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 June 30, 2019
March 31, 2020
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
pebo-20200331_g1.jpg
PEOPLES BANCORP INC.
(Exact name of Registrant as specified in its charter)
Ohio31-0987416
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
138 Putnam Street, P.O. Box 738, Marietta, Ohio45750
Marietta,Ohio45750
(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 valuePEBOPEBOThe 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
filero
o
Accelerated filerx
Non-accelerated filero

o
Smaller reporting companyo
Emerging growth companyo


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:20,698,57120,034,344 common shares, without par value, at July 31, 2019.


May 4, 2020.


Table of Contents

Table of Contents
Table of Contents





2


PART I
ITEM 1.  FINANCIAL STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
2019
December 31,
2018
March 31,
2020
December 31,
2019
(Dollars in thousands)(Unaudited) (Dollars in thousands)(Unaudited)
Assets Assets 
Cash and cash equivalents: Cash and cash equivalents:
Cash and due from banks$56,731
$61,775
Cash and due from banks$56,490  $53,263  
Interest-bearing deposits in other banks36,692
15,837
Interest-bearing deposits in other banks107,162  61,930  
Total cash and cash equivalents93,423
77,612
Total cash and cash equivalents163,652  115,193  
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 $932,179 at March 31, 2020 and $929,395 at December 31, 2019) (a)Available-for-sale investment securities, at fair value (amortized cost of $932,179 at March 31, 2020 and $929,395 at December 31, 2019) (a)960,835  936,101  
Held-to-maturity investment securities, at amortized cost (fair value of $40,682 at March 31, 2020 and $32,541 at December 31, 2019) (a)(b)Held-to-maturity investment securities, at amortized cost (fair value of $40,682 at March 31, 2020 and $32,541 at December 31, 2019) (a)(b)38,738  31,747  
Other investment securities43,508
42,985
Other investment securities46,924  42,730  
Total investment securities997,711
871,837
Loans, net of deferred fees and costs (a)2,833,533
2,728,778
Allowance for loan losses(21,357)(20,195)
Net loans2,812,176
2,708,583
Total investment securities (a)(b)Total investment securities (a)(b)1,046,497  1,010,578  
Loans, net of deferred fees and costs (b)Loans, net of deferred fees and costs (b)2,911,437  2,873,525  
Allowance for credit losses (b)Allowance for credit losses (b)(42,833) (21,556) 
Net loans (b)Net loans (b)2,868,604  2,851,969  
Loans held for sale5,928
5,470
Loans held for sale2,217  6,499  
Bank premises and equipment, net of accumulated depreciation64,451
56,542
Bank premises and equipment, net of accumulated depreciation60,301  61,846  
Bank owned life insurance69,909
68,934
Bank owned life insurance70,195  69,722  
Goodwill163,292
151,245
Goodwill165,805  165,701  
Other intangible assets13,471
10,840
Other intangible assets11,642  11,802  
Other assets56,015
40,391
Other assets80,207  60,855  
Total assets$4,276,376
$3,991,454
Total assets$4,469,120  $4,354,165  
Liabilities Liabilities      
Deposits: Deposits:
Non-interest-bearing$643,058
$607,877
Non-interest-bearing$727,266  $671,208  
Interest-bearing2,720,555
2,347,588
Interest-bearing2,671,164  2,620,204  
Total deposits3,363,613
2,955,465
Total deposits3,398,430  3,291,412  
Short-term borrowings186,457
356,198
Short-term borrowings259,661  316,977  
Long-term borrowings85,691
109,644
Long-term borrowings132,791  83,123  
Accrued expenses and other liabilities(b)61,593
50,007
94,517  68,260  
Total liabilities3,697,354
3,471,314
Total liabilities3,885,399  3,759,772  
Stockholders’ equity 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 March 31, 2020 and December 31, 2019Preferred stock, no par value, 50,000 shares authorized, no shares issued at March 31, 2020 and December 31, 2019—  —  
Common stock, no par value, 24,000,000 shares authorized, 21,162,702 shares issued at March 31, 2020 and 21,156,143 shares issued at December 31, 2019, including shares held in treasuryCommon stock, no par value, 24,000,000 shares authorized, 21,162,702 shares issued at March 31, 2020 and 21,156,143 shares issued at December 31, 2019, including shares held in treasury420,678  420,876  
Retained earnings(b)171,410
160,346
175,637  187,149  
Accumulated other comprehensive income (loss), net of deferred income taxes316
(12,933)Accumulated other comprehensive income (loss), net of deferred income taxes8,252  (1,425) 
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, 865,998 shares at March 31, 2020 and 504,182 shares at December 31, 2019Treasury stock, at cost, 865,998 shares at March 31, 2020 and 504,182 shares at December 31, 2019(20,846) (12,207) 
Total stockholders’ equity579,022
520,140
Total stockholders’ equity583,721  594,393  
Total liabilities and stockholders’ equity$4,276,376
$3,991,454
Total liabilities and stockholders’ equity$4,469,120  $4,354,165  
(a) Also referredAvailable-for-sale investment securities and held-to-maturity investment securities are presented net of allowance for credit losses of $0 and $6,000, respectively, as of March 31, 2020.
(b) On January 1, 2020, Peoples adopted ASU 2016-13 and adopted the current expected credit loss ("CECL") model, which resulted in the establishment of a $7,000 allowance for credit losses for held-to-maturity investment securities; an increase in loan balances of $2.6 million to throughoutestablish the document as "total loans"allowance for credit losses for purchased credit deteriorated loans; an increase to the allowance for credit losses (which was the "allowance for loan losses" prior to January 1, 2020) of $5.8 million; the addition of a $1.5 million unfunded commitment liability included in accrued expenses and "loans held for investment."other liabilities; and a reduction to retained earnings of $3.7 million, net of statutory federal corporate income tax.
See Notes to the Unaudited Consolidated Financial Statements



