencies$
$3,041
$15,011
$999
$19,051
$
$2,053
$10,092
$
$12,145
States and political subdivisions4,236
31,477
45,518
44,187
125,418
3,774
28,917
44,334
38,588
115,613
Residential mortgage-backed securities1
1,934
60,507
685,690
748,132
1
1,731
66,823
766,617
835,172
Commercial mortgage-backed securities
17,195
1,904
3,565
22,664

15,952
1,027
3,482
20,461
Bank-issued trust preferred securities

4,099

4,099


4,644

4,644
Total available-for-sale securities$4,237
$53,647
$127,039
$734,441
$919,364
$3,775
$48,653
$126,920
$808,687
$988,035
Total weighted-average yield2.36%2.52%2.77%2.93%2.88%2.26%2.52%2.74%2.83%2.80%
Held-to-Maturity
The following table summarizes Peoples’ held-to-maturity investment securities:
(Dollars in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesFair ValueAmortized CostGross Unrealized GainsGross Unrealized LossesFair Value
June 30, 2019 
September 30, 2019 
Obligations of:  
States and political subdivisions$4,398
$482
$
$4,880
$4,395
$502
$
$4,897
Residential mortgage-backed securities23,335
256
(140)23,451
22,412
237
(41)22,608
Commercial mortgage-backed securities7,106
310

7,416
7,022
366

7,388
Total held-to-maturity securities$34,839
$1,048
$(140)$35,747
$33,829
$1,105
$(41)$34,893
December 31, 2018  
Obligations of:  
States and political subdivisions$4,403
$493
$
$4,896
$4,403
$493
$
$4,896
Residential mortgage-backed securities29,044
191
(632)28,603
29,044
191
(632)28,603
Commercial mortgage-backed securities3,514

(50)3,464
3,514

(50)3,464
Total held-to-maturity securities$36,961
$684
$(682)$36,963
$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 any of the three and sixnine months ended JuneSeptember 30, 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 TotalLess than 12 Months 12 Months or More Total
(Dollars in thousands)
Fair
Value
Unrealized LossNo. of Securities 
Fair
Value
Unrealized LossNo. of Securities 
Fair
Value
Unrealized Loss
Fair
Value
Unrealized LossNo. of Securities 
Fair
Value
Unrealized LossNo. of Securities 
Fair
Value
Unrealized Loss
June 30, 2019       
September 30, 2019       
Residential mortgage-backed securities$
$

 $11,639
$140
3
 $11,639
$140
$7,885
$14
1
 $899
$27
1
 $8,784
$41
Total$
$

 $11,639
$140
3
 $11,639
$140
$7,885
$14
1
 $899
$27
1
 $8,784
$41
December 31, 2018              
Residential mortgage-backed securities$
$

 $13,102
$632
5
 $13,102
$632
$
$

 $13,102
$632
5
 $13,102
$632
Commercial mortgage-backed securities


 3,464
50
1
 3,464
50



 3,464
50
1
 3,464
50
Total$
$

 $16,566
$682
6
 $16,566
$682
$
$

 $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 JuneSeptember 30, 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 Year1 to 5 Years5 to 10 YearsOver 10 YearsTotalWithin 1 Year1 to 5 Years5 to 10 YearsOver 10 YearsTotal
Amortized cost  
Obligations of:  
States and political subdivisions$305
$
$2,984
$1,109
$4,398
$303
$
$2,985
$1,107
$4,395
Residential mortgage-backed securities

4,002
19,333
23,335


3,842
18,570
22,412
Commercial mortgage-backed securities
410
3,893
2,803
7,106

404
3,868
2,750
7,022
Total held-to-maturity securities$305
$410
$10,879
$23,245
$34,839
$303
$404
$10,695
$22,427
$33,829
Fair value  
Obligations of:  
States and political subdivisions$307
$
$3,458
$1,115
$4,880
$305
$
$3,481
$1,111
$4,897
Residential mortgage-backed securities

4,070
19,381
23,451


3,916
18,692
22,608
Commercial mortgage-backed securities
412
4,196
2,808
7,416

410
4,208
2,770
7,388
Total held-to-maturity securities$307
$412
$11,724
$23,304
$35,747
$305
$410
$11,605
$22,573
$34,893
Total weighted-average yield2.62%2.29%1.49%2.81%2.83%2.61%2.29%1.49%2.82%2.39%
Other Investment Securities
Peoples' other investment securities on the Unaudited Consolidated Balance Sheet consist largely of shares of FHLB of Cincinnati and FRB of Cleveland stock, and other equity investment securities.
The following table summarizes the carrying value of Peoples' other investment securities:
(Dollars in thousands)June 30, 2019December 31, 2018September 30, 2019December 31, 2018
FHLB stock$29,257
$29,367
$27,716
$29,367
FRB stock12,294
12,294
13,310
12,294
Nonqualified deferred compensation1,293
987
1,336
987
Equity investment securities299
277
318
277
Other investment securities365
60
365
60
Total other investment securities$43,508
$42,985
$43,045
$42,985
Peoples redeemed FHLB stock in order to be in compliance with the requirements of the FHLB of Cincinnati, which totaled $1.5 million during the third quarter of 2019, $1.1 million during the second quarter of 2019, and $1.8 million during the first quarter of 2019. During the second quarter of 2019, ofPeoples acquired $2.8 million FHLB stock to be in compliance with requirements offrom the FHLB of Cincinnati.First Prestonsburg acquisition.
During the three and sixnine months ended JuneSeptember 30, 2019, Peoples recorded the change in the fair value of equity investment securities held at JuneSeptember 30, 2019 in other non-interest income, resulting in unrealized gains of zero$19,000 and $22,000,


16

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$42,000, respectively. During the three and sixnine months ended JuneSeptember 30, 2018, Peoples recorded the change in the fair value of equity investment securities held at JuneSeptember 30, 2018 in other non-interest income, resulting in an unrealized lossesloss of $658,000$16,000 and $198,000,


15

Tablean unrealized gain of Contents

$621,000, respectively. Net realized gains on sales of equity investment securities, included in other non-interest income during the first sixnine 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 zero due to the litigation liability associated with the stock.
At JuneSeptember 30, 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 $499.5 million and $430.0 million at June 30, 2019 and December 31, 2018, respectively, and held-to-maturity investment securities with carrying values of $14.6 million and $16.9 million at June 30, 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 $54.3 million and $60.1 million at June 30, 2019 and December 31, 2018, respectively, and held-to-maturity securities with carrying values of $15.6 million and $16.7 million at June 30, 2019 and December 31, 2018, respectively, to secure additional borrowing capacity at the FHLB and the FRB.

The following table summarizes the carrying value of Peoples' pledged securities:
 Carrying Amount
(Dollars in thousands)September 30, 2019 December 31, 2018
 
Securing public and trust department deposits, and repurchase agreements:   
     Available-for-sale$565,093
 $429,987
     Held-to-maturity14,302
 16,928
    
Securing additional borrowing capacity at the FHLB and the FRB:   
     Available-for-sale49,911
 60,058
     Held-to-maturity14,835
 16,731



17

Table of Contents

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 central 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)June 30,
2019
December 31, 2018September 30,
2019
December 31, 2018
Originated loans:  
Commercial real estate, construction$102,904
$124,013
$100,338
$124,013
Commercial real estate, other641,061
632,200
659,103
632,200
Commercial real estate743,965
756,213
759,441
756,213
Commercial and industrial548,460
530,207
564,279
530,207
Residential real estate299,173
296,860
308,964
296,860
Home equity lines of credit90,374
93,326
92,910
93,326
Consumer, indirect419,595
407,167
423,217
407,167
Consumer, direct72,209
71,674
72,699
71,674
Consumer491,804
478,841
495,916
478,841
Deposit account overdrafts676
583
1,081
583
Total originated loans$2,174,452
$2,156,030
$2,222,591
$2,156,030
Acquired loans:  
Commercial real estate, construction$6,775
$12,404
$4,435
$12,404
Commercial real estate, other201,909
184,711
171,096
184,711
Commercial real estate208,684
197,115
175,531
197,115
Commercial and industrial51,506
35,537
43,961
35,537
Residential real estate348,439
296,937
358,053
296,937
Home equity lines of credit41,262
40,653
41,942
40,653
Consumer, indirect90
136
67
136
Consumer, direct9,100
2,370
8,171
2,370
Consumer9,190
2,506
8,238
2,506
Total acquired loans$659,081
$572,748
$627,725
$572,748
Total loans$2,833,533
$2,728,778
$2,850,316
$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)June 30,
2019
December 31,
2018
September 30,
2019
December 31,
2018
Commercial real estate$13,116
$11,955
$9,063
$11,955
Commercial and industrial4,479
1,287
3,791
1,287
Residential real estate23,509
20,062
24,361
20,062
Consumer640
58
663
58
Total outstanding balance$41,744
$33,362
$37,878
$33,362
Net carrying amount$28,125
$22,475
$23,796
$22,475
Changes in the accretable yield for purchased credit impaired loans for the sixnine months ended JuneSeptember 30 were as follows:
(Dollars in thousands)June 30,
2019
June 30,
2018
September 30,
2019
September 30,
2018
Balance, beginning of period$8,955
$6,704
$8,955
$6,704
Reclassification from nonaccretable to accretable199
2,019
Additions:  
ASB Financial Corp.
2,415

2,047
First Prestonsburg Bancshares Inc.3,853

3,860

Accretion(1,148)(897)(1,763)(1,392)
Balance, June 30$11,660
$8,222
Balance, September 30$11,251
$9,378
The fair value of newly acquired loans is determined at the time of acquisition and 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 purchased credit impaired loans, 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, loans that have become past due and actual cash flows compared to the projected cash flows from the last re-estimation. Peoples evaluates these changes quarterly and compares the current status or activity to those at the previous cash flow re-estimation date, and the related materiality of the changes. As of JuneSeptember 30, 2019, these changes, when compared to the total loan portfolio and the factors at the last 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 2018.2019, resulting in a reclassification from nonaccretable to accretable yield as shown in the table above.
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 $488.4$485.8 million and $505.7 million at JuneSeptember 30, 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 $153.0$171.7 million and $180.9 million at JuneSeptember 30, 2019 and December 31, 2018, respectively.


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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.
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 AccruingNonaccrual Loans Loans 90+ Days Past Due and Accruing
(Dollars in thousands)June 30,
2019
December 31,
2018
 June 30,
2019
December 31,
2018
September 30,
2019
December 31,
2018
 September 30,
2019
December 31,
2018
Originated loans:      
Commercial real estate, construction$688
$710
 $
$
$
$710
 $
$
Commercial real estate, other6,241
6,565
 
786
6,680
6,565
 
786
Commercial real estate6,929
7,275
 
786
6,680
7,275
 
786
Commercial and industrial2,044
1,673
 

1,120
1,673
 298

Residential real estate3,816
4,105
 438
398
4,145
4,105
 431
398
Home equity lines of credit452
596
 53
7
387
596
 134
7
Consumer, indirect535
480
 

771
480
 

Consumer, direct12
56
 

53
56
 

Consumer547
536
 

824
536
 

Total originated loans$13,788
$14,185
 $491
$1,191
$13,156
$14,185
 $863
$1,191
Acquired loans:      
Commercial real estate, construction$
$
 $230
$
$230
$
 $
$
Commercial real estate, other308
319
 557
15
155
319
 582
15
Commercial real estate308
319
 787
15
385
319
 582
15
Commercial and industrial36
36
 261
18
95
36
 274
18
Residential real estate1,716
1,921
 1,853
1,032
1,862
1,921
 2,664
1,032
Home equity lines of credit742
637
 

700
637
 49

Consumer, direct1

 57

2

 83

Total acquired loans$2,803
$2,913
 $2,958
$1,065
$3,044
$2,913
 $3,652
$1,065
Total loans$16,591
$17,098
 $3,449
$2,256
$16,200
$17,098
 $4,515
$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
Loans Past Due 
Current
Loans
Total
Loans
(Dollars in thousands)30 - 59 days60 - 89 days90 + DaysTotal 30 - 59 days60 - 89 days90 + DaysTotal 
June 30, 2019   
September 30, 2019   
Originated loans:      
Commercial real estate, construction$
$
$688
$688
 $102,216
$102,904
$
$
$
$
 $100,338
$100,338
Commercial real estate, other

6,050
6,050
 635,011
641,061
8
171
6,482
6,661
 652,442
659,103
Commercial real estate

6,738
6,738
 737,227
743,965
8
171
6,482
6,661
 752,780
759,441
Commercial and industrial606
3
1,937
2,546
 545,914
548,460
429
175
1,279
1,883
 562,396
564,279
Residential real estate1,391
1,177
2,478
5,046
 294,127
299,173
1,288
845
2,489
4,622
 304,342
308,964
Home equity lines of credit387
18
461
866
 89,508
90,374
95
129
476
700
 92,210
92,910
Consumer, indirect3,024
216
111
3,351
 416,244
419,595
2,719
484
215
3,418
 419,799
423,217
Consumer, direct306
17
2
325
 71,884
72,209
292
42
6
340
 72,359
72,699
Consumer3,330
233
113
3,676
 488,128
491,804
3,011
526
221
3,758
 492,158
495,916
Deposit account overdrafts



 676
676




 1,081
1,081
Total originated loans$5,714
$1,431
$11,727
$18,872
 $2,155,580
$2,174,452
$4,831
$1,846
$10,947
$17,624
 $2,204,967
$2,222,591
Acquired loans:      
Commercial real estate, construction$
$
$230
$230
 $6,545
$6,775
$100
$317
$230
$647
 $3,788
$4,435
Commercial real estate, other661
728
773
2,162
 199,747
201,909
473
290
724
1,487
 169,609
171,096
Commercial real estate661
728
1,003
2,392
 206,292
208,684
573
607
954
2,134
 173,397
175,531
Commercial and industrial488
60
297
845
 50,661
51,506
159
123
368
650
 43,311
43,961
Residential real estate1,685
2,075
2,700
6,460
 341,979
348,439
1,270
1,020
3,252
5,542
 352,511
358,053
Home equity lines of credit228
109
563
900
 40,362
41,262
681
42
706
1,429
 40,513
41,942
Consumer, indirect



 90
90




 67
67
Consumer, direct88
52
57
197
 8,903
9,100
47
19
85
151
 8,020
8,171
Consumer88
52
57
197

8,993
9,190
47
19
85
151

8,087
8,238
Total acquired loans$3,150
$3,024
$4,620
$10,794
 $648,287
$659,081
$2,730
$1,811
$5,365
$9,906
 $617,819
$627,725
Total loans$8,864
$4,455
$16,347
$29,666
 $2,803,867
$2,833,533
$7,561
$3,657
$16,312
$27,530
 $2,822,786
$2,850,316


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Table of Contents

 Loans Past Due 
Current
Loans
Total
Loans
(Dollars in thousands)30 - 59 days60 - 89 days90 + DaysTotal 
December 31, 2018       
Originated loans:       
Commercial real estate, construction$
$
$710
$710
 $123,303
$124,013
Commercial real estate, other12
736
7,151
7,899
 624,301
632,200
    Commercial real estate12
736
7,861
8,609
 747,604
756,213
Commercial and industrial1,678
3,520
1,297
6,495
 523,712
530,207
Residential real estate4,457
1,319
2,595
8,371
 288,489
296,860
Home equity lines of credit531
30
431
992
 92,334
93,326
Consumer, indirect3,266
488
165
3,919
 403,248
407,167
Consumer, direct308
50
42
400
 71,274
71,674
    Consumer3,574
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, other523
457
233
1,213
 183,498
184,711
    Commercial real estate1,034
457
233
1,724
 195,391
197,115
Commercial and industrial111
13
18
142
 35,395
35,537
Residential real estate6,124
1,823
1,885
9,832
 287,105
296,937
Home equity lines of credit238
233
534
1,005
 39,648
40,653
Consumer, indirect



 136
136
Consumer, direct23
6

29
 2,341
2,370
    Consumer23
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 99.0% of Peoples' portfolio was considered “current” at JuneSeptember 30, 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
Pass Rated
(Grades 1 - 4)
Special Mention
(Grade 5)
Substandard
(Grade 6)
Doubtful (Grade 7)
Not
Rated
Total
Loans
(Dollars in thousands)
June 30, 2019 
September 30, 2019 
Originated loans:  
Commercial real estate, construction$100,231
$
$1,431
$
$1,242
$102,904
$99,569
$
$
$
$769
$100,338
Commercial real estate, other622,966
7,673
10,416
6

641,061
626,042
22,003
11,058


659,103
Commercial real estate723,197
7,673
11,847
6
1,242
743,965
725,611
22,003
11,058

769
759,441
Commercial and industrial525,738
5,807
16,915


548,460
544,048
6,341
13,890


564,279
Residential real estate13,752
201
14,682
249
270,289
299,173
19,489
177
16,214
226
272,858
308,964
Home equity lines of credit17



90,357
90,374
1,429



91,481
92,910
Consumer, indirect



419,595
419,595




423,217
423,217
Consumer, direct24



72,185
72,209
27



72,672
72,699
Consumer24



491,780
491,804
27



495,889
495,916
Deposit account overdrafts



676
676




1,081
1,081
Total originated loans$1,262,728
$13,681
$43,444
$255
$854,344
$2,174,452
$1,290,604
$28,521
$41,162
$226
$862,078
$2,222,591
Acquired loans:  
Commercial real estate, construction$4,338
$1,636
$801
$
$
$6,775
$2,766
$920
$749
$
$
$4,435
Commercial real estate, other178,425
12,700
10,693
91

201,909
155,011
7,860
8,139
86

171,096
Commercial real estate182,763
14,336
11,494
91

208,684
157,777
8,780
8,888
86

175,531
Commercial and industrial43,171
3,265
5,038
32

51,506
39,127
1,049
3,785


43,961
Residential real estate17,634
2,686
2,564
130
325,425
348,439
33,453
3,053
4,663
128
316,756
358,053
Home equity lines of credit81



41,181
41,262
2,017
93


39,832
41,942
Consumer, indirect1



89
90




67
67
Consumer, direct19



9,081
9,100
13



8,158
8,171
Consumer20



9,170
9,190
13



8,225
8,238
Total acquired loans$243,669
$20,287
$19,096
$253
$375,776
$659,081
$232,387
$12,975
$17,336
$214
$364,813
$627,725
Total loans$1,506,397
$33,968
$62,540
$508
$1,230,120
$2,833,533
$1,522,991
$41,496
$58,498
$440
$1,226,891
$2,850,316


2123

Table of Contents

 
Pass Rated
(Grades 1 - 4)
Special Mention
(Grade 5)
Substandard
(Grade 6)
Doubtful (Grade 7)
Not
Rated
Total
Loans
(Dollars in thousands)
December 31, 2018      
Originated loans:      
Commercial real estate, construction$121,457
$
$1,472
$
$1,084
$124,013
Commercial real estate, other612,099
10,898
9,203


632,200
    Commercial real estate733,556
10,898
10,675

1,084
756,213
Commercial and industrial476,290
45,990
7,692

235
530,207
Residential real estate14,229
500
11,971
409
269,751
296,860
Home equity lines of credit453



92,873
93,326
Consumer, indirect8



407,159
407,167
Consumer, direct30



71,644
71,674
   Consumer38



478,803
478,841
Deposit account overdrafts



583
583
Total originated loans$1,224,566
$57,388
$30,338
$409
$843,329
$2,156,030
Acquired loans:      
Commercial real estate, construction$8,976
$1,795
$1,633
$
$
$12,404
Commercial real estate, other169,260
7,241
8,114
96

184,711
    Commercial real estate178,236
9,036
9,747
96

197,115
Commercial and industrial32,471
2,008
1,058


35,537
Residential real estate17,370
1,938
2,033
137
275,459
296,937
Home equity lines of credit33



40,620
40,653
Consumer, indirect4



132
136
Consumer, direct31



2,339
2,370
   Consumer35



2,471
2,506
Total acquired loans$228,145
$12,982
$12,838
$233
$318,550
$572,748
Total loans$1,452,711
$70,370
$43,176
$642
$1,161,879
$2,728,778
In the first sixnine months of 2019, Peoples' classified loans, which are loans categorized as substandard or doubtful, increased compared to the balances at December 31, 2018 mostly due to downgrades during the period combined with loans acquired in the First Prestonsburg merger, which were partially offset by paydowns on classified loans. At JuneSeptember 30, 2019, criticized loans, which are those categorized as special mention, substandard or doubtful, declined compared to the balance at December 31, 2018, largely due to the upgrade of two commercial relationships, partially offset by loans acquired in the First Prestonsburg merger.
At JuneSeptember 30, 2019, Peoples had a total of $2.2$1.9 million of loans secured by residential real estate mortgages that were in the process of foreclosure.


2224

Table of Contents

Impaired Loans
The following table summarizes loans classified as impaired:
Unpaid
Principal
Balance
Recorded Investment
Total
Recorded
Investment
 
Average
Recorded
Investment
Interest
Income
Recognized
Unpaid
Principal
Balance
Recorded Investment
Total
Recorded
Investment
 
Average
Recorded
Investment
Interest
Income
Recognized
With
Allowance
Without
Allowance
Related
Allowance
With
Allowance
Without
Allowance
Related
Allowance
(Dollars in thousands)
June 30, 2019 
September 30, 2019 
Commercial real estate, construction$1,793
$
$1,706
$1,706
$
$1,728
$29
$780
$
$693
$693
$
$702
$1
Commercial real estate, other15,546
4,753
10,296
15,049
520
14,722
250
15,093
4,754
9,755
14,509
475
13,764
369
Commercial real estate17,339
4,753
12,002
16,755
520
16,450
279
15,873
4,754
10,448
15,202
475
14,466
370
Commercial and industrial4,265
1,485
2,731
4,216
449
3,226
47
4,113
999
3,087
4,086
206
2,481
99
Residential real estate22,195
387
23,170
23,557
53
22,086
629
25,447
381
26,582
26,963
47
23,312
1,065
Home equity lines of credit1,469
419
1,051
1,470
68
1,343
40
1,433
416
1,019
1,435
43
1,329
61
Consumer, indirect445
96
356
452
23
413
15
597
195
410
605
30
456
31
Consumer, direct464
49
415
464
18
207
9
628
43
586
629
10
261
22
Consumer909
145
771
916
41
620
24
1,225
238
996
1,234
40
717
53
Total$46,177
$7,189
$39,725
$46,914
$1,131
$43,725
$1,019
$48,091
$6,788
$42,132
$48,920
$811
$42,305
$1,648
December 31, 2018  
Commercial real estate, construction$2,376
$
$2,376
$2,376
$
$1,732
$74
$2,376
$
$2,376
$2,376
$
$1,732
$74
Commercial real estate, other15,464
274
14,946
15,220
119
14,043
455
15,464
274
14,946
15,220
119
14,043
455
Commercial real estate17,840
274
17,322
17,596
119
15,775
529
17,840
274
17,322
17,596
119
15,775
529
Commercial and industrial3,305
790
2,436
3,226
157
2,423
72
3,305
790
2,436
3,226
157
2,423
72
Residential real estate25,990
644
24,034
24,678
154
22,769
1,134
25,990
644
24,034
24,678
154
22,769
1,134
Home equity lines of credit2,291
424
1,869
2,293
73
1,832
109
2,291
424
1,869
2,293
73
1,832
109
Consumer, indirect496

503
503

278
15
496

503
503

278
15
Consumer, direct79
22
57
79
6
63
20
79
22
57
79
6
63
20
Consumer575
22
560
582
6
341
35
575
22
560
582
6
341
35
Total$50,001
$2,154
$46,221
$48,375
$509
$43,140
$1,879
$50,001
$2,154
$46,221
$48,375
$509
$43,140
$1,879
Peoples' impaired loans shown in the table above included loans that were classified as troubled debt restructurings ("TDRs").
In assessing whether or not a borrower is experiencing financial difficulties, Peoples considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the borrower is currently in payment default on any of the borrower's debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the borrower has declared or is in the process of declaring bankruptcy; and (iv) the borrower's projected cash flow is insufficient to satisfy contractual payments due under the original terms of the loan without a modification.
Peoples considers all aspects of the modification to loan terms to determine whether a concession has been granted to the borrower. Key factors considered by Peoples include the borrower's ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to the unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by Peoples generally include one or more modifications to the terms of the loan, such as (i) a reduction in the interest rate for the remaining life of the loan, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new loans with similar risk, (iii) a temporary period of interest-only payments, and (iv) a reduction in the contractual payment amount for either a short period or the remaining term of the loan.


2325

Table of Contents

The following table summarizes the loans that were modified as a TDR during the three months ended JuneSeptember 30:
  Three Months Ended
  
Recorded Investment (a)
(Dollars in thousands)Number of ContractsPre-ModificationPost-ModificationRemaining Recorded Investment
June 30, 2019   
Originated loans:   
Residential real estate1
$37
$37
$37
Home equity lines of credit2
60
60
60
Consumer, indirect7
110
110
110
Consumer, direct3
41
41
41
   Consumer10
151
151
151
Total originated loans13
$248
$248
$248
Acquired loans:   
Commercial real estate, other7
$725
$699
$700
Commercial and industrial4
1,259
1,259
1,259
Residential real estate35
1,823
1,823
1,823
Home equity lines of credit7
113
113
113
Consumer, direct16
340
340
340
Total acquired loans69
$4,260
$4,234
$4,235
June 30, 2018   
Originated loans:   
Residential real estate5
$717
$717
$717
Home equity lines of credit3
61
61
61
Consumer, indirect14
230
230
230
Consumer, direct5
27
27
27
   Consumer19
257
257
257
Total originated loans27
$1,035
$1,035
$1,035
Acquired loans:   
Residential real estate11
$720
$720
$720
Home equity lines of credit4
86
86
86
Consumer, direct3
57
57
57
Total acquired loans18
$863
$863
$863
(a) The amounts shown are inclusive of all partial paydowns and charge-offs. Loans modified in a TDR that were fully paid down, charged-off or foreclosed upon by period-end are not reported.
  Three Months Ended
  
Recorded Investment (a)
(Dollars in thousands)Number of ContractsPre-ModificationPost-ModificationRemaining Recorded Investment
September 30, 2019   
Originated loans:   
Consumer, indirect15
$205
$205
$205
Total originated loans15
$205
$205
$205
Acquired loans:   
Residential real estate1
$70
$70
$70
Total acquired loans1
$70
$70
$70
September 30, 2018   
Originated loans:   
Residential real estate3
$87
$87
$87
Home equity lines of credit4
533
533
531
Consumer, indirect7
150
150
150
Total originated loans14
$770
$770
$768
Acquired loans:   
Residential real estate3
$272
$272
$272
Home equity lines of credit1
54
54
54
Total acquired loans4
$326
$326
$326
 
(a) The amounts shown are inclusive of all partial paydowns and charge-offs. Loans modified in a TDR that were
fully paid down, charged-off or foreclosed upon by period-end are not reported.


2426

Table of Contents

  Six Months Ended
  
Recorded Investment (a)
(Dollars in thousands)Number of ContractsPre-ModificationPost-ModificationRemaining Recorded Investment
June 30, 2019   
Originated loans:   
Commercial and industrial2
$38
$38
$35
Residential real estate3
436
440
437
Home equity lines of credit4
139
139
139
Consumer, indirect8
123
123
123
Consumer, direct5
69
69
67
   Consumer13
192
192
190
Total originated loans22
$805
$809
$801
Acquired loans:   
Commercial real estate, other7
$724
$699
$700
Commercial and industrial4
1,259
1,259
1,259
Residential real estate36
1,847
1,847
1,842
Home equity lines of credit9
179
179
178
Consumer, direct16
340
340
340
Total acquired loans72
$4,349
$4,324
$4,319
June 30, 2018   
Originated loans:   
Residential real estate7
$910
$910
$911
Home equity lines of credit3
61
61
61
Consumer, indirect21
316
316
302
Consumer, direct7
31
31
31
   Consumer28
347
347
333
Total originated loans38
$1,318
$1,318
$1,305
Acquired loans:   
Commercial real estate, other1
$50
$50
$48
Residential real estate13
989
989
989
Home equity lines of credit4
86
86
86
Consumer, direct3
57
57
57
Total acquired loans21
$1,182
$1,182
$1,180
(a) The amounts shown are inclusive of all partial paydowns and charge-offs. Loans modified in a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported.
  Nine Months Ended
  
Recorded Investment (a)
(Dollars in thousands)Number of ContractsPre-ModificationPost-ModificationRemaining Recorded Investment
September 30, 2019   
Originated loans:   
Commercial and industrial2
$38
$38
$34
Residential real estate3
437
440
434
Home equity lines of credit4
139
139
137
Consumer, indirect23
328
328
312
Consumer, direct3
52
52
48
   Consumer26
380
380
360
Total originated loans35
$994
$997
$965
Acquired loans:   
Commercial real estate, other3
$101
$76
$75
Commercial and industrial5
1,557
1,557
1,510
Residential real estate35
2,088
2,088
2,037
Home equity lines of credit8
172
172
168
Consumer, direct16
340
340
330
Total acquired loans67
$4,258
$4,233
$4,120
September 30, 2018   
Originated loans:   
Residential real estate9
$871
$871
$871
Home equity lines of credit6
565
565
562
Consumer, indirect26
454
454
420
Consumer, direct5
27
27
18
   Consumer31
481
481
438
Total originated loans46
$1,917
$1,917
$1,871
Acquired loans:   
Commercial real estate, other1
$50
$50
$47
Residential real estate15
1,258
1,258
1,244
Home equity lines of credit5
140
140
139
Total acquired loans21
$1,448
$1,448
$1,430
(a) The amounts shown are inclusive of all partial paydowns and charge-offs. Loans modified in a TDR that were
fully paid down, charged-off or foreclosed upon by period end are not reported.
 


2527

Table of Contents

The following table presents those acquired loans modified in a TDR during the year that subsequently defaulted (i.e., were 90 days or more past due following a modification) during the six-monthnine-month periods ended JuneSeptember 30:
June 30, 2019 June 30, 2018September 30, 2019 September 30, 2018
(Dollars in thousands)Number of Contracts
Recorded Investment (a)
Impact on the Allowance for Loan Losses Number of Contracts
Recorded Investment (a)
Impact on the Allowance for Loan LossesNumber of Contracts
Recorded Investment (a)
Impact on the Allowance for Loan Losses Number of Contracts
Recorded Investment (a)
Impact on the Allowance for Loan Losses
Acquired loans:          
Home equity lines of credit
$
$
 1
$10
$
Consumer, direct1
$34
$
 
$
$
2
35

 


Total1
$34
$
 
$
$
2
$35
$
 1
$10
$
(a) The amount shown is inclusive of all partial paydowns and charge-offs. Loans modified in a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported.
Peoples did not have any originated loans that were modified as a TDR during the last twelve months that subsequently defaulted. Peoples had no commitments to lend additional funds to the related debtors whose terms have been modified in a TDR.
Allowance for Originated Loan Losses
Changes in the allowance for originated loan losses for the sixnine months ended JuneSeptember 30 were as follows:
(Dollars in thousands)Commercial Real EstateCommercial and IndustrialResidential Real EstateHome Equity Lines of CreditConsumer IndirectConsumer DirectDeposit Account OverdraftsTotalCommercial Real EstateCommercial and IndustrialResidential Real EstateHome Equity Lines of CreditConsumer IndirectConsumer DirectDeposit Account OverdraftsTotal
Balance, January 1, 2019$8,003
$6,178
$1,214
$618
$3,214
$351
$81
$19,659
$8,003
$6,178
$1,214
$618
$3,214
$351
$81
$19,659
Charge-offs(153)(63)(176)(9)(819)(96)(349)(1,665)(153)(324)(257)(45)(1,266)(150)(632)(2,827)
Recoveries12
2,012
133
2
162
40
106
2,467
98
2,093
220
10
229
45
157
2,852
Net (charge-offs) recoveries(141)1,949
(43)(7)(657)(56)(243)802
(55)1,769
(37)(35)(1,037)(105)(475)25
Provision for (recoveries of) loan losses383
(930)13
(13)615
47
248
363
Balance, June 30, 2019$8,245
$7,197
$1,184
$598
$3,172
$342
$86
$20,824
Provision for (recovery of) loan losses518
(785)(15)(16)1,070
93
522
1,387
Balance, September 30, 2019$8,466
$7,162
$1,162
$567
$3,247
$339
$128
$21,071
  
Balance, January 1, 2018$7,797
$5,813
$904
$693
$2,944
$464
$70
$18,685
$7,797
$5,813
$904
$693
$2,944
$464
$70
$18,685
Charge-offs(849)(38)(227)(57)(1,479)(219)(420)(3,289)(849)(38)(293)(67)(1,967)(297)(731)(4,242)
Recoveries43

67
9
272
84
116
591
58
10
98
12
403
114
160
855
Net charge-offs(806)(38)(160)(48)(1,207)(135)(304)(2,698)(791)(28)(195)(55)(1,564)(183)(571)(3,387)
Provision for (recovery of) loan losses1,280
(410)261
(27)1,602
136
329
3,171
Balance, June 30, 2018$8,271
$5,365
$1,005
$618
$3,339
$465
$95
$19,158
Provision for loan losses960
353
290
70
2,043
114
596
4,426
Balance, September 30, 2018$7,966
$6,138
$999
$708
$3,423
$395
$95
$19,724
The increase in the allowance for loan losses allocated to commercial real estate recorded during the first nine months of 2019 was driven by an increase in the allowance needed for loans individually evaluated for impairment combined with loan growth. The decline in the allowance for loan losses allocated to residential real estate recorded during the first nine months of 2019 was driven by a decrease in the allowance needed for loans individually evaluated for impairment which was offset partially by loan growth. The changes in the commercial and industrial, consumer indirect and consumer direct categories of the allowance for originated loan losses and the related provision for originated loan losses recorded during the nine months of 2019 were driven by net charge-off activity and increases in the size of the respective loan portfolios.