3

Table of Contents

PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS (Unaudited)
Three Months Ended
March 31,
(Dollars in thousands, except per share data)20202019
Interest income:
Interest and fees on loans$34,588  $34,053  
Interest and dividends on taxable investment securities5,383  5,810  
Interest on tax-exempt investment securities655  537  
Other interest income236  176  
Total interest income40,862  40,576  
Interest expense:
Interest on deposits4,629  4,844  
Interest on short-term borrowings1,039  1,173  
Interest on long-term borrowings558  645  
Total interest expense6,226  6,662  
Net interest income34,636  33,914  
Provision for (recovery of) credit losses (a)16,969  (263) 
Net interest income after provision for (recovery of) credit losses17,667  34,177  
Non-interest income:
Insurance income4,130  4,621  
Electronic banking income3,280  2,987  
Trust and investment income3,262  3,112  
Deposit account service charges2,820  2,341  
Mortgage banking income750  788  
Bank owned life insurance income582  485  
Net gain on investment securities319  30  
Commercial loan swap fees244  146  
Net loss on asset disposals and other transactions(87) (182) 
Other non-interest income437  1,101  
Total non-interest income15,737  15,429  
Non-interest expense:
Salaries and employee benefit costs19,918  19,202  
Net occupancy and equipment expense3,154  2,978  
Electronic banking expense1,865  1,577  
Data processing and software expense1,752  1,545  
Professional fees1,693  1,276  
Franchise tax expense882  705  
Amortization of other intangible assets729  694  
Foreclosed real estate and other loan expenses578  255  
Marketing expense473  594  
Communication expense280  278  
FDIC insurance premium(5) 371  
Other non-interest expense3,006  2,385  
Total non-interest expense34,325  31,860  
(Loss) income before income taxes(921) 17,746  
Income tax (benefit) expense(156) 3,377  
Net (loss) income$(765) $14,369  
(Loss) earnings per common share - basic$(0.04) $0.74  
(Loss) earnings per common share - diluted$(0.04) $0.73  
Weighted-average number of common shares outstanding - basic20,367,564  19,366,008  
Weighted-average number of common shares outstanding - diluted20,538,214  19,508,868  
Cash dividends declared$7,038  $5,868  
Cash dividends declared per common share$0.34  $0.30  
 Three Months Ended Six Months Ended
 June 30, June 30,
(Dollars in thousands, except per share data)20192018 20192018
Interest income:     
Interest and fees on loans$36,660
$31,250
 $70,713
$58,131
Interest and dividends on taxable investment securities5,969
5,830
 11,779
11,480
Interest on tax-exempt investment securities729
635
 1,266
1,278
Other interest income263
54
 439
106
Total interest income43,621
37,769
 84,197
70,995
Interest expense:     
Interest on deposits5,719
3,101
 10,563
5,314
Interest on short-term borrowings1,233
1,175
 2,406
2,143
Interest on long-term borrowings620
685
 1,265
1,371
Total interest expense7,572
4,961
 14,234
8,828
Net interest income36,049
32,808
 69,963
62,167
Provision for loan losses626
1,188
 363
3,171
Net interest income after provision for loan losses35,423
31,620
 69,600
58,996
Non-interest income:     
Insurance income3,486
3,369
 8,107
8,024
Trust and investment income3,401
3,232
 6,513
6,300
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
Bank owned life insurance income490
497
 975
965
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)
Other non-interest income502
421
 1,603
1,752
Total non-interest income15,289
13,255
 30,718
28,224
Non-interest expense:     
Salaries and employee benefit costs20,824
18,025
 40,026
34,015
Net occupancy and equipment expense3,132
2,803
 6,110
5,669
Professional fees2,344
3,022
 3,620
4,740
Electronic banking expense1,693
1,407
 3,270
2,857
Data processing and software expense1,567
1,359
 3,112
2,681
Amortization of other intangible assets824
861
 1,518
1,615
Franchise tax expense772
614
 1,477
1,258
Marketing expense490
656
 1,084
981
FDIC insurance expense381
416
 752
782
Foreclosed real estate and other loan expenses469
338
 724
550
Communication expense317
300
 595
644
Other non-interest expense6,063
6,170
 8,448
8,400
Total non-interest expense38,876
35,971
 70,736
64,192
Income before income taxes11,836
8,904
 29,582
23,028
Income tax expense2,238
1,012
 5,615
3,395
Net income$9,598
$7,892
 $23,967
$19,633
Earnings per common share - basic$0.47
$0.41
 $1.20
$1.05
Earnings per common share - diluted$0.46
$0.41
 $1.19
$1.04
Weighted-average number of common shares outstanding - basic20,277,028
19,160,728
 19,824,035
18,646,266
Weighted-average number of common shares outstanding - diluted20,442,366
19,293,381
 19,972,350
18,773,169
Cash dividends declared$7,035
$5,466
 $12,903
$10,237
Cash dividends declared per common share$0.34
$0.28
 $0.64
$0.54
(a) On January 1, 2020, Peoples adopted ASU 2016-13 and adopted the CECL model. Prior to the adoption of the CECL model, the provision for (recovery of) credit losses was the "provision for (recovery of) loan losses." The provision for credit losses includes changes related to the allowance for credit losses on loans, which includes purchased credit deteriorated loans, held-to-maturity investment securities, and the unfunded commitment liability.
See Notes to the Unaudited Consolidated Financial Statements



4

Table of Contents

PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months Ended Six Months EndedThree Months Ended
June 30, June 30,March 31,
(Dollars in thousands)20192018 20192018(Dollars in thousands)20202019
Net income$9,598
$7,892
 $23,967
$19,633
Other comprehensive income (loss):   
Net (loss) incomeNet (loss) income$(765) $14,369  
Other comprehensive income:Other comprehensive income:
Available-for-sale investment securities:   Available-for-sale investment securities:
Gross unrealized holding gain (loss) arising during the period12,947
(2,661) 21,672
(12,774)
Related tax (expense) benefit(2,719)559
 (4,551)3,737
Gross unrealized holding gain arising during the periodGross unrealized holding gain arising during the period22,268  8,725  
Related tax expenseRelated tax expense(4,676) (1,832) 
Less: reclassification adjustment for net gain included in net income(57)(147) (27)(146)Less: reclassification adjustment for net gain included in net income319  30  
Related tax benefit12
31
 6
31
Amounts reclassified out of accumulated other comprehensive loss per ASU 2016-01 (a)

 
(5,020)
Net effect on other comprehensive income (loss)10,273
(1,986) 17,142
(13,942)
Related tax expenseRelated tax expense(67) (6) 
Net effect on other comprehensive incomeNet effect on other comprehensive income17,340  6,869  
Defined benefit plans:   Defined benefit plans:
Net gain arising during the period

 2

Net (loss) gain arising during the periodNet (loss) gain arising during the period(365)  
Related tax (benefit) expense Related tax (benefit) expense76  —  
Amortization of unrecognized loss and service cost on benefit plans20
26
 37
52
Amortization of unrecognized loss and service cost on benefit plans28  17  
Related tax expenseRelated tax expense(6) (4) 
Recognition of loss due to settlement and curtailmentRecognition of loss due to settlement and curtailment368  —  
Related tax expense(4)(5) (8)(11)Related tax expense(77) —  
Net effect on other comprehensive income16
21
 31
41
Net effect on other comprehensive income24  15  
Cash flow hedges:   Cash flow hedges:
Net (loss) gain arising during the period(3,134)537
 (4,967)1,915
Related tax benefit (expense)658
(113) 1,043
(402)
Net effect on other comprehensive (loss) income(2,476)424
 (3,924)1,513
Total other comprehensive income (loss), net of tax7,813
(1,541) 13,249
(12,388)
Net loss arising during the periodNet loss arising during the period(9,730) (1,833) 
Related tax benefit Related tax benefit2,043  385  
Net effect on other comprehensive lossNet effect on other comprehensive loss(7,687) (1,448) 
Total other comprehensive income, net of taxTotal other comprehensive income, net of tax9,677  5,436  
Total comprehensive income$17,411
$6,351
 $37,216
$7,245
Total comprehensive income$8,912  $19,805  
(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





5

Table of Contents

PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
Accumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
Common StockRetained EarningsTreasury Stock
(Dollars in thousands)
Balance, December 31, 2019$420,876  $187,149  $(1,425) $(12,207) $594,393  
Net loss—  (765) —  —  (765) 
Other comprehensive income, net of tax—  —  9,677  —  9,677  
Cash dividends declared—  (7,038) —  —  (7,038) 
Reissuance of treasury stock for common share awards(1,865) —  —  1,865  —  
Repurchase of treasury stock in connection with employee incentive plan and under compensation plan for Boards of Directors—  —  —  (812) (812) 
Common shares repurchased under share repurchase program—  —  —  (10,226) (10,226) 
Common shares issued under dividend reinvestment plan209  —  —  —  209  
Common shares issued under compensation plan for Boards of Directors45  —  —  195  240  
Gross common shares issued under performance unit awards41  —  —  234  275  
Common shares issued under employee stock purchase plan(8) —  —  105  97  
Stock-based compensation1,380  —  —  —  1,380  
Impact of adoption of new accounting standard, net of taxes (a)—  (3,709) —  —  (3,709) 
Balance, March 31, 2020$420,678  $175,637  $8,252  $(20,846) $583,721  
   Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity
 Common StockRetained EarningsTreasury Stock
(Dollars in thousands)
Balance, December 31, 2018$386,814
$160,346
$(12,933)$(14,087)$520,140
Net income
23,967


23,967
Other comprehensive income, net of tax

13,249

13,249
Cash dividends declared
(12,903)

(12,903)
Reissuance of treasury stock for common share awards(2,821)

2,821

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


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


(684)(684)
Common shares issued under dividend reinvestment plan384



384
Common shares issued under compensation plan for Boards of Directors52


157
209
Common shares issued under employee stock purchase plan28


86
114
Stock-based compensation2,056



2,056
Issuance of common shares related to merger with First Prestonsburg Bancshares Inc.32,437



32,437
Balance, June 30, 2019$418,950
$171,410
$316
$(11,654)$579,022
(a) On January 1, 2020, Peoples adopted ASU 2016-13, which resulted in a reduction to retained earnings of $3.7 million, net of statutory federal corporate income tax.
See Notes to the Unaudited Consolidated Financial Statements









6

Table of Contents

PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months EndedThree Months Ended
June 30,March 31,
(Dollars in thousands)20192018(Dollars in thousands)20202019
Net cash provided by operating activities$18,821
$27,499
Net cash provided by operating activities$18,218  $6,279  
Investing activities: Investing activities:
Available-for-sale investment securities: Available-for-sale investment securities:
Purchases(116,433)(81,441)Purchases(72,942) (37,462) 
Proceeds from sales72,481
14,489
Proceeds from sales5,620  7,425  
Proceeds from principal payments, calls and prepayments70,728
60,088
Proceeds from principal payments, calls and prepayments61,701  25,799  
Held-to-maturity investment securities: Held-to-maturity investment securities:
PurchasesPurchases(8,404) —  
Proceeds from principal payments1,984
2,627
Proceeds from principal payments1,354  1,277  
Other investment securities: Other investment securities:
Purchases(376)(1,089)Purchases(5,376) (246) 
Proceeds from sales3,872
7,111
Proceeds from sales957  2,694  
Proceeds from insurance claim26

Net decrease (increase) in loans held for investment29,219
(92,582)
Net increase in loans held for investmentNet increase in loans held for investment(32,265) (6,811) 
Net expenditures for premises and equipment(1,233)(2,721)Net expenditures for premises and equipment(1,028) (1,584) 
Proceeds from sales of other real estate owned143
265
Proceeds from sales of other real estate owned50   
Proceeds from bank owned life insurance contractsProceeds from bank owned life insurance contracts109  —  
Business acquisitions, net of cash received7,795
4,695
Business acquisitions, net of cash received(839) —  
Investment in limited partnership and tax credit funds(44)(399)
Net cash provided by (used in) investing activities68,162
(88,957)
(Investment in) return of limited partnership and tax credit funds(Investment in) return of limited partnership and tax credit funds(15)  
Net cash used in investing activitiesNet cash used in investing activities(51,078) (8,905) 
Financing activities: 
 
Financing activities:      
Net (decrease) increase in non-interest-bearing deposits(23,318)364
Net increase in non-interest-bearing depositsNet increase in non-interest-bearing deposits56,058  20,587  
Net increase in interest-bearing deposits173,571
19,705
Net increase in interest-bearing deposits50,905  161,293  
Net (decrease) increase in short-term borrowings(207,329)66,412
Net decrease in short-term borrowingsNet decrease in short-term borrowings(57,316) (168,023) 
Proceeds from long-term borrowingsProceeds from long-term borrowings50,000  —  
Payments on long-term borrowings(849)(1,062)Payments on long-term borrowings(372) (503) 
Cash dividends paid(12,467)(10,001)Cash dividends paid(6,918) (5,719) 
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)
Purchase of treasury stock under share repurchase programPurchase of treasury stock under share repurchase program(10,226) —  
Purchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors to be held as treasury stockPurchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors to be held as treasury stock(812) (450) 
Proceeds from issuance of common shares6
15
Proceeds from issuance of common shares—   
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 acquisitionContingent consideration payments made after a business acquisition—  (102) 
Net cash provided by financing activitiesNet cash provided by financing activities81,319  7,086  
Net increase in cash and cash equivalents15,811
12,608
Net increase in cash and cash equivalents48,459  4,460  
Cash and cash equivalents at beginning of period77,612
72,194
Cash and cash equivalents at beginning of period115,193  77,612  
Cash and cash equivalents at end of period$93,423
$84,802
Cash and cash equivalents at end of period$163,652  $82,072  
 
Supplemental cash flow information: Supplemental cash flow information:
Interest paid13,765
8,765
Interest paid6,634  6,499  
Income taxes paid6,150
6,065
Supplemental noncash disclosures: Supplemental noncash disclosures:
Transfers from loans to other real estate owned49
16
Transfers from loans to other real estate owned66  14  
Lease right-of-use assets obtained in exchange for lessee operating lease liabilitiesLease right-of-use assets obtained in exchange for lessee operating lease liabilities27  —  
 
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 (“2019 ("Peoples' 20182019 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’ 20182019 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 June 30, 2019March 31, 2020 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, 2018,2019, contained herein, has been derived from the audited Consolidated Balance Sheet included in Peoples’ 20182019 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' insurance income includes performance-based insurance commissions that are recognized by Peoples when received, which typically occurs, for the most part, during the first quarter of each year. For the three months ended March 31, 2020 and 2019, the amount of performance-based insurance commissions recognized totaled $1.3 million and $1.4 million, respectively.
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’ 20182019 Form 10-K.
Accounting Standards Update ("ASU") 2017-04 - Intangibles - Goodwill and Other (Topic 350): Simplifying Unless otherwise discussed, management believes 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 valueimpact of goodwill to measure a goodwill impairment charge. This accounting guidanceany recently issued standards, including those issued but not yet effective, 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.statements taken as a whole.
ASUAccounting Standards Update ("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 beis 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 SubtopicAccounting Standards Codification ("ASC") 326-20, and should be accounted for according to TopicASC 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. ThisThe measurement willis to 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 currentprevious US GAAP accounting guidance, which delaysdelayed recognition until it iswas probable a loss hashad been incurred. Accordingly,
Peoples expects thatadopted ASU 2016-13 using the adoption of the CECL model will materially affect how the allowancemodified retrospective method for loan losses is determined and could require significant increases to the allowance for loan losses. Moreover, the CECL model may create more volatility in the level of Peoples' allowance for loan losses. If required to materially increase the level of allowance for loan losses for any reason, such increase could adversely affect Peoples' business,all financial condition and results of operations.