2628

Table of Contents

The following table details the recorded investment and allowance for originated loan losses disaggregated based on impairment method:
(Dollars in thousands)Commercial Real EstateCommercial and IndustrialResidential Real EstateHome Equity Lines of CreditConsumer IndirectConsumer DirectDeposit Account OverdraftsTotalCommercial Real EstateCommercial and IndustrialResidential Real EstateHome Equity Lines of CreditConsumer IndirectConsumer DirectDeposit Account OverdraftsTotal
June 30, 2019 
September 30, 2019 
Allowance for loan losses allocated to:Allowance for loan losses allocated to: Allowance for loan losses allocated to: 
Loans individually evaluated for impairment$520
$449
$53
$68
$23
$18
$
$1,131
$475
$206
$47
$43
$30
$10
$
$811
Loans collectively evaluated for impairment7,725
6,748
1,131
530
3,149
324
86
19,693
7,991
6,956
1,115
524
3,217
329
128
20,260
Ending balance$8,245
$7,197
$1,184
$598
$3,172
$342
$86
$20,824
$8,466
$7,162
$1,162
$567
$3,247
$339
$128
$21,071
  
Recorded investment in:Recorded investment in: Recorded investment in: 
Loans individually evaluated for impairment$16,755
$4,216
$23,557
$1,470
$452
$464
$
$46,914
$15,202
$4,086
$26,963
$1,435
$605
$629
$
$48,920
Loans collectively evaluated for impairment727,210
544,244
275,616
88,904
419,143
71,745
676
2,127,538
744,239
560,193
282,001
91,475
422,612
72,070
1,081
2,173,671
Ending balance$743,965
$548,460
$299,173
$90,374
$419,595
$72,209
$676
$2,174,452
$759,441
$564,279
$308,964
$92,910
$423,217
$72,699
$1,081
$2,222,591
  
December 31, 2018  
Allowance for loan losses allocated to:Allowance for loan losses allocated to: Allowance for loan losses allocated to: 
Loans individually evaluated for impairment$119
$157
$154
$73
$
$6
$
$509
$119
$157
$154
$73
$
$6
$
$509
Loans collectively evaluated for impairment7,884
6,021
1,060
545
3,214
345
81
19,150
7,884
6,021
1,060
545
3,214
345
81
19,150
Ending balance$8,003
$6,178
$1,214
$618
$3,214
$351
$81
$19,659
$8,003
$6,178
$1,214
$618
$3,214
$351
$81
$19,659
  
Recorded investment in:Recorded investment in: Recorded investment in: 
Loans individually evaluated for impairment$17,596
$3,226
$24,678
$2,293
$503
$79
$
$48,375
$17,596
$3,226
$24,678
$2,293
$503
$79
$
$48,375
Loans collectively evaluated for impairment738,617
526,981
272,182
91,033
406,664
71,595
583
2,107,655
738,617
526,981
272,182
91,033
406,664
71,595
583
2,107,655
Ending balance$756,213
$530,207
$296,860
$93,326
$407,167
$71,674
$583
$2,156,030
$756,213
$530,207
$296,860
$93,326
$407,167
$71,674
$583
$2,156,030
  
June 30, 2018 
September 30, 2018 
Allowance for loan losses allocated to:Allowance for loan losses allocated to: Allowance for loan losses allocated to: 
Loans individually evaluated for impairment$1
$191
$47
$14
$31
$45
$
$329
$91
$191
$40
$83
$140
$32
$
$577
Loans collectively evaluated for impairment8,270
5,174
958
604
3,308
420
95
18,829
7,875
5,947
959
625
3,283
363
95
19,147
Ending balance$8,271
$5,365
$1,005
$618
$3,339
$465
$95
$19,158
$7,966
$6,138
$999
$708
$3,423
$395
$95
$19,724
  
Recorded investment in:Recorded investment in: Recorded investment in: 
Loans individually evaluated for impairment$19,162
$3,173
$26,497
$1,736
$441
$150
$
$51,159
$18,375
$2,185
$25,147
$2,270
$527
$77
$
$48,581
Loans collectively evaluated for impairment737,051
468,097
273,437
88,221
372,943
71,395
860
2,012,004
715,907
508,406
274,621
90,622
396,174
72,524
649
2,058,903
Ending balance$756,213
$471,270
$299,934
$89,957
$373,384
$71,545
$860
$2,063,163
$734,282
$510,591
$299,768
$92,892
$396,701
$72,601
$649
$2,107,484


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Allowance for Loan Losses for Acquired Loans
Acquired loans are recorded at their fair value as of the acquisition date with no valuation allowance, and monitored for changes in credit quality and subsequent increases or decreases in expected cash flows. Decreases in expected cash flows of acquired purchased credit impaired loans are recognized as an impairment, with the amount of the expected loss included in management's evaluation of the appropriateness of the allowance for loan losses. The methods utilized to estimate the required allowance for loan losses for non-impaired acquired loans are similar to those utilized for originated loans; however, Peoples records a provision for loan losses only when the computed allowance exceeds the remaining fair value adjustment.
The following table presents activity in the allowance for loan losses for acquired loans:
 Three Months Ended Six Months Ended
(Dollars in thousands)June 30, 2019June 30, 2018 June 30, 2019June 30, 2018
Non-impaired loans:     
Balance, beginning of period$380
$
 $383
$
Charge-offs

 (3)
Balance, end of period$380
$
 $380
$
      
Purchased credit impaired loans:     
Balance, beginning of period$153
$108
 $153
$108
Balance, end of period$153
$108
 $153
$108
The allowance for loan losses for non-impaired acquired loans was established at December 31, 2018.
 Three Months Ended Nine Months Ended
 September 30, September 30,
(Dollars in thousands)20192018 20192018
Non-impaired loans:     
Balance, beginning of period$380
$
 $383
$
Charge-offs

 (3)
Balance, end of period$380
$
 $380
$
      
Purchased credit impaired loans:     
Balance, beginning of period$153
$108
 $153
$108
(Recovery of) provision for loan losses(19)47
 (19)47
Balance, end of period$134
$155
 $134
$155
Note 5 Long-Term Borrowings

The following table summarizes Peoples' long-term borrowings:
June 30, 2019 December 31, 2018September 30, 2019 December 31, 2018
(Dollars in thousands)BalanceWeighted-
Average
Rate
 BalanceWeighted-
Average
Rate
BalanceWeighted-
Average
Rate
 BalanceWeighted-
Average
Rate
FHLB putable, non-amortizing, fixed-rate advances$65,000
2.18% $85,000
2.05%$65,000
2.18% $85,000
2.05%
FHLB amortizing, fixed-rate advances13,324
1.73% 17,361
2.09%11,785
1.77% 17,361
2.09%
Junior subordinated debt securities7,367
7.34% 7,283
7.83%7,409
7.29% 7,283
7.83%
Total long-term borrowings$85,691
2.55% $109,644
2.44%$84,194
2.57% $109,644
2.44%
Peoples continually evaluates its overall balance sheet position given the interest rate environment. During the first sixnine months of 2019, no additional borrowings were entered into, and twothree long-term FHLB non-amortizing advances totaling $20.0$25.0 million were reclassified to short-term borrowings as the maturity became less than one year.
As of JuneSeptember 30, 2019, Peoples had one remaining FHLB putable option-based advance. The FHLB has the option, at its sole discretion, to terminate the advance after the initial fixed rate period of three months, requiring full repayment of the advance by Peoples prior to the stated maturity. If the advance is terminated prior to maturity, the FHLB will offer Peoples replacement funding at the then-prevailing rate on an advance product then offered by the FHLB, subject to normal FHLB credit and collateral requirements. Peoples is required to make quarterly interest payments.
The amortizing, fixed-rate FHLB advances have a fixed rate for the term of each advance, with remaining maturities ranging from eightseven to thirteentwelve years. These advances require monthly principal and interest payments, with some having a constant prepayment rate requiring an additional principal payment annually. These advances are not eligible for optional prepayment prior to maturity.


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The aggregate minimum annual retirements of long-term borrowings in future periods are as follows:
(Dollars in thousands)BalanceWeighted-Average RateBalanceWeighted-Average Rate
Six months ending December 31, 2019$2,568
1.48%
Three months ending December 31, 2019$1,071
1.87%
Year ending December 31, 20202,555
1.35%2,555
1.35%
Year ending December 31, 202121,979
1.74%21,979
1.74%
Year ending December 31, 202216,521
1.95%16,521
1.95%
Year ending December 31, 20231,157
1.06%1,157
1.08%
Thereafter40,911
3.41%40,911
3.40%
Total long-term borrowings$85,691
2.55%$84,194
2.57%
Effective April 3, 2019, Peoples terminated the Credit Agreement, dated as of March 4, 2016, between Peoples, as Borrower, and Raymond James Bank, N.A., as Lender (the "RJB Credit Agreement"), with a revolving line of credit in the maximum aggregate principal amount of $15.0 million. As of the termination date, April 3, 2019, and December 31, 2018, there were no borrowings outstanding under the RJB Credit Agreement. Additional information regarding the RJB Credit Agreement can be found in "Note 9 Long-Term Borrowings" of the Notes to the Consolidated Financial Statements included in Peoples' 2018 Form 10-K.
Peoples replaced the RBJ Credit Agreement with a short-term revolving line of credit. On April 3, 2019, Peoples entered into a Loan Agreement (the “U.S. Bank Loan Agreement”) with U.S. Bank National Association. The U.S. Bank Loan Agreement has a one-year term and provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $20.0 million that may be used: (i) for working capital purposes; (ii) to finance dividends or other distributions (other than stock dividends and stock splits) on or in respect of Peoples’ capital stock and redemptions, repurchases or other acquisitions of any of Peoples’ capital stock permitted under the U.S. Bank Loan Agreement and (iii) to finance acquisitions permitted under the U.S. Bank Loan Agreement.
Note 6 Stockholders’ Equity 

The following table details the progression in Peoples’ common shares and treasury stock during the sixnine months ended JuneSeptember 30, 2019:
Common Stock
Treasury
Stock
Common Stock
Treasury
Stock
Shares at December 31, 201820,124,378
601,289
20,124,378
601,289
Changes related to stock-based compensation awards:  
Release of restricted common shares
17,481

19,174
Cancellation of restricted common shares
3,465

10,240
Grant of restricted common shares
(122,286)
(133,926)
Grant of common shares
(4,680)
(5,130)
Changes related to deferred compensation plan for Boards of Directors:  
Purchase of treasury stock
3,834

5,497
Disbursed out of treasury stock
(2,187)
(2,187)
Common shares repurchased under share repurchase program
14,175
Common shares issued under dividend reinvestment plan12,400

19,266

Common shares issued under compensation plan for Boards of Directors
(3,490)
(5,103)
Common shares issued under employee stock purchase plan
(3,624)
(10,287)
Issuance of common shares related to the merger with First Prestonsburg Bancshares Inc.1,005,478

1,005,478

Shares at June 30, 201921,142,256
489,802
Shares at September 30, 201921,149,122
493,742
Under its Amended Articles of Incorporation, Peoples is authorized to issue up to 50,000 preferred shares, in one or more series, having such voting powers, designations, preferences, rights, qualifications, limitations and restrictions as determined by Peoples' Board of Directors. At JuneSeptember 30, 2019, Peoples had no preferred shares issued or outstanding.
The following table details the cash dividends declared per common share during 2019 and the comparable period of 2018:
2019201820192018
First quarter$0.30
$0.26
$0.30
$0.26
Second quarter0.34
0.28
0.34
0.28
Third quarter0.34
0.28
0.34
0.28
Fourth quarter0.34
0.30
Total dividends declared$0.98
$0.82
$1.32
$1.12

Accumulated Other Comprehensive Income (Loss)
The following table details the change in the components of Peoples’ accumulated other comprehensive income (loss) for the sixnine months ended JuneSeptember 30, 2019:
(Dollars in thousands)Unrealized Gain (Loss) on SecuritiesUnrecognized Net Pension and Postretirement CostsUnrealized Gain (Loss) on Cash Flow HedgeAccumulated Other Comprehensive Income (Loss)Unrealized Gain (Loss) on SecuritiesUnrecognized Net Pension and Postretirement CostsUnrealized (Loss) Gain on Cash Flow HedgeAccumulated Other Comprehensive Income (Loss)
Balance, December 31, 2018$(10,082)$(3,711)$860
$(12,933)$(10,082)$(3,711)$860
$(12,933)
Reclassification adjustments to net income: 

 

Realized gain on sale of securities, net of tax21


21
(55)

(55)
Other comprehensive income (loss), net of reclassifications and tax17,121
31
(3,924)13,228
19,422
46
(5,391)14,077
Balance, June 30, 2019$7,060
$(3,680)$(3,064)$316
Balance, September 30, 2019$9,285
$(3,665)$(4,531)$1,089
Note 7 Employee Benefit Plans 

Peoples sponsors a noncontributory defined benefit pension plan that covers substantially all employees hired before January 1, 2010.  The plan provides retirement benefits based on an employee’s years of service and compensation.  For employees hired before January 1, 2003, the amount of postretirement benefit is based on the employee’s average monthly compensation over the highest five consecutive years out of the employee’s last ten years with Peoples while an eligible employee.  For employees hired on or after January 1, 2003, the amount of postretirement benefit is based on 2% of the employee’s annual compensation during the years 2003 through 2009, plus accrued interest. Effective January 1, 2010, the pension plan was closed to new entrants.  Effective March 1, 2011, the accrual of pension plan benefits for all participants was frozen. Peoples recognized this freeze as a curtailment as of December 31, 2010 and March 1, 2011, under the terms of the pension plan. Effective July 1, 2013, a participant in the pension plan who is employed by Peoples may elect to receive or to commence receiving such person's retirement benefits as of the later of such person's normal retirement date or the first day of the month first following the date such person makes an election to receive his or her retirement benefits.
Peoples also provides post-retirement health and life insurance benefits to certain former employees and directors. Only those individuals who retired before January 27, 2012 were eligible for life insurance benefits. As of January 1, 2011, all retirees who desire to participate in the Peoples Bank medical plan do so by electing COBRA, which provides up to 18 months of coverage; retirees over the age of 65 also have the option to pay to participate in a group Medicare supplemental plan. Peoples only pays 100% of the cost for those individuals who retired before January 1, 1993. For all others, the retiree is responsible for most, if not all, of the cost of the health benefits.  Peoples’ policy is to fund the cost of the benefits as they arise.


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The following tables detail the components of the net periodic cost for the plans described above:
 
Pension BenefitsPension Benefits
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, June 30,September 30, September 30,
(Dollars in thousands)20192018 2019201820192018 20192018
Interest cost$110
$105
 $219
$210
$109
$104
 $328
$314
Expected return on plan assets(196)(146) (391)(293)(195)(147) (586)(440)
Amortization of net loss20
27
 39
55
19
29
 58
84
Net periodic income$(66)$(14) $(133)$(28)
Settlement of benefit obligation
176
 
176
Net periodic (income) loss$(67)$162
 $(200)$134
Postretirement BenefitsPostretirement Benefits
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, June 30,September 30, September 30,
(Dollars in thousands)20192018 2019201820192018 20192018
Interest cost$1
$1
 $2
$2
$1
$
 $3
$2
Amortization of prior service cost(1)
 (1)


 (1)
Amortization of net loss
(1) (2)(3)
Amortization of net gain(2)(1) (4)(4)
Net periodic income$
$
 $(1)$(1)$(1)$(1) $(2)$(2)
There were noUnder US GAAP, Peoples is required to recognize a settlement charges recorded during anygain or loss when the aggregate amount of lump-sum distributions to participants equals or exceeds the sum of the threeservice and six months ended June 30, 2019interest cost components of the net periodic pension cost. The amount of settlement gain or loss recognized is the pro rata amount of the unrealized gain or loss existing immediately prior to the settlement. In general, both the projected benefit obligation and June 30, 2018 underfair value of plan assets are required to be remeasured in order to determine the noncontributory defined benefit pension plan.settlement gain or loss.
Note 8 Earnings Per Common Share 

The calculations of basic and diluted earnings per common share were as follows:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, June 30,September 30, September 30,
(Dollars in thousands, except per common share data)20192018 2019201820192018 20192018
Distributed earnings allocated to common shareholders$6,935
$5,407
 $12,711
$10,123
$6,941
$5,409
 $19,652
$15,532
Undistributed earnings allocated to common shareholders2,568
2,427
 11,067
9,389
7,828
7,246
 18,900
16,638
Net earnings allocated to common shareholders$9,503
$7,834
 $23,778
$19,512
$14,769
$12,655
 $38,552
$32,170
      
Weighted-average common shares outstanding20,277,028
19,160,728
 19,824,035
18,646,266
20,415,245
19,325,457
 20,023,271
18,875,290
Effect of potentially dilutive common shares165,338
132,653
 148,315
126,903
180,524
141,408
 155,363
128,797
Total weighted-average diluted common shares outstanding20,442,366
19,293,381
 19,972,350
18,773,169
20,595,769
19,466,865
 20,178,634
19,004,087
      
Earnings per common share:      
Basic$0.47
$0.41
 $1.20
$1.05
$0.72
$0.65
 $1.93
$1.70
Diluted$0.46
$0.41
 $1.19
$1.04
$0.72
$0.65
 $1.91
$1.69
Anti-dilutive common shares excluded from calculation:      
Restricted shares87

 46
32
844
5,541
 720
2,193


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Note 9 Derivative Financial Instruments

Peoples utilizes interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.
Derivatives and Hedging Activities - Risk Management Objective of Using Derivatives
Peoples is exposed to certain risks arising from both its business operations and economic conditions. Peoples principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. Peoples manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities, and through the use of derivative financial instruments. Specifically, Peoples enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known or expected cash amounts, the values of which are determined by interest rates. Peoples’ derivative financial instruments are used to manage differences in the amount, timing and duration of Peoples' known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings. Peoples also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in Peoples' assets or liabilities. Peoples manages a matched book with respect to customer-related derivative financial instruments in order to minimize its net risk exposure resulting from such transactions.
Cash Flow Hedges of Interest Rate Risk
Peoples' objectives in using interest rate derivatives are to add stability to interest income and expense, and to manage its exposure to interest rate movements. To accomplish these objectives, Peoples has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for Peoples making fixed payments. As of JuneSeptember 30, 2019, Peoples had entered into fifteensixteen interest rate swap contracts with an aggregate notional value of $140.0$150.0 million. Peoples will pay a fixed rate of interest for up to ten years while receiving a floating rate component of interest equal to the three-month LIBOR rate. The interest received on the floating rate component is intended to offset the interest paid on rolling three-month FHLB advances or rolling three-month brokered certificates of deposit, which will continue to be rolled through the life of the swaps. Amounts reported in accumulated other comprehensive income (loss) ("AOCI"), related to derivatives will be reclassified to interest income or expense as interest payments are made or received on Peoples' variable-rate assets or liabilities. During the three and sixnine months ended JuneSeptember 30, 2019, Peoples had reclassifications of gains to interest expense of $70,000$30,000 and $153,000,$183,000, respectively, and during the three and sixnine months ended JuneSeptember 30, 2018, Peoples had reclassifications of gains to interest expense of $28,000$2,000 and $16,000,$18,000, respectively.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of each derivative is reported in AOCI (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. Peoples assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transaction. The reset dates and the payment dates on the 90-day advances or brokered certificates of deposit used to fund the swaps are matched to the reset dates and payment dates on the receipt of the 3-month LIBOR floating portion of the swaps to ensure effectiveness of the cash flow hedge. Effectiveness is measured by ensuring that reset dates and payment dates are matched. The amount of pre-tax AOCI for Peoples' cash flow hedges was $3.9 million at June 30, 2019.
The following table summarizes information about the interest rate swaps designated as cash flow hedges:
(Dollars in thousands)June 30,
2019
December 31,
2018
September 30,
2019
December 31,
2018
Notional amount$140,000
$110,000
$150,000
$110,000
Weighted average pay rates2.27%2.37%2.22%2.37%
Weighted average receive rates1.80%2.57%1.53%2.57%
Weighted average maturity5.6 years
6.2 years
5.7 years
6.2 years
Unrealized gains$3,879
$860
Pre-tax unrealized gains included in AOCI$5,736
$860


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The following table presents net losses or gains recorded in AOCI and in the Unaudited Consolidated Statements of Income related to the cash flow hedges:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, June 30,September 30, September 30,
(Dollars in thousands)20192018 2019201820192018 20192018
Amount of loss (gain) recognized in AOCI, pre-tax$2,994
$(529) $4,661
$(1,907)$1,796
$(651) $6,457
$(2,558)
Amount of (gain) loss recognized in earnings$
$
 $(19)$30
Amount of (loss) gain recognized in earnings$
$
 $(19)$30
The following table reflects the cash flow hedges, which are included in the Unaudited Consolidated Balance Sheets at fair value:
June 30,
2019
December 31,
2018
September 30,
2019
 December 31,
2018
(Dollars in thousands)Notional AmountFair ValueNotional AmountFair ValueNotional AmountFair Value Notional AmountFair Value
Included in other assets:    
Interest rate swaps related to debt$35,000
$316
$60,000
$2,093
$20,000
$105
 $60,000
$2,093
Total included in other assets$35,000
$316
$60,000
$2,093
$20,000
$105
 $60,000
$2,093
    
Included in accrued expenses and other liabilities:    
Interest rate swaps related to debt$105,000
$4,363
$50,000
$1,111
$130,000
$6,026
 $50,000
$1,111
Total included in accrued expenses and other liabilities$105,000
$4,363
$50,000
$1,111
$130,000
$6,026
 $50,000
$1,111
At June 30, 2019, Peoples had $14.4$21.2 million and no amount of cash pledged at September 30, 2019 and December 31, 2018, respectively, against interest rate swaps related to debt,debt; however, the counterparties had pledged no amount of cash and $130,000, respectively.respectively, at those dates.
Non-Designated Hedges
Peoples maintains an interest rate protection program for commercial loan customers, which was established in 2010. Under this program, Peoples originates variable rate loans with interest rate swaps, where the customer enters into an interest rate swap with Peoples on terms that match the terms of the loan. By entering into the interest rate swap with the customer, Peoples Bank effectively provides the customer with a fixed rate loan while creating a variable rate asset for Peoples Bank. Peoples Bank offsets its exposure in the swap by entering into an offsetting interest rate swap with an unaffiliated institution. These interest rate swaps do not qualify as designated hedges; therefore, each swap is accounted for as a standalone derivative. Peoples had interest rate swaps associated with commercial loans with a gross notional value of $492.0$590.0 million and fair value of $9.7$14.2 million of equally offsetting assets and liabilities at JuneSeptember 30, 2019, and a gross notional value of $453.4 million and fair value of $2.5 million of equally offsetting assets and liabilities at December 31, 2018. These interest rate swaps did not have a material impact on Peoples' results of operation or financial condition.
The following table reflects the non-designated hedges, which are included in the Unaudited Consolidated Balance Sheets at fair value:
June 30,
2019
December 31,
2018
September 30,
2019
 December 31,
2018
(Dollars in thousands)Notional AmountFair ValueNotional AmountFair ValueNotional AmountFair Value Notional AmountFair Value
Included in other assets:    
Interest rate swaps related to commercial loans$245,996
$9,656
$226,662
$2,451
$295,070
$14,197
 $226,662
$2,451
Total included in other assets$245,996
$9,656
$226,662
$2,451
$295,070
$14,197
 $226,662
$2,451
    
Included in accrued expenses and other liabilities:    
Interest rate swaps related to commercial loans$245,996
$9,656
$226,662
$2,451
$295,070
$14,197
 $226,662
$2,451
Total included in accrued expenses and other liabilities$245,996
$9,656
$226,662
$2,451
$295,070
$14,197
 $226,662
$2,451
Peoples had no cash pledged against interest rate swaps related to commercial loans.


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Note 10 Stock-Based Compensation 

Under the Peoples Bancorp Inc. Third Amended and Restated 2006 Equity Plan (the "2006 Equity Plan"), Peoples may grant, among other awards, nonqualified stock options, incentive stock options, restricted common stock awards, stock appreciation rights ("SARs"), performance units and unrestricted common share awards to employees and non-employee directors. The total number of common shares available under the 2006 Equity Plan is 891,340.  The maximum number of common shares that can be issued for incentive stock options is 500,000 common shares. Prior to 2007, Peoples granted nonqualified and incentive stock options to employees and nonqualified stock options to non-employee directors under the 2006 Equity Plan and predecessor plans.  Since February 2009, Peoples has granted restricted common shares to employees, and periodically to non-employee directors, subject to the terms and conditions prescribed by the 2006 Equity Plan. Additionally, in 2018 and 2019, the Board of Directors granted unrestricted common shares to non-employee directors and to all full-time and part-time employees who did not already participate in the 2006 Equity Plan. In general, common shares issued in connection with stock-based awards are issued from treasury shares to the extent available.  If no treasury shares are available, common shares are issued from authorized but unissued common shares.
Restricted Common Shares
 Under the 2006 Equity Plan, Peoples may award restricted common shares to officers, key employees and non-employee directors.  Since 2018, common shares awarded to non-employee directors have vested immediately upon grant with no restrictions. Restrictions on restricted common shares awarded to employees typically expire after periods ranging from one to three years. In the first sixnine months of 2019, Peoples granted an aggregate of 117,200117,773 restricted common shares subject to performance-based vesting to officers and key employees with restrictions that will lapse three years after the grant date provided that in order for the restricted common shares to vest in full, Peoples must have reported positive net income and maintained a well capitalized status by regulatory standards for each of the three fiscal years preceding the vesting date. During the first sixnine months of 2019, Peoples granted, to certain key employees, an aggregate of 5,08616,153 restricted common shares subject to time-based vesting with restrictions that will lapse three years after the grant date.
The following table summarizes the changes to Peoples’ restricted common shares for the sixnine months ended JuneSeptember 30, 2019:
Time-Based Vesting Performance-Based VestingTime-Based Vesting Performance-Based Vesting
Number of Common SharesWeighted-Average Grant Date Fair Value Number of Common SharesWeighted-Average Grant Date Fair ValueNumber of Common SharesWeighted-Average Grant Date Fair Value Number of Common SharesWeighted-Average Grant Date Fair Value
Outstanding at January 143,679
$29.64
 175,772
$31.08
43,679
$29.64
 175,772
$31.08
Awarded5,086
32.05
 117,200
32.20
16,153
31.35
 117,773
32.20
Released17,500
21.69
 33,400
17.86
22,750
24.70
 33,400
17.86
Forfeited2,852
37.79
 613
34.50
4,852
35.87
 5,388
33.17
Outstanding at June 3028,413
$34.16
 258,959
$33.29
Outstanding at September 3032,230
$33.05
 254,757
$33.29
 
For the sixnine months ended JuneSeptember 30, 2019, the total intrinsic value for restricted common shares released was $1.6$1.8 million compared to $3.2 million for the sixnine months ended JuneSeptember 30, 2018.
Performance Unit Awards
Under the 2006 Equity Plan, Peoples may grant performance unit awards to officers, key employees and non-employee directors.  On July 26, 2017, Peoples granted a total of seven performance unit awards to individuals who were then serving as officers, with a maximum aggregate dollar amount of $1.3 million represented by the performance units subject to such awards and each performance unit representing $1.00. As of JuneSeptember 30, 2019, one of seven performance unit awards had been forfeited as one of the individuals granted a performance unit award left Peoples before meeting the minimum service requirement to retain the performance unit award. The performance unit awards granted cover the performance period beginning January 1, 2018 and ending on December 31, 2019, and are subject to two performance goals. Twenty-five percent of the performance units subject to each award will vest if, but only if, the related company-specific target performance goal is achieved. The remaining 75% of the performance units subject to each award will vest based on the relative performance of Peoples compared to a defined peer group (measured by percentile ranking) with respect to the related maximum performance goal. If, for the performance period, the target level of achievement for the first performance goal and/or the maximum level of achievement for the second performance goal is not reached, the dollar amount represented by the performance units associated with each performance goal will be adjusted to reflect the level of performance achieved. After the vesting date, the participant will receive that number of common shares of Peoples equal to (i) the aggregate number of


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the participant's performance units (and equivalent dollar value of such performance units) that vested based on the performance achieved under both performance goals (ii) divided by the fair market value of a common share of Peoples on the date the performance units are deemed to have vested (which will be the last day of the performance period) and rounded down to the nearest whole common share.
Stock-Based Compensation
Peoples recognizes stock-based compensation, which is included as a component of Peoples’ salaries and employee benefit costs, for restricted common shares and performance unit awards, as well as purchases made by participants in the employee stock purchase plan. For restricted common shares, Peoples recognizes stock-based compensation based on the estimated fair value of the awards on the grant date, for the portion of awards that is expected to vest over the vesting period. For performance unit awards, Peoples recognizes stock-based compensation over the performance period, based on the portion of the awards that is expected to vest based on the expected level of achievement of the two performance goals. Peoples also has an employee stock purchase plan whereby employees can purchase Peoples' common shares at a discount of up to 15%. The following table summarizes the amount of stock-based compensation expense and related tax benefit recognized for each period:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30, June 30,September 30, September 30,
(Dollars in thousands)20192018 2019201820192018 20192018
Total stock-based compensation expense$930
$424
 $2,138
$1,510
$950
$579
 $3,088
$2,089
Recognized tax benefit(195)(89) (449)(317)(199)(122) (648)(439)
Net expense recognized$735
$335
 $1,689
$1,193
$751
$457
 $2,440
$1,650
Restricted common shares were the primary form of stock-based compensation awards granted by Peoples in the three and sixnine months ended JuneSeptember 30, 2019 and 2018. The fair value of restricted common share awards on the grant date is the market price of Peoples' common shares. Total unrecognized stock-based compensation expense related to unvested restricted common share awards was $3.6$3.3 million at JuneSeptember 30, 2019, which will be recognized over a weighted-average period of 2.12.0 years. On February 14, 2018, an aggregate of 11,112 unrestricted common shares were granted as a one-time special award to all full-time and part-time employees who did not already participate in the 2006 Equity Plan, with a related stock-based compensation expense of $388,000 being recognized. On June 3, 2019, an aggregate of 880 unrestricted common shares were granted as a one-time special award to all full-time and part-time First Prestonsburg employees, with a related stock-based compensation expense of $27,000 being recognized. For the three and sixnine months ended JuneSeptember 30, 2019, Peoples recorded $11,000$46,000 and $50,000,$96,000, respectively, of stock-based compensation associated with the performance unit awards and for the three and sixnine months ended JuneSeptember 30, 2018 recorded $81,000$62,000 and $125,000,$188,000, respectively. Additionally, Peoples recognized $16,000 and $32,000$48,000 of stock-based compensation associated with the employee stock purchase plan, based on purchases by employees thereunder, in the three and sixnine months ended JuneSeptember 30, 2019, respectively, and $14,000$15,000 and $28,000$44,000 for the three and sixnine months ended JuneSeptember 30, 2018, respectively.
Unrestricted common shares awarded to non-employee directors are included as a component of Peoples' other non-interest expense. On January 31, 2019, Peoples granted to non-employee directors, an aggregate of 3,200 unrestricted common shares, which resulted in an additional $102,000 of stock-based compensation expense being recognized. On January 31, 2018, Peoples granted, to non-employee directors, an aggregate of 3,600 unrestricted common shares, which resulted in an additional $128,000 of stock-based compensation expense being recognized.