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The CECL standard will become effective for interim and annual reportingassets measured at amortized costs on January 1, 2020. Reporting periods beginning after December 15,31, 2019 (effectiveare presented as required by ASU 2016-13, while prior period amounts continue to be reported in accordance with previously applicable US GAAP requirements. Peoples is using the prospective transition approach for financial assets purchased with credit deterioration that were previously classified as purchased credit impaired and accounted for under ASC 310-30. Peoples did not reassess whether purchased credit impaired assets met the criteria of purchased credit deteriorated assets as of the date of adoption.
As of 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. Peoples intends to complete a test run of its process, inclusive of the model, by the end of the third quarter of 2019, pending any unforeseen circumstances or significant changes to the requirements. Peoples expects to recognizerecorded a one-time cumulative-effect adjustment to reduce retained earnings by $3.7 million, net of statutory corporate federal income taxes, an increase in allowance for credit losses of $5.8 million and an increase in unfunded commitment liability of $1.5 million. On January 1, 2020, the amortized cost basis of the purchased credit deteriorated assets were adjusted to reflect the addition of $2.6 million to establish the allowance for loancredit losses. The remaining interest-related discount is

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being accreted into interest income at the effective interest rate beginning on January 1, 2020. As of January 1, 2020, Peoples did not record an allowance for credit losses for available-for-sale investment securities, as all unrealized losses on these securities were deemed to be non-credit in nature, with no credit deterioration upon review by Peoples. Peoples recorded an allowance for credit losses for held-to-maturity securities of $7,000 as of January 1, 2020.
The following table illustrates the impact on the allowance for credit losses from the adoption of ASU 2016-13:
(Dollars in thousands)As Reported Under ASC 326 January 1, 2020Pre-ASC 326 Adoption December 31, 2019Impact of ASC 326 Adoption
Assets:



Loans, at amortized cost$2,876,147  $2,873,525  $2,622  
Allowance for credit losses on loans:
  Construction651  1,188  (537) 
  Commercial real estate, other8,549  6,560  1,989  
  Commercial and industrial5,820  8,568  (2,748) 
  Residential real estate4,360  1,296  3,064  
  Home equity lines of credit1,572  612  960  
  Consumer, indirect5,389  2,942  2,447  
  Consumer, direct890  296  594  
  Deposit account overdrafts94  94  —  
Allowance for credit losses on loans27,325  21,556  5,769  




Liabilities:



Allowance for credit losses for unfunded commitments$1,495  $—  $1,495  
Investment Securities: Investment securities are recorded initially at cost, which includes premiums and discounts if purchased at other than par or face value. Peoples amortizes premiums and accretes discounts as an adjustment to interest income on a level yield basis. The cost of investment securities sold, excluding equity investment securities, and any resulting gain or loss, provision,is based on the specific identification method and related tax effect,recognized as of the beginningtrade date. The cost of equity investment securities is based on the weighted-average method.
Peoples determines the appropriate classification of investment securities at the time of purchase. Held-to-maturity securities are those securities that Peoples has the positive intent and ability to hold to maturity and are recorded at amortized cost. Available-for-sale securities are those securities that would be available to be sold in the future in response to Peoples' liquidity needs, changes in market interest rates, and asset-liability management strategies, among other considerations. Available-for-sale securities are reported at fair value, with unrealized gains and losses reported in total stockholders' equity as a separate component of accumulated other comprehensive income or loss, net of applicable deferred income taxes.
Certain restricted equity investment securities that do not have readily determinable fair values and for which Peoples does not exercise significant influence, are carried at cost. These cost method securities are reported in other investment securities on the Unaudited Consolidated Balance Sheets and consist primarily of shares of the first reporting periodFederal Home Loan Bank of Cincinnati (the "FHLB") and the Federal Reserve Bank of Cleveland (the "FRB").
Peoples evaluates available-for-sale investment securities on a quarterly basis to determine how much, if any, allowance for credit losses is required. Peoples reviews available-for-sale investment securities at an unrealized loss position, with potential exposure to a credit event (which excludes U.S. government and U.S. government sponsored agency securities) to determine if the unrealized loss was credit-related. An allowance for credit losses is recorded to the extent that the unrealized losses are credit-related and likely to be permanent.
Peoples evaluates held-to-maturity investment securities on a quarterly basis in whichdetermining an allowance for credit losses. Peoples has determined that the new standardloss given default for U.S. government sponsored enterprise investment securities is effective, consistent with regulatory expectations set forthzero, due to the fact that it is unlikely the ultimate guarantor (the U.S. government) would not perform on its implicit guarantee in interagency guidance issuedthe event of default. The remaining securities are included in the calculation of the allowance for credit losses for held-to-maturity investment securities.
Loans: Loans originated that Peoples has the positive intent and ability to hold for the foreseeable future or to maturity or payoff are reported at the endprincipal balance outstanding, net of 2016.deferred loan fees and costs, purchase premiums and discounts, charge-offs and an allowance for credit losses. The impactforeseeable future is based upon current market conditions and business strategies, as well as balance sheet management and liquidity. As the conditions change, so may management's view of the adoptionforeseeable future.

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Peoples considers loans 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. Upon detection of the reduced ability of a borrower to meet cash flow obligations, consumer and residential real estate loans are typically charged down to the net realizable value, with the residual balance placed on nonaccrual status. Loans deemed to be uncollectable are charged against the allowance for credit losses, while recoveries of previously charged off amounts are credited to the allowance for credit losses.
Loans acquired in a business combination that have evidence of more than insignificant credit deterioration, which includes loans that Peoples believes it is probable that it will dependbe unable to collect all contractually required payments, are considered "purchased credit deteriorated" loans. These loans are recorded at the purchase price, and an allowance for credit losses is determined using the same methodology as for other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The total of the purchase price and allowance for credit losses is the initial amortized cost of these loans. The variance between the initial amortized cost basis and the par value of the loan is considered an interest premium or discount, which is amortized or accreted into interest income on a level yield method over the life of the loan.
Loans acquired in a business combination that are not considered purchased credit deteriorated are recorded at the fair value and the difference between the acquisition date fair value and the contractual amounts due at the acquisition date represents the discount or premium to a loan's cost basis and is accreted or amortized to interest income over the loan's remaining life using the level yield method.
Allowance for Credit Losses: The allowance for credit losses is a valuation reserve established through the provision for credit losses charged against income. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
The allowance for credit losses is measured on a pool basis, with loans collectively evaluated when similar risk characteristics exist. Peoples evaluated risk characteristics, including but not limited to; internal or third-party credit scores or credit ratings, risk ratings or classifications, financial asset type, collateral type, size, effective interest rate, term, geographical location, industry of the borrower, vintage, historical or credit loss patterns and reasonable and supportable forecast periods. Peoples identified 16 segments for which it believes there are similar risk characteristics and utilized a discounted cash flow methodology in determining an allowance for credit losses for each segment.
In estimating credit losses, Peoples uses a loss driver method, which analyzes one or more economic variables to the change in default rate using a regression analysis. Variables that had a strong correlation were selected as economic factors, or variables, for the model. If a single variable was not found to be strongly correlated, additional variables were included. Peoples utilized the U.S. unemployment, Ohio unemployment, Ohio Gross Domestic Product, and the Ohio Case Shiller Home Price Indices as economic factors in modeling.
Probabilities of default are used in the loss driver model, and are analyzed on a quarterly basis to assess reasonableness. Current conditions probabilities of default is a credit performance metric, with default defined as loans being 90 days or more past due, nonaccrual loans, troubled-debt restructurings and loans with a partial or entire charge-off.
Peoples measured loss given default at the segment level due to statistical considerations using historical information. Peoples also utilized peer data due to somewhat volatile loss history in certain segments to normalize default curves, which provided more meaningful results.
Peoples modeled amortizing loans with a prepayment rate annualized to one year. The prepayment rates were calculated using Peoples' historical data, at the adoption date, includingsegment level.
Peoples models extensions of contractual terms in the characteristicsfollowing situations: when a loan is 60 days or more past due, when a charge-off has occurred, if the loan is in non-accrual status, if a troubled debt restructuring ("TDR") has occurred, or if the loan is grade 5 or higher. When any of these criteria are met and the loan matures within the next 12 months, the loan will be modeled to extend for an additional 12 months.
In general, Peoples completes a quarterly evaluation based on several qualitative factors to determine if there should be adjustments made to loss rates used in determining the allowance for credit losses. These factors include economic conditions, collateral, concentrations, troubled assets, Peoples' loss trends, peer loss trends, delinquency trends, portfolio composition and loan growth, underwriting and other certain risks.
The allowance for credit losses related to specific loans was based on management's estimate of potential losses on impaired loans as determined by (1) the present value of expected future cash flows, (2) the fair value of collateral if the loan is determined to be collateral dependent, or (3) the loan's observable market price.
Peoples categorized loans involving commercial borrowers into risk categories based upon an established grading matrix. This system was used to manage the risk within Peoples' commercial lending activities, evaluate changes in the overall credit quality of the loan portfolio macroeconomic conditions and forecasts. evaluate the appropriateness of the allowance for credit losses. Loan grades are assigned at the time a new loan or lending commitment is extended by Peoples and may be changed at any time when circumstances warrant. Loans to borrowers with an aggregate unpaid principal balance in excess of $1 million are reviewed on an annual basis for

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possible credit deterioration. Loan relationships whose aggregate credit exposure to Peoples is equal to or less than $1 million are reviewed on an event driven basis. Triggers for review include knowledge of adverse events affecting the borrower's business, receipt of financial statements indicating deteriorating credit quality or other similar events. Adversely classified loans are generally reviewed on a quarterly basis.
The primary factors considered when assigning a risk grade to a loan include (1) reliability and sustainability of the primary source of repayment, (2) past, present and projected financial condition of the borrower, and (3) current economic and industry conditions. Other factors that could influence the risk grade assigned include the type and quality of collateral and the strength of any guarantors. The primary source of repayment for commercial real estate loans and commercial and industrial loans is normally the operating cash flow of the business available to repay debt. Management's analysis of operating cash flow for commercial real estate loans secured by non-owner occupied properties takes into account factors such as rent rolls and vacancy statistics. Management's analysis of operating cash flow for commercial real estate loans secured by owner occupied properties and all commercial and industrial loans considers the profitability, liquidity and leverage of the business. The evaluation of construction loans includes consideration of the borrower's ability to complete construction within the established budget.
The primary factors considered when classifying residential real estate, home equity lines of credit and consumer loans include the loan's past due status and declaration of bankruptcy by the borrower(s). The classification of residential real estate and home equity lines of credit also takes into consideration the current value of the underlying collateral.
Peoples has elected the practical expedient not yet determinedto measure allowance for credit losses for accrued interest receivables.
Unfunded Commitments: Peoples also completes a quarterly evaluation for unfunded commitments for loans that are not conditionally cancellable, which includes construction loans, floor plan lines of credit, home equity lines of credit, other credit lines and letters of credit. Peoples performed a study to determine the magnitudehistorical funding rates of any such one-time cumulative-effect adjustment orunadvanced portions of loans, and applied these funding rates to the unfunded commitments at period end. The loss rates, including qualitative factors, in determining the allowance for credit losses were applied at the segment level to the unfunded commitment amount to determine the allowance for credit loss liability for unfunded commitments.
Troubled Debt Restructuring ("TDR"): The restructuring of a loan is considered a TDR if both (1) the borrower is experiencing financial difficulties and (2) the creditor has granted a concession. Loans acquired that are restructured after acquisition are not considered TDRs if the loans evidenced credit deterioration as of the overall impactacquisition date and are accounted for in pools of purchased credit deteriorated loans.
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 (1) the borrower is currently in payment default on any of the borrower's debt; (2) a payment default is probable in the foreseeable future without the modification; (3) the borrower has declared or is in the process of declaring bankruptcy; and (4) 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 or not 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 loans with similar risk characteristics, the significance of the modification relative to the unpaid principal loan balance or collateral value underlying the loan, 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 (1) a reduction in the interest rate for the remaining life of the loan, (2) an extension of the maturity date at an interest rate lower than the current market rate for a new standardloan with similar risk, (3) a temporary period of interest-only payments, and (4) a reduction in the contractual payment amount for either a short period or the remaining term of the loan. All TDRs are evaluated individually to determine if a write-down is required and if they should be on Peoples'accrual or nonaccrual status.
On March 22, 2020, federal and state banking regulators issued a joint statement, with which the FASB concurred as to the approach, regarding accounting for loan modifications for borrowers affected by COVID-19. In this guidance, short-term modifications, made on a good faith basis in response to COVID-19, to borrowers who were current prior to any relief, are not considered TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment which are insignificant. Under the guidance, borrowers that are considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. In addition, modification or deferral programs mandated by the U.S. federal government or any state government related to COVID-19 are not in the scope of ASC 310-40.
Nonaccrual loans: Peoples discontinues the accrual of interest on a loan when conditions cause management to believe collection of all or any portion of the loan's contractual interest is doubtful. Such conditions may include the borrower being 90 days or more past due on any contractual payments, or current information regarding the borrower's financial condition and repayment ability. All unpaid accrued interest deemed uncollectable is reversed, which reduces Peoples' net interest income. Interest received on nonaccrual loans is included in income only if principal recovery is reasonably assured.

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Interest Income Recognition: Interest income on loans and investment securities is recognized by methods that result in level rates of return on principal amounts outstanding. This includes yield adjustments resulting from the amortization of premiums on investment securities, loan costs and premiums, and accretion of discounts on investment securities, loan fees and discounts. Loans that have been placed on nonaccrual, and are subsequently returned to accruing status, recognize interest income similar to other accruing loans once they return to accruing status. Prior accrued interest that was reversed when the loan was placed on nonaccrual is recognized when received, after the principal of the loan has been paid. Since mortgage-backed securities comprise a sizable portion of Peoples' investment portfolio, a significant increase in principal payments on those securities can impact interest income due to the corresponding acceleration of premium amortization or results of operations.discount accretion.
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' 20182019 Form 10‑K.10-K.
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 Unaudited Consolidated Balance Sheets by level in the fair value hierarchy.
Recurring Fair Value Measurements at Reporting Date Recurring Fair Value Measurements at Reporting Date
June 30, 2019 December 31, 2018March 31, 2020December 31, 2019
(Dollars in thousands)Level 1Level 2Level 3 Level 1Level 2Level 3(Dollars in thousands)Level 1Level 2Level 3Level 1Level 2Level 3
Assets:   Assets: 
Available-for-sale investment securities:   Available-for-sale investment securities:
Obligations of:   Obligations of: 
U.S. government sponsored agencies$
$19,051
$
 $
$
$
U.S. government sponsored agencies$—  $6,361  $—  $—  $8,209  $—  
States and political subdivisions
125,418

 
88,587

States and political subdivisions—  108,812  —  —  114,104  —  
Residential mortgage-backed securities
748,132

 
692,608

Residential mortgage-backed securities—  823,893  —  —  791,009  —  
Commercial mortgage-backed securities
22,664

 
6,707

Commercial mortgage-backed securities—  17,061  —  —  18,088  —  
Bank-issued trust preferred securities
4,099

 
3,989

Bank-issued trust preferred securities—  4,708  —  —  4,691  —  
Total available-for-sale securities
919,364

 
791,891

Total available-for-sale securities—  960,835  —  —  936,101  —  
Equity investment securities111
188

 94
183

Derivative assets (a)
9,972

 
4,544

Equity investment securities (a)Equity investment securities (a)83  206  —  123  198  —  
Derivative assets (b)Derivative assets (b)—  30,235  —  —  11,419  —  
Liabilities:   Liabilities:
Derivative liabilities (b)$
$14,020
$
 $
$3,562
$
Derivative liabilities (c)Derivative liabilities (c)$—  $43,659  $—  $—  $15,116  $—  
(a) Included in other investment securities on the Unaudited Consolidated Balance Sheets. For additional information, see "Note 3 Investment Securities of the Notes to the Unaudited Consolidated Financial Statements."
(b) 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)(c) 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.