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Note 11 Revenue

The following table details Peoples' revenue from contracts with customers:
Three Months Ended Nine Months Ended
Three Months Ended Six Months EndedSeptember 30, September 30,
(Dollars in thousands)June 30, 2019June 30, 2018 June 30, 2019June 30, 201820192018 20192018
Insurance income:      
Commission and fees from sale of insurance policies (a)$3,306
$3,193
 $6,339
$6,382
$3,173
$3,159
 $9,512
$9,541
Fees related to third-party administration services (a)178
173
 347
292
140
131
 486
423
Performance-based commissions (b)2
3
 1,421
1,350
73
98
 1,495
1,448
Trust and investment income (a)3,401
3,232
 6,513
6,300
3,205
3,110
 9,718
9,410
Electronic banking income:      
Interchange income (a)2,747
2,520
 5,190
4,784
2,842
2,464
 8,032
7,248
Promotional and usage income (a)520
265
 1,064
786
735
426
 1,799
1,212
Deposit account service charges:      
Ongoing maintenance fees for deposit accounts (a)1,012
646
 1,764
1,321
1,049
691
 2,813
2,012
Transactional-based fees (b)1,965
1,742
 3,554
3,187
2,184
1,961
 5,738
5,148
Commercial loan swap fees (b)516
146
 662
262
772
355
 1,434
617
Other non-interest income transactional-based fees (b)253
262
 424
543
174
228
 598
772
Total$13,900
$12,182
 $27,278
$25,207
$14,347
$12,623
 $41,625
$37,831
      
Timing of revenue recognition:      
Services transferred over time$11,164
$10,029
 $21,217
$19,865
$11,144
$9,981
 $32,360
$29,846
Services transferred at a point in time2,736
2,153
 6,061
5,342
3,203
2,642
 9,265
7,985
Total$13,900
$12,182
 $27,278
$25,207
$14,347
$12,623
 $41,625
$37,831
(a) Services transferred over time.
(b) Services transferred at a point in time.
Peoples records contract assets for income that has been recognized over a period of time for fulfillment of performance obligations, but has not yet been received related to electronic banking income. This income typically relates to bonuses for which Peoples is eligible, but will not receive until a certain time in the future. Peoples records contract liabilities for payments received for commission income related to the sale of insurance policies, for which the performance obligations have not yet been fulfilled. The contract liabilities are recognized as income over time, during the period in which the performance obligations are fulfilled, which is over the insurance policy period. Peoples also records contract liabilities for bonuses received related to electronic banking income, for which income is recognized during the period in which the performance obligations are fulfilled.
The following table details the change in Peoples' contract assets and contract liabilities for the period ended JuneSeptember 30, 2019:
Contract AssetsContract LiabilitiesContract AssetsContract Liabilities
(Dollars in thousands)
Balance, January 1, 2019$207
$5,055
$207
$5,055
Additional income receivable183

324

Additional deferred income
4,013

4,468
Receipt of income previously receivable(11)
(11)
Recognition of income previously deferred
(3,521)
(4,211)
Balance, June 30, 2019$379
$5,547
Balance, September 30, 2019$520
$5,312


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Note 12 Acquisitions

On April 12, 2019, Peoples completed the merger with First Prestonsburg Bancshares Inc. ("First Prestonsburg"). First Prestonsburg merged into Peoples and First Prestonsburg's wholly-owned subsidiary, First Commonwealth Bank of Prestonsburg, Inc. ("First Commonwealth"), which operates nine full-service branches located in eastern and central Kentucky, merged into Peoples Bank. Consideration of $32.4 million was paid by Peoples in the form of 12.512 Peoples common shares of Peoples stock to shareholders of First Prestonsburg for each share of First Prestonsburg common stock they owned, which resulted in the issuance of 1,005,478 Peoples common shares of Peoples stock.shares. In addition, immediately prior to the closing of the merger, First Prestonsburg paid a special cash distribution of $140.30 per share (for an aggregate amount of $11.3 million) which was deemed part of the purchase pricetotal consideration to its shareholders. As a result, First Prestonsburg shareholders received a total purchase priceconsideration of $43.7 million.


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The following table provides the preliminary purchase price calculation as of the date of acquisition for the First Prestonsburg acquisition, and the assets acquired and liabilities assumed at their estimated fair values.
  
(Dollars in thousands, except per share data)  
Consideration  
Common shares80,362
80,362
Number of common shares of Peoples issued for each common share of acquired company12.512
12.512
Price per Peoples common share, based on closing date$32.26
$32.26
Common share consideration$32,437
$32,437
  
Net Assets at Fair Value  
Assets  
Cash and due from banks$4,998
$5,016
Interest-bearing deposits in other banks2,798
2,797
Total cash and cash equivalents7,796
7,813
Available-for-sale investment securities137,658
136,596
Other investment securities3,068
3,077
Total investment securities140,726
139,673
Total loans130,407
Loans129,365
Bank premises and equipment, net of accumulated depreciation8,255
7,597
Other intangible assets4,234
4,234
Other assets2,677
2,207
Total assets$294,095
$290,889
Liabilities  
Deposits:  
Non-interest-bearing$40,089
$40,089
Interest-bearing217,151
217,151
Total deposits257,240
257,240
Short-term borrowings14,400
14,400
Accrued expenses and other liabilities2,065
2,061
Total liabilities$273,705
$273,701
Net assets$20,390
$17,188
Goodwill$12,047
$15,249


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The estimated fair values presented in the above table reflect additional information that was obtained during the three months ended September 30, 2019, which resulted in changes to certain fair value estimates made as of the date of acquisition. Adjustments to acquisition date estimated fair values are recorded induring the period in which the adjustment is determinedthey occur and, as a result, previously recorded results may change.

have changed. The below table reflects the changes in the estimated fair value at September 30, 2019 from balances reported at June 30, 2019:

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(Dollars in thousands)Change in Fair Value
Net Assets 
Cash and cash equivalents$17
Total investment securities(1,053)
Loans(1,042)
Bank premises and equipment, net of accumulated depreciation(658)
Other assets(470)
Accrued expenses and other liabilities(4)
Change in Goodwill(3,202)
Acquired loans are reported net of the unamortized fair value adjustment. The following table details the fair value adjustment for acquired loans as of the acquisition date:
 
(Dollars in thousands)First PrestonsburgFirst Prestonsburg
Non-impaired Loans  
Contractual cash flows$168,903
$168,729
Nonaccretable difference19,756
19,745
Expected cash flows149,147
148,984
Accretable yield27,789
28,269
Fair value$121,358
$120,715
Credit Impaired Loans  
Contractual cash flows$17,706
$17,847
Nonaccretable difference4,804
5,337
Expected cash flows12,902
12,510
Accretable yield3,853
3,860
Fair value$9,049
$8,650
Peoples recorded non-interest expense related primarily to acquisitionsthe First Prestonsburg acquisition of $6.8 million$199,000 and $7.0$7.2 million for the three and sixnine months ended JuneSeptember 30, 2019, respectively. TotalFor the three and nine months ended September 30, 2019, total non-interest income declined due toincluded gains of $10,000 and losses of $253,000$243,000, respectively, associated with the First Prestonsburg merger. For each of the three and sixnine months ended JuneSeptember 30, 2019, salaries and employee benefit costs included $68,000 and $2.4 million, respectively, related to change in control agreements, retention and severance bonuses, and regular payroll and taxes after conversion. Professional fees related to the acquisition included $562,000 and $620,000a reversal of expense of $6,000 for the three and six months ended JuneSeptember 30, 2019, respectively,and expense of $614,000 for the nine months ended September 30, 2019, and other non-interest expenses included $3.7 million$93,000 and $3.8$3.9 million (mainly contract termination fees) for the three and sixnine months ended JuneSeptember 30, 2019, respectively.


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Note 13 Leases

Peoples leases certain banking facilities and equipment under various agreements with original terms providing for fixed monthly payments over periods generally ranging from two to twentythirty years.  Certain leases contain renewal options and rent escalation clauses calling for rent increases over the term of the lease.  Short-term leases of certain facilities and equipment, with lease terms of 12 months or less, are recognized on a straight-line basis over the lease term. At JuneSeptember 30, 2019, Peoples did not have any finance leases or any significant lessor agreements.
Peoples elected certain practical expedients, in accordance with Accounting Standards Codification ("ASC") 842. Peoples elected to recognize a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019 for the implementation of ASU 2016-02. Peoples also made an accounting policy election to account for each separate lease component of a contract and its associated non-lease components as a single lease component for all leases subject to ASC 842.
The table below details Peoples' lease expense, which is included in net occupancy and equipment expense in the Unaudited Consolidated Statements of Income:
 Three Months Ended Six Months Ended
(Dollars in thousands)June 30, 2019 June 30, 2019
Operating lease expense$311
 618
Short-term lease expense32
 62
Total lease expense$343
 $680


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 Three Months Ended Nine Months Ended
(Dollars in thousands)September 30, 2019 September 30, 2019
Operating lease expense$192
 815
Short-term lease expense113
 170
Total lease expense$305
 $985

The following table details the right-of-use asset, the lease liability and other information related to Peoples' operating leases:
(Dollars in thousands)June 30, 2019
Right-of-use asset: 
     Other assets$6,661
Lease liability: 
     Accrued expenses and other liabilities$6,839
  
Other information: 
     Weighted-average remaining lease term13.1 years
     Weighted-average discount rate2.46%
The increased right-of-use asset and lease liability at June 30, 2019 were due to acquired leases associated with the First Prestonsburg merger.
(Dollars in thousands)September 30, 2019
Right-of-use asset: 
     Other assets$6,581
Lease liability: 
     Accrued expenses and other liabilities$6,774
Other information: 
     Weighted-average remaining lease term13.3 years
     Weighted-average discount rate2.18%
The following table summarizes the maturity of remaining lease liabilities:
(Dollars in thousands)BalanceBalance
Six months ending December 31, 2019$10
Three months ending December 31, 2019$5
Year ending December 31, 2020112
81
Year ending December 31, 2021148
131
Year ending December 31, 2022700
654
Year ending December 31, 202363
59
Thereafter5,806
5,844
Total lease liability$6,839
$6,774



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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the Unaudited Consolidated Financial Statements and Management’s Discussion and Analysis that follows:
At or For the Three Months Ended At or For the Six Months EndedAt or For the Three Months Ended At or For the Nine Months Ended
June 30, June 30,September 30, September 30,
20192018 2019201820192018 20192018
Operating Data (a)      
Total interest income$43,621
$37,769
 $84,197
$70,995
$43,609
$39,631
 $127,806
$110,626
Total interest expense7,572
4,961
 14,234
8,828
7,855
6,307
 22,089
15,135
Net interest income36,049
32,808
 69,963
62,167
35,754
33,324
 105,717
95,491
Provision for loan losses626
1,188
 363
3,171
1,005
1,302
 1,368
4,473
Net loss on investment securities(57)(147) (27)(146)
Net loss on asset disposals and other transactions(293)(405) (475)(331)
Net gain (loss) on investment securities97

 70
(146)
Net (loss) gain on asset disposals and other transactions(78)12
 (553)(319)
Total non-interest income excluding net gains and losses15,639
13,807
 31,220
28,701
16,374
14,341
 47,594
43,042
Total non-interest expense38,876
35,971
 70,736
64,192
32,993
30,829
 103,729
95,021
Net income9,598
7,892
 23,967
19,633
14,868
12,725
 38,835
32,358
Balance Sheet Data (a)      
Total investment securities$997,711
$876,765
 $997,711
$876,765
$1,064,909
$874,159
 $1,064,909
$874,159
Loans, net of deferred fees and costs ("total loans")2,833,533
2,686,491
 2,833,533
2,686,491
2,850,316
2,707,727
 2,850,316
2,707,727
Allowance for loan losses21,357
19,266
 21,357
19,266
21,585
19,879
 21,585
19,879
Goodwill and other intangible assets176,763
163,953
 176,763
163,953
179,126
163,401
 179,126
163,401
Total assets4,276,376
3,972,091
 4,276,376
3,972,091
4,396,148
4,003,089
 4,396,148
4,003,089
Non-interest-bearing deposits643,058
585,861
 643,058
585,861
677,232
617,447
 677,232
617,447
Other interest-bearing deposits2,394,398
2,363,398
 2,394,398
2,363,398
2,417,740
2,423,676
 2,417,740
2,423,676
Brokered certificates of deposits326,157
211,062
 326,157
211,062
262,230
265,258
 262,230
265,258
Short-term borrowings186,457
360,727
 186,457
360,727
288,150
296,830
 288,150
296,830
Junior subordinated debentures held by subsidiary trust7,367
7,195
 7,367
7,195
7,409
7,239
 7,409
7,239
Other long-term borrowings85,691
113,085
 85,691
113,085
84,194
111,099
 84,194
111,099
Total stockholders' equity579,022
499,339
 579,022
499,339
588,533
504,290
 588,533
504,290
Tangible assets (b)4,099,613
3,808,138
 4,099,613
3,808,138
4,217,022
3,839,688
 4,217,022
3,839,688
Tangible equity (b)402,259
335,386
 402,259
335,386
409,407
340,889
 409,407
340,889
Per Common Share Data (a)      
Earnings per common share – basic$0.47
$0.41
 $1.20
$1.05
$0.72
$0.65
 $1.93
$1.70
Earnings per common share – diluted0.46
0.41
 1.19
1.04
0.72
0.65
 1.91
1.69
Cash dividends declared per common share0.34
0.28
 0.64
0.54
0.34
0.28
 0.98
0.82
Book value per common share (c)27.98
25.57
 27.98
25.57
28.43
25.79
 28.43
25.79
Tangible book value per common share (b)(c)$19.44
$17.17
 $19.44
$17.17
$19.78
$17.44
 $19.78
$17.44
Weighted-average number of common shares outstanding – basic20,277,028
19,160,728
 19,824,035
18,646,266
20,415,245
19,325,457
 20,023,271
18,875,290
Weighted-average number of common shares outstanding – diluted20,442,366
19,283,381
 19,972,350
18,773,169
20,595,769
19,466,865
 20,178,634
19,004,087
Common shares outstanding at end of period20,696,041
19,528,952
 20,696,041
19,528,952
20,700,630
19,550,014
 20,700,630
19,550,014
Closing stock price at end of period$32.26
$37.78
 $32.26
$37.78
$31.81
$35.03
 $31.81
$35.03


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At or For the Three Months Ended At or For the Six Months EndedAt or For the Three Months Ended At or For the Nine Months Ended
June 30, June 30,September 30, September 30,
20192018 2019201820192018 20192018
Significant Ratios (a)      
Return on average stockholders' equity (d)6.81%6.46% 8.87 %8.39%10.11%10.06% 9.31%8.97%
Return on average tangible equity (d)(e)10.55%10.47% 13.49 %13.21%15.35%15.73% 14.14%14.09%
Return on average assets (d)0.91%0.81% 1.17 %1.06%1.37%1.26% 1.24%1.13%
Return on average assets adjusted for non-core items (d)(f)1.44%1.35% 1.47 %1.34%1.38%1.33% 1.44%1.31%
Average stockholders' equity to average assets13.33%12.57% 13.24 %12.60%13.53%12.55% 13.34%12.58%
Average total loans to average deposits86.37%89.57% 87.81 %88.37%84.99%90.47% 86.83%89.11%
Net interest margin (d)(g)3.77%3.74% 3.78 %3.70%3.66%3.68% 3.74%3.69%
Efficiency ratio (h)73.24%74.96% 68.09 %68.53%61.10%62.58% 65.71%66.48%
Efficiency ratio adjusted for non-core items (i)60.21%62.03% 61.19 %61.73%60.72%60.80% 61.03%61.41%
Pre-provision net revenue to total average assets (j)1.21%1.10% 1.49 %1.44%1.76%1.67% 1.59%1.52%
Dividend payout ratio73.30%69.27% 53.84 %52.15%47.35%43.00% 51.35%48.55%
Total investment securities as percentage of total assets (c)23.33%22.07% 23.33 %22.07%24.22%21.84% 24.22%21.84%
Asset Quality Ratios (a)      
Nonperforming loans as a percent of total loans (c)(k)0.71%0.67% 0.71 %0.67%0.73%0.67% 0.73%0.67%
Nonperforming assets as a percent of total assets (c)(k)0.47%0.46% 0.47 %0.46%0.48%0.46% 0.48%0.46%
Nonperforming assets as a percent of total loans and OREO (c)(k)0.71%0.67% 0.71 %0.67%0.74%0.67% 0.74%0.67%
Criticized loans as a percent of total loans (c)(l)3.42%4.50% 3.42 %4.50%3.52%4.38% 3.52%4.38%
Classified loans as a percent of total loans (c)(m)2.23%2.07% 2.23 %2.07%2.07%1.81% 2.07%1.81%
Allowance for loan losses as a percent of total loans (c)0.75%0.72% 0.75 %0.72%0.76%0.73% 0.76%0.73%
Allowance for loan losses as a percent of nonperforming loans (c)(k)106.57%106.77% 106.57 %106.77%104.20%109.71% 104.20%109.71%
Provision for loan losses as a percent of average total loans0.09%0.18% 0.03 %0.26%0.14%0.19% 0.07%0.23%
Net charge-offs (recoveries) as a percentage of average total loans0.03%0.11% (0.06)%0.22%0.11%0.10% %0.18%
Capital Information (a)(c) 
    
   
Common equity tier 1 capital ratio (n)14.16%13.03% 14.16 %13.03%14.19%13.29% 14.19%13.29%
Tier 1 risk-based capital ratio14.41%13.29% 14.41 %13.29%14.45%13.55% 14.45%13.55%
Total risk-based capital ratio (tier 1 and tier 2)15.14%13.99% 15.14 %13.99%15.18%14.27% 15.18%14.27%
Leverage ratio10.26%9.73% 10.26 %9.73%10.28%9.69% 10.28%9.69%
Common equity tier 1 capital$410,979
$358,987
 $410,979
$358,987
$417,468
$367,537
 $417,468
$367,537
Tier 1 capital418,347
366,182
 418,347
366,182
424,877
374,776
 424,877
374,776
Total capital (tier 1 and tier 2)439,704
385,448
 439,704
385,448
446,462
394,655
 446,462
394,655
Total risk-weighted assets$2,903,387
$2,755,112
 $2,903,387
$2,755,112
$2,941,193
$2,764,951
 $2,941,193
$2,764,951
Total stockholders' equity to total assets13.54%12.57% 13.54 %12.57%13.39%12.60% 13.39%12.60%
Tangible equity to tangible assets (b)9.81%9.07% 9.81 %9.07%9.71%8.88% 9.71%8.88%
(a)Reflects the impact of the acquisition of First Prestonsburg Bancshares Inc. ("First Prestonsburg") beginning April 12, 2019, and of ASB Financial Corp. ("ASB") beginning April 13, 2018.
(b)
These amounts represent non-US GAAP financial measures since they exclude the balance sheet impact of goodwill and other intangible assets acquired through acquisitions on total stockholders’ equity and total assets.  Additional information regarding the calculation of these non-US GAAP financial measures can be found under the caption “Capital/Stockholders’ Equity.”
(c)Data presented as of the end of the period indicated.
(d)Ratios are presented on an annualized basis.
(e)
Return on average tangible equity represents a non-US GAAP financial measures since it excludes the after-tax impact of amortization of other intangible assets from earnings and it excludes the balance sheet impact of goodwill and other intangible assets acquired through acquisitions on total stockholders’ equity. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption “Return on Average Tangible Equity Ratio.Ratio (non-US GAAP).
(f)
Return on average assets adjusted for non-core items represents a non-US GAAP financial measure since it excludes the impact of the Tax Cuts and Jobs Act on the remeasurement of deferred tax assets and deferred tax liabilities, and the after-tax impact of all gains and/or losses, core banking system conversion revenue and expenses, acquisition-related expenses, and pension settlement charges and other non-recurring expensesincluded in earnings. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption "Return on Average Assets Adjusted for Non-Core Items.Items (non-US GAAP)."
(g)Information presented on a fully tax-equivalent basis.
(h)The efficiency ratio is defined as total non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus total non-interest income (excluding all gains and losses). This amount represents a non-US GAAP financial measure since it excludes amortization of other intangible assets, and all gains and/or losses included in earnings, and uses fully tax-equivalent net interest income.


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excludes amortization of other intangible assets, and all gains and/or losses included in earnings, and uses fully tax-equivalent net interest income. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption “Efficiency Ratio.Ratio (non-US GAAP).
(i)The efficiency ratio adjusted for non-core items is defined as core non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus core non-interest income excluding all gains and losses. This amount represents a non-US GAAP financial measure since it excludes the impact of all gains and/or losses, and acquisition-related expenses, and pension settlement charges included in earnings, and uses fully tax-equivalent net interest income. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption “Efficiency Ratio.Ratio (non-US GAAP).
(j)Pre-provision net revenue is defined as net interest income plus total non-interest income (excluding all gains and losses) minus total non-interest expense. This ratio represents a non-US GAAP financial measure since it excludes the provision for loan losses and all gains and/or losses included in earnings. This measure is a key metric used by federal bank regulatory agencies in their evaluation of capital adequacy for financial institutions.  Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption “Pre-Provision Net Revenue.Revenue (non-US GAAP).
(k)Nonperforming loans include loans 90+ days past due and accruing, renegotiated loans and nonaccrual loans. Nonperforming assets include nonperforming loans and other real estate owned.
(l)Includes loans categorized as special mention, substandard and doubtful.
(m)Includes loans categorized as substandard and doubtful.
(n)Peoples' capital conservation buffer was 7.14%7.18% at JuneSeptember 30, 2019 and 5.99%6.27% at JuneSeptember 30, 2018, compared to 2.50% for the fully phased-in capital conservation buffer required at January 1, 2019.
Forward-Looking Statements
Certain statements in this Form 10-Q, which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are identified by the fact they are not historical facts and include words such as "anticipate," "estimate," "may," "feel," "expect," "believe," "plan," "will," "will likely," "would," "should," "could," "project," "goal," "target," "potential," "seek," "intend," and similar expressions.
These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of Peoples' business and operations. Additionally, Peoples' financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to:
(1)the success, impact, and timing of the implementation of Peoples' business strategies, including the successful integration of the business of First Prestonsburg, and the expansion of consumer lending activity;
(2)risks and uncertainties associated with Peoples' entry into new geographic markets and risks resulting from Peoples' inexperience in these new geographic markets;
(3)Peoples' ability to identify, acquire, or integrate futuresuitable strategic acquisitions, which may be unsuccessful, or may be more difficult, time-consuming or costly than expected;
(4)competitive pressures among financial institutions, or from non-financial institutions, which may increase significantly, including product and pricing pressures, which can in turn impact Peoples' credit spreads, changes to third-party relationships and revenues, changes in the manner of providing services, customer acquisition and retention pressures, and Peoples' ability to attract, develop and retain qualified professionals;
(5)changes in the interest rate environment due to economic conditions and/or the fiscal policies of the United States ("U.S.") government and the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which may adversely impact interest rates, interest margins, loan demand and interest rate sensitivity;
(6)uncertainty regarding the nature, timing, cost, and effect of legislative or regulatory changes or actions, promulgated and to be promulgated by governmental and regulatory agencies in the state of Ohio, the Federal Deposit Insurance Corporation, the Federal Reserve Board and the Consumer Financial Protection Bureau, which may subject Peoples, its subsidiaries, or one or more acquired companies to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses, including in particular the rules and regulations promulgated and to be promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Basel III regulatory capital reform;
(7)the effects of easing restrictions on participants in the financial services industry;
(8)local, regional, national and international economic conditions (including the impact of potential or imposed tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations)regulations, and the relationship of the U.S. and its global trading partners) and the impact these conditions may have on Peoples, its customers and its counterparties, and Peoples' assessment of the impact, which may be different than anticipated;


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(9)the existence or exacerbation of general geopolitical instability and uncertainty;
(10)changes in policy and other regulatory and legal developments, and uncertainty or speculation pending the enactment of such changes;
(11)Peoples may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to Peoples' current shareholders;
(12)changes in prepayment speeds, loan originations, levels of nonperforming assets, delinquent loans, charge-offs and charge-offs,customer creditworthiness generally, which may be less favorable than expected and adversely impact the amount of interest income generated;
(13)adverse changes in economic conditions and/or activities, including, but not limited to, slowing or reversal of the current U.S. economic expansion, continued economic uncertainty in the U.S., the European Union (including the uncertainty surrounding the actions to be taken to implement the referendum by British voters to exit the European Union), Asia, and other areas, which could decrease sales volumes, add volatility to the global stock markets, and increase loan delinquencies and defaults;
(14)deterioration in the credit quality of Peoples' loan portfolio, which may adversely impact the provision for loan losses;
(15)Peoples may have more credit risk and higher credit losses to the extent loans are concentrated by location or industry of the borrowers or collateral;
(16)changes in accounting standards, policies, estimates or procedures, including the extent to which the new current expected credit loss rule issued by the Financial Accounting StandardsStandard Board in June 2016, which will require banks to record, at the time of origination, credit losses expected throughout the life of the asset portfolio on loans and held-to-maturity securities, as opposed to the current practice of recording losses when it is probable that a loss event has occurred, which may adversely affect Peoples' reported financial condition or results of operations;
(17)Peoples' assumptions and estimates used in applying critical accounting policies, which may prove unreliable, inaccurate or not predictive of actual results;
(18)the discontinuation of the London Inter-Bank Offered Rate and other reference rates which may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies;
(19)adverse changes in the conditions and trends in the financial markets, including political developments, which may adversely affect the fair value of securities within Peoples' investment portfolio, the interest rate sensitivity of Peoples' consolidated balance sheet, and the income generated by Peoples' trust and investment activities;
(20)the volatility from quarter to quarter of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors;
(21)Peoples' ability to receive dividends from its subsidiaries;
(22)Peoples' ability to maintain required capital levels and adequate sources of funding and liquidity;
(23)the impact of larger or similar-sized financial institutions encountering problems, which may adversely affect the banking industry and/or Peoples' business generation and retention, funding and liquidity;
(24)the costs and effects of new federal and state laws, and other regulatory and legal developments, including the outcome of potential regulatory or other governmental inquiries and legal proceedings and results of regulatory examinations;
(25)Peoples' ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks, including those of Peoples' third-party vendors and other service providers, which may prove inadequate, and could adversely affect customer confidence in Peoples and/or result in Peoples incurring a financial loss;
(26)Peoples' ability to anticipate and respond to technological changes, and Peoples' reliance on, and the potential failure of, a number of third-party vendors to perform as expected, including Peoples' primary core banking system provider, which can impact Peoples' ability to respond to customer needs and meet competitive demands;


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(27)operational issues stemming from and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems on which Peoples and its subsidiaries are highly dependent;
(28)changes in consumer spending, borrowing and saving habits, whether due to tax reform legislation, changes in retail distribution strategies, consumer preferences and behavior, changes in business and economic conditions, legislative or regulatory initiatives, or other factors, which may be different than anticipated;
(29)the adequacy of Peoples' internal controls and risk management program in the event of changes in strategic, reputational, market, economic, operational, cyber security, compliance, legal, asset/liability repricing, liquidity, credit and interest rate risks associated with Peoples' business;
(30)the impact on Peoples' businesses, personnel, facilities, or systems, related to fraud, theft, or violence;
(31)the impact on Peoples' businesses, as well as on the risks described above, of various domestic or international widespread natural or other disasters, pandemics, cyber attacks, system failures, civil unrest, military or terrorist activities or international conflicts;
(32)the impact on Peoples' businesses and operating results of any costs associated with obtaining rights in intellectual property claimed by others and adequately protecting Peoples' intellectual property;
(33)Peoples' continued ability to grow deposits; and
(33)(34)other risk factors relating to the banking industry or Peoples as detailed from time to time in Peoples’ reports filed with the Securities and Exchange Commission (the "SEC"), including those risk factors included in the disclosures under the heading "ITEM 1A. RISK FACTORS" of Peoples’ Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and under the heading "ITEM 1A. RISK FACTORS" in Part II of this Form 10-Q.
All forward-looking statements speak only as of the filing date of this Form 10-Q and are expressly qualified in their entirety by the cautionary statements.  Although management believes the expectations in these forward-looking statements are based on reasonable assumptions within the bounds of management’s knowledge of Peoples’ business and operations, it is possible that actual results may differ materially from these projections.  Additionally, Peoples undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the filing date of this Form 10-Q or to reflect the occurrence of unanticipated events except as may be required by applicable legal requirements.  Copies of documents filed with the SEC are available free of charge at the SEC’s website at www.sec.gov and/or from Peoples' website – www.peoplesbancorp.com under the “Investor Relations” section.
This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements, and Notes thereto, contained in Peoples’ 2018 Form 10-K, as well as the Unaudited Consolidated Financial Statements, Notes to the Unaudited Consolidated Financial Statements, ratios, statistics and discussions contained elsewhere in this Form 10-Q.
Business Overview
The following discussion and analysis of Peoples’ Unaudited Consolidated Financial Statements is presented to provide insight into management’s assessment of the financial condition and results of operations.
Peoples offers diversified financial products and services through 89 locations, including 79 full-service bank branches, and 86 Automated Teller Machines ("ATMs") in northeastern, central, southwestern and southeastern Ohio, west central West Virginia, and central and eastern Kentucky through its financial service units – Peoples Bank and Peoples Insurance Agency, LLC ("Peoples Insurance"), a subsidiary of Peoples Bank.  Peoples Bank is subject to regulation and examination primarily by the Ohio Division of Financial Institutions (the "ODFI"), the Federal Reserve Bank ("FRB") of Cleveland and the Federal Deposit Insurance Corporation (the "FDIC"). Peoples Bank is must also subject tofollow the regulations ofpromulgated by the Consumer Financial Protection Bureau (the "CFPB") which regulates consumer financial products and services and certain financial services providers. Peoples Insurance is subject to regulation by the Ohio Department of Insurance and the state insurance regulatory agencies of those states in which Peoples Insurance may do business.
Peoples’ products and services include traditional banking products, such as deposit accounts, lending products and trust services.  Peoples provides services through traditional offices, ATMs, mobile banking and telephone and internet-based banking.  Peoples also offers a complete array of insurance products and makes available custom-tailored fiduciary, employee benefit plan and asset management services.  Brokerage services are offered by Peoples exclusively through an unaffiliated registered broker-dealer located at Peoples Bank's offices.