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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 Unaudited 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 Date
March 31, 2020December 31, 2019
(Dollars in thousands)Level 1Level 2Level 3Level 1Level 2Level 3
Other real estate owned ("OREO")$—  $—  $226  $—  $—  $227  
 Non-Recurring Fair Value Measurements at Reporting Date
 June 30, 2019 December 31, 2018
(Dollars in thousands)Level 1Level 2Level 3 Level 1Level 2Level 3
 
Impaired loans$
$
$32,952
 $
$
$24,129
Other real estate owned ("OREO")

123
 

94
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 June 30, 2019, impaired loans with an aggregate principal balance of $43.2 million were outstanding and reported at fair value of $33.0 million.  For the three and six months ended June 30, 2019, Peoples recognized an increase of $223,000 and $830,000 in the specific reserve on impaired loans, through the allowance for loan losses.
Other Real Estate Owned: OREO, included in other assets on the Unaudited 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 Unaudited Consolidated Balance Sheets.
Fair Value Measurements of Other Financial Instruments Fair Value Measurements of Other Financial Instruments
(Dollars in thousands)Fair Value Hierarchy LevelJune 30, 2019 December 31, 2018(Dollars in thousands)Fair Value Hierarchy LevelMarch 31, 2020December 31, 2019
Carrying AmountFair Value Carrying AmountFair ValueCarrying AmountFair ValueCarrying AmountFair Value
Assets:    Assets:
Cash and cash equivalents1$93,423
$93,423
 $77,612
$77,612
Cash and cash equivalents1$163,652  $163,652  $115,193  $115,193  
Held-to-maturity investment securities:    Held-to-maturity investment securities:
Obligations of:     Obligations of:
States and political subdivisions24,398
4,880
 4,403
4,896
States and political subdivisions23,844  4,348  4,346  4,791  
Residential mortgage-backed securities223,335
23,451
 29,044
28,603
Residential mortgage-backed securities229,070  30,090  21,494  21,569  
Commercial mortgage-backed securities27,106
7,416
 3,514
3,464
Commercial mortgage-backed securities25,830  6,250  5,907  6,181  
Total held-to-maturity securities 34,839
35,747
 36,961
36,963
Total held-to-maturity securities38,744  40,688  31,747  32,541  
Other investment securities:    Other investment securities:
Federal Home Loan Bank ("FHLB") stock229,257
29,257
 29,367
29,367
Federal Home Loan Bank ("FHLB") stock231,595  31,595  27,235  27,235  
Federal Reserve Bank ("FRB") stock212,294
12,294
 12,294
12,294
Federal Reserve Bank ("FRB") stock213,310  13,310  13,310  13,310  
Nonqualified deferred compensation21,293
1,293
 987
987
Nonqualified deferred compensation21,365  1,365  1,499  1,499  
Other investment securities2365
365
 60
60
Other investment securities2365  365  365  365  
Other investment securities (a) 43,209
43,209
 42,708
42,708
Other investment securities (a)46,635  46,635  42,409  42,409  
Net loans32,812,176
3,076,717
 2,708,583
2,907,537
Net loans32,868,604  3,227,179  2,851,969  3,147,190  
Loans held for sale25,928
6,353
 5,470
5,492
Loans held for sale22,217  2,364  6,499  6,553  
Bank owned life insurance369,909
69,909
 68,934
68,934
Bank owned life insurance370,195  70,195  69,722  69,722  
Servicing rights (b)32,571
3,617
 2,655
4,568
Servicing rights (b)(c)Servicing rights (b)(c)32,576  2,736  2,742  3,881  
Liabilities:    Liabilities:
Deposits2$3,363,613
$3,335,686
 $2,955,465
$2,953,452
Deposits2$3,398,430  $3,406,572  $3,291,412  $3,292,950  
Short-term borrowings2186,457
187,337
 356,198
349,994
Short-term borrowings2259,661  275,389  316,977  317,973  
Long-term borrowings285,691
84,933
 109,644
107,696
Long-term borrowings2132,791  140,353  83,123  82,701  
(a)  Other investment securities, as reported on the Unaudited Consolidated Balance Sheets, also includes equity investment securities for 2018,2020 and 2019, 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.
(c) Peoples recognized a write-down on servicing rights of $182,000 during the first quarter of 2020 as the fair value of the servicing rights was less than the carrying value.
 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

14

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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 arerepresents 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). Peoples recognized a write-down on servicing rights of $182,000 during the first quarter of 2020 as the fair value of the servicing rights was less than the carrying value.
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 a 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.
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 Value
March 31, 2020    
Obligations of:    
U.S. government sponsored agencies$5,918  $443  $—  $6,361  
States and political subdivisions105,904  3,026  (118) 108,812  
Residential mortgage-backed securities798,762  25,914  (783) 823,893  
Commercial mortgage-backed securities16,899  279  (117) 17,061  
Bank-issued trust preferred securities4,696  202  (190) 4,708  
Total available-for-sale securities$932,179  $29,864  $(1,208) $960,835  
December 31, 2019    
Obligations of:    
U.S. government sponsored agencies$7,917  $292  $—  $8,209  
States and political subdivisions111,217  3,018  (131) 114,104  
Residential mortgage-backed securities787,430  7,763  (4,184) 791,009  
Commercial mortgage-backed securities18,135  88  (135) 18,088  
Bank-issued trust preferred securities4,696  137  (142) 4,691  
Total available-for-sale securities$929,395  $11,298  $(4,592) $936,101  
(Dollars in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
June 30, 2019    
Obligations of:    
U.S. government sponsored agencies$18,606
$445
$
$19,051
States and political subdivisions122,809
2,721
(112)125,418
Residential mortgage-backed securities742,164
8,770
(2,802)748,132
Commercial mortgage-backed securities22,656
148
(140)22,664
Bank-issued trust preferred securities4,196
100
(197)4,099
Total available-for-sale securities$910,431
$12,184
$(3,251)$919,364
December 31, 2018    
Obligations of:    
States and political subdivisions$88,358
$787
$(558)$88,587
Residential mortgage-backed securities705,289
2,720
(15,401)692,608
Commercial mortgage-backed securities6,812

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


The unrealized losses related to residential mortgage-backed securities at June 30, 2019March 31, 2020 and December 31, 2018,2019, were attributed to changes in market interest rates and spreads since the securities were purchased.



15
12


During each of the three months ended March 31, 2020 and 2019, Peoples realized 0 gross losses from sales of available-for-sale securities. The gross gains and gross losses realized by Peoples from sales of available-for-sale securities for the periods ended June 30March 31 were as follows:
Three Months Ended Six Months EndedThree Months Ended
June 30, June 30,March 31,
(Dollars in thousands)20192018 20192018(Dollars in thousands)20202019
Gross gains realized$30
$3
 $60
$5
Gross gains realized$319  $30  
Gross losses realized87
150
 87
151
Net losses realized$(57)$(147) $(27)$(146)
Net gain realizedNet gain realized$319  $30  
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.
The following table presents a summary of available-for-sale investment securities that had an unrealized loss:
 Less than 12 Months12 Months or MoreTotal
(Dollars in thousands)
Fair
Value
Unrealized LossNo. of Securities
Fair
Value
Unrealized LossNo. of Securities
Fair
Value
Unrealized Loss
March 31, 2020        
Obligations of:
States and political subdivisions  $2,337  $75   $2,251  $43   $4,588  $118  
Residential mortgage-backed securities57,391  449  28  18,948  334  15  76,339  783  
Commercial mortgage-backed securities—  —  —  2,050  117   2,050  117  
Bank-issued trust preferred securities—  —  —  1,810  190   1,810  190  
Total$59,728  $524  30  $25,059  $684  21  $84,787  $1,208  
December 31, 2019            
Obligations of:
States and political subdivisions$6,226  $74   $2,441  $57   $8,667  $131  
Residential mortgage-backed securities284,096  2,527  62  88,993  1,657  39  373,089  4,184  
Commercial mortgage-backed securities970  21   2,409  114   3,379  135  
Bank-issued trust preferred securities—  —  —  1,858  142   1,858  142  
Total$291,292  $2,622  65  $95,701  $1,970  45  $386,993  $4,592  
 Less than 12 Months 12 Months or More Total
(Dollars in thousands)
Fair
Value
Unrealized LossNo. of Securities 
Fair
Value
Unrealized LossNo. of Securities 
Fair
Value
Unrealized Loss
June 30, 2019          
Obligations of:          
States and political subdivisions$
$

 $8,020
$112
5
 $8,020
$112
Residential mortgage-backed securities17,932
154
7
 226,208
2,648
77
 244,140
2,802
Commercial mortgage-backed securities


 6,380
140
5
 6,380
140
Bank-issued trust preferred securities


 1,803
197
2
 1,803
197
Total$17,932
$154
7
 $242,411
$3,097
89
 $260,343
$3,251
December 31, 2018          
Obligations of:          
States and political subdivisions$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
Commercial mortgage-backed securities


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


 1,718
282
2
 1,718
282
Total$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 valuean allowance for credit losses on a quarterly basis.  At June 30, 2019,March 31, 2020, management concluded nothat 0 individual securities were other-than-temporarily impaired sinceat an unrealized loss position required an allowance for credit losses. At March 31, 2020, 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 June 30,March 31, 2020 and March 31, 2019 and December 31, 2018 were largely attributable to changes in market interest rates and spreads since the securities were purchased.purchased, and were not credit related losses. Accrued interest receivable is not included in investment securities balances, and is presented in the “Other assets” line of the Unaudited Consolidated Balance Sheets, with no recorded allowance for credit losses. Interest receivable on investment securities was $3.8 million at March 31, 2020 and $3.6 million at December 31, 2019.
At June 30, 2019,March 31, 2020, 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 two2 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$202,000 and $147,000,$165,000, 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 two2 bank-issued trust preferred securities that had been in an unrealized loss position for twelve months or more at June 30, 2019March 31, 2020 were primarily attributable to the subordinated nature of the debt.



16
13


The table below presents the amortized cost, fair value and total weighted-average yield of available-for-sale securities by contractual maturity at June 30, 2019.March 31, 2020.  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 YearsTotal
Amortized cost     
Obligations of:     
U.S. government sponsored agencies$—  $1,993  $3,925  $—  $5,918  
States and political subdivisions4,641  23,918  42,744  34,601  105,904  
Residential mortgage-backed securities 1,656  81,803  715,299  798,762  
Commercial mortgage-backed securities4,750  8,024  974  3,151  16,899  
Bank-issued trust preferred securities—  —  4,696  —  4,696  
Total available-for-sale securities$9,395  $35,591  $134,142  $753,051  $932,179  
Fair value               
Obligations of:               
U.S. government sponsored agencies$—  $2,115  $4,246  $—  $6,361  
States and political subdivisions4,655  24,299  44,538  35,320  108,812  
Residential mortgage-backed securities 1,710  83,776  738,403  823,893  
Commercial mortgage-backed securities4,781  8,162  1,025  3,093  17,061  
Bank-issued trust preferred securities—  —  4,708  —  4,708  
Total available-for-sale securities$9,440  $36,286  $138,293  $776,816  $960,835  
Total weighted-average yield2.25 %2.63 %2.68 %2.58 %2.59 %
(Dollars in thousands)Within 1 Year1 to 5 Years5 to 10 YearsOver 10 YearsTotal
Amortized cost     
Obligations of:     
U.S. government sponsored agencies$
$2,984
$14,644
$978
$18,606
States and political subdivisions4,234
31,186
44,207
43,182
122,809
Residential mortgage-backed securities1
1,919
60,647
679,597
742,164
Commercial mortgage-backed securities
17,107
1,848
3,701
22,656
Bank-issued trust preferred securities

4,196

4,196
Total available-for-sale securities$4,235
$53,196
$125,542
$727,458
$910,431
Fair value     
Obligations of:     
U.S. government sponsored agencies$
$3,041
$15,011
$999
$19,051
States and political subdivisions4,236
31,477
45,518
44,187
125,418
Residential mortgage-backed securities1
1,934
60,507
685,690
748,132
Commercial mortgage-backed securities
17,195
1,904
3,565
22,664
Bank-issued trust preferred securities

4,099

4,099
Total available-for-sale securities$4,237
$53,647
$127,039
$734,441
$919,364
Total weighted-average yield2.36%2.52%2.77%2.93%2.88%

Held-to-Maturity
The following table summarizes Peoples’ held-to-maturity investment securities:
(Dollars in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value(Dollars in thousands)Amortized CostAllowance for Credit LossesGross Unrealized GainsGross Unrealized LossesFair Value
June 30, 2019 
March 31, 2020March 31, 2020  
Obligations of: Obligations of:  
States and political subdivisions$4,398
$482
$
$4,880
States and political subdivisions$3,844  $(6) $504  $—  $4,342  
Residential mortgage-backed securities23,335
256
(140)23,451
Residential mortgage-backed securities29,070  —  1,020  —  30,090  
Commercial mortgage-backed securities7,106
310

7,416
Commercial mortgage-backed securities5,830  —  420  —  6,250  
Total held-to-maturity securities$34,839
$1,048
$(140)$35,747
Total held-to-maturity securities$38,744  $(6) $1,944  $—  $40,682  
December 31, 2018 
December 31, 2019December 31, 2019  
Obligations of: Obligations of:  
States and political subdivisions$4,403
$493
$
$4,896
States and political subdivisions$4,346  $—  $445  $—  $4,791  
Residential mortgage-backed securities29,044
191
(632)28,603
Residential mortgage-backed securities21,494  —  169  (94) 21,569  
Commercial mortgage-backed securities3,514

(50)3,464
Commercial mortgage-backed securities5,907  —  275  (1) 6,181  
Total held-to-maturity securities$36,961
$684
$(682)$36,963
Total held-to-maturity securities$31,747  $—  $889  $(95) $32,541  
There were no0 gross gains or gross losses realized by Peoples from sales of held-to-maturity securities for anyeither of the three and six months ended June 30, 2019March 31, 2020 and 2018.2019.