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Critical Accounting Policies
The accounting and reporting policies of Peoples conform to US GAAP and to general practices within the financial services industry.  The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could materially differ from those estimates.  Management has identified the accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to understanding Peoples’ Unaudited Consolidated Financial Statements, and Management’s Discussion and Analysis at JuneSeptember 30, 2019, which were unchanged from the policies disclosed in Peoples’ 2018 Form 10-K.
 Summary of Recent Transactions and Events
The following is a summary of recent transactions and events that have impacted or are expected to impact Peoples’ results of operations or financial condition: 
On April 12,During the third quarter of 2019, Peoples completed the previously-announced merger with First Prestonsburg. First Prestonsburg merged into Peoples and First Prestonsburg's wholly-owned subsidiary, First Commonwealth Bankrepurchased 14,175 of Prestonsburg, Inc., which operated nine full-service bank branches in central and eastern Kentucky, merged into Peoples Bank. Total purchase price of $43.7 million was paid in the merger, of which $11.3 million was in the form of a special cash dividend paid by First Prestonsburg to shareholders of First Prestonsburg prior to the merger with the remainder being paid in the form of an aggregate of 1,005,478 Peoplesits common shares by Peoples. The merger added $130.4 millionthrough its share repurchase program for a total of total loans and $257.2 million of total deposits at the acquisition date, after preliminary fair value adjustments. Peoples also recorded $4.2 million of other intangible assets and $12.0 million of goodwill. These amounts reflect information available through the date of the filing of this Quarterly Report on Form 10-Q. Refer to "Note 12 Acquisitions" of the Notes to the Unaudited Consolidated Financial Statements for additional information.$431,000.
AtOn August 22, 2019, Peoples Risk Management, Inc., a wholly-owned subsidiary of Peoples, was formed. Peoples Risk Management, Inc. is a Nevada-based captive insurance company which insures against certain risks unique to the closeoperations of business on April 13, 2018, Peoples completed the merger with ASB. ASB merged into Peoples and ASB's wholly-owned subsidiary, American Savings Bank, fsb,for which operated seven full-service bank branches and two loan production offices in southern Ohio and eastern Kentucky, merged intoinsurance may not be currently available or economically feasible. Peoples Bank. UnderRisk Management, Inc. pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among all participants. Peoples Risk Management, Inc. is subject to the termsregulations of the merger agreement, Peoples paid total considerationState of $41.5 million. The merger added $239.2 millionNevada and undergoes periodic examinations by the Nevada Division of total loans and loans held for sale in the aggregate, and $198.6 million of total deposits at the acquisition date, after acquisition accounting adjustments. Peoples also recorded $2.6 million of other intangible assets and $18.1 million of goodwill.Insurance.
During the secondthird quarter of 2019, Peoples incurred $189,000 of acquisition-related costs, compared to $7.0 million in the second quarter of 2019, and $674,000 in the third quarter of 2018. During the first nine months of 2019, Peoples incurred $7.5 million of acquisition-related costs, compared to $253,000 in the first quarter of 2019, and $6.3 million in the second quarter of 2018. During the first six months of 2019, Peoples incurred $7.3 million of acquisition-related costs, compared to $6.4$7.1 million during the first sixnine months of 2018. The acquisitionacquisition-related costs in 2019 and 2018 were primarily related to the First Prestonsburg and ASB mergers,acquisitions, respectively, and were primarily related to fees associated with early termination of contracts, severance costs and write-offs associated with assets acquired.
During the third quarter of 2019, Peoples entered into $10.0 million of interest rate swaps, with a notional value in the aggregate of $10.0 million, which became effective immediately and will mature in 2029, with an interest rate of 1.44%. During the second quarter of 2019, Peoples entered into $30.0 million of interest rate swaps, with a notional value in the aggregate of $30.0 million, which became effective immediately and will mature between 2023 and 2026, with interest rates ranging from 1.89% to 1.91%. For additional information regarding Peoples' interest rate swaps, refer to "Note 9 Derivative Financial Instruments" of the Notes to the Unaudited Consolidated Financial Statements.
During the firstthird quarter of 2019, Peoples recognized a $1.8 million recovery on a previously charged-off commercial loan.
reported that it will be closing one full-service bank branch located in Kentucky and one full-service bank branch located in West Virginia. During the second quarter of 2019, Peoples closed one full-service bank branch located in West Virginia when the lease expired in June 2019. During the first quarter of 2019, Peoples closed one insurance office located in Ohio when the lease for the location expired at the end of January 2019 and one full-service bank branch located in West Virginia when the lease for the location expired in March 2019. EmployeesMost employees at the closed locations were relocated to other branches or offices.
On April 22, 2019, Peoples Bank signed an agreement to open a Federal Funds liquidity facility with Canadian Imperial Bank of Commerce, which either party may cancel at any time. The $20.0 million line increases Peoples Bank's contingent liquidity funding and will serve to help manage Peoples Bank's daily liquidity needs. As of JuneSeptember 30, 2019, Peoples Bank had not borrowed under the agreement.
On April 12, 2019, Peoples completed the previously-announced merger with First Prestonsburg. First Prestonsburg merged into Peoples and First Prestonsburg's wholly-owned subsidiary, First Commonwealth Bank of Prestonsburg, Inc., which operated nine full-service bank branches in central and eastern Kentucky, merged into Peoples Bank. First Prestonsburg shareholders received total consideration of $43.7 million in the merger, of which $11.3 million was in the form of a special cash dividend paid by First Prestonsburg to shareholders of First Prestonsburg prior to the merger with the remainder being paid in the form of an aggregate of 1,005,478 Peoples common shares by Peoples. The merger added $129.4 million of total loans and $257.2 million of total deposits at the acquisition date, after preliminary fair value adjustments. Peoples also recorded $4.2 million of other intangible assets and $15.2 million of goodwill. These amounts reflect information available through the date of the filing of this Quarterly


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Report on Form 10-Q. Refer to "Note 12 Acquisitions" of the Notes to the Unaudited Consolidated Financial Statements for additional information.
On April 3, 2019, Peoples entered into a Loan Agreement (the “U.S. Bank Loan Agreement”) with U.S. Bank National Association. The U.S. Bank Loan Agreement has a one-year term and provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $20.0 million that may be used: (i) for working capital purposes; (ii) to finance dividends or other distributions (other than stock dividends and stock splits) on or in respect of Peoples’ capital stock and redemptions, repurchases or other acquisitions of any of Peoples’ capital stock permitted under the U.S. Bank Loan Agreement and (iii) to finance acquisitions permitted under the U.S. Bank Loan Agreement.


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purposes; (ii) to finance dividends or other distributions (other than stock dividends and stock splits) on or in respect of Peoples’ capital stock and redemptions, repurchases or other acquisitions of any of Peoples’ capital stock permitted under the U.S. Bank Loan Agreement and (iii) to finance acquisitions permitted under the U.S. Bank Loan Agreement.
Effective April 3, 2019, Peoples terminated the Credit Agreement, dated as of March 4, 2016 between Peoples, as Borrower, and Raymond James Bank, N.A., as Lender (the "RJB Credit Agreement"), withwhich provided for a revolving line of credit in the maximum aggregate principal amount of $15.0 million.
During the first quarter of 2019, Peoples recognized a $1.8 million recovery on a previously charged-off commercial loan.
During the first quarter of 2019, Peoples sold its restricted Class B Visa stock, which had been held at a carrying cost and fair value of zero due to the litigation liability associated with the stock, resulting in a gain of $787,000 recorded in other non-interest income.
Multiple items impacted Peoples' income tax expense during 2018, primarily as a result of the Tax Cuts and Jobs Act, which lowered the statutory federal corporate income tax rate to 21% as of January 1, 2018, from a previous rate of 35%. There were no similar items in 2019.
Beginning on January 1, 2018, Peoples began recognizing income tax expense at the 21% statutory federal corporate income tax rate.
During the fourth quarter of 2018, Peoples finalized the remeasurement of its net deferred tax assets and liabilities at the new statutory federal corporate income tax rate of 21%, which resulted in a reduction to income tax expense of $705,000 in 2018. The final adjustment was mainly due to Peoples' contribution of $3.2 million to Peoples' defined benefit pension plan during 2018.
During 2018, Peoples released a valuation allowance, which reduced income tax expense by $0.8 million. The valuation allowance was related to a historical tax credit that Peoples had invested in during 2015. Peoples sold $6.7 million of equity investment securities in the second quarter of 2018, which resulted in a capital gain for tax purposes. This capital gain was large enough to offset an anticipated future capital loss, which is expected to be recognized due to the structure of the historical tax credit investment, resulting in the release of the valuation allowance.
During the fourth quarter of 2018, Peoples incurred $176,000 and $91,000 in pension settlement costs during the third and fourth quarters of 2018, respectively, due to the aggregate amount of lump-sum distributions to participants in Peoples' defined benefit pension plan exceeding the threshold for recognizing such charges during the period. There were no such costs during the first, second or secondthird quarters of 2019 or the first or second quarters of 2018.
On July 31, 2018, Peoples entered into $50.0 million of interest rate swaps, which became effective immediately and will mature between 2021 and 2028, with interest rates ranging from 2.92% to 3.00%. Additionally, the three interest rate swaps acquired with the ASB acquisition matured in July of 2018. These swaps locked in funding rates for $40.0 million, in notional value, in FHLB advances that matured in 2018, which had interest rates ranging from 3.57% to 3.92%. For additional information regarding Peoples' interest rate swaps, refer to "Note 9 Derivative Financial Instruments" of the Notes to the Unaudited Consolidated Financial Statements.
At the close of business on April 13, 2018, Peoples completed the merger with ASB. ASB merged into Peoples, and ASB's wholly-owned subsidiary, American Savings Bank, fsb, which operated seven full-service bank branches and two loan production offices in southern Ohio and eastern Kentucky, merged into Peoples Bank. Under the terms of the merger agreement, Peoples paid total consideration of $41.5 million. The merger added $239.2 million of total loans and loans held for sale in the aggregate, and $198.6 million of total deposits at the acquisition date, after acquisition accounting adjustments. Peoples also recorded $2.6 million of other intangible assets and $18.1 million of goodwill.
On January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of $7.8 million of equity investment securities from available-for-sale investment securities to other investment securities and the reclassification of $5.0 million in net unrealized gains on equity investment securities from accumulated other comprehensive loss to retained earnings.


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reclassification of $5.0 million in net unrealized gains on equity investment securities from accumulated other comprehensive loss to retained earnings.
The Federal Reserve Board began tightening monetary policyraising interest rates in December 2015 by raisingwhen the benchmark Federal Funds Target Rate. Since then, the rate has increased several times fromeffective target range was 0.00% to 0.25%. The last increase was in December 2018, resulting in a range of 0.25% to 0.50% to its currenttarget range of 2.25% to 2.50%. Market participants are now expecting two eases this yearThe Federal Reserve Board lowered interest rates once in July 2019 and potentially one early next year. While recent economic numbers have been fairly strong,again in September 2019, resulting in a Federal Funds Target Rate of 1.75% to 2.00% by the end of the third quarter. The Federal Funds futures market suggests the Federal Reserve Board is contemplating lowering rates in order to prevent the economy from slipping into what many investors believe is a long-overdue recession. The Federal Reserve Board has also indicated it would pause reducing its balance sheet beginning in September 2019 as planned. As a result,will cut interest rates will likely remain rather low throughoutagain before the restend of 2019. Peoples is closely monitoringThe impact of trade tariffs, coupled with recent weakness in the manufacturing sector, have given rise to concerns of a slowdown of the US economy, which could potentially lead to additional interest rates, both foreign and domestic; and potential impacts of changesrate cuts in interest rates to Peoples' operations.2020.
The impact of these transactions and events, where material, is discussed in the applicable sections of this Management’s Discussion and Analysis of Results of Operations and Financial Condition.


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EXECUTIVE SUMMARY
Peoples recorded net income of $9.6$14.9 million for the secondthird quarter of 2019, representing earnings per diluted common share of $0.46,$0.72, compared to $14.4$9.6 million, or $0.73$0.46 per diluted common share, for the firstsecond quarter of 2019, and $7.9$12.7 million, or $0.41$0.65 per diluted share, for the secondthird quarter of 2018. During the second quarter of 2019,Acquisition-related costs negatively impacted earnings per diluted common share were negatively impacted by $0.01 per share during the third quarter of 2019, and $0.28 per share for acquisition-related costs.during the second quarter of 2019. During the first quarter of 2019, earnings per diluted common share were positively impacted by $0.07 per share for the recovery on a previously charged-off commercial loan and by $0.03 per share for income related to the sale of restricted Class B Visa stock, partially offset by the negative impact of $0.01 per share for acquisition-related costs. During the secondthird quarter of 2018, earnings per diluted common share were negatively impacted by $0.25$0.03 per share in acquisition-related costs and were positively impacted by $0.04$0.01 per share due to the release of a tax valuation allowance.for pension settlement charges.
During the first sixnine months of 2019, net income was $24.0$38.8 million, or $1.19$1.91 per diluted share, compared to $19.6$32.4 million, or $1.04$1.69 per diluted common share, for the same period in 2018. The increased earnings were primarily due to increases in net interest income, deposit account service charges, and electronic banking income, which were partially offset by increased salaries and employee benefit costs, and other non-interest expenses, which were impacted by the First Prestonsburg and ASB mergers,acquisition in 2019 compared toand the ASB acquisition in 2018. Acquisition-related costs negatively impacted earnings per diluted common share by $0.29 and $0.27 during the first sixnine months of 2019, and $0.28 per share during the first nine months of 2018. Earnings per diluted common share for the first nine months of 2018 respectively.were also negatively impacted by $0.01 per share for pension settlement charges, which was offset by an additional $0.04 per share provided by the release of a tax valuation allowance.
Net interest income increasedwas $35.8 million for the third quarter of 2019, down 1% compared to $36.0 million for the second quarter of 2019, up 6%and an increase of 7% compared to $33.9$33.3 million for the first quarter of 2019, and increased by 10% compared to $32.8 million for the secondthird quarter of 2018. Net interest margin was 3.66% for the third quarter of 2019, compared to 3.77% for the second quarter of 2019, compared to 3.80%and 3.68% for the first quarter of 2019, and 3.74% for the secondthird quarter of 2018. The slight decline in net interest income and net interest margin duringcompared to the linked quarter was driven by lower yields on loans, combined with slightly higher costs for time deposits and governmental deposits, which more than offset increased loan yields, driven by the First Prestonsburg merger. Compared to the first quarter of 2019, net interest income was positively impacted by the merger of First Prestonsburg.deposit costs. The increase in net interest income compared to the secondthird quarter of 2018, which was impacted by the acquired First Prestonsburg loans and deposits, was driven by higher yields on loans, combined with the impact of First Prestonsburg earning assets. These werehigher loan balances, partially offset by higher deposit costs due to increased competition for deposits, combined with additional interest expense related to the acquired First Prestonsburgon deposits.
For the second quarter of 2019, accretionAccretion income, from acquisitions, net of amortization expense, from acquisitions was $1.2 million compared to $722,000 for the first quarterthird and second quarters of 2019, and $523,000$612,000 for the secondthird quarter of 2018, which added 12 basis points, 13 basis points, 8 basis points, and 67 basis points, respectively, to net interest margin. The growthincrease in net accretion income compared to the first quarter of 2019 and the secondthird quarter of 2018 was due to the First Prestonsburg merger, specifically the loan discount that was accreted during the quarter.acquisition.
For the first sixnine months of 2019, net interest income was $70.0$105.7 million, and net interest margin was 3.78%3.74%, compared to $62.2$95.5 million and 3.70%3.69%, respectively, duringfor the same period in 2018. The increases were driven by higher interest income on loans due to a combination of loan growth, which was primarily the result of the First Prestonsburg and ASB acquisitions, and higher yields from interest rate increases. The interestInterest income from higher average loan balanceson loans outpaced interest expense from deposits, which increased primarily due to higher rates paid on deposits, combined with additional interest expense related to the recent acquisitions and increased competition for deposits.acquisitions. The first sixnine months of 2018 benefited from proceeds of $589,000$588,000 received on an investment securitiessecurity that had been previously written down due to other-than-temporary impairment ("OTTI"), which added 32 basis points to net interest margin. Peoples recorded no similar proceeds during the first nine months of 2019.
Accretion income, net of amortization expense, from acquisitions was $1.9$3.1 million for the first sixnine months of 2019 and $1.1$1.7 million for the first sixnine months of 2018, which added 1011 basis points and 67 basis points, respectively, to net interest margin. The growth in net accretion income compared to the first sixnine months of 2018 was largely due to the First Prestonsburg acquisition and, to a lesser extent, the ASB acquisition.


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During the firstthird quarter of 2019, Peoples recorded a provision for loan losses of $626,000,$1.0 million, compared to a recovery of loan losses of $263,000$626,000 for the firstsecond quarter of 2019 and a provision for loan losses of $1.2$1.3 million for the secondthird quarter of 2018. Net charge-offs for the secondthird quarter of 2019 were $208,000,$777,000, or 0.03%0.11% of average total loans, compared to net recoveries of $1.0 million,$208,000, or 0.15%0.03% of average total loans, for the linked quarter and net charge-offs of $720,000,$687,000, or 0.11%0.10% of average total loans, for the secondthird quarter of 2018. Net recoveries during the first quarter of 2019 were driven by a $1.8 million recovery recorded on a previously charged-off commercial loan. Given the low net charge-offs in the current quarter, combined with originated loan balances remaining stable during the second quarter of 2019, theThe provision for loan losses during each of the current and linked quarter was lower than historical trends. Provisiondriven by higher net charge-offs and originated loan growth. The provision for loan losses during the first sixnine months of 2019 was $363,000,$1.4 million, compared to $3.2$4.5 million for the first sixnine months of 2018. Net recoveries for the first sixnine months of 2019 were $799,000,$22,000, compared to net charge-offs of $2.7$3.4 million, or 0.18% of average total loans, for the first sixnine months of 2018. The first sixnine months of 2019 included thea $1.8 million recovery recorded on a previously charged-off commercial loan. The first sixnine months of 2018 included a charge-off of $827,000 on an acquired commercial loan relationship.


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For the secondthird quarter of 2019, total non-interest income declined $140,000,was up $1.1 million, or 1%7%, compared to the firstsecond quarter of 2019 and was up $2.0 million, or 15%14%, from the secondthird quarter of 2018. The first quarter of 2019 included $1.4 million of annual performance-based insurance commissions, which are primarily received in the first quarter each year. Additionally, other non-interest income in the first quarter of 2019 included $787,000 of income relatedCompared to the sale of restricted Class B Visa stock. During the second quarter of 2019, these two items were largely offset by increases in a number of categories, includingelectronic banking income was up $310,000, or 9%, income from deposit account service charges increased $256,000, or 9%, commercial loan swap fee income was up $256,000, or 50%, and mortgage banking income increased $204,000, or 20%. These increases were partially offset by a decline of $196,000, or 6%, in trust and investment income, electronic banking income, and mortgage bankinga decline of $100,000, or 3%, in insurance income. The increase in total non-interest income from the secondthird quarter of 2018 was driven by increases in all non-interest income categories, with the exception of bank owned life insurance and insurance income, which had a slight decrease. decreases.
For the first sixnine months of 2019, total non-interest income grew 9%11%, as most categories of non-interest income increased, including income from deposit account service charges, which was up $1.4 million, or 19%, and electronic banking income, which increased $1.4 million, or 16%. Commercial loan swap fee income more than doubled and mortgage banking income increased $612,000, or 26%. Realized and commercial loan swap fee income.unrealized gains on equity investment securities increased $620,000 compared to the first nine months of 2018, driven by $787,000 of income related to the sale of restricted Class B Visa stock during the first quarter of 2019.
Total non-interest expense increased $7.0decreased $5.9 million, or 22%15%, infor the secondthird quarter of 2019 compared to the firstsecond quarter of 2019 and grew $2.9$2.2 million, or 8%7%, compared to the secondthird quarter of 2018. The increasedecline compared to the linked quarter was primarily due to acquisition-related expenses, which totaled $199,000 for the third quarter of First Prestonsburg, coupled with2019, compared to $6.8 million for the ongoing costsecond quarter of running the First Prestonsburg operations.2019. The growth in total non-interest expense compared to the secondthird quarter of 2018 was led by higher salaries and employee benefit costs and electronic banking expenses, partially offset by a decline in professional fees.FDIC insurance expense. Base salaries, stock-based compensation, and medical insurance were the main contributors to the increase in salaries and employee benefit costs whichcompared to the third quarter of 2018. Base salaries were impacted by employees that have been added in the last twelve months from acquisitions and for future growth, as well as higher medical claims. Base salaries were also impacted by annual merit increases, which included the implementation ofcontinued movement towards a $15 per hour minimum wage throughout the company, whichand the First Prestonsburg and ASB acquisitions. The $15 per hour minimum wage began being phased in during 2018 and will be largely implemented by January 1, 2020. Professional fees declined 22% comparedThe increase in stock-based compensation was driven by higher expense related to the second quarter of 2018, primarily duestock grants made to consulting work performedretirement eligible grantees combined with Peoples' improved performance during the second quarter of 2018 whichrecent years. The increase in medical insurance was not repeated in 2019.driven by higher medical claims.
During the first sixnine months of 2019, total non-interest expense increased 10%9% compared to the same period in 2018. This increase was led by higher salaries and employee benefit costs, partially offset by a decline in professional fees. Salaries and employee benefit costs were up primarily due to higher base salaries, medical insurance and stock-based compensation. Base salaries were impacted by the First Prestonsburg and ASB acquisitions, annual merit increases, which included the implementation ofcontinued movement towards a $15 per hour minimum wage throughout the company, and employees that have been added in the last twelve months for future growth.First Prestonsburg and ASB acquisitions. The increase in medical insurance was driven by higher medical claims. Stock-based compensation increased as a result of the employees that have been added in the last twelve months fromhigher expense related to stock grants made to retirement eligible grantees combined with Peoples' improved performance during recent acquisitions and for future growth.years. Professional fees declined 24% compared to the first sixnine months of 2018, mostly due to consulting work performed during the first sixnine months of 2018 which was not repeated in 2019. Net occupancy and equipment expenses also increased compared to the first nine months of 2018, primarily due to the added facilities obtained in the acquisitions. Peoples also made investments in technology, which resulted in increased electronic banking, and data processing and software expenses.
Peoples' efficiency ratio, calculated as total non-interest expense less amortization of other intangible assets divided by fully tax-equivalent ("FTE") net interest income, plus total non-interest income, excluding all gains and losses, for the third quarter of 2019 was 61.1%, compared to 73.2% for the second quarter of 2019 was 73.2%, compared to 62.7%and 62.6% for the first quarter of 2019 and 75.0% for the secondthird quarter of 2018. The efficiency ratio increasedimproved compared to the linked quarter, driven by higherlower acquisition-related expenses. The efficiency ratio, when adjusted for non-core items, was 60.7% for the third quarter of 2019, compared to 60.2% for the second quarter of 2019 compared to 62.2%and 60.8% for the first quarter of 2019 and 62.0% for the secondthird quarter of 2018. During the first sixnine months of 2019, the efficiency ratio was 68.1%65.7%, compared to 68.5%66.5% for the same period in 2018. The efficiency ratio, when adjusted for non-core items, during the first sixnine months of


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2019 was 61.2% and was 61.7%improved to 61.0%, compared to 61.4% for the first sixnine months of 2018.2018, driven by increases in net interest income and non-interest income.
Income tax expense was $2.2$3.3 million for the secondthird quarter of 2019, compared to $3.4$2.2 million for the linked quarter and $1.0$2.8 million for the secondthird quarter of 2018. The declineincrease in income tax expense compared to the linked quarter was due to lower pre-tax income. The current quarter included a tax benefit of $59,000 recorded for the vesting of restricted stock during the current quarter, compared to a tax benefit of $133,000 in the linked quarter. The vesting of a majority of stock awards granted by Peoples occurs annually in the first quarter. The increase in income tax expense compared to the secondand third quarter of 2018 was primarily due to higher pre-tax income. For the first sixnine months of 2019, Peoples recorded income tax expense of $5.6$8.9 million, compared to $3.4$6.2 million for the same period in the prior year. The year-over-year increase in income tax expense was primarily due to higher pre-tax income. The first sixnine months of 2019 included a tax benefit of $192,000$195,000 recorded for the vesting of restricted stock during the period. The first sixnine months of 2018 also included an $805,000 valuation allowance release, as well as a tax benefit of $296,000$314,000 recorded for the vesting of restricted stock during the period.
At JuneSeptember 30, 2019, total assets were $4.28$4.40 billion, compared to $3.99 billion at December 31, 2018. The 7%10% increase compared to December 31, 2018 was primarily due to the First Prestonsburg merger,acquisition, which added $294.1$290.9 million of assets, including $130.4$129.4 million in total loans and $139.7 million in investment securities, after preliminary fair value adjustments.


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Total liabilities were $3.70$3.81 billion at JuneSeptember 30, 2019, up $226.0$336.3 million since December 31, 2018. The increase in liabilities during the first sixnine months of 2019 was primarily due to an increase in deposits of $408.1$401.7 million, partially offset by a decline in borrowings of $193.7$93.5 million. The growth in deposits compared to December 31, 2018, was mostly due to acquired First Prestonsburg deposit balances, which totaled $232.2$214.0 million at JuneSeptember 30, 2019. Retail certificates of deposit ("CDs") grew $102.9 million, of which $65.3 million was from First Prestonsburg. Governmental deposit and brokered CDs were up $64.4 million and $62.3 million, respectively, compared to December 31, 2018.
At JuneSeptember 30, 2019, total stockholders' equity was $579.0$588.5 million, an increase of $58.9$68.4 million, compared to December 31, 2018. The increase in total stockholders' equity was mostly due to net income of $38.8 million, the $32.4 million of common shares issued in connection with the First Prestonsburg merger, net income of $9.6 millionacquisition, and other comprehensive income of $7.8$14.0 million, partially offset by dividends paid of $7.0$19.9 million. Additionally, Peoples repurchased 14,175 of its common shares under its share repurchase program for a total of $431,000 during the third quarter of 2019.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the amount by which interest income exceeds interest expense, remains Peoples' largest source of revenue.  The amount of net interest income earned by Peoples each quarter is affected by various factors, including changes in market interest rates due to the Federal Reserve Board’s monetary policy, the level and degree of pricing competition for both loans and deposits in Peoples’ markets, and the amount and composition of Peoples' earning assets and interest-bearing liabilities. 
Net interest margin, which is calculated by dividing FTE net interest income by average interest-earning assets, serves as an important measurement of the net revenue stream generated by the volume, mix and pricing of interest-earning assets and interest-bearing liabilities.  FTE net interest income is calculated by increasing interest income to convert tax-exempt income earned on obligations of states and political subdivisions and tax-exempt loans to the pre-tax equivalent of taxable income using a federal corporate income tax rate of 21%.  
The following table details the calculation of FTE net interest income:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018 20192018
Net interest income$36,049
33,914
$32,808
 $69,963
$62,167
$35,754
36,049
$33,324
 $105,717
$95,491
Taxable equivalent adjustments267
200
223
 467
450
314
267
221
 781
670
Fully tax-equivalent net interest income$36,316
$34,114
$33,033
 $70,430
$62,617
$36,068
$36,316
$33,545
 $106,498
$96,161




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The following tables detail Peoples’ average balance sheets for the periods presented:
For the Three Months EndedFor the Three Months Ended
June 30, 2019 March 31, 2019 June 30, 2018September 30, 2019 June 30, 2019 September 30, 2018
(Dollars in thousands)
Average BalanceIncome/ ExpenseYield/Cost Average BalanceIncome/ ExpenseYield/Cost Average BalanceIncome/ ExpenseYield/CostAverage BalanceIncome/ ExpenseYield/Cost Average BalanceIncome/ ExpenseYield/Cost Average BalanceIncome/ ExpenseYield/Cost
Short-term investments$27,979
$263
3.77% $16,247
$176
4.39% $10,815
$56
2.00%$62,860
$506
3.19% $27,979
$263
3.77% $23,057
$86
1.48%
Investment securities (a)(b):                
Taxable (c)874,427
6,006
2.75% 780,721
5,847
3.00% 793,497
5,868
2.96%896,142
5,986
2.67% 874,427
6,006
2.75% 787,081
5,615
2.85%
Nontaxable118,241
923
3.12% 83,319
680
3.26% 96,991
804
3.32%113,806
874
3.07% 118,241
923
3.12% 93,958
777
3.31%
Total investment securities992,668
6,929
2.79% 864,040
6,527
3.03% 890,488
6,672
3.00%1,009,948
6,860
2.69% 992,668
6,929
2.79% 881,039
6,392
2.90%
Loans (b)(d):                
Commercial real estate, construction124,334
1,655
5.27% 131,683
1,732
5.26% 118,206
1,438
4.81%103,758
1,313
4.95% 124,334
1,655
5.27% 123,939
1,573
4.97%
Commercial real estate, other833,991
11,322
5.37% 806,181
10,596
5.26% 840,677
10,434
4.91%844,186
11,307
5.24% 833,991
11,322
5.37% 852,675
10,934
5.02%
Commercial and industrial599,432
8,081
5.33% 578,954
7,681
5.31% 503,364
6,216
4.89%603,750
8,110
5.26% 599,432
8,081
5.33% 526,316
6,844
5.09%
Residential real estate (e)646,978
7,918
4.90% 603,253
6,927
4.59% 600,799
6,749
4.49%648,481
7,903
4.87% 646,978
7,918
4.90% 614,914
7,010
4.56%
Home equity lines of credit132,395
2,006
6.08% 131,089
1,860
5.75% 131,970
1,701
5.17%131,898
1,977
5.95% 132,395
2,006
6.08% 135,626
1,860
5.44%
Consumer, indirect412,986
4,255
4.13% 409,975
4,088
4.04% 359,941
3,498
3.90%423,694
4,452
4.17% 412,986
4,255
4.13% 387,559
3,872
3.96%
Consumer, direct80,442
1,459
7.27% 73,457
1,189
6.56% 72,820
1,230
6.77%82,067
1,495
7.23% 80,442
1,459
7.27% 76,171
1,281
6.67%
Total loans2,830,558
36,696
5.20% 2,734,592
34,073
5.00% 2,627,777
31,266
4.73%2,837,834
36,557
5.08% 2,830,558
36,696
5.16% 2,717,200
33,374
4.84%
Allowance for loan losses(21,311)   (20,406)   (19,071)  (21,620)   (21,311)   (19,584)  
Net loans2,809,247
36,696
5.20% 2,714,186
34,073
5.04% 2,608,706
31,266
4.77%2,816,214
36,557
5.12% 2,809,247
36,696
5.20% 2,697,616
33,374
4.88%
Total earning assets3,829,894
43,888
4.56% 3,594,473
40,776
4.55% 3,510,009
37,994
4.31%3,889,022
43,923
4.47% 3,829,894
43,888
4.56% 3,601,712
39,852
4.37%
Goodwill and other intangible assets175,169
   161,673
   161,600
  179,487
   175,169
   163,615
  
Other assets234,716
   229,475
   226,348
  242,880
   234,716
   232,927
  
Total assets
$4,239,779
   $3,985,621
   $3,897,957
  $4,311,389
   $4,239,779
   $3,998,254
  
Deposits: ��               
Savings accounts$523,295
$110
0.08% $472,656
$91
0.08% $477,167
$69
0.06%$524,025
$126
0.10% $523,295
$110
0.08% $476,127
$84
0.07%
Governmental deposit accounts331,607
848
1.03% 297,537
557
0.76% 312,999
273
0.35%347,625
991
1.13% 331,607
848
1.03% 328,806
507
0.61%
Interest-bearing demand accounts603,494
231
0.15% 569,472
247
0.18% 581,600
202
0.14%617,770
378
0.24% 603,494
231
0.15% 551,291
157
0.11%
Money market accounts414,307
654
0.63% 395,324
531
0.54% 393,580
323
0.33%434,834
787
0.72% 414,307
654
0.63% 395,477
365
0.37%
Retail certificates of deposit477,530
2,079
1.75% 396,977
1,417
1.45% 395,304
1,242
1.26%495,499
2,255
1.81% 477,530
2,079
1.75% 402,379
1,372
1.35%
Brokered certificates of deposit272,693
1,797
2.64% 314,163
2,001
2.58% 187,387
992
2.13%261,145
1,622
2.46% 272,693
1,797
2.64% 256,780
1,533
2.37%
Total interest-bearing deposits2,622,926
5,719
0.87% 2,446,129
4,844
0.80% 2,348,037
3,101
0.53%2,680,898
6,159
0.91% 2,622,926
5,719
0.87% 2,410,860
4,018
0.66%
Borrowed funds:                
Short-term FHLB advances193,963
1,140
2.36% 198,643
1,115
2.28% 225,635
966
1.72%190,677
1,086
2.26% 193,963
1,140
2.36% 258,742
1,475
2.26%
Repurchase agreements and other46,631
93
0.80% 46,111
58
0.50% 85,188
209
0.98%46,240
64
0.55% 46,631
93
0.80% 74,174
142
0.77%
Total short-term borrowings240,594
1,233
2.06% 244,754
1,173
1.94% 310,823
1,175
1.52%236,917
1,150
1.93% 240,594
1,233
2.06% 332,916
1,617
1.93%
Long-term FHLB advances96,519
491
2.04% 100,930
508
2.04% 114,287
559
1.96%76,893
410
2.12% 96,519
491
2.04% 104,026
537
2.05%
Other borrowings7,346
129
7.02% 7,304
137
7.50% 7,766
126
6.49%7,388
136
7.36% 7,346
129
7.02% 7,217
135
7.48%
Total long-term borrowings103,865
620
2.39% 108,234
645
2.41% 122,053
685
2.25%84,281
546
2.58% 103,865
620
2.39% 111,243
672
2.40%
Total borrowed funds344,459
1,853
2.16% 352,988
1,818
2.09% 432,876
1,860
1.72%321,198
1,696
2.10% 344,459
1,853
2.16% 444,159
2,289
2.05%
Total interest-bearing liabilities2,967,385
7,572
1.02% 2,799,117
6,662
0.96% 2,780,913
4,961
0.71%3,002,096
7,855
1.04% 2,967,385
7,572
1.02% 2,855,019
6,307
0.88%
Non-interest-bearing deposits654,468
   613,924
   585,800
  657,952
   654,468
   592,709
  