14


At March 31, 2020, there were 0 held-to-maturity investment securities that had an unrealized loss. The following table presents a summary of held-to-maturity investment securities that had an unrealized loss:loss at December 31, 2019:
 Less than 12 Months12 Months or MoreTotal
(Dollars in thousands)Fair
Value
Unrealized LossNo. of SecuritiesFair
Value
Unrealized LossNo. of SecuritiesFair
Value
Unrealized Loss
December 31, 2019            
Residential mortgage-backed securities$7,731  $67   $890  $27   $8,621  $94  
Commercial mortgage-backed securities1,666    —  —  —  1,666   
Total$9,397  $68   $890  $27   $10,287  $95  

17

 Less 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
June 30, 2019          
Residential mortgage-backed securities$
$

 $11,639
$140
3
 $11,639
$140
Total$
$

 $11,639
$140
3
 $11,639
$140
December 31, 2018          
Residential mortgage-backed securities$
$

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


 3,464
50
1
 3,464
50
Total$
$

 $16,566
$682
6
 $16,566
$682
Management evaluates held-to-maturity investment securities for an allowance for credit losses on a quarterly basis. The majority of Peoples' held-to-maturity investment securities are issued by U.S. government sponsored agencies. The remaining securities were obligations of state and political subdivisions. Peoples analyzed these securities using cumulative default rate averages for investment grade municipal securities and determined that the potential credit losses of the securities was $6,000. As a result, at March 31, 2020, Peoples recorded $6,000 of allowance for credit losses for held-to-maturity securities, compared to $7,000 at January 1, 2020.
The table below presents the amortized cost, fair value and total weighted-average yield of held-to-maturity securities by contractual maturity at June 30, 2019.March 31, 2020.  The weighted-average yields are based on the amortized cost.cost and are computed on a fully taxable-equivalent basis using a statutory federal corporate income tax rate of 21%.  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 YearsTotal(Dollars in thousands)Within 1 Year1 to 5 Years5 to 10 YearsOver 10 YearsTotal
Amortized cost Amortized cost 
Obligations of: Obligations of: 
States and political subdivisions$305
$
$2,984
$1,109
$4,398
States and political subdivisions$300  $—  $3,544  $—  $3,844  
Residential mortgage-backed securities

4,002
19,333
23,335
Residential mortgage-backed securities—  —  3,399  25,671  29,070  
Commercial mortgage-backed securities
410
3,893
2,803
7,106
Commercial mortgage-backed securities—  392  3,816  1,622  5,830  
Total held-to-maturity securities$305
$410
$10,879
$23,245
$34,839
Total held-to-maturity securities$300  $392  $10,759  $27,293  $38,744  
Fair value Fair value               
Obligations of: Obligations of:               
States and political subdivisions$307
$
$3,458
$1,115
$4,880
States and political subdivisions$301  $—  $4,041  $—  $4,342  
Residential mortgage-backed securities

4,070
19,381
23,451
Residential mortgage-backed securities—  —  3,538  26,552  30,090  
Commercial mortgage-backed securities
412
4,196
2,808
7,416
Commercial mortgage-backed securities—  402  4,214  1,634  6,250  
Total held-to-maturity securities$307
$412
$11,724
$23,304
$35,747
Total held-to-maturity securities$301  $402  $11,793  $28,186  $40,682  
Total weighted-average yield2.62%2.29%1.49%2.81%2.83%Total weighted-average yield2.55 %2.29 %2.79 %2.71 %2.73 %
Other Investment Securities
Peoples' other investment securities on the Unaudited Consolidated Balance SheetSheets 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, 2018(Dollars in thousands)March 31, 2020December 31, 2019
FHLB stock$29,257
$29,367
FHLB stock$31,595  $27,235  
FRB stock12,294
12,294
FRB stock13,310  13,310  
Nonqualified deferred compensation1,293
987
Nonqualified deferred compensation1,365  1,499  
Equity investment securities299
277
Equity investment securities289  321  
Other investment securities365
60
Other investment securities365  365  
Total other investment securities$43,508
$42,985
Total other investment securities$46,924  $42,730  
Peoples redeemed $1.1 millionFHLB stock in order to be in compliance with the requirements of the FHLB of Cincinnati, which redemptions totaled $700,000 during the secondfirst quarter of 2019 and $1.82020. Peoples purchased additional FHLB Stock, which totaled $5.0 million during the first quarter of 2019 of FHLB stock to be in compliance with requirements2020, as a result of the FHLB of Cincinnati.Cincinnati's capital requirements on FHLB advances during the quarter.
During the three and six months ended June 30,March 31, 2020 and March 31, 2019, Peoples recorded the change in the fair value of equity investment securities held at June 30,March 31, 2020 and March 31, 2019, respectively, in other non-interest income, resulting in unrealized gainsloss of zero$30,000 and unrealized gain of $22,000, respectively. During the three and six months ended June 30, 2018, Peoples recorded the change in the fair value of equity investment securities held at June 30, 2018 in other non-interest income, resulting in unrealized losses of $658,000 and $198,000,


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respectively. Net realized gains on sales of equity investment securities, included in other non-interest income during the first sixthree 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 June 30, 2019,March 31, 2020, Peoples' investment in equity investment securities was comprised largely of common stocks issued by various unrelated bank holding companies. There were no0 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.


18

Table of Contents
The following table summarizes the carrying value of Peoples' pledged securities:
 Carrying Amount
(Dollars in thousands)March 31, 2020December 31, 2019
Securing public and trust department deposits, and repurchase agreements:
     Available-for-sale$572,848  $527,655  
     Held-to-maturity19,263  12,975  
Securing additional borrowing capacity at the FHLB and the FRB:
     Available-for-sale92,651  44,618  
     Held-to-maturity13,587  14,155  

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)March 31,
2020
December 31, 2019
Construction$110,865  $88,518  
Commercial real estate, other897,817  833,238  
Commercial and industrial654,530  662,993  
Residential real estate625,366  661,476  
Home equity lines of credit128,011  132,704  
Consumer, indirect418,066  417,185  
Consumer, direct76,172  76,533  
Deposit account overdrafts610  878  
Total loans, at amortized cost$2,911,437  $2,873,525  
(Dollars in thousands)June 30,
2019
December 31, 2018
Originated loans:  
Commercial real estate, construction$102,904
$124,013
Commercial real estate, other641,061
632,200
    Commercial real estate743,965
756,213
Commercial and industrial548,460
530,207
Residential real estate299,173
296,860
Home equity lines of credit90,374
93,326
Consumer, indirect419,595
407,167
Consumer, direct72,209
71,674
   Consumer491,804
478,841
Deposit account overdrafts676
583
Total originated loans$2,174,452
$2,156,030
Acquired loans:  
Commercial real estate, construction$6,775
$12,404
Commercial real estate, other201,909
184,711
    Commercial real estate208,684
197,115
Commercial and industrial51,506
35,537
Residential real estate348,439
296,937
Home equity lines of credit41,262
40,653
Consumer, indirect90
136
Consumer, direct9,100
2,370
   Consumer9,190
2,506
Total acquired loans$659,081
$572,748
Total loans$2,833,533
$2,728,778

Accrued interest receivable is not included in loan balances, and is presented in the “Other assets” line of the Unaudited Consolidated Balance Sheets, with no recorded allowance for credit losses. Interest receivable on loans was $8.8 million at March 31, 2020 and $9.1 million at December 31, 2019.


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Nonaccrual and Past Due Loans
Peoples has acquired variousA 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 amortized cost of loans through business combinationson nonaccrual status and loans delinquent for 90 days or more and accruing were as follows:
March 31, 2020December 31, 2019
(Dollars in thousands)
Nonaccrual (1)(2)
Accruing Loans 90+ Days Past Due
Nonaccrual (1)
Accruing Loans 90+ Days