Other liabilities52,934
 
  48,384
 
  41,368
 
 68,072
 
  52,934
 
  48,741
 
 
Total liabilities3,674,787
   3,461,425
  
3,408,081
  3,728,120
   3,674,787
  
3,496,469
  
Total stockholders’ equity564,992
 
  524,196
 
  489,876
 
 583,269
 
  564,992
 
  501,785
 
 
Total liabilities and stockholders’ equity$4,239,779
 
  $3,985,621
 
  $3,897,957
 
 $4,311,389
 
  $4,239,779
 
  $3,998,254
 
 
Interest rate spread (b) $36,316
3.54%  $34,114
3.59%  $33,033
3.60% $36,068
3.43%  $36,316
3.54%  $33,545
3.49%
Net interest margin (b)Net interest margin (b)3.77%  3.80%  3.74%Net interest margin (b)3.66%  3.77%  3.68%



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For the Six Months EndedFor the Nine Months Ended
June 30, 2019 June 30, 2018September 30, 2019 September 30, 2018
(Dollars in thousands)
Average BalanceIncome/ ExpenseYield/Cost Average BalanceIncome/ ExpenseYield/CostAverage BalanceIncome/ ExpenseYield/Cost Average BalanceIncome/ ExpenseYield/Cost
Short-term investments$22,145
$439
4.00% $11,052
$106
1.93%$35,867
$945
3.52% $15,379
$192
1.67%
Investment securities (a)(b):          
Taxable(c)827,831
11,853
2.86% 784,628
11,555
2.95%850,852
17,839
2.80% 785,454
17,169
2.91%
Nontaxable100,876
1,603
3.18% 97,062
1,618
3.33%105,233
2,477
3.14% 96,016
2,395
3.33%
Total investment securities928,707
13,456
2.90% 881,690
13,173
2.99%956,085
20,316
2.83% 881,470
19,564
2.96%
Loans (b)(c):     
Loans (b)(d):     
Commercial real estate, construction127,988
3,387
5.26% 118,396
2,771
4.66%119,823
4,700
5.17% 120,264
4,344
4.76%
Commercial real estate, other820,163
21,918
5.32% 803,085
19,558
4.84%828,258
33,225
5.29% 819,797
30,492
4.90%
Commercial and industrial589,249
15,762
5.32% 491,643
11,787
4.77%594,136
23,872
5.30% 503,328
18,631
4.88%
Residential real estate (d)(e)625,236
14,845
4.75% 546,558
12,058
4.41%633,070
22,748
4.79% 569,593
19,068
4.46%
Home equity lines of credit131,746
3,866
5.92% 120,360
2,972
4.98%131,797
5,843
5.93% 125,505
4,832
5.15%
Consumer, indirect411,489
8,343
4.09% 351,581
6,628
3.80%415,602
12,795
4.12% 363,705
10,500
3.86%
Consumer, other76,969
2,648
6.94% 70,633
2,392
6.83%78,687
4,143
7.04% 72,499
3,673
6.77%
Total loans2,782,840
70,769
5.07% 2,502,256
58,166
4.64%2,801,373
107,326
5.07% 2,574,691
91,540
4.70%
Less: Allowance for loan losses(20,861)   (18,878)  (21,117)   (19,116)  
Net loans2,761,979
70,769
5.12% 2,483,378
58,166
4.68%2,780,256
107,326
5.12% 2,555,575
91,540
4.75%
Total earning assets3,712,831
84,664
4.55% 3,376,120
71,445
4.23%3,772,208
128,587
4.52% 3,452,424
111,296
4.28%
Intangible assets168,458
   152,943
  172,175
  ��156,540
  
Other assets232,114
   219,268
  235,280
   223,590
  
Total assets
$4,113,403
   $3,748,331
  $4,179,663
   $3,832,554
  
Deposits:          
Savings accounts$498,115
$201
0.08% $465,091
$133
0.06%$506,847
$326
0.09% $468,810
$217
0.06%
Governmental deposit accounts314,666
1,405
0.90% 302,286
490
0.33%325,773
2,396
0.98% 311,223
997
0.43%
Interest-bearing demand accounts586,577
478
0.16% 574,465
423
0.15%597,089
857
0.19% 566,656
580
0.14%
Money market accounts404,868
1,185
0.59% 380,834
549
0.29%414,966
1,972
0.64% 385,768
914
0.32%
Retail certificates of deposit437,476
3,496
1.61% 366,923
2,007
1.10%457,030
5,750
1.68% 378,871
3,379
1.19%
Brokered certificates of deposit293,313
3,798
2.61% 172,101
1,712
2.01%282,473
5,421
2.57% 200,637
3,245
2.16%
Total interest-bearing deposits2,535,015
10,563
0.84% 2,261,700
5,314
0.47%2,584,178
16,722
0.87% 2,311,965
9,332
0.54%
Borrowed funds:          
Short-term FHLB advances196,290
2,255
2.32% 185,195
1,629
1.77%194,398
3,342
2.30% 209,980
3,104
1.98%
Repurchase agreements and other46,373
151
0.65% 93,634
514
1.10%46,328
214
0.62% 87,076
656
1.00%
Total short-term borrowings242,663
2,406
2.00% 278,829
2,143
1.55%240,726
3,556
1.97% 297,056
3,760
1.69%
Long-term FHLB advances98,712
999
2.04% 116,628
1,123
1.94%91,359
1,409
2.06% 112,381
1,660
1.97%
Other borrowings7,325
266
7.26% 7,439
248
6.67%7,347
402
7.30% 7,364
383
6.93%
Total long-term borrowings106,037
1,265
2.40% 124,067
1,371
2.22%98,706
1,811
2.45% 119,745
2,043
2.28%
Total borrowed funds348,700
3,671
2.12% 402,896
3,514
1.75%339,432
5,367
2.11% 416,801
5,803
1.86%
Total interest-bearing liabilities2,883,715
14,234
0.99% 2,664,596
8,828
0.67%2,923,610
22,089
1.01% 2,728,766
15,135
0.74%
Non-interest-bearing deposits634,308
   569,711
  642,276
   577,461
  
Other liabilities50,674
 
  41,872
 
 56,075
 
  44,189
 
 
Total liabilities3,568,697
   3,276,179
 
 
3,621,961
   3,350,416
 
 
Total stockholders’ equity544,706
 
  472,152
 
 557,702
 
  482,138
 
 
Total liabilities and stockholders’ equity$4,113,403
 
  $3,748,331
 
 $4,179,663
 
  $3,832,554
 
 
Interest rate spread (b) $70,430
3.56%  $62,617
3.56% $106,498
3.51%  $96,161
3.54%
Net interest margin (b) 3.78%  3.70% 3.74%  3.69%
(a)Average balances are based on carrying value.
(b)Interest income and yields are presented on a fully tax-equivalent basis using a 21% statutory federal corporate income tax rate.
(c)Interest income and yield presented for the second quarter of 2018 include $248,000 of proceeds on an investment security for which an other-than-temporary-impairment had been recorded in previous years. Interest income and yield presented for the first sixnine months of 2018 include $589,000 of proceeds on an investment security for which an other-than-temporary-impairment had been recorded in previous years.


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(d)Average balances include nonaccrual, impaired loans and loans held for sale. Interest income includes interest earned and received on nonaccrual loans prior to the loans being placed on nonaccrual status. Loan fees included in interest income were immaterial for all periods presented.
(e)Loans held for sale are included in the average loan balance listed. Related interest income on loans originated for sale prior to the loan being sold is included in loan interest income.
The following table provides an analysis of the changes in FTE net interest income:
Three Months Ended June 30, 2019 Compared to Compared toThree Months Ended September 30, 2019 Compared to Compared to
(Dollars in thousands)March 31, 2019 June 30, 2018 June 30, 2018June 30, 2019 September 30, 2018 September 30, 2018
Increase (decrease) in:RateVolume
Total (a)
 RateVolume
Total (a)
 RateVolume
Total (a)
RateVolume
Total (a)
 RateVolume
Total (a)
 RateVolume
Total (a)
INTEREST INCOME:          
Short-term investments$(155)$242
$87
 $74
$133
$207
 $169
$164
$333
$9
$234
$243
 $201
$219
$420
 $381
$372
$753
Investment Securities (b):
          
Taxable(2,234)2,393
159
 (1,908)2,046
138
 282
16
298
(633)613
(20) (1,821)2,192
371
 516
154
670
Nontaxable(191)434
243
 (271)390
119
 (14)(1)(15)(15)(34)(49) (307)404
97
 60
22
82
Total investment income(2,425)2,827
402
 (2,179)2,436
257
 268
15
283
(648)579
(69) (2,128)2,596
468
 576
176
752
Loans (b):
                
Commercial real estate, construction11
(88)(77) 140
77
217
 380
236
616
(91)(251)(342) (6)(254)(260) 382
(26)356
Commercial real estate, other280
446
726
 1,424
(536)888
 1,937
423
2,360
(738)723
(15) 1,001
(628)373
 2,415
318
2,733
Commercial and industrial50
350
400
 604
1,261
1,865
 1,464
2,511
3,975
(288)317
29
 233
1,033
1,266
 1,685
3,556
5,241
Residential real estate471
520
991
 629
540
1,169
 965
1,822
2,787
(104)89
(15) 499
394
893
 1,461
2,219
3,680
Home equity lines of credit124
22
146
 299
6
305
 595
299
894
(25)(4)(29) 403
(286)117
 760
251
1,011
Consumer, indirect125
42
167
 219
538
757
 527
1,188
1,715
50
147
197
 207
373
580
 729
1,566
2,295
Consumer, direct145
125
270
 85
144
229
 236
20
256
(48)84
36
 103
111
214
 385
85
470
Total loan income1,206
1,417
2,623
 3,400
2,030
5,430
 6,104
6,499
12,603
(1,244)1,105
(139) 2,440
743
3,183
 7,817
7,969
15,786
Total interest income$(1,374)$4,486
$3,112
 $1,295
$4,599
$5,894
 $6,541
$6,678
$13,219
$(1,883)$1,918
$35
 $513
$3,558
$4,071
 $8,774
$8,517
$17,291
INTEREST EXPENSE:                
Deposits:                
Savings accounts$8
$11
$19
 $34
$7
$41
 $58
$10
$68
$16
$
$16
 $33
$9
$42
 $90
$19
$109
Governmental deposit accounts220
71
291
 558
17
575
 894
21
915
97
46
143
 453
31
484
 1,351
48
1,399
Interest-bearing demand accounts(92)76
(16) 21
8
29
 46
9
55
141
6
147
 200
21
221
 244
33
277
Money market accounts94
29
123
 313
18
331
 599
37
636
97
36
133
 383
39
422
 984
74
1,058
Retail certificates of deposit334
328
662
 544
293
837
 1,051
438
1,489
84
92
176
 522
361
883
 1,578
793
2,371
Brokered certificates of deposit291
(495)(204) 281
524
805
 626
1,460
2,086
(107)(68)(175) 63
26
89
 683
1,493
2,176
Total deposit cost855
20
875
 1,751
867
2,618
 3,274
1,975
5,249
328
112
440
 1,654
487
2,141
 4,930
2,460
7,390
Borrowed funds:                
Short-term borrowings180
(120)60
 886
(828)58
 679
(416)263
(58)(25)(83) (10)(457)(467) 493
(697)(204)
Long-term borrowings(13)(12)(25) 136
(201)(65) 171
(277)(106)111
(185)(74) 106
(232)(126) 132
(364)(232)
Total borrowed funds cost167
(132)35
 1,022
(1,029)(7) 850
(693)157
53
(210)(157) 96
(689)(593) 625
(1,061)(436)
Total interest expense1,022
(112)910
 2,773
(162)2,611
 4,124
1,282
5,406
381
(98)283
 1,750
(202)1,548
 5,555
1,399
6,954
Net interest income$(2,396)$4,598
$2,202
 $(1,478)$4,761
$3,283
 $2,417
$5,396
$7,813
$(2,264)$2,016
$(248) $(1,237)$3,760
$2,523
 $3,219
$7,118
$10,337
(a)The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the dollar amounts of the changes in each.
(b)Interest income and yields are presented on a fully tax-equivalent basis using a 21% statutory federal corporate income tax rate.
Net interest income was $36.0$35.8 million for the secondthird quarter of 2019, an increasea decrease of 6%1% compared to the linked quarter.quarter, and an increase of $2.4 million, or 7%, over the third quarter of 2018. Net interest margin was 3.77%3.66% for the secondthird quarter of 2019, compared to 3.80%3.77% for the linked quarter, and 3.68% for the third quarter of 2018. Net interest income remained relatively stable although interest rates declined during the quarter, which impacted the loan and investment portfolios. Peoples' variable rate commercial loans are subject to changes in London Interbank Offered Rate and the prime rate, both of which declined during the third quarter of 2019. The net interest margin was impacted by the lower interest rates received on loans. At September 30, 2019, average loan balances as a percent of average total earning assets declined to 73.0%, from 73.9% in the linked quarter. Higher deposit costs were partially offset by lower interest expense on borrowings.


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The slight declineincrease in net interest margin duringincome compared to the third quarter of 2018 was driven by higher costs for time deposits and governmental deposits, which more than offset increased loan yields, driven by the acquisition of First Prestonsburg. Compared to the first quarter of 2019, net interest income was positivelyon loans, due to higher yields on loans, combined with higher loan balances, which were impacted by the acquisition ofacquired First Prestonsburg.Prestonsburg loans. The higher interest income on loans was partially offset by an increase in interest expense on deposits due to higher rates paid on deposits, combined with additional interest expense related to the acquired First Prestonsburg deposits.
Accretion income, net of amortization expense, from acquisitions was $1.2 million for the third and second quarterquarters of 2019, and $722,000$612,000 for the first quarter of 2019, which added 13 basis points and 8 basis points, respectively, to net interest margin.


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The growth in accretion income compared to the first quarter of 2019 was due to the First Prestonsburg acquisition, specifically the loan discount that was accreted during the quarter.
Net interest income for the current quarter increased $3.2 million, or 10%, over the second quarter of 2018. Net interest margin increased 3 basis points compared to 3.74% for the second quarter of 2018. The increase in net interest income compared to the second quarter of 2018 was driven by higher yields on loans combined with the impact of acquired First Prestonsburg loans. These were partially offset by higher deposit costs due to increased competition for deposits, combined with additional interest expense related to the acquired First Prestonsburg deposits. The second quarter of 2018 also benefited from proceeds of $248,000 received on an investment security that had been previously written down due to an OTTI, which added 3 basis points to the net interest margin. Peoples recorded no similar proceeds during the current quarter.
Accretion income, net of amortization expense, from acquisitions was $1.2 million for the second quarter of 2019 and $523,000 for the secondthird quarter of 2018, which added 12 basis points, 13 basis points, and 67 basis points, respectively, to net interest margin. The increase in accretion income compared to the secondthird quarter of 2018 was due to the First Prestonsburg acquisition.
For the first sixnine months of 2019, net interest income grew 13%11% compared to 2018, and net interest margin grew 85 basis points to 3.78%3.74%. The increases were driven by higher interest income on loans due to a combination of loan growth, which was primarily the result of the First Prestonsburg acquisition in 2019 and the ASB acquisitions,acquisition in 2018, and higher yields from average interest rate increases. The increase in interest income on loan balances outpaced interest expense from deposits, which increased primarily due to loan growth outpaced higher deposit costs, which were duerates paid on deposits, combined with additional interest expense related to the recent acquisitions and increased competition for deposits.acquisitions. The first sixnine months of 2018 benefited from proceeds of $589,000$588,000 received on an investment securitiessecurity that had been previously written down due to OTTI, which added 32 basis points to net interest margin. Peoples recorded no similar proceeds during the first sixnine months of 2019.
Accretion income, net of amortization expense, from acquisitions was $1.9$3.1 million for the first sixnine months of 2019 and $1.1$1.7 million for the first sixnine months of 2018, which added 1011 basis points and 67 basis points, respectively, to net interest margin. The growth in accretion income compared to the first sixnine months of 2018 was largely due to the First Prestonsburg acquisition and, to a lesser extent, the ASB acquisition.
Additional information regarding changes in the Unaudited Consolidated Balance Sheets can be found under appropriate captions of the “FINANCIAL CONDITION” section of this discussion. Additional information regarding Peoples' interest rate risk and the potential impact of interest rate changes on Peoples' results of operations and financial condition can be found later in this discussion under the caption "FINANCIAL CONDITION - Interest Rate Sensitivity and Liquidity."
Provision for (Recovery of) Loan Losses
The following table details Peoples’ provision for (recovery of) loan losses:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018 20192018
Provision for (recovery of) other loan losses$475
$(360)$1,000
 $115
$2,842
Provision for other loan losses$731
$475
$1,035
 $846
$3,877
Provision for checking account overdrafts151
97
188
 248
329
274
151
267
 522
596
Provision for (recovery of) loan losses$626
$(263)$1,188
 $363
$3,171
Provision for loan losses$1,005
$626
$1,302
 $1,368
$4,473
As a percentage of average total loans (a)0.09%(0.04)%0.18% 0.03%0.26%0.14%0.09%0.19% 0.07%0.23%
(a) Presented on an annualized basis.      
The provision for or recovery of, loan losses recorded represents the amount needed to maintain the appropriate level of the allowance for loan losses based on management’s formal quarterly analysis of the loan portfolio and procedural methodology that estimates the amount of probable credit losses. This process considers various factors that affect losses, such as changes in Peoples’ loan quality, historical loss experience, current economic conditions, and other environmental factors such as changes in real estate market conditions, unemployment, and the economic impact of tariffs.
The provision for loan losses during the secondcurrent quarter and the first six months of 2019 was lower than historical trends, given low grossdriven by higher net charge-offs and high recoveries combined with originated loan balances remaining stable during the first six months of 2019.growth. Net charge-offs for the secondthird quarter of 2019 were $208,000,$777,000, or 0.03%0.11% of average total loans, compared to net recoveries of $1.0 million,$208,000, or 0.15%0.03% of average total loans, for the linked quarter and $720,000,$687,000, or 0.11%0.10% of average total loans, for the secondthird quarter of 2018.
Net recoveries duringfor the first quarternine months of 2019 were driven by$22,000, compared to net charge-offs of $3.4 million, or 0.18% of average total loans, for the first nine months of 2018. The first nine months of 2019 included a $1.8 million recovery recorded on a previously charged-off commercial loan. Gross charge-offs were $665,000, or 0.09% of average total loans, for the second quarter of 2019, compared to $1.0 million, or 0.15% of average total loans, for the first quarter of 2019, and


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$1.0 million, or 0.15% of average total loans, for the second quarter of 2018. Net recoveries for the first six months of 2019 were $799,000, compared to net charge-offs of $2.7 million for the first six months of 2018. The first sixnine months of 2018 included a charge-off of $827,000 on an acquired commercial loan relationship. Gross charge-offs were $1.7 million, or 0.12%


55

Table of average total loans, for the first six months of 2019, compared to $3.3 million, or 0.26% of average total loans, for the first six months of 2018.Contents

Additional information regarding changes in the allowance for loan losses and loan credit quality can be found later in this discussion under the caption “FINANCIAL CONDITION - Allowance for Loan Losses.”
Net (Losses) Gains Included in Total Non-Interest Income
Net (losses) gains and net losses include gains and losses on investment securities, and on asset disposals and other transactions, which are recognized in total non-interest income. The following table details Peoples’ net gains and net losses:(losses) gains:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018 20192018
Net (loss) gain on investment securities$(57)$30
$(147) $(27)$(146)
Net gain (loss) on investment securities$97
$(57)$
 $70
$(146)
      
Net (loss) gain on asset disposals and other transactions:      
Net loss on other assets$(274)$(157)$(330) $(431)$(251)
Net (loss) gain on other assets$(73)$(274)$12
 $(504)$(239)
Net (loss) gain on OREO(24)(25)14
 (49)9
(5)(24)
 (54)9
Net loss on debt extinguishment

(13) 
(13)


 
(13)
Net gain (loss) on other transactions5

(76) 5
(76)
5

 5
(76)
Net loss on asset disposals and other transactions$(293)$(182)$(405)
$(475)$(331)
Net (loss) gain on asset disposals and other transactions$(78)$(293)$12

$(553)$(319)
During the second quarter of 2019, losses included $253,000 of write-offs of fixed assets acquired from First Prestonsburg. During the first quarter of 2019, net loss on other assets was primarily due to $118,000 of market value write-downs related to closed offices that were held for sale. During the second quarter of 2018, net loss on other assets included losses of $192,000 related to fixed assets acquired from ASB and $147,000 of market value write-downs related to closed offices that were held for sale.
Net losses during the year-to-date period through JuneSeptember 30, 2019 were driven by the write-offs of fixed assets acquired from First Prestonsburg combined withand market value write-downs related to closed offices that were held for sale. For the year-to-date period infirst nine months of 2018, the second quarter losses onwere primarily associated with write-offs of fixed asset disposals, loss on investment securities, and market value write-downs on properties held for sale were partially offset by net gains related to repossessed assets recorded in the first quarteracquired from ASB of 2018.$203,000.
Total Non-Interest Income, Excluding Net Gains and Losses
InsuranceElectronic banking ("e-banking") income comprised the largest portion of the secondthird quarter 2019 total non-interest income. The following table details Peoples' insurance income:
 Three Months Ended Six Months Ended
 June 30,
2019
March 31,
2019
June 30,
2018
 June 30,
(Dollars in thousands) 20192018
Property and casualty insurance commissions$2,680
$2,674
$2,597
 $5,354
$5,242
Performance-based commissions2
1,419
3
 1,421
1,350
Life and health insurance commissions626
359
596
 985
1,140
Other fees and charges178
169
173
 347
292
Insurance income$3,486
$4,621
$3,369
 $8,107
$8,024
The decline in revenue related to performance-based commissions is due to annual performance-based insurance commissions, which are primarily recognized in the first quarter of each year and are a core component of insurance income.


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Life and health insurance commissions were low in the first six months of 2019 primarily due to an increase in deferred revenue.
Peoples' fiduciary and brokerage revenues continued to be based primarily upon the value of assets under administration and management, with additional income generated from transaction commissions, cross-selling of products and additional retirement plan services business. Fiduciary and brokerage income for the second quarter of 2019 increased compared to the first quarter of 2019 and the second quarter of 2018 primarily due to higher market values of accounts. The following tables detail Peoples’ trust and investment income and related assets under administration and management:
 Three Months Ended Six Months Ended
 June 30,
2019
March 31,
2019
June 30,
2018
 June 30,
(Dollars in thousands) 20192018
Fiduciary$1,837
$1,636
$1,767
 $3,473
$3,374
Brokerage1,038
965
989
 2,003
1,952
Employee benefits526
511
476
 1,037
974
Trust and investment income$3,401
$3,112
$3,232
 $6,513
$6,300
 June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
(Dollars in thousands)
Trust assets under administration and management$1,501,110
$1,471,422
$1,384,113
$1,489,810
$1,454,009
Brokerage assets under administration and management887,745
863,286
849,188
914,172
881,839
Total assets under administration and management$2,388,855
$2,334,708
$2,233,301
$2,403,982
$2,335,848
Quarterly average$2,356,121
$2,312,098
$2,316,201
$2,378,676
$2,331,529
Peoples' electronic banking ("e-banking")e-banking services include ATM and debit cards, direct deposit services, internet and mobile banking, and remote deposit capture and serve as alternative delivery channels to traditional sales offices for providing services to clients. The following table details Peoples' e-banking income:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018 20192018
Interchange fees$2,747
$2,443
$2,520
 $5,190
$4,784
$2,842
$2,747
$2,464
 $8,032
$7,248
Promotional and usage income520
544
265
 1,064
786
735
520
426
 1,799
1,212
E-banking income$3,267
$2,987
$2,785
 $6,254
$5,570
$3,577
$3,267
$2,890
 $9,831
$8,460
Peoples' e-banking revenue is derived largely from ATM and debit cards, as other services are mainly provided at no charge to the customers. The amount of e-banking income is largely dependent on the timing and volume of customer activity. The increases in e-banking income in all comparisons were the result of the increased usage of debit cards by more customers, which includes the impact of additional cardholders obtained in the merger withacquisition of First Prestonsburg.


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The following table details Peoples' insurance income:
 Three Months Ended Nine Months Ended
 September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018
Property and casualty insurance commissions$2,542
$3,060
$2,603
 $7,875
$7,982
Deferred income from property and casualty insurance commissions64
(380)11
 85
(126)
Total property and casualty insurance commissions2,606
2,680
2,614
 7,960
7,856
Life and health insurance commissions466
464
454
 1,401
1,413
Deferred income from life and health insurance commissions101
162
91
 151
272
Total life and health insurance commissions567
626
545
 1,552
1,685
Performance-based commissions74
2
98
 1,495
1,448
Other fees and charges139
178
131
 486
423
Insurance income$3,386
$3,486
$3,388
 $11,493
$11,412
Property and casualty insurance commissions during the second quarter of 2019 included a large policy renewal for which the related income was deferred over the life of the contract. Fluctuations in deferred income from property and casualty, and life and health insurance commissions during the first nine months of 2019, compared to 2018, were driven by timing in revenue recognition upon the satisfaction of related benefit obligations. For more information regarding the recognition of insurance income, refer to "Note 11 Revenue" of the Notes to the Unaudited Consolidated Financial Statements.
Deposit account service charges are based on the recovery of costs associated with services provided. The following table details Peoples' deposit account service charges:
 Three Months Ended Six Months Ended
 June 30,
2019
March 31,
2019
June 30,
2018
 June 30,
(Dollars in thousands) 20192018
Overdraft and non-sufficient funds fees$1,746
$1,433
$1,584
 $3,179
$3,023
Account maintenance fees1,012
752
646
 1,764
1,321
Other fees and charges219
156
158
 375
164
Deposit account service charges$2,977
$2,341
$2,388
 $5,318
$4,508


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 Three Months Ended Nine Months Ended
 September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018
Overdraft and non-sufficient funds fees$1,970
$1,746
$1,800
 $5,149
$4,823
Account maintenance fees1,049
1,012
691
 2,813
2,012
Other fees and charges214
219
161
 589
325
Deposit account service charges$3,233
$2,977
$2,652
 $8,551
$7,160
The amount of deposit account service charges, particularly fees for overdrafts and non-sufficient funds, is largely dependent on the timing and volume of customer activity. Management periodically evaluates its cost recovery fees to ensure they are reasonable based on operational costs and similar to fees charged in Peoples' markets by competitors. Income from deposit account service charges were up compared to the linked quarter, due to a combination of the additional accounts acquired from First Prestonsburg and a new deposit account fee schedule that was implemented in March 2019.Prestonsburg. Income from deposit account service charges for the first sixnine months of 2019 were up compared to a year ago primarily due to the ASB and First Prestonsburg acquisitions, coupled with changes in fee schedules. Peoples implemented a new deposit account fee schedule in March 2019, and it is anticipated that the higher deposit fees associated with the new fee schedule will diminish somewhat over time.


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Peoples' fiduciary and brokerage revenues continued to be based primarily upon the value of assets under administration and management, with additional income generated from transaction commissions, cross-selling of products and additional retirement plan services business. The following tables detail Peoples’ trust and investment income and related assets under administration and management:
 Three Months Ended Nine Months Ended
 September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018
Fiduciary$1,621
$1,837
$1,626
 $5,094
$5,000
Brokerage1,048
1,038
999
 3,051
2,951
Employee benefits536
526
485
 1,573
1,459
Trust and investment income$3,205
$3,401
$3,110
 $9,718
$9,410
Fiduciary income for the third quarter of 2019 declined compared to the second quarter of 2019 primarily due to seasonal tax return revenue received annually in the second quarter. Employee benefits in 2019 have increased compared to the second quarter of 2019 and the nine months of 2018 due to the continued growth of our business that administers 401k plans for businesses.
 September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
(Dollars in thousands)
Assets under administration and management:     
Trust$1,504,036
$1,501,110
$1,471,422
$1,384,113
$1,489,810
Brokerage904,191
887,745
863,286
849,188
914,172
Total$2,408,227
$2,388,855
$2,334,708
$2,233,301
$2,403,982
Quarterly average$2,397,515
$2,356,121
$2,312,098
$2,316,201
$2,378,676
The following table details the other items included within Peoples' total non-interest income:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018 20192018
Mortgage banking income$1,000
$788
$969
 $1,788
$1,320
$1,204
$1,000
$1,060
 $2,992
$2,380
Commercial loan swap fees772
516
355
 1,434
617
Bank owned life insurance income490
485
497
 975
965
487
490
495
 1,462
1,460
Commercial loan swap fees516
146
146
 662
262
Other non-interest income502
1,101
421
 1,603
1,752
510
502
391
 2,113
2,143
Mortgage banking income is comprised mostly of net gains from the origination and sale of real estate loans in the secondary market, and servicing income for loans sold with servicing retained. As a result, the amount of income recognized by Peoples is largely dependent on customer demand and long-term interest rates for residential real estate loans offered in the secondary market. The increaseincreases in mortgage banking income from the firstsecond quarter of 2019 wasand the third quarter of 2018 were mainly due to higher sales of real estate loans. Interest rates declined during the third quarter of 2019, resulting in increased customer demand, which is typically seasonally low inprimarily due to customers refinancing to take advantage of the first quarter of each year.lower rates. For the first sixnine months of 2019, compared to the same period in 2018, the increase in mortgage banking income was largely attributabledue to gains on sale of real estateincreased customer demand, which was driven by the decline in mortgage interest rates during the period. Also contributing to the increase were the loans originated by the mortgage origination operation acquired as part of the ASB acquisition.
In the secondthird quarter of 2019, Peoples sold approximately $24.9$31.7 million in loans to the secondary market with servicing retained and sold approximately $11.4$15.6 million in loans with servicing released, compared to approximately $13.7$24.9 million and $10.9$11.4 million, respectively, in the linked quarter.quarter, and approximately $20.6 million and $19.2 million, respectively, in the third quarter of 2018. For the first sixnine months of 2019, Peoples sold approximately $38.6$70.4 million in loans to the secondary market with servicing retained and sold approximately $22.3$37.8 million in loans with servicing released, compared to approximately $29.2$49.9 million and $13.6$38.1 million, respectively, in the first sixnine months of 2018. The volume of sales has a direct impact on the amount of mortgage banking income.


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Commercial loan swap fees are largely dependent on timing, interest rates, and the volume of customer activity. The increase in all comparisons was driven by a combination of an increase in the average size of each transaction and higher customer demand, given the current rate environment and the favorable longer term rates that customers can lock in by utilizing a swap.
Compared toFor the linked quarter,first nine months of 2019, other non-interest income declined primarily due to lowerincluded an increase in income from equity investment securities whichof $620,000 compared to the same period of 2018. The increase in income from equity investment securities was down $809,000. During the first quarter of 2019, Peoples recognizeddriven by $787,000 of income related to the sale of restricted Class B Visa stock during 2019, which had been held at a carrying cost and fair value of zero due to the litigation liability associated with the stock. Other non-interest income forFor the first sixnine months of 2019 was down compared to the same period of 2018, due toother non-interest income also included a decreasedecline in Small Business Administration income of $550,000 and declines in various other small items, partially offset by an increase in income from equity investment securities of $585,000.$474,000.


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Non-Interest Expense
Salaries and employee benefit costs remain Peoples' largest non-interest expense, accounting for over one-half of total non-interest expense.  The following table details Peoples' salaries and employee benefit costs:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018 20192018
Base salaries and wages$14,353
$11,874
$12,656
 $26,227
$23,028
$12,592
$14,353
$11,889
 $38,819
$34,917
Sales-based and incentive compensation2,986
3,096
3,125
 8,691
8,364
Employee benefits1,966
2,690
1,485
 4,656
3,028
1,869
1,966
1,880
 6,525
4,909
Sales-based and incentive compensation3,096
2,609
3,003
 5,705
5,239
Payroll taxes and other employment costs1,208
1,377
1,036
 2,585
2,220
1,256
1,208
1,036
 3,841
3,255
Stock-based compensation930
1,208
424
 2,138
1,510
950
930
580
 3,088
2,090
Deferred personnel costs(729)(556)(579) (1,285)(1,010)(722)(729)(602) (2,007)(1,612)
Salaries and employee benefit costs$20,824
$19,202
$18,025
 $40,026
$34,015
$18,931
$20,824
$17,908
 $58,957
$51,923
Full-time equivalent employees:  
    
  
Actual at end of period918
859
862
 918
862
910
918
849
 910
849
Average during the period906
869
844
 891
820
913
906
860
 897
832
 
The increase in full-time equivalent employees in the second quarter of 2019 and the first six months of 2019 compared to previous periods2018 was mainly due to additional employees from the First Prestonsburg acquisition and, in comparison to the 2018 periods, employees that were added in the last twelve months from acquisitions and for future growth.acquisition.
The increase inIn all comparisons, base salaries and wages for the second quarter of 2019 compared to the linked quarter was primarily due to acquisition-related expenses of $2.2 million (mainly severance and change in control costs). Compared to the second quarter of 2018, base salaries and wages increased due to a combination of employees that have been added in the last twelve months from acquisitions and for future growth, annualwere impacted by merit increases, which included the implementation ofcontinued movement towards a $15 per hour minimum wage throughout the company, and an increase in acquisition-related expenses of $594,000.company. The $15 per hour minimum wage began being phased in during 2018 and is expected to be largely implemented by January 1, 2020. ForBase salaries and wages were also impacted by the first six monthsadditional employees, primarily as a result of the First Prestonsburg acquisition in 2019 and the ASB acquisition in 2018. Base salaries and wages included no acquisition-related expenses during the third quarter of 2019, compared to $2.2 million (mainly severance and change in control costs) during the same periodsecond quarter of 2018,2019, and $450,000 during the increase was impacted by the First Prestonsburgthird quarter of 2018.
The decrease in sales-based and ASB acquisitions, as well as the employees that have been added in the last twelve months for future growth.
The decline in employee benefitsincentive compensation for the secondthird quarter of 2019, compared to the linkedsecond quarter of 2019, was primarily due to lower medicalsales-based compensation from insurance, costs of $817,000. Medical insurance costspartially offset by higher sales-based compensation from mortgage banking.The decrease in sales-based and incentive compensation for the linked quarter included annual contributions to employee health benefit accounts resulting in an expense of $450,000. These contributions occur primarily in the firstthird quarter of each year. 2019, compared to the third quarter of 2018, was related to overall company performance measures used in calculating incentive awards, partially offset by higher sales-based compensation from mortgage banking, and trust and investments.Compared to the second quarterfirst nine months of 2018, the increase in employee benefitssales-based and incentive compensation for the first nine months of 2019 was driven by higher medical insurance costs due primarily to higher medical claims and thesales-based compensation from mortgage banking. The increase in mortgage banking compared to the numberfirst nine months of plan participants, which2018 was impacted bylargely attributable to the First Prestonsburgrecent increase in customer demand as interest rates declined, coupled with the mortgage origination operation acquired as part of the ASB acquisition.
The increase in employee benefits in the six-month periodsnine-month period comparison was impacted by the First Prestonsburg and ASB acquisitions, and included an increase in medical insurance costs of $1.3 million.
The$1.5 million due primarily to higher medical claims and an increase in sales-based and incentive compensation for the second quarternumber of 2019, compared toparticipants in the linked quarter, was due to higher sales-based compensation from insurance mortgage banking and retail lines of business. The increase in sales-based and incentive compensation for the second quarter of 2019, compared to the second quarter of 2018, was due to higher sales-based compensation from the mortgage banking and retail lines of business. Compared to the first six months of 2018, the increase in sales-based and incentive compensation for the first six months of 2019 was driven by higher sales-based compensation from mortgage banking. The increase in mortgage banking growth compared to the first six months of 2018 was largely attributable to the mortgage origination operation acquired as part of the ASB acquisition.plan.
The increases in payroll taxes and other employment costs for periods in 2019 compared to those in 2018 primarily reflected the increases in base salaries and wages.
Stock-based

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The increases in stock-based compensation declined compared to the linked quarter due largely2018 periods were driven by higher expense related to annual stock grants which occur primarily in the first quarter of each year.made to retirement eligible grantees combined with Peoples' improved performance during recent years. The majority of the grants are expensed over thea three-year vesting period, with the exception of those made to retirement eligible grantees. Stock grants to retirement eligible grantees are expensed either immediately or over a shorter period than three years. The $1.2 million of stock-based compensation for the first quarter of 2019 included $469,000 of expense related to stock grants to retirement eligible individuals, and $128,000 of expense related


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to the annual vesting of prior stock grants. The increase in stock-based compensation compared to the 2018 periods was driven by higher expense related to stock grants made to retirement eligible grantees combined with Peoples' improved performance during recent years.
Peoples' net occupancy and equipment expense was comprised of the following:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018 20192018
Depreciation$1,494
$1,249
$1,248
 $2,743
$2,466
$1,451
$1,494
$1,237
 $4,194
$3,704
Repairs and maintenance costs715
770
659
 1,485
1,507
803
715
697
 2,288
2,203
Net rent expense250
288
235
 538
444
182
250
264
 720
709
Property taxes, utilities and other costs673
671
661
 1,344
1,252
662
673
652
 2,006
1,903
Net occupancy and equipment expense$3,132
$2,978
$2,803
 $6,110
$5,669
$3,098
$3,132
$2,850
 $9,208
$8,519
NetFor the 2019 periods, net occupancy and equipment expense forwas impacted by the second quarter of 2019 increased primarily due to costs related to the addition of nine full-service bank branches from the First Prestonsburg acquisition, and ongoing increased operating costs associated with the expanded footprint. These increases were partially offset by a reduction in ATM repairs and maintenance costs driven byresulting from a new vendor contract. For the first six months of 2019, the increase in net occupancy and equipment expense was driven by additional costs related to the First Prestonsburg and ASB acquisitions, partially offset by a reduction in ATM repairs and maintenance costs driven by the new vendor contract.servicing agreement.
The following table details the other items included in total non-interest expense:
 Three Months Ended Six Months Ended
 June 30,
2019
March 31,
2019
June 30,
2018
 June 30,
(Dollars in thousands) 20192018
Professional fees$2,344
$1,276
$3,022
 $3,620
$4,740
Electronic banking expense1,693
1,577
1,407
 3,270
2,857
Data processing and software expense1,567
1,545
1,359
 3,112
2,681
Amortization of other intangible assets824
694
861
 1,518
1,615
Franchise tax expense772
705
614
 1,477
1,258
Marketing expense490
594
656
 1,084
981
FDIC insurance expense381
371
416
 752
782
Foreclosed real estate and other loan expenses469
255
338
 724
550
Communication expense317
278
300
 595
644
Other non-interest expense6,063
2,519
6,170
 8,448
8,400
Professional fees increased $1.1 million, or 84%, from the first quarter of 2019, driven by acquisition-related expenses of $562,000 in the current quarter, up from $58,000 in the first quarter of 2019, combined with additional audit and consulting work performed during second quarter of 2019. Professional fees were down compared to the second quarter of 2018, primarily due to consulting work performed during the second quarter of 2018 which was not duplicated in 2019. Professional fees were down compared to the first six months of 2018, mainly due to lower legal expenses and consulting work performed during the first six months of 2018 which was not duplicated in 2019.
 Three Months Ended Nine Months Ended
 September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018
Electronic banking expense$2,070
$1,693
$1,552
 $5,340
$4,409
Data processing and software expense1,572
1,567
1,408
 4,684
4,089
Professional fees1,544
2,344
1,395
 5,164
6,135
Amortization of other intangible assets953
824
862
 2,471
2,477
Franchise tax expense797
772
616
 2,274
1,874
Marketing expense634
490
456
 1,718
1,437
Foreclosed real estate and other loan expenses600
469
373
 1,324
923
Communication expense268
317
305
 863
949
FDIC insurance expense
381
391
 752
1,173
Other non-interest expense2,526
6,063
2,713
 10,974
11,113
Electronic banking expense was up in each comparison due to an increase in customer accounts and customer usage of mobile and online banking tools, which were impacted by the First Prestonsburg and ASB mergers.acquisitions.
DataThe increase in data processing and software expense increased $208,000, or 15%, from the second quarter of 2018, and $431,000, or 16%, compared to the first six months of 2018. The increases wereprior periods was driven by systems and software upgrades and overall growth, which included: the implementation of enhanced functionalities for Peoples' core banking system, including making certain mobile banking tools available to customers; increases in customer accounts and customer usage of mobile and online banking tools; software upgrades; and additional network capacity and security features. Data processing and software expense included $91,000$93,000 of acquisition-related expenses in the first sixnine months of 2019, and $59,000 in the first sixnine months of 2018.
Professional fees decreased from the second quarter of 2019, driven by a decline in acquisition-related expenses of $566,000, combined with additional consulting work performed during second quarter of 2019 that was not duplicated in the third quarter of 2019. Professional fees were up compared to the third quarter of 2018, primarily due to higher legal expenses. Professional fees were down compared to the first nine months of 2018, mainly due to lower legal expenses and consulting work performed during the first nine months of 2018 compared to the first nine months of 2019.
Peoples' amortization of other intangible assets is driven by acquisition-related activity. Amortization of other intangible assets for the secondthird quarter of 2019 was up compared to the firstsecond quarter of 2019 as a resultdue to additional information that was obtained during the three months ended September 30, 2019, which resulted in additional amortization given further refinement of the core deposit intangible asset related to the acquisition of First Prestonsburg.


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Peoples is subject to state franchise taxes, which are based largely on Peoples' equity, in the states where Peoples has a physical presence.  Franchise tax expense also includes the Ohio Financial Institution Tax ("FIT"), which is a business privilege tax that is imposed on financial institutions organized for profit and doing business in Ohio. The Ohio FIT is based on the total equity capital in proportion to the taxpayer's gross receipts in Ohio. Expenses related to state franchise taxes, which includes Ohio FIT, increased in 2019 compared to 2018 due to additional equity from the issuance of common shares related to the acquisitions of First Prestonsburg and ASB and from operating results.
Marketing expense was down $104,000, or 18%, forincreased compared to the second quarter of 2019 compared toand the first quarter of 2019, and down $166,000, or 25%, compared to the secondthird quarter of 2018, due to the timing of product marketing campaigns. Additionally, marketing expense was higher during the three and nine months ended September 30, 2019 due to overall increases in spending on brand awareness and product marketing campaigns, Peoples' expanded footprint as a result of the First Prestonsburg acquisition in 2019 and the ASB acquisition in 2018.
TheForeclosed real estate and other loan expenses increased in all comparisons primarily due to the increase in othercosts related to the higher production of residential real estate mortgage loans sold to the secondary market, which were driven by customer demand resulting from the decline in interest rates during the third quarter of 2019, combined with loans originated by the mortgage origination operation acquired as part of the ASB acquisition.
Peoples' FDIC insurance expense declined in the first nine months of 2019 and netted to zero during the third quarter of 2019, as the deposit insurance fund had reached its target threshold for smaller banks to recognize a credit to their insurance expense. This resulted in a reversal of Peoples' second quarter 2019 accrued expense, which was offset then by the third quarter accrual. Peoples cannot reasonably anticipate any future recognition of credits, as the deposit insurance fund is analyzed on a quarterly basis, and is the premise for receiving credits.
Other non-interest expense of $3.5 million for the secondthird quarter of 2019 declined $3.5 million compared to the linked quarter wasand $187,000 compared to the third quarter of 2018. The decreases were primarily due to acquisition-related expenses of $93,000 in the current quarter compared to $3.7 million (mainly contract termination fees) in the currentlinked quarter, and $163,000 in the third quarter of 2018. The decline in other non-interest expense for the first nine months of 2019 compared to $54,000the same period of 2018 of $139,000 was due to small decreases across multiple line items of expense (fraud charges, director fees and stock expense, checking and savings charge-offs and printing and supplies expense). Acquisition-related expenses included in other non-interest expense were $3.9 million and $3.6 million for the linked quarter.first nine months of 2019 and 2018, respectively.
Income Tax Expense
Income tax expense was $2.2$3.3 million for the secondthird quarter of 2019, compared to $3.4$2.2 million for the linked quarter and $1.0$2.8 million for the secondthird quarter of 2018. The declineincreases in income tax expense compared to the linked quarter was due to lower pre-tax income. The current quarter included a tax benefit of $59,000 recorded for the vesting of restricted stock during the current quarter, compared to a tax benefit of $133,000 in the linked quarter. The vesting of a majority of stock awards granted by Peoples occurs annually in the first quarter. The increase in income tax expense compared to the secondand third quarter of 2018 waswere primarily due to higher pre-tax income combined with the release of a valuation allowance during the second quarter of 2018 of $805,000.income.
For the first sixnine months of 2019, Peoples recorded income tax expense of $5.6$8.9 million, compared to $3.4$6.2 million for the same period in the prior year, and the effective tax rate for the first sixnine months of 2019 was 18.9%18.6%, compared to 14.7%16.1% for the first sixnine months of 2018. The year-over-year increase in income tax expense was primarily due to higher pre-tax income combined with the release of a valuation allowance during the first six months of 2018 of $805,000.income. The first sixnine months of 2019 included a tax benefit of $192,000$195,000 recorded for the vesting of restricted stock during the period, compared toperiod. The first nine months of 2018 included an $805,000 valuation allowance release, as well as a tax benefit of $296,000 in$314,000 recorded for the first six monthsvesting of 2018.restricted stock during the period.
Additional information regarding income taxes can be found in "Note 12 Income Taxes" of the Notes to the Consolidated Financial Statements included in Peoples' 2018 Form 10-K.
Pre-Provision Net Revenue (non-US GAAP)
Pre-provision net revenue ("PPNR") has become a key financial measure used by state and federal bank regulatory agencies when assessing the capital adequacy of financial institutions. PPNR is defined as net interest income plus total non-interest income (excluding all gains and losses) minus total non-interest expense while excluding the recovery of, or provision for, loan losses and all gains and losses included in earnings. As a result, PPNR represents the earnings capacity that can be either retained in order to build capital or used to absorb unexpected losses and preserve existing capital. This ratio represents a non-US GAAP financial measure since it excludes the provision for loan losses and all gains and/or losses included in earnings.


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The following table provides a reconciliation of this non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:    
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018 20192018
Pre-provision net revenue:      
Income before income taxes$11,836
$17,746
$8,904
 $29,582
$23,028
$18,149
$11,836
$15,546
 $47,731
$38,574
Add: provision for loan losses626

1,188
 363
3,171
1,005
626
1,302
 1,368
4,473
Add: loss on debt extinguishment

13
 
13



 
13
Add: net loss on OREO24
25

 49

5
24

 54

Add: net loss on investment securities57

147
 27
146

57

 57
146
Add: net loss on other assets274
157
330
 431
251
73
274

 504
239
Add: net loss on other transactions

76
 
76



 
76
Less: net gain on OREO

14
 
9



 
9
Less: recovery of loan losses
263

 

Less: net gain on investment securities
30

 

97


 127

Less: net gain on other assets

12
 

Less: gain on other transactions5



 5


5

 5

Pre-provision net revenue$12,812
$17,635
$10,644
 $30,447
$26,676
$19,135
$12,812
$16,836
 $49,582
$43,512
Total average assets$4,239,779
$3,985,621
$3,897,957
 $4,113,403
$3,748,331
$4,311,389
$4,239,779
$3,998,254
 $4,179,663
$3,832,554
Pre-provision net revenue to total average assets (a)1.21%1.79%1.10% 1.49%1.44%1.76%1.21%1.67% 1.59%1.52%
(a) Presented on an annualized basis.      
Pre-provision net revenuePPNR and the ratio of pre-provision net revenuePPNR to total average assets decreasedincreased in the secondthird quarter of 2019 compared to the linked quarter, due primarily to decreasedhigher income before income taxes mainly as a result ofreflecting lower acquisition-related expenses of $6.8 million.expenses. Compared to the secondthird quarter of 2018, the increase in pre-provision net revenuePPNR and pre-provision net revenuePPNR to total average assets was driven by higher net interest income. Pre-provision net revenuePPNR and the ratio of pre-provision net revenuePPNR to total average assets for the first sixnine months of 2019, compared to the first sixnine months of 2018, increased primarily due to higher net interest income, before income taxes, aswith both periods werebeing impacted by acquisition-related expenses.expenses of $7.2 million for the first nine months of 2019 and $6.9 million for the first nine months of 2018.
Core Non-Interest Expense (non-US GAAP)
Core non-interest expense is a financial measuresmeasure used to evaluate Peoples' recurring expense stream. This measure is non-US GAAP since it excludes the impact of all acquisition-related expenses.expenses and pension settlement charges.
The following tables provide reconciliations of this non-US GAAP measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:
 
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018 20192018
Core non-interest expense:      
Total non-interest expense$38,876
$31,860
$35,971
 $70,736
$64,192
$32,993
$38,876
$30,829
 $103,729
$95,021
Less: acquisition-related expenses6,770
253
6,056
 7,023
6,205
199
6,770
675
 7,222
6,880
Less: pension settlement charges

176
 
176
Core non-interest expense$32,106
$31,607
$29,915
 $63,713
$57,987
$32,794
$32,106
$29,978
 $96,507
$87,965


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Efficiency Ratio (non-US GAAP)
The efficiency ratio is a key financial measure used to monitor performance. The efficiency ratio is calculated as total non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus total non-interest income excluding net gains and losses. This measure is non-US GAAP since it excludes amortization of other intangible assets and all gains and/or losses included in earnings, and uses fully tax-equivalent net interest income.
The following table provides a reconciliation of this non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018 20192018
      
Efficiency ratio:      
Total non-interest expense$38,876
$31,860
$35,971
 $70,736
$64,192
$32,993
$38,876
$30,829
 $103,729
$95,021
Less: amortization of other intangible assets824
694
861
 1,518
1,615
953
824
862
 2,471
2,477
Adjusted total non-interest expense$38,052
$31,166
$35,110
 $69,218
$62,577
$32,040
$38,052
$29,967
 $101,258
$92,544
      
Total non-interest income$15,289
$15,429
$13,255
 $30,718
$28,224
$16,393
$15,289
$14,353
 $47,111
$42,577
Less: net (loss) gain on investment securities(57)30
(147) (27)(146)
Less: net loss on asset disposals and other transactions(293)(182)(405) (475)(331)
Less: net gain (loss) on investment securities97
(57)
 70
(146)
Less: net (loss) gain on asset disposals and other transactions(78)(293)12
 (553)(319)
Total non-interest income excluding net gains and losses$15,639
$15,581
$13,807
 $31,220
$28,701
$16,374
$15,639
$14,341
 $47,594
$43,042
      
Net interest income$36,049
$33,914
$32,808
 $69,963
$62,167
$35,754
$36,049
$33,324
 $105,717
$95,491
Add: fully tax-equivalent adjustment (a)267
200
225
 467
450
314
267
221
 781
670
Net interest income on a fully tax-equivalent basis$36,316
$34,114
$33,033
 $70,430
$62,617
$36,068
$36,316
$33,545
 $106,498
$96,161
      
Adjusted revenue$51,955
$49,695
$46,840
 $101,650
$91,318
$52,442
$51,955
$47,886
 $154,092
$139,203
      
Efficiency ratio73.24%62.71%74.96% 68.09%68.53%61.10%73.24%62.58% 65.71%66.48%
      
Efficiency ratio adjusted for non-core items:      
Core non-interest expense$32,106
$31,607
$29,915
 $63,713
$57,987
$32,794
$32,106
$29,978
 $96,507
$87,965
Less: amortization of other intangible assets824
694
861
 1,518
1,615
953
824
862
 2,471
2,477
Adjusted core non-interest expense$31,282
$30,913
$29,054
 $62,195
$56,372
$31,841
$31,282
$29,116
 $94,036
$85,488
      
Total non-interest income excluding net gains and losses$15,639
$15,581
$13,807
 $31,220
$28,701
$16,374
$15,639
$14,341
 $47,594
$43,042
Net interest income on a fully tax-equivalent basis36,316
34,114
33,033
 70,430
62,617
36,068
36,316
33,545
 106,498
96,161
Adjusted revenue$51,955
$49,695
$46,840
 $101,650
$91,318
$52,442
$51,955
$47,886
 $154,092
$139,203
      
Efficiency ratio adjusted for non-core items60.21%62.21%62.03% 61.19%61.73%60.72%60.21%60.80% 61.03%61.41%
(a) Based on a 21% statutory federal corporate income tax rate.
The increaseimprovement in the efficiency ratio compared to the linked quarter was driven by an increasea decrease in acquisition-related expenses of $6.5$6.6 million. The efficiency ratio adjusted for non-core items declinedincreased compared to both the linked quarter andprimarily due to the secondlack of growth in net interest income given the impact of the rate environment, offset partially by growth in earnings assets. The efficiency ratio adjusted for non-core items improved compared to the third quarter of 2018, mostly due to higher net interest income.income and increased fee revenue. Management is targeting an efficiency ratio of 59%60% to 61%62% for the full year of 2019, after excluding acquisition-related expenses and other non-core acquisition-related expenses.


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Return on Average Assets Adjusted for Non-Core Items (non-US GAAP)
In addition to return on average assets, management uses return on average assets adjusted for non-core items to monitor performance. The return on average assets ratio adjusted for non-core items represents a non-US GAAP financial measure since it excludes the after-tax impact of all gains and losses, and acquisition-related expenses.


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The following table provides a reconciliation of this non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018 20192018
      
Annualized net income adjusted for non-core items:Annualized net income adjusted for non-core items:  Annualized net income adjusted for non-core items:  
Net income$9,598
$14,369
$7,892
 $23,967
$19,633
$14,868
$9,598
$12,725
 $38,835
$32,358
Add: net loss on investment securities57

147
 27
146

57

 
146
Less: tax effect of net loss on investment securities (a)12

31
 6
31

12

 
31
Less: net gain on investment securities
30

 

97


 70

Add: tax effect of net gain on investment securities (a)
6

 

20


 15

Add: net loss on asset disposals and other transactions293
182
405
 475
331
78
293

 553
319
Less: tax effect of net loss on asset disposals and other transactions (a)62
38
85
 100
70
16
62

 116
67
Less: net gain on asset disposals and other transactions (a)

12
 

Add: tax effect of net loss on asset disposals and other transactions (a)

3
 

Add: acquisition-related expenses6,770
253
6,056
 7,023
6,205
199
6,770
675
 7,222
6,880
Less: tax effect of acquisition-related expenses (a)1,422
53
1,272
 1,475
1,303
42
1,422
142
 1,517
1,445
Add: pension settlement charges (a)

176
 
176
Less: tax effect of pension settlement charges (a)

37
 
37
Less: release of deferred tax asset valuation allowance


 
805
Net income adjusted for non-core items$15,222
$14,689
$13,112
 $29,911
$24,911
$15,010
$15,222
$13,388
 $44,922
$37,494
Days in the quarter91
90
91
 181
181
Days in the period92
91
92
 273
273
Days in the year365
365
365
 365
365
365
365
365
 365
365
Annualized net income$38,497
$58,274
$31,655
 $48,331
$39,591
$58,987
$38,497
$50,485
 $51,922
$43,263
Annualized net income adjusted for non-core items$61,055
$59,572
$52,592
 $60,318
$50,235
$59,551
$61,055
$53,115
 $60,061
$50,129
Return on average assets:      
Annualized net income$38,497
$58,274
$31,655
 $48,331
$39,591
$58,987
$38,497
$50,485
 $51,922
$43,263
Total average assets4,239,779
3,985,621
3,897,957
 4,113,403
3,748,331
4,311,389
4,239,779
3,998,254
 4,179,663
3,832,554
Return on average assets0.91%1.46%0.81% 1.17%1.06%1.37%0.91%1.26% 1.24%1.13%
Return on average assets adjusted for non-core items:Return on average assets adjusted for non-core items:  Return on average assets adjusted for non-core items:  
Annualized net income adjusted for non-core items$61,055
$59,572
$52,592
 $60,318
$50,235
$59,551
$61,055
$53,115
 $60,061
$50,129
Total average assets4,239,779
3,985,621
3,897,957
 4,113,403
3,748,331
4,311,389
4,239,779
3,998,254
 4,179,663
3,832,554
Return on average assets adjusted for non-core items1.44%1.49%1.35% 1.47%1.34%1.38%1.44%1.33% 1.44%1.31%
(a) Based on a 21% statutory federal corporate income tax rate.


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The return on average assets declinedincreased in the secondthird quarter of 2019 compared to the linked quarter, driven by an increasea decline in acquisition-related expenses of $6.5$6.6 million compared to the linked quarter, combined withpartially offset by higher average assets, which resulted from the First Prestonsburg merger. Comparedacquisition. The decline in the return on average assets adjusted for non-core items in the third quarter of 2019 compared to the secondlinked quarter of 2018,was driven by the increase in average assets, combined with the slight decline in net interest income. The increases in return on average assets wasand return on average assets adjusted for non-core items compared to the third quarter and first nine months of 2018, which were impacted by the First Prestonsburg acquisition, and the ASB acquisition in the nine month comparison, were driven by higher net interest income, higher non-interest income, and a lower provision for loan losses, partially offset by an increase in average assets. The return on average assets increased in the first six months of 2019 compared to the same period of 2018, driven by higher net interest income, a lower provision for loan losses, and higher non-interest income compared to the linked quarter, partially offset by an increase in average assets, all of which were impacted by the First Prestonsburg and ASB mergers.
The return on average assets adjusted for non-core items declined in the second quarter of 2019 compared to the linked quarter, driven by the increase in average assets, combined with relatively unchanged non-interest income. Compared to the second quarter of 2018, the increase in return on average assets adjusted for non-core items was driven by higher net interest income, non-interest income, and a lower provision for loan losses, partially offset by an increase in average assets. The return on average assets adjusted for non-core items increased in the first six months of 2019 compared to the same period of 2018, driven by higher net interest income, a lower provision for loan losses, and higher non-interest income compared to the


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linked quarter, partially offset by an increase in average assets, all of which were impacted by the First Prestonsburg and ASB mergers.
Return on Average Tangible Equity (non-US GAAP)
The return on average tangible equity ratio is a key financial measure used to monitor performance. The return on tangible equity is calculated as net income (less the after-tax impact of amortization of other intangible assets) divided by tangible equity. The return on tangible equity is calculated as net income (less the after-tax impact of amortization of other intangible assets) divided by tangible equity. This measure is non-US GAAP since it excludes amortization of other intangible assets from earnings and the impact of goodwill and other intangible assets acquired through acquisitions on total stockholders' equity.
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,September 30,
2019
June 30,
2019
September 30,
2018
 September 30,
(Dollars in thousands) 20192018 20192018
Annualized net income excluding amortization of other intangible assets:Annualized net income excluding amortization of other intangible assets:  Annualized net income excluding amortization of other intangible assets:  
Net income$9,598
$14,369
$7,892
 $23,967
$19,633
$14,868
$9,598
$12,725
 $38,835
$32,358
Add: amortization of other intangible assets824
694
861
 1,518
1,615
953
824
862
 2,471
2,477
Less: tax effect of amortization of other intangible assets (a)173
146
181
 319
339
200
173
181
 519
520
Net income excluding amortization of other intangible assets$10,249
$14,917
$8,572
 $25,166
$20,909
$15,621
$10,249
$13,406
 $40,787
$34,315
Days in the quarter91
90
91
 181
181
Days in the period92
91
92
 273
273
Days in the year365
365
365
 365
365
365
365
365
 365
365
Annualized net income$38,497
$58,274
$31,655
 $48,331
$39,591
$58,987
$38,497
$50,485
 $51,922
$43,263
Annualized net income excluding amortization of other intangible assets$41,109
$60,497
$34,382
 $50,749
$42,165
$61,975
$41,109
$53,187
 $54,532
$45,879
Average tangible equity:Average tangible equity:   Average tangible equity:   
Total average stockholders' equity$564,992
$524,196
$489,876
 $544,706
$472,152
$583,269
$564,992
$501,785
 $557,702
$482,138
Less: average goodwill and other intangible assets175,169
161,673
161,600
 168,458
152,943
179,487
175,169
163,615
 172,175
156,540
Average tangible equity$389,823
$362,523
$328,276
 $376,248
$319,209
$403,782
$389,823
$338,170
 $385,527
$325,598
Return on average stockholders' equity ratio:Return on average stockholders' equity ratio:   Return on average stockholders' equity ratio:   
Annualized net income$38,497
$58,274
$31,655
 $48,331
$39,591
$58,987
$38,497
$50,485
 $51,922
$43,263
Average stockholders' equity$564,992
$524,196
$489,876
 $544,706
$472,152
$583,269
$564,992
$501,785
 $557,702
$482,138
Return on average stockholders' equity6.81%11.12%6.46% 8.87%8.39%10.11%6.81%10.06% 9.31%8.97%
Return on average tangible equity ratio:Return on average tangible equity ratio:  Return on average tangible equity ratio:  
Annualized net income excluding amortization of other intangible assets$41,109
$60,497
$34,382
 $50,749
$42,165
$61,975
$41,109
$53,187
 $54,532
$45,879
Average tangible equity$389,823
$362,523
$328,276
 $376,248
$319,209
$403,782
$389,823
$338,170
 $385,527
$325,598
Return on average tangible equity10.55%16.69%10.47% 13.49%13.21%15.35%10.55%15.73% 14.14%14.09%
(a) Based on a 21% statutory federal corporate income tax rate.
TheCompared to the linked quarter, the return on average stockholders' equity and on average tangible stockholders' equity ratios were up, primarily due to the decline in acquisition-related costs compared to the second quarter of 2019. Compared to the third quarter of 2018, the return on average stockholders' equity and on average tangible stockholders' equity ratios were impacted by the First Prestonsburg acquisition, which created increases in capital and decreased income for the second quarter of 2019 due to the acquisition-related costs.increased capital. The return on average stockholders' equity and the return on average tangible stockholders' equity ratios increased in the first sixnine months of 2019 compared to the first sixnine months of 2018, reflecting an increase in net income, which was partially offset by dividends declared and paid during the period.


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period. Compared to the first nine months of 2018, these ratios were also impacted by the First Prestonsburg acquisition and, to a lesser extent, the ASB acquisition, which increased capital.
FINANCIAL CONDITION
Cash and Cash Equivalents
At JuneSeptember 30, 2019, Peoples' interest-bearing deposits in other banks increased $20.9$37.2 million from December 31, 2018. The total cash and cash equivalent balance included $19.8$9.9 million of excess cash reserves being maintained at the FRB of Cleveland at JuneSeptember 30, 2019, compared to $11.2 million at December 31, 2018. The amount of excess cash reserves maintained is dependent upon Peoples' daily liquidity position, which is driven primarily by changes in deposit and loan balances.
Through the first sixnine months of 2019, Peoples' total cash and cash equivalents increased $15.8$43.8 million as Peoples' net cash provided used in financinginvesting activities of $71.2$23.8 million was less than the sum of net cash provided by investingoperating and operatingfinancing activities of $68.2$52.5 million and $18.8$15.1 million, respectively. Peoples' investing activities reflected a net decrease of $29.2$12.0 million in loans and $145.2$246.6 million in purchases of available-for-sale investment securities, which were partially offset by $206.5 million in net proceeds from sales, principal payments, calls and prepayments on available-for-sale and held-to-maturity investment securities, which were partially offset by purchases of $116.4 million in available-for-sale investment securities. Financing activities included a $207.3$143.7 million net increase in deposits, offset partially by a decrease of $105.6 million in short-term borrowings, as well as $12.5$19.2 million of cash dividends paid, offset partially by a net increase of $150.3 million in deposits.paid.
Further information regarding the management of Peoples' liquidity position can be found later in this discussion under “Interest Rate Sensitivity and Liquidity.”
Investment Securities
The following table provides information regarding Peoples’ investment portfolio:
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
Available-for-sale securities, at fair value:Available-for-sale securities, at fair value: Available-for-sale securities, at fair value: 
Obligations of:  
U.S. Treasury and government agencies$
$
$
$
$43
U.S. government sponsored agencies19,051




$12,145
$19,051
$
$
$
States and political subdivisions125,418
84,827
88,587
93,790
96,913
115,613
125,418
84,827
88,587
93,790
Residential mortgage-backed securities748,132
706,976
692,608
688,656
688,002
835,172
748,132
706,976
692,608
688,656
Commercial mortgage-backed securities22,664
6,649
6,707
6,713
6,799
20,461
22,664
6,649
6,707
6,713
Bank-issued trust preferred securities4,099
4,118
3,989
4,166
4,167
4,644
4,099
4,118
3,989
4,166
Total fair value$919,364
$802,570
$791,891
$793,325
$795,924
$988,035
$919,364
$802,570
$791,891
$793,325
Total amortized cost$910,431
$806,641
$804,655
$819,431
$816,217
$976,286
$910,431
$806,641
$804,655
$819,431
Net unrealized gain (loss)$8,933
$(4,071)$(12,764)$(26,106)$(20,293)$11,749
$8,933
$(4,071)$(12,764)$(26,106)
Held-to-maturity securities, at amortized cost:Held-to-maturity securities, at amortized cost: Held-to-maturity securities, at amortized cost: 
Obligations of:



 



 
States and political subdivisions$4,398
$4,401
$4,403
$4,451
$4,530
$4,395
$4,398
$4,401
$4,403
$4,451
Residential mortgage-backed securities23,335
28,348
29,044
29,765
30,668
22,412
23,335
28,348
29,044
29,765
Commercial mortgage-backed securities7,106
2,857
3,514
3,574
3,636
7,022
7,106
2,857
3,514
3,574
Total amortized cost$34,839
$35,606
$36,961
$37,790
$38,834
$33,829
$34,839
$35,606
$36,961
$37,790
Other investment securities$43,508
$41,449
$42,985
$43,044
$42,007
$43,045
$43,508
$41,449
$42,985
$43,044
Total investment securities:

 

 
Amortized cost$988,778
$883,696
$884,601
$900,265
$897,058
$1,053,160
$988,778
$883,696
$884,601
$900,265
Carrying value$997,711
$879,625
$871,837
$874,159
$876,765
$1,064,909
$997,711
$879,625
$871,837
$874,159

DuringAt September 30, 2019, available-for-sale securities were up compared to June 30, 2019, as Peoples deployed excess liquidity in investment securities during the second quarter ofquarter. The increases in investment securities at September 30, 2019 Peoplescompared to March 31, 2019 and prior periods was driven by the investment securities acquired in the First Prestonsburg acquisition,


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combined with increases in fair value driven by overall declines in market interest rates during the later half of the first nine months of 2019. In the First Prestonsburg acquisition, Peoples acquired investment securities totaling $140.7$139.7 million and subsequently sold approximately $65.1 million of acquired available-for-sale investment securities. In April and May of 2019, $53.7 million inof the proceeds were reinvested. Available-for-sale residential mortgage-backed securities


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were up at March 31, 2019, compared to December 31, 2018, primarily due to an increase in fair value driven by overall declines in market interest rates during the quarter. At December 31, 2018, the amortized cost of available-for-sale securities declined compared to September 30, 2018, as securities matured and were not replaced.
Additional information regarding Peoples' investment portfolio can be found in "Note 3 Investment Securities" of the Notes to the Unaudited Consolidated Financial Statements.


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Loans
The following table provides information regarding outstanding loan balances:
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
Gross originated loans:  
Commercial real estate, construction$102,904
$116,992
$124,013
$103,562
$107,255
$100,338
$102,904
$116,992
$124,013
$103,562
Commercial real estate, other641,061
630,679
632,200
630,720
650,512
659,103
641,061
630,679
632,200
630,720
Commercial real estate743,965
747,671
756,213
734,282
757,767
759,441
743,965
747,671
756,213
734,282
Commercial and industrial548,460
558,070
530,207
510,591
471,270
564,279
548,460
558,070
530,207
510,591
Residential real estate299,173
297,667
296,860
299,768
299,934
308,964
299,173
297,667
296,860
299,768
Home equity lines of credit90,374
90,831
93,326
92,892
89,957
92,910
90,374
90,831
93,326
92,892
Consumer, indirect419,595
410,172
407,167
396,701
373,384
423,217
419,595
410,172
407,167
396,701
Consumer, direct72,209
69,710
71,674
72,601
71,545
72,699
72,209
69,710
71,674
72,601
Consumer491,804
479,882
478,841
469,302
444,929
495,916
491,804
479,882
478,841
469,302
Deposit account overdrafts676
518
583
649
860
1,081
676
518
583
649
Total originated loans$2,174,452
$2,174,639
$2,156,030
$2,107,484
$2,064,717
$2,222,591
$2,174,452
$2,174,639
$2,156,030
$2,107,484
Gross acquired loans (a):  
Commercial real estate, construction$6,775
$7,966
$12,404
$13,050
$14,780
$4,435
$6,775
$7,966
$12,404
$13,050
Commercial real estate, other201,909
171,785
184,711
191,993
207,195
171,096
201,909
171,785
184,711
191,993
Commercial real estate208,684
179,751
197,115
205,043
221,975
175,531
208,684
179,751
197,115
205,043
Commercial and industrial51,506
34,837
35,537
41,188
40,938
43,961
51,506
34,837
35,537
41,188
Residential real estate348,439
308,137
296,937
308,178
309,629
358,053
348,439
308,137
296,937
308,178
Home equity lines of credit41,262
38,084
40,653
42,961
45,933
41,942
41,262
38,084
40,653
42,961
Consumer, indirect90
111
136
161
198
67
90
111
136
161
Consumer, direct9,100
2,021
2,370
2,712
3,101
8,171
9,100
2,021
2,370
2,712
Consumer9,190
2,132
2,506
2,873
3,299
8,238
9,190
2,132
2,506
2,873
Total acquired loans$659,081
$562,941
$572,748
$600,243
$621,774
$627,725
$659,081
$562,941
$572,748
$600,243
Total loans$2,833,533
$2,737,580
$2,728,778
$2,707,727
$2,686,491
$2,850,316
$2,833,533
$2,737,580
$2,728,778
$2,707,727
Average total loans$2,830,558
$2,734,592
$2,718,620
$2,717,200
$2,627,777
$2,837,834
$2,830,558
$2,734,592
$2,718,620
$2,717,200
Average allowance for loan losses(21,311)(20,406)(20,079)(19,584)(19,071)(21,620)(21,311)(20,406)(20,079)(19,584)
Average loans, net of average allowance for loan losses$2,809,247
$2,714,186
$2,698,541
$2,697,616
$2,608,706
$2,816,214
$2,809,247
$2,714,186
$2,698,541
$2,697,616
Percent of loans to total loans:  
Commercial real estate, construction3.9%4.6%5.1%4.3%4.5%3.8%3.9%4.6%5.1%4.3%
Commercial real estate, other29.7%29.3%29.9%30.4%31.9%29.1%29.7%29.3%29.9%30.4%
Commercial real estate33.6%33.9%35.0%34.7%36.4%32.9%33.6%33.9%35.0%34.7%
Commercial and industrial21.2%21.7%20.7%20.3%19.1%21.3%21.2%21.7%20.7%20.3%
Residential real estate22.9%22.1%21.8%22.5%22.7%23.4%22.9%22.1%21.8%22.5%
Home equity lines of credit4.6%4.7%4.9%5.0%5.1%4.7%4.6%4.7%4.9%5.0%
Consumer, indirect14.8%15.0%14.9%14.7%13.9%14.9%14.8%15.0%14.9%14.7%
Consumer, direct2.9%2.6%2.7%2.8%2.8%2.8%2.9%2.6%2.7%2.8%
Consumer17.7%17.6%17.6%17.5%16.7%17.7%17.7%17.6%17.6%17.5%
Deposit account overdrafts (b)NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
Total percentage100.0%100.0%100.0%100.0%100.0%100.0%100.0%100.0%100.0%100.0%
Residential real estate loans being serviced for others$473,443
$464,575
$461,256
$458,999
$451,391
$488,724
$473,443
$464,575
$461,256
$458,999
 
(a)Includes all loans acquired, and related loan discount recorded as part of acquisition accounting, 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).
(b)Not meaningful.


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As of JuneSeptember 30, 2019, balances in loan accounts acquired from First Prestonsburg totaled $125.3$115.9 million, including $52.1$53.0 million in residential real estate loans, $42.4$36.4 million in commercial real estate loans, $7.4 million in consumer, direct loans, $17.7$13.7 million in commercial and industrial loans, $6.7 million in consumer, direct loans, and $5.8$6.1 million in home equity lines of credit.


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Period-end total loan balances at September 30, 2019 increased $16.8 million, or 2% annualized, compared to June 30, 2019, increased $96.0$121.5 million, compared to March 31, 2019, $104.8 millionor 6% annualized, compared to December 31, 2018, and $147.0$142.6 million, or 5%, compared to JuneSeptember 30, 2018. Originated loan balances declined $187,000were up $48.1 million, or 9% annualized, compared to March 31,June 30, 2019, and increased $18.4$66.6 million, or 4% annualized, compared to December 31, 2018, and $109.7$115.1 million, or 5%, compared to JuneSeptember 30, 2018. Loan originations during the first halfnine months of 2019 were higher than in recent yearsthe prior year for the same period, however, significantly higher loan paydowns experienced during the first halfnine months of 2019 minimized the impact of the increased production on loan growth for all comparison periods. Comparedcompared to period-end total loan balances at MarchDecember 31, 2018 and September 30, 2018.
The increase compared to June 30, 2019 originatedwas driven by residential real estate and commercial and industrial loan balances declined $9.6growth of $19.4 million and $8.3 million, respectively. During the third quarter of 2019, Peoples purchased $9.8 million of 1-4 family first lien mortgages, which had the largest impact on residential real estate loan growth compared to June 30, 2019 These increases were partially offset by growthdeclines in originatedcommercial real estate loans of $12.8 million and construction loans of $4.9 million. Compared to December 31, 2018, commercial loan balances were up $24.1 million, or 2% annualized, residential real estate loans increased $73.2 million, or 16% annualized, and consumer indirect loans of $9.4 million.
Commercial and industrial loan balances grew $18.3were up $16.0 million, compared to December 31, 2018. Growthor 5% annualized. The increase in residential real estate loans of $71.2 million was driven by the First Prestonsburg acquisition, combined withcompared to December 31, 2018, included the purchase of $9.8 million and $19.0 million of 1-4 family first lien mortgages, during the third and first quarterquarters of 2019.
2019, respectively. Compared to JuneSeptember 30, 2018, originated loan growth of $109.7residential real estate loans increased $59.1 million, or 5%10%, was led by an increase in commercial and industrial loans of $77.2loan balances were up $52.1 million, or 16%3%, and consumer indirect consumer lending growth of $46.2loans were up $26.4 million, or 12%7%.
Loan Concentration
Peoples categorizes its commercial loans according to standard industry classifications and monitors for concentrations in a single industry or multiple industries that could be impacted by changes in economic conditions in a similar manner. Peoples' commercial lending activities continue to be spread over a diverse range of businesses from all sectors of the economy, with no single industry comprising over 10% of Peoples' total loan portfolio.
Loans secured by commercial real estate, including commercial construction loans, continued to comprise the largest portion of Peoples' loan portfolio. The following table provides information regarding the largest concentrations of commercial real estate loans within the loan portfolio at JuneSeptember 30, 2019:
(Dollars in thousands)Outstanding BalanceLoan CommitmentsTotal Exposure% of TotalOutstanding BalanceLoan CommitmentsTotal Exposure% of Total
Commercial real estate, construction:    
Apartment complexes$23,041
$31,693
$54,734
27.5%
Assisted living facilities and nursing homes$17,745
$29,268
$47,013
23.7%20,491
24,736
45,227
22.8%
Apartment complexes15,767
14,818
30,585
15.4%
Office buildings18,892
3,564
22,456
11.3%
Educational services8,538
19,895
28,433
14.3%
19,895
19,895
10.0%
Office buildings15,775
7,702
23,477
11.8%
Mixed used facility17,729
4,902
22,631
11.4%
Mixed used facilities14,722
3,684
18,406
9.3%
Retail3,213
2,616
5,829
2.9%
Industrial8,271

8,271
4.2%5,123

5,123
2.6%
Child care5,930
95
6,025
3.0%
Retail1,797
4,035
5,832
2.9%
Warehouse4,280
1,333
5,613
2.9%
Land Only4,183
1,057
5,240
2.6%
Residential property2,465
2,714
5,179
2.6%1,788
3,011
4,799
2.4%
Land Development2,265
1,917
4,182
2.1%
Other (a)11,382
4,057
15,439
7.8%11,055
1,838
12,893
6.5%
Total commercial real estate, construction$109,679
$88,819
$198,498
100.0%$104,773
$94,011
$198,784
100.0%
(a)All other outstanding balances are less than 2% of the total loan portfolio.


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(Dollars in thousands)Outstanding BalanceLoan CommitmentsTotal Exposure% of TotalOutstanding BalanceLoan CommitmentsTotal Exposure% of Total
Commercial real estate, other:    
Office buildings and complexes:      
Owner occupied$73,617
$1,822
$75,439
8.6%$69,033
$2,943
$71,976
8.3%
Non-owner occupied52,739
4,591
57,330
6.5%56,487
3,094
59,581
6.9%
Total office buildings and complexes126,356
6,413
132,769
15.1%125,520
6,037
131,557
15.2%
Mixed-use facilities:    
Owner occupied36,567
864
37,431
4.3%47,421
338
47,759
5.5%
Non-owner occupied71,527
785
72,312
8.2%63,796
595
64,391
7.5%
Total mixed-use facilities108,094
1,649
109,743
12.5%111,217
933
112,150
13.0%
Apartment complexes77,535
849
78,384
8.9%72,594
1,005
73,599
8.5%
Retail facilities:      
Owner occupied29,202
714
29,916
3.5%28,805
561
29,366
3.4%
Non-owner occupied39,602
98
39,700
4.5%39,189
98
39,287
4.6%
Total retail facilities68,804
812
69,616
8.0%67,994
659
68,653
8.0%
Industrial facilities:  
Light industrial facilities:  
Owner occupied46,056
127
46,183
5.2%46,639
163
46,802
5.4%
Non-owner occupied16,782
1,088
17,870
2.0%17,908
1,088
18,996
2.2%
Total light industrial facilities62,838
1,215
64,053
7.2%64,547
1,251
65,798
7.6%
Warehouse facilities56,048
4,898
60,946
6.9%61,346
4,166
65,512
7.6%
Lodging and lodging related30,901

30,901
3.5%33,710

33,710
3.9%
Assisted living facilities and nursing homes30,915
282
31,197
3.5%27,353
291
27,644
3.2%
Land only16,383
2,177
18,560
2.1%
Other (a)265,096
18,693
283,788
32.3%265,918
18,804
284,722
33.0%
Total commercial real estate, other$842,970
$36,988
$879,957
100.0%$830,199
$33,146
$863,345
100.0%
(a)All other outstanding balances are less than 2% of the total loan portfolio.
Peoples' commercial lending activities continue to focus on lending opportunities inside its primary and secondary market areas within Ohio, West Virginia and Kentucky. In all other states, the aggregate outstanding balances of commercial loans in each state were not material at either JuneSeptember 30, 2019 or December 31, 2018.


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Allowance for Loan Losses
The amount of the allowance for loan losses at the end of each period represents management's estimate of expected losses from existing loans based upon its quarterly analysis of the loan portfolio. While this process involves allocations being made to specific loans and pools of loans, the entire allowance is available for all losses incurred within the loan portfolio.
The following details management's allocation of the allowance for loan losses:
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
Commercial real estate$8,245
$8,297
$8,003
$7,966
$8,271
$8,466
$8,245
$8,297
$8,003
$7,966
Commercial and industrial7,197
6,743
6,178
6,138
5,365
7,162
7,197
6,743
6,178
6,138
Total commercial15,442
15,040
14,181
14,104
13,636
15,628
15,442
15,040
14,181
14,104
Residential real estate1,184
1,213
1,214
999
1,005
1,162
1,184
1,213
1,214
999
Home equity lines of credit598
608
618
708
618
567
598
608
618
708
Consumer, indirect3,172
3,133
3,214
3,423
3,339
3,247
3,172
3,133
3,214
3,423
Consumer, direct342
351
351
395
465
339
342
351
351
395
Consumer3,514
3,484
3,565
3,818
3,804
3,586
3,514
3,484
3,565
3,818
Deposit account overdrafts86
61
81
95
95
128
86
61
81
95
Originated allowance for loan losses20,824
20,406
19,659
19,724
19,158
21,071
20,824
20,406
19,659
19,724
Acquired allowance for loan losses533
533
536
155
108
514
533
533
536
155
Allowance for loan losses$21,357
$20,939
$20,195
$19,879
$19,266
$21,585
$21,357
$20,939
$20,195
$19,879
As a percent of total loans0.75%0.76%0.74%0.73%0.72%0.76%0.75%0.76%0.74%0.73%


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At JuneSeptember 30, 2019, the allowance for loan losses was $21.4$21.6 million, compared to $20.2 million at December 31, 2018 and $19.3$19.9 million at JuneSeptember 30, 2018. The ratio of the allowance for loan losses as a percent of total loans was 0.75%0.76% at JuneSeptember 30, 2019, compared to 0.74% at December 31, 2018 and 0.72%0.73% at JuneSeptember 30, 2018. The ratio includes all acquired loans, from both First Prestonsburg and previous acquisitions since 2012, of $659.1$627.7 million and allowance for acquired loan losses of $533,000.$514,000. The increase in the allowance for loan losses over time was mainly the result of loan growth. The increase duringCompared to December 31, 2018 and September 30, 2018, the first quarter of 2019 wasincreases in the allowance for loan losses were also impacted by increases in the specific reserve on a non-accrual loan.impaired loans.
The significant allocations of allowance for loan losses to commercial loans reflect the higher credit risk associated with this type of lending and the size of this loan category in relationship to the entire loan portfolio. The allowance allocated to the residential real estate and consumer loan categories is based upon Peoples' allowance methodology for homogeneous pools of loans. The fluctuations in these allocations have been directionally consistent with the changes in loan quality, loss experience and loan balances in these categories.
The current allowance for loan loss calculation will be replaced as of January 1, 2020 with a new model, referred to as the Current Expected Credit Loss ("CECL") model. For additional information see "Note 1 Summary of Significant Accounting Policies" of the Notes to the Unaudited Consolidated Financial Statements.


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The following table summarizes Peoples’ net charge-offs and recoveries:
Three Months EndedThree Months Ended
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
Gross charge-offs:          
Commercial real estate, other$43
$113
$
$
$7
$
$43
$113
$
$
Commercial and industrial
63


7
261

63


Residential real estate67
109
64
66
82
81
67
109
64
66
Home equity lines of credit
9
40
10
20
36

9
40
10
Consumer, indirect346
473
548
488
550
447
346
473
548
488
Consumer, direct33
63
61
78
109
54
33
63
61
78
Consumer379
536
609
566
659
501
379
536
609
566
Deposit account overdrafts176
173
234
311
215
283
176
173
234
311
Total gross charge-offs$665
$1,003
$947
$953
$990
$1,162
$665
$1,003
$947
$953
Recoveries:  
Commercial real estate, other$2
$10
$2
$15
$28
$86
$2
$10
$2
$15
Commercial and industrial228
1,784
8
10

81
228
1,784
8
10
Residential real estate102
31
133
32
41
87
102
31
133
32
Home equity lines of credit1
1
2
3
2
8
1
1
2
3
Consumer, indirect47
115
71
131
138
67
47
115
71
131
Consumer, direct27
13
25
31
15
5
27
13
25
31
Consumer74
128
96
162
153
72
74
128
96
162
Deposit account overdrafts50
56
45
44
46
51
50
56
45
44
Total recoveries$457
$2,010
$286
$266
$270
$385
$457
$2,010
$286
$266
Net charge-offs (recoveries):  
Commercial real estate, other$41
$103
$(2)$(15)$(21)$(86)$41
$103
$(2)$(15)
Commercial and industrial(228)(1,721)(8)(10)7
180
(228)(1,721)(8)(10)
Residential real estate(35)78
(69)34
41
(6)(35)78
(69)34
Home equity lines of credit(1)8
38
7
18
28
(1)8
38
7
Consumer, indirect299
358
477
357
412
380
299
358
477
357
Consumer, direct6
50
36
47
94
49
6
50
36
47
Consumer305
408
513
404
506
429
305
408
513
404
Deposit account overdrafts126
117
189
267
169
232
126
117
189
267
Total net charge-offs (recoveries)$208
$(1,007)$661
$687
$720
$777
$208
$(1,007)$661
$687
Ratio of net charge-offs to average total loans (annualized):
Ratio of net charge-offs (recoveries) to average total loans (annualized):Ratio of net charge-offs (recoveries) to average total loans (annualized):
Commercial real estate0.01 %0.02 % %%%(0.01)%0.01 %0.02 % %%
Commercial and industrial(0.03)%(0.26)% %%%0.03 %(0.03)%(0.26)% %%
Residential real estate %0.01 %(0.01)%%0.01% % %0.01 %(0.01)%%
Home equity lines of credit % % %%% % % % %%
Consumer, indirect0.03 %0.05 %0.07 %0.05%0.06%0.05 %0.03 %0.05 %0.07 %0.05%
Consumer, other %0.01 %0.01 %0.01%0.01%0.01 % %0.01 %0.01 %0.01%
Consumer0.03 %0.06 %0.08 %0.06%0.07%0.06 %0.03 %0.06 %0.08 %0.06%
Deposit account overdrafts0.02 %0.02 %0.03 %0.04%0.03%0.03 %0.02 %0.02 %0.03 %0.04%
Total0.03 %(0.15)%0.10 %0.10%0.11%0.11 %0.03 %(0.15)%0.10 %0.10%
Each with "--%" not meaningful.


70

TableNet charge-offs during the third quarter of Contents

2019 continued to be low as a result of relatively strong asset quality metrics. During the second quarter of 2019, net charge-offs had remained relatively low, as gross charge-offs were down compared to prior periods. The net recoveries during the first quarter of 2019 were driven by the recognition of a $1.8 million recovery on a previously charged-off commercial loan. During the third and fourth quartersquarter of 2018, the net charge-offs decreased as Peoples' asset quality remained stable. For the third quarter of 2019 compared to the third quarter of 2018, the ratio of net charge-offs to average total loans was relatively low.


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The following table details Peoples’ nonperforming assets: 
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
Loans 90+ days past due and accruing:  
Commercial real estate, construction$230
$
$
$401
$
$
$230
$
$
$401
Commercial real estate, other557
15
801
60
615
582
557
15
801
60
Commercial real estate787
15
801
461
615
582
787
15
801
461
Commercial and industrial261
50
18


572
261
50
18

Residential real estate2,291
963
1,430
1,338
1,308
3,095
2,291
963
1,430
1,338
Home equity lines of credit53
42
7
84
6
183
53
42
7
84
Consumer, indirect
4

2



4

2
Consumer, direct57



46
83
57



Consumer57
4

2
46
83
57
4

2
Total loans 90+ days past due and accruing$3,449
$1,074
$2,256
$1,885
$1,975
$4,515
$3,449
$1,074
$2,256
$1,885
Nonaccrual loans:  
Commercial real estate, construction$688
$703
$710
$725
$725
$230
$688
$703
$710
$725
Commercial real estate, other6,427
6,459
6,730
6,751
6,422
6,723
6,427
6,459
6,730
6,751
Commercial real estate7,115
7,162
7,440
7,476
7,147
6,953
7,115
7,162
7,440
7,476
Commercial and industrial1,748
1,719
1,304
939
1,265
883
1,748
1,719
1,304
939
Residential real estate3,868
4,479
4,075
3,725
3,770
4,237
3,868
4,479
4,075
3,725
Home equity lines of credit1,001
1,065
1,023
796
681
893
1,001
1,065
1,023
796
Consumer, indirect383
440
324
286
221
568
383
440
324
286
Consumer, direct13
17
56
14
12
55
13
17
56
14
Consumer396
457
380
300
233
623
396
457
380
300
Total nonaccrual loans$14,128
$14,882
$14,222
$13,236
$13,096
$13,589
$14,128
$14,882
$14,222
$13,236
Nonaccrual troubled debt restructurings ("TDRs"):  
Commercial real estate, other$122
$127
$154
$186
$236
$112
$122
$127
$154
$186
Commercial and industrial332
332
405
430
436
332
332
332
405
430
Residential real estate1,664
1,389
1,951
2,087
2,132
1,770
1,664
1,389
1,951
2,087
Home equity lines of credit193
195
210
160
71
194
193
195
210
160
Consumer, indirect152
159
156
119
93
203
152
159
156
119
Consumer, direct
5

17
5


5

17
Consumer152
164
156
136
98
203
152
164
156
136
Total nonaccrual TDRs$2,463
$2,207
$2,876
$2,999
$2,973
$2,611
$2,463
$2,207
$2,876
$2,999
Total nonperforming loans ("NPLs")$20,040
$18,163
$19,354
$18,120
$18,044
$20,715
$20,040
$18,163
$19,354
$18,120
OREO:  
Commercial$145
$
$
$
$
Residential$123
$81
$94
$106
$63
$144
$123
$81
$94
$106
Total OREO$123
$81
$94
$106
$63
$289
$123
$81
$94
$106
Total nonperforming assets ("NPAs")$20,163
$18,244
$19,448
$18,226
$18,107
$21,004
$20,163
$18,244
$19,448
$18,226
Criticized loans (a)$97,016
$89,812
$114,188
$118,703
$120,809
$100,434
$97,016
$89,812
$114,188
$118,703
Classified loans (b)63,048
47,327
43,818
49,058
55,596
58,938
63,048
47,327
43,818
49,058


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(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
Asset Quality Ratios:  
NPLs as a percent of total loans (c)(d)0.71%0.66%0.71%0.67%0.67%0.73%0.71%0.66%0.71%0.67%
NPAs as a percent of total assets (c)(d)0.47%0.45%0.49%0.46%0.46%0.48%0.47%0.45%0.49%0.46%
NPAs as a percent of total loans and OREO (c)(d)0.71%0.67%0.71%0.67%0.67%0.74%0.71%0.67%0.71%0.67%
Allowance for loan losses as a percent of NPLs (c)106.57%115.28%104.35%109.71%106.77%104.20%106.57%115.28%104.35%109.71%
Criticized loans as a percent of total loans (a)(c)3.42%3.28%4.18%4.38%4.50%3.52%3.42%3.28%4.18%4.38%
Classified loans as a percent of total loans (b)(c)2.23%1.73%1.61%1.81%2.07%2.07%2.23%1.73%1.61%1.81%
(a) Includes loans categorized as special mention, substandard or doubtful.
(b) Includes loans categorized as substandard or doubtful.
(c) Data presented as of the end of the period indicated.
(d) Nonperforming loans include loans 90+ days past due and accruing, troubled debt restructurings and nonaccrual loans. Nonperforming assets include nonperforming loans and OREO.

NonperformingThe increase in nonperforming assets increased $1.9 million,of $841,000, or 11%4%, compared to June 30, 2019, was due to several smaller acquired relationships that have become 90+ days past due and are still accruing. The increase in nonperforming assets at September 30, 2019 compared to March 31, 2019, and were up $2.1 million, or 11%, compared to June 30, 2018. The increase compared to March 31, 2019,as well as previous periods, was partially due to acquired loans from First Prestonsburg, which comprised $0.7$1.5 million of nonperforming assets at JuneSeptember 30, 2019, with the remainder due to smaller relationships that have become 90+ days past due and are still accruing. Classified loans, which are those categorized as substandard or doubtful, increased $15.7declined $4.1 million, or 33%7%, compared to March 31, 2019, and were up $7.5 million, or 13%, from June 30, 2018.2019, due to paydowns on several relationships. The increase in classified loans during the second quarter of 2019 was largely related to acquired First Prestonsburg loans, coupled with downgrades of two commercial loan relationships totaling $8.5 million during the second quarter of 2019. Criticized loans, which are those categorized as special mention, substandard or doubtful, increased $7.2$3.4 million, or 8%, compared to March 31, 2019, and decreased $23.8 million, or 20%4%, compared to June 30, 2018.2019. The increase was mostly due to two relationships being downgraded, which were partially offset by upgrades of several loans. The increase in criticized loans during the second quarter of 2019 was largely related to acquired First Prestonsburg loans.
Deposits
The following table details Peoples’ deposit balances:
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
Non-interest-bearing deposits (a)$643,058
$628,464
$607,877
$617,447
$585,861
$677,232
$643,058
$628,464
$607,877
$617,447
Interest-bearing deposits:  
Interest-bearing demand accounts (a)610,464
572,316
573,702
547,172
570,359
622,496
610,464
572,316
573,702
547,172
Savings accounts526,746
477,824
468,500
473,240
480,615
526,372
526,746
477,824
468,500
473,240
Retail certificates of deposit ("CDs")497,221
404,186
394,335
402,309
406,214
488,942
497,221
404,186
394,335
402,309
Money market deposit accounts428,213
403,642
379,878
391,377
389,893
441,989
428,213
403,642
379,878
391,377
Governmental deposit accounts331,754
363,636
267,319
344,320
305,255
337,941
331,754
363,636
267,319
344,320
Brokered CDs326,157
287,345
263,854
265,258
211,062
262,230
326,157
287,345
263,854
265,258
Total interest-bearing deposits2,720,555
2,508,949
2,347,588
2,423,676
2,363,398
2,679,970
2,720,555
2,508,949
2,347,588
2,423,676
Total deposits$3,363,613
$3,137,413
$2,955,465
$3,041,123
$2,949,259
$3,357,202
$3,363,613
$3,137,413
$2,955,465
$3,041,123
(a)The sum of amounts presented is considered total demand deposits.
At September 30, 2019, period-end deposits decreased $6.4 million, compared to June 30, 2019, and increased $401.7 million, or 14%, compared to December 31, 2018, and $316.1 million, or 10%, compared to September 30, 2018. Compared to June 30, 2019, higher-rate brokered CDs and retail CDs declined and were partially offset by increases in non-interest-bearing, money market and lower-cost interest-bearing demand deposit account balances. Brokered CDs and retail CDs were down $63.9 million, or 20%, and $8.3 million, or 2%, respectively. Non-interest-bearing deposit account balances increased $34.2 million, or 5%, while money market deposit accounts and interest-bearing demand deposit accounts were up $13.8 million, or 3%, and $12.0 million, or 2%, respectively. The increase in non-interest-bearing deposit account balances was primarily driven by two customer relationships that maintained balances that were higher than at June 30, 2019 and it is


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anticipated these balances will decline by year-end. The increase compared to December 31, 2018 and September 30, 2018 was primarily driven by the deposits acquired in the First Prestonsburg acquisition.
As of JuneSeptember 30, 2019, the balances in deposit accounts acquired from First Prestonsburg totaled $232.2$214.0 million, including $65.3 million of retail CDs, $62.8$62.3 million of interest-bearing demand accounts, $55.7$54.0 million of retail CDs, $53.1 million of savings accounts, $33.4$30.1 million of non-interest-bearing demand accounts, and $15.1$14.5 million of money market accounts.
At June 30, 2019, period-end deposits increased $226.2 million, or 7%, compared to March 31, 2019, $408.1 million, or 14%, compared to December 31, 2018, and $414.4 million, or 14%, compared to June 30, 2018. Compared toDuring the linked quarter, the growth was driven by the First Prestonsburg acquisition, partially offset by a seasonal decline of $31.9 million in governmental deposits, which are typically higher during the firstthird quarter of each year.2019, Peoples issued $10.0 million of 90-day brokered CDs to fund one $10.0 million interest rate swap with a notional value of $10.0 million. During the second quarter of 2019, Peoples issued $30.0 million of 90-day brokered CDs to fund three $10.0 million interest rate swaps with a notional value in the aggregate of $30.0 million duringmillion. The brokered CDs issued in the second quarter of 2019.2019 matured in the third quarter. The CDs were replaced with 90-day brokered CDs. The swaps will pay a fixed rate of interest while receiving three-month LIBOR, which offsets the rate on the brokered CDs.


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the swaps.
Total demand deposit accounts comprised 39% of total deposits at September 30, 2019, compared to 37% of total deposits at June 30, 2019, compared to 38% of total deposits at March 31, 2019, 40% at December 31, 2018, and 38% at September 30, 2018, and 39% at June 30, 2018. Peoples continues its deposit strategy of growing low-cost core deposits, such as checking and savings accounts, and retail CDs when possible, and relying on higher-cost, non-core deposits, such as brokered CDs when deposits are not available in Peoples' footprint.
Borrowed Funds
The following table details Peoples’ short-term and long-term borrowings:
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
Short-term borrowings:  
FHLB overnight borrowings$
$24,000
$165,000
$102,000
$173,000
$106,000
$
$24,000
$165,000
$102,000
FHLB 90-day advances117,200
110,000
110,000
100,000
13,000
110,000
117,200
110,000
110,000
100,000
Current portion of long-term FHLB advances23,129
13,188
30,000
30,000
98,566
23,069
23,129
13,188
30,000
30,000
Retail repurchase agreements46,128
44,175
51,202
64,840
76,177
49,081
46,128
44,175
51,202
64,840
Unamortized debt issuance cost (a)

(4)(10)(16)


(4)(10)
Total short-term borrowings$186,457
$191,363
$356,198
$296,830
$360,727
$288,150
$186,457
$191,363
$356,198
$296,830
Long-term borrowings:  
FHLB advances$78,324
$98,670
$102,361
$103,860
$105,890
$76,785
$78,324
$98,670
$102,361
$103,860
Junior subordinated debt securities7,367
7,325
7,283
7,239
7,195
7,409
7,367
7,325
7,283
7,239
Total long-term borrowings$85,691
$105,995
$109,644
$111,099
$113,085
$84,194
$85,691
$105,995
$109,644
$111,099
Total borrowed funds$272,148
$297,358
$465,842
$407,929
$473,812
$372,344
$272,148
$297,358
$465,842
$407,929
(a)Unamortized debt issuance cost iswas related to the cost associated with the Credit Agreement with Raymond James Bank, N.A., which was a short-term obligation that was terminated as of March 31,April 3, 2019.
Peoples' short-term FHLB advances generally consist of overnight borrowings maintained in connection with the management of Peoples' daily liquidity position. Borrowed funds, in total, which include overnight borrowings, are mainly a function of loan growth and changes in total deposit balances. OvernightThe increase in overnight borrowings of $106.0 million as of September 30, 2019 compared to June 30, 2019, declined $24 million compared to March 31, 2019, primarily duewas tied to the increasegrowth in deposit balancesearning assets during the quarter. As of JuneSeptember 30, 2019, Peoples had fifteensixteen effective interest rate swaps, with an aggregate notional value of $140.0$150.0 million, $110.0 million of which waswere funded by FHLB 90-day advances, which are expected to extend every 90 days through the maturity dates of the swaps. The remaining $30.0$40.0 million of interest rate swaps waswere funded by 90-day brokered CDs, which will also be extended every 90 days through the maturity dates of the swaps. Peoples continually evaluates the overall balance sheet position given the interest rate environment. Long-term FHLB advances declined at June 30, 2019 compared to March 31, 2019 due to transfers to short-term borrowings. At March 31, 2019 compared to December 31, 2018, long-term FHLB advances declined due to principal payments.
Additional information regarding Peoples' interest rate swaps can be found in "Note 9 Derivative Financial Instruments" of the Notes to the Unconsolidated Financial Statements.
Capital/Stockholders’ Equity
At JuneSeptember 30, 2019, capital levels for both Peoples and Peoples Bank remained substantially higher than the minimum amounts needed to be considered "well capitalized" institutions under applicable banking regulations. These higher capital levels reflect Peoples' desire to maintain a strong capital position. In order to avoid limitations on dividends,


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equity repurchases and compensation, Peoples must exceed the three minimum required ratios by at least the capital conservation buffer. The capital conservation buffer was phased in from 0.625% beginning January 1, 2016 to 2.50% by January 1, 2019, and applies to the common equity tier 1 ("CET1") ratio, the tier 1 capital ratio and the total risk-based capital ratio. At JuneSeptember 30, 2019, Peoples had a capital conservation buffer of 7.14%7.18%, compared to 2.50% for the fully phased-in capital conservation buffer required at January 1, 2019. As such, Peoples exceeded the minimum ratios including the capital conservation buffer at JuneSeptember 30, 2019.


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The following table details Peoples' risk-based capital levels and corresponding ratios:
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
Capital Amounts: 
  
 
Common Equity Tier 1$410,979
$389,393
$378,855
$367,537
$358,987
$417,468
$410,979
$389,394
$378,855
$367,537
Tier 1418,347
396,719
386,138
374,776
366,182
424,877
418,347
396,719
386,138
374,776
Total (Tier 1 and Tier 2)439,704
417,657
406,333
394,655
385,448
446,462
439,704
417,658
406,333
394,655
Net risk-weighted assets$2,903,387
$2,788,934
$2,782,995
$2,764,951
$2,755,112
$2,941,193
$2,903,387
$2,788,935
$2,773,383
$2,764,951
Capital Ratios:  
Common Equity Tier 114.16%13.96%13.61%13.29%13.03%14.19%14.16%13.96%13.66%13.29%
Tier 114.41%14.22%13.87%13.55%13.29%14.45%14.41%14.22%13.92%13.55%
Total (Tier 1 and Tier 2)15.14%14.98%14.60%14.27%13.99%15.18%15.14%14.98%14.65%14.27%
Leverage ratio10.26%10.31%9.99%9.69%9.73%10.28%10.26%10.31%9.99%9.69%
Peoples' capital ratios at September 30, 2019 increased compared to the linked quarter due to earnings during the third quarter of 2019, which exceeded the dividends declared and paid during the quarter by $7.8 million. Peoples' capital ratios at June 30, 2019 increased compared to the linked quarter due to earnings during the second quarter of 2019, which exceeded the dividends declared and paid during the quarter by $2.6 million. The capital ratios at June 30, 2019 were also impacted by the increase in risk-weighted assets, which was largely attributable to the First Prestonsburg merger.acquisition. The capital ratios increased at March 31, 2019 compared to December 31, 2018 due to increased equity as earnings exceeded the dividends declared. Peoples' capital ratios at December 31, 2018 increased compared to September 30, 2018 due primarily to increased earnings, which was largely driven by loan growth. The capital ratios increased at September 30, 2018 compared to June 30, 2018 due to increased equity as earnings exceeded the dividends declared, while net risk-weighted assets decreased slightly in relation to some large payoffs that were higher volatility commercial real estate loans. The leverage ratio at September 30, 2018 decreased slightly compared to June 30, 2018 due to the increase in average assets in the third quarter of 2018 compared to the second quarter as ASB was acquired on April 13, 2018.
In addition to traditional capital measurements, management uses tangible capital measures to evaluate the adequacy of Peoples' stockholders' equity. Such ratios represent non-US GAAP financial measures since their calculation removes the impact of goodwill and other intangible assets acquired through acquisitions on amounts reported in the Unaudited Consolidated Balance Sheets. Management believes this information is useful to investors since it facilitates the comparison of Peoples' operating performance, financial condition and trends to peers, especially those without a similar level of intangible assets to that of Peoples. Further, intangible assets generally are difficult to convert into cash, especially during a financial crisis, and could decrease substantially in value should there be deterioration in the overall franchise value. As a result, tangible equity represents a conservative measure of the capacity for Peoples to incur losses but remain solvent.


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The following table reconciles the calculation of these non-US GAAP financial measures to amounts reported in Peoples' Unaudited Consolidated Financial Statements:
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
Tangible equity:  
Total stockholders' equity$579,022
$535,121
$520,140
$504,290
$499,339
$588,533
$579,022
$535,121
$520,140
$504,290
Less: goodwill and other intangible assets176,763
161,242
162,085
163,401
163,953
179,126
176,763
161,242
162,085
163,401
Tangible equity$402,259
$373,879
$358,055
$340,889
$335,386
$409,407
$402,259
$373,879
$358,055
$340,889
Tangible assets:  
Total assets$4,276,376
$4,017,119
$3,991,454
$4,003,089
$3,972,091
$4,396,148
$4,276,376
$4,017,119
$3,991,454
$4,003,089
Less: goodwill and other intangible assets176,763
161,242
162,085
163,401
163,953
179,126
176,763
161,242
162,085
163,401
Tangible assets$4,099,613
$3,855,877
$3,829,369
$3,839,688
$3,808,138
$4,217,022
$4,099,613
$3,855,877
$3,829,369
$3,839,688
Tangible book value per common share:Tangible book value per common share: Tangible book value per common share: 
Tangible equity$402,259
$373,879
$358,055
$340,889
$335,386
$409,407
$402,259
$373,879
$358,055
$340,889
Common shares outstanding20,696,041
19,681,692
19,565,029
19,550,014
19,528,952
20,700,630
20,696,041
19,681,692
19,565,029
19,550,014
Tangible book value per common share$19.44
$19.00
$18.30
$17.44
$17.17
$19.78
$19.44
$19.00
$18.30
$17.44
Tangible equity to tangible assets ratio:Tangible equity to tangible assets ratio: Tangible equity to tangible assets ratio: 
Tangible equity$402,259
$373,879
$358,055
$340,889
$335,386
$409,407
$402,259
$373,879
$358,055
$340,889
Tangible assets$4,099,613
$3,855,877
$3,829,369
$3,839,688
$3,808,138
$4,217,022
$4,099,613
$3,855,877
$3,829,369
$3,839,688
Tangible equity to tangible assets9.81%9.70%9.35%8.88%8.81%9.71%9.81%9.70%9.35%8.88%
The primary contributor to the increase in tangible book value per share at September 30, 2019 compared to June 30, 2019, was net income, partially offset by dividends paid. The slight decline in the tangible equity to tangible assets ratio at September 30, 2019 compared to June 30, 2019, was a result of asset growth, driven primarily by an increase in the investment securities portfolio. The increase in the tangible equity to tangible assets ratio at June 30, 2019 compared to March 31, 2019, was due largely to the issuance of equity in the form of common shares in connection with the First Prestonsburg mergeracquisition combined with higher retained earnings and other comprehensive income, given the increase in the market value of available-for-sale investment securities, during the second quarter of 2019, offset partially by higher tangible assets attributable primarily to the First Prestonsburg merger.acquisition. The increase in the tangible equity to tangible assets ratio at March 31, 2018 compared to December 31, 2018 as well as previous periods,and September 30, 2018, was the result of higher retained earnings, combined with an increase in the market value of available-for-sale investment securities.
Interest Rate Sensitivity and Liquidity
While Peoples is exposed to various business risks, the risks relating to interest rate sensitivity and liquidity are major risks that can materially impact future results of operations and financial condition due to their complexity and dynamic nature. The objective of Peoples' asset-liability management function is to measure and manage these risks in order to optimize net interest income within the constraints of prudent capital adequacy, liquidity and safety. This objective requires Peoples to focus on interest rate risk exposure and adequate liquidity through its management of the mix of assets and liabilities, their related cash flows and the rates earned and paid on those assets and liabilities. Ultimately, the asset-liability management function is intended to guide management in the acquisition and disposition of earning assets and selection of appropriate funding sources.
Interest Rate Risk
Interest rate risk ("IRR") is one of the most significant risks arising in the normal course of business of financial services companies like Peoples. IRR is the potential for economic loss due to future interest rate changes that can impact the earnings stream, as well as market values, of financial assets and liabilities. Peoples' exposure to IRR is due primarily to differences in the maturity or repricing of earning assets and interest-bearing liabilities. In addition, other factors, such as prepayments of loans and investment securities, or early withdrawal of deposits, can affect Peoples' exposure to IRR and increase interest costs or reduce revenue streams.
Peoples has assigned overall management of IRR to its Asset-Liability Committee (the “ALCO”), which has established an IRR management policy that sets minimum requirements and guidelines for monitoring and managing the


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level of IRR. The methods used by ALCO to assess IRR remain largely unchanged from those disclosed in Peoples' 2018 Form 10-K.


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The following table shows the estimated changes in net interest income and the economic value of equity based upon a standard, parallel shock analysis with balances held constant (dollars in thousands):
 
Increase (Decrease) in Interest Rate
Estimated Increase (Decrease) in
Net Interest Income
 Estimated (Decrease) Increase in Economic Value of Equity
Estimated Increase (Decrease) in
Net Interest Income
 Estimated Increase (Decrease) in Economic Value of Equity
(in Basis Points)June 30, 2019 December 31, 2018 June 30, 2019 December 31, 2018September 30, 2019 December 31, 2018 September 30, 2019 December 31, 2018
300$13,557
 10.1 % $7,351
5.5 % $(11,969) (1.1)% $(22,088)(2.1)%$16,897
 13.0 % $7,351
5.5 % $79,690
 7.4 % $(22,088)(2.1)%
20011,046
 8.3 % 5,780
4.3 % 24,680
 2.2 % (7,191)(0.7)%13,889
 10.7 % 5,780
4.3 % 84,199
 7.8 % (7,191)(0.7)%
1007,478
 5.6 % 3,588
2.7 % 25,125
 2.2 % 3,926
0.4 %9,205
 7.1 % 3,588
2.7 % 59,470
 5.5 % 3,926
0.4 %
(100)(11,962) (9.0)% (9,075)(6.8)% (41,465) (3.7)% (44,512)(4.2)%(12,630) (9.7)% (9,075)(6.8)% (70,881) (6.6)% (44,512)(4.2)%
(200)(23,702) (17.7)% (23,712)(17.6)% (95,175) (8.5)% (130,769)(12.4)%(21,147) (16.3)% (23,712)(17.6)% (122,534) (11.3)% (130,769)(12.4)%
Estimated changes in net interest income and economic value of equity are partially driven by assumptions regarding the rate at which non-maturity deposits will reprice given a move in short-term interest rates.rates as well as assumptions regarding prepayment speeds on mortgage-backed securities. Peoples takes a historically conservative approach when determining what repricing rates (deposit(i.e. deposit betas) are used and what prepayment speeds are used in modeling interest rate risk. These assumptions are monitored closely by Peoples and are updated at least annually.on an ongoing basis. The actual deposit betas experienced recently by Peoples recently in the repricing of non-maturity deposits are lower than those used in Peoples’Peoples' current interest rate risk modeling.model. While Peoples has benefited from this trend in the currentpast, the changing interest rate and competitor environment as it has provided forposes potential risks to continued growth in Peoples’net interest income.
With respect to investment prepayment speeds, the assumptions used are projecting the rate that the underlying mortgages prepay and cash flows are reinvested, generally as a result of refinancing activity. This activity tends to increase as longer term interest rates decline, much like the current environment. The assumptions in the interest rate risk model could be incorrect, leading to either a lower or higher impact on net interest income. However, in recent months, Peoples has experiencedgenerally takes a more pressure on margin expansion and rate competition in its markets.conservative approach regarding prepayment speed assumptions.
Peoples considers other interest rate scenarios in addition to analyzing the impact of parallel yield curve shifts. This includes various flattening and steepening scenarios in which short-term and long-term rates move in different directions with varying magnitude. Peoples believes these scenarios to be more reflective of how interest rates change versus the severe parallel rate shocks described above. At JuneSeptember 30, 2019, the U.S. Treasury and LIBOR swap curves were inverted for certain tenors. Given the shape of market yield curves at JuneSeptember 30, 2019, consideration of the bull steepener scenario yields insights which were not captured by parallel shifts. The key insight presented by the bull steepener scenario highlights the risk to net interest income when long-term yields remain constant while short-term rates fall. In such a scenario, Peoples’ funding costs, which are correlated with short-term rates, decline while asset yields, which are correlated with long-term rates, remain constant.
Peoples has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate cash flows from a counterparty in exchange for Peoples making fixed payments. The swaps are funded through either rolling 90-day FHLB advances or rolling 90-day brokered certificates of deposit, the rate on which is hedged by receipt of the three-month LIBOR component of the swaps. The net result is that, given interest rates are near historical lows, Peoples can obtain funding at swap rates which are significantly lower than rates available on alternative sources of funding, especially overnight and shorter term funding. As of September 30, 2019, Peoples has entered into sixteen interest rate swap contracts with an aggregate notional value of $150.0 million. Additional information regarding Peoples’ interest rate swaps can be found in “Note 14 Derivative Financial Instruments” of the Notes to the Unconsolidated Financial Statement included in this Form 10-Q.
At JuneSeptember 30, 2019, Peoples' consolidated balance sheet was positioned to benefit from rising interest rates in terms of potential impact on net interest income. The table above illustrates this point as changes to net interest income increase in the rising rate scenarios. The increase in asset sensitivity from December 31, 2018 was largely attributable to the high balance of governmental deposits. Peoples’ overnight FHLB borrowing position, which had declined substantially from December 31, 2018 to June 30, 2019 as a result of increased public funds deposits, ultimately led to a decline in liability sensitivityadditional interest rate swaps added in the first halfsecond and third quarters of the year. The increased public funds deposit balances are expected to decline through September 2019. While parallel interest rate shock scenarios are useful in assessing the level of interest rate risk inherent in the balance sheet, interest rates typically move in a non-parallel manner with differences in the timing, direction, and magnitude of changes in short-term


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and long-term interest rates. Thus, any benefit that might occur as a result of the Federal Reserve increasinglowering short-term interest rates in the future could be offset by an inverse movementa greater reduction in long-term interest rates.
Peoples has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for Peoples making fixed payments. As of June 30, 2019, Peoples had entered into fifteen interest rate swap contracts, with an aggregate notional value of $140.0 million. Additional information regarding Peoples' interest rate swaps can be found in "Note 14 Derivative Financial Instruments" of the Notes to the Consolidated Financial Statements included in Peoples' 2018 Form 10-K and "Note 9 Derivative Financial Instruments" of the Notes to the Unconsolidated Financial Statements included in this Form 10-Q.
Liquidity
In addition to IRR management, another major objective of the ALCO is to maintain a sufficient level of liquidity. The methods used by the ALCO to monitor and evaluate the adequacy of Peoples Bank's liquidity position remain unchanged from those disclosed in Peoples' 2018 Form 10-K.
At JuneSeptember 30, 2019, Peoples Bank had liquid assets of $261.9$286.6 million, which represented 5.6%5.9% of total assets and unfunded loan commitments. This amount exceeded the minimum level by $168.2$189.0 million, or 3.6%3.9% of total loans and


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unfunded commitments, currently required under Peoples' liquidity policy. Peoples also had an additional $115.0$112.1 million of unpledged investment securities not included in the measurement of liquid assets.
Management believes the current balance of cash and cash equivalents, and anticipated cash flows from the investment portfolio, along with the availability of other funding sources, will allow Peoples to meet anticipated cash obligations, as well as special needs and off-balance sheet commitments.
Off-Balance Sheet Activities and Contractual Obligations
In the normal course of business, Peoples is a party to financial instruments with off-balance sheet risk necessary to meet the financing needs of Peoples' customers. These financial instruments include commitments to extend credit and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract amounts of these instruments express the extent of involvement Peoples has in these financial instruments.
Loan Commitments and Standby Letters of Credit
Loan commitments are made to accommodate the financial needs of Peoples' customers. Standby letters of credit are instruments issued by Peoples Bank guaranteeing the beneficiary payment by Peoples Bank in the event of default by Peoples Bank's customer in the performance of an obligation or service. Historically, most loan commitments and standby letters of credit expire unused. Peoples Bank's exposure to credit loss in the event of nonperformance by the counter-party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. Peoples Bank uses the same underwriting standards in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties.
Peoples Bank routinely engages in activities that involve, to varying degrees, elements of risk that are not reflected in whole or in part in the Consolidated Financial Statements. These activities are part of Peoples Bank's normal course of business and include traditional off-balance sheet credit-related financial instruments, interest rate contracts and commitments to make additional capital contributions in low-income housing tax credit investments. Traditional off-balance sheet credit-related financial instruments continue to represent the most significant off-balance sheet exposure.
The following table details the total contractual amount of loan commitments and standby letters of credit:
(Dollars in thousands)
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
Home equity lines of credit$106,456
$103,343
$101,265
$101,651
$103,975
$110,127
$106,456
$103,343
$101,265
$101,651
Unadvanced construction loans95,266
80,916
74,734
71,836
87,477
87,063
95,266
80,916
74,734
71,836
Other loan commitments360,872
308,103
314,271
324,059
319,519
365,343
360,872
308,103
314,271
324,059
Loan commitments$562,594
$492,362
$490,270
$497,546
$510,971
$562,533
$562,594
$492,362
$490,270
$497,546
Standby letters of credit$14,658
$12,371
$10,214
$9,979
$20,354
$14,983
$14,658
$12,371
$10,214
$9,979
Management does not anticipate that Peoples Bank’s current off-balance sheet activities will have a material impact on its future results of operations and financial condition based on historical experience and recent trends.


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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this Item 3 is provided under the caption “Interest Rate Sensitivity and Liquidity” under “ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” in this Quarterly Report on Form 10-Q, and is incorporated herein by reference.


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ITEM 4 CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Peoples' management, with the participation of Peoples' President and Chief Executive Officer and Peoples’ Executive Vice President, Chief Financial Officer and Treasurer, has evaluated the effectiveness of Peoples’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of JuneSeptember 30, 2019.  Based upon that evaluation, Peoples’ President and Chief Executive Officer and Peoples’ Executive Vice President, Chief Financial Officer and Treasurer have concluded that:
(a)information required to be disclosed by Peoples in this Quarterly Report on Form 10-Q and other reports Peoples files or submits under the Exchange Act would be accumulated and communicated to Peoples’ management, including its President and Chief Executive Officer and its Executive Vice President, Chief Financial Officer and Treasurer, as appropriate to allow timely decisions regarding required disclosure;
(b)information required to be disclosed by Peoples in this Quarterly Report on Form 10-Q and other reports Peoples files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and
(c)Peoples’ disclosure controls and procedures were effective as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q.
 Changes in Internal Control Over Financial Reporting
There were no changes in Peoples' internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during Peoples' fiscal quarter ended JuneSeptember 30, 2019, that have materially affected, or are reasonably likely to materially affect, Peoples’ internal control over financial reporting.
PART II
ITEM 1 LEGAL PROCEEDINGS
In the ordinary course of their respective businesses or operations, Peoples or one of its subsidiaries may be named as a plaintiff, a defendant, or a party to a legal proceeding or any of their respective properties may be subject to various pending and threatened legal proceedings and various actual and potential claims.  In view of the inherent difficulty of predicting the outcome of such matters, Peoples cannot state what the eventual outcome of any such matters will be. However, based on management's current knowledge and after consultation with legal counsel, management believes these proceedings will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of Peoples.
ITEM 1A RISK FACTORS
Peoples has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for Peoples making fixed payments. As of JuneSeptember 30, 2019, Peoples had entered into fifteensixteen interest rate swap contracts, which were effective with an aggregate notional value of $140.0$150.0 million. Although Peoples expects that each of the hedging relationships will continue to be highly effective as described above, it has not assumed that there will be no ineffectiveness in the hedging relationships. Additional information regarding Peoples' interest rate swaps can be found in "Note 14 Derivative Financial Instruments" of the Notes to the Consolidated Financial Statements included in Peoples' 2018 Form 10-K and "Note 9 Derivative Financial Instruments" of the Notes to the Unconsolidated Financial Statements in this Form 10-Q.
There have been no other material changes from those risk factors previously disclosed in “ITEM 1A. RISK FACTORS” of Part I of Peoples’ 2018 Form 10-K.  Those risk factors are not the only risks Peoples faces.  Additional risks and uncertainties not currently known to management or that management currently deems to be immaterial also may materially adversely affect Peoples’ business, financial condition and/or operating results.


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ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table details repurchases by Peoples and purchases by “affiliated purchasers” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, of Peoples’ common shares during the three months ended JuneSeptember 30, 2019:
Period
(a)
Total Number of Common Shares Purchased
 
(b)
Average Price Paid per Common Share
 
 (c)
Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs (1)
(d)
Maximum
Number ( or Approximate Dollar Value) of Common Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1-30, 2019

$
 
$15,049,184
May 1-31, 2019 (2) (3)
3,728
 32.60
 
15,049,184
June 1-30, 2019 (2) (3)
2,724
 31.23
 
15,049,184
Total6,452
 $32.02
 
$15,049,184
Period
(a)
Total Number of Common Shares Purchased
 
(b)
Average Price Paid per Common Share
 
 (c)
Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs (1)
(d)
Maximum
Number ( or Approximate Dollar Value) of Common Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1-31, 2019 (2) (3)
1,248

$32.25
 
$15,049,184
August 1-31, 2019 (2)
988
 30.79
 
15,049,184
September 1-30, 2019 (1) (3)
14,657
 30.40
 14,175
14,618,757
Total16,893
 $30.56
 14,175
$14,618,757
(1)On November 3, 2015, Peoples announced that on that same date, Peoples' Board of Directors authorized a share repurchase program authorizing Peoples to purchase up to $20.0 million of its outstanding common shares. No14,175 common shares were purchased under this share repurchase program during the three months ended June 30,September 2019.
(2)Information reported includes 3,160705 common shares and 2,239988 common shares withheld to paysatisfy income taxes associated with restricted common shares, which vested during MayJuly and June,August, respectively.
(3)Information reported includes 568543 common shares and 485482 common shares purchased in open market transactions during MayJuly and June,September, respectively, by Peoples Bank under the Rabbi Trust Agreement. The Rabbi Trust Agreement establishes a rabbi trust that holds assets to provide funds for the payment of the benefits under the Peoples Bancorp Inc. Third Amended and Restated Deferred Compensation Plan for Directors of Peoples Bancorp Inc. and Subsidiaries.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 OTHER INFORMATION
None



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ITEM 6 EXHIBITS
Exhibit
Number
 
 
Description
 
 
Exhibit Location
     
 
Agreement and Plan of Merger, dated as of October 23, 2017, between Peoples Bancorp Inc. and ASB Financial Corp.+
 Included as Annex A to the definitive proxy statement/prospectus which forms a part of the Registration Statement of Peoples Bancorp Inc. ("Peoples") on Form S-4/A (Registration No. 333-222054)
     
 
Agreement and Plan of Merger, dated as of October 29, 2018, as amended on December 18, 2018, between Peoples Bancorp Inc. and First Prestonsburg Bancshares Inc.+
 Included as Annex A to the definitive proxy statement/prospectus which forms a part of the Registration Statement of Peoples on Form S-4/A (Registration No. 333-228745)
     
3.1(a) 
Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on May 3, 1993) P
 Incorporated herein by reference to Exhibit 3(a) to Peoples' Registration Statement on Form 8-B filed July 20, 1993 (File No. 0-16772)
     
 Certificate of Amendment to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on April 22, 1994) Incorporated herein by reference to Exhibit 3.1(b) to Peoples' Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017 (File No. 0-16772) ("Peoples' September 30, 2017 Form 10-Q")
     
 Certificate of Amendment to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on April 9, 1996) Incorporated herein by reference to Exhibit 3.1(c) to Peoples' September 30, 2017 Form 10-Q
     
 Certificate of Amendment to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on April 23, 2003) Incorporated herein by reference to Exhibit 3(a) to Peoples’ Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 (File No. 0-16772) (“Peoples’ March 31, 2003 Form 10-Q”)
     
 Certificate of Amendment by Shareholders to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on January 22, 2009) Incorporated herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K dated and filed on January 23, 2009 (File No. 0-16772)
     
 Certificate of Amendment by Directors to Articles filed with the Secretary of State of the State of Ohio on January 28, 2009, evidencing adoption of amendments by the Board of Directors of Peoples Bancorp Inc. to Article FOURTH of Amended Articles of Incorporation to establish express terms of Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value, of Peoples Bancorp Inc. Incorporated herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K dated and filed on February 2, 2009 (File No. 0-16772)
     
 Amended Articles of Incorporation of Peoples Bancorp Inc. (This document represents the Amended Articles of Incorporation of Peoples Bancorp Inc. in compiled form incorporating all amendments. The compiled document has not been filed with the Ohio Secretary of State.) Incorporated herein by reference to Exhibit 3.1(g) to Peoples’ Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (File No. 0-16772)
     
3.2(a) 
Code of Regulations of Peoples Bancorp Inc. P
 Incorporated herein by reference to Exhibit 3(b) to Peoples’ Registration Statement on Form 8-B filed on July 20, 1993 (File No. 0-16772)
     
 Certified Resolutions Regarding Adoption of Amendments to Sections 1.03, 1.04, 1.05, 1.06, 1.08, 1.10, 2.03(C), 2.07, 2.08, 2.10 and 6.02 of the Code of Regulations of Peoples Bancorp Inc. by shareholders on April 10, 2003 Incorporated herein by reference to Exhibit 3(c) to Peoples’ March 31, 2003 Form 10-Q
     
 Certificate regarding adoption of amendments to Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.07, 3.08 and 3.11 of the Code of Regulations of Peoples Bancorp Inc. by shareholders on April 8, 2004 Incorporated herein by reference to Exhibit 3(a) to Peoples’ Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004 (File No. 0-16772)
     
+Schedules and exhibits were omitted pursuant to Item 601(b)(2) of SEC Regulation S-K, as in effect at the time of filing of the Agreement and Plan of Merger. A copy of any omitted schedules or exhibits will be furnished supplementally to the SEC upon request.
P Filed the exhibitExhibit filed with the SEC in paper originally and has not been filed with the SEC in electronic format.
     


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Exhibit
Number
 
 
Description
 
 
Exhibit Location
     
 Certificate regarding adoption of amendments to Sections 2.06, 2.07, 3.01 and 3.04 of Peoples Bancorp Inc.’s Code of Regulations by the shareholders on April 13, 2006 Incorporated herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K dated and filed on April 14, 2006 (File No. 0-16772)
     
 Certificate regarding adoption of an amendment to Section 2.01 of Peoples Bancorp Inc.’s Code of Regulations by the shareholders on April 22, 2010 Incorporated herein by reference to Exhibit 3.2(e) to Peoples’ Quarterly Report on Form 10-Q/A (Amendment No. 1) for the quarterly period ended June 30, 2010 (File No. 0-16772)
     
 Certificate regarding Adoption of Amendment to Division (D) of Section 2.02 of Code of Regulations of Peoples Bancorp Inc. by the Shareholders at the Annual Meeting of Shareholders on April 26, 2018 Incorporated herein by reference to Exhibit 3.1 to Peoples' Current Report on Form 8-K dated and filed on June 28, 2018 (File No. 0-16772) ("Peoples' June 28, 2018 Form 8-K")
     
 Code of Regulations of Peoples Bancorp Inc. (This document represents the Code of Regulations of Peoples Bancorp Inc. in compiled form incorporating all amendments.) Incorporated herein by reference to Exhibit 3.2 to Peoples' June 28, 2018 Form 8-K
     
 Loan Agreement, made and entered into as of April 3, 2019, between Peoples Bancorp Inc., as Borrower, and U.S. Bank National Association, as LenderIncorporated herein by reference to Exhibit 10.1 to Peoples' Current Report on Form 8-K dated and filed on April 9, 2019 (File No. 0-16772) ("Peoples' April 9, 2019 Form 8-K")
Revolving Credit Note issued by Peoples Bancorp Inc. on April 3, 2019 to U.S. Bank National Association in the principal amount of $20,000,000Incorporated herein by reference to Exhibit 10.2 to Peoples' April 9, 2019 Form 8-K
Peoples Bancorp Inc. Amended and Restated Nonqualified Deferred Compensation Plan (adopted effective July 11, 2019) Filed herewithIncorporated herein by reference to Exhibit 10.3 to Peoples' Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019 (File No. 0-16772)
     
 Rule 13a-14(a)/15d-14(a) Certifications [President and Chief Executive Officer] Filed herewith
     
 Rule 13a-14(a)/15d-14(a) Certifications [Executive Vice President, Chief Financial Officer and Treasurer] Filed herewith
     
 Section 1350 Certifications Furnished herewith
     
101.INS XBRL Instance Document Submitted electronically herewith #
     
101.SCH XBRL Taxonomy Extension Schema Document Submitted electronically herewith #
     
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document Submitted electronically herewith #
     
101.LAB XBRL Taxonomy Extension Label Linkbase Document Submitted electronically herewith #
     
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document Submitted electronically herewith #
     
101.DEF XBRL Taxonomy Extension Definition Linkbase Document Submitted electronically herewith #
     
# Attached as Exhibit 101 to the Quarterly Report on Form 10-Q for the quarterly period ended JuneSeptember 30, 2019 of Peoples Bancorp Inc. are the following documents formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (Unaudited) at JuneSeptember 30, 2019 and December 31, 2018; (ii) Consolidated Statements of Income (Unaudited) for the three and sixnine months ended JuneSeptember 30, 2019 and 2018; (iii) Consolidated Statements of Comprehensive Income (Unaudited) for the three and sixnine months ended JuneSeptember 30, 2019 and 2018; (iv) Consolidated Statement of Stockholders' Equity (Unaudited) for the sixnine months ended JuneSeptember 30, 2019; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the sixnine months ended March 31,September 30, 2019 and 2018; and (vi) Notes to the Unaudited Consolidated Financial Statements.



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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   PEOPLES BANCORP INC.
    
Date:August 1,October 30, 2019By: /s/CHARLES W. SULERZYSKI
   Charles W. Sulerzyski
   President and Chief Executive Officer
    
    
Date:August 1,October 30, 2019By: /s/JOHN C. ROGERS
   John C. Rogers
   Executive Vice President,
   Chief Financial Officer and Treasurer



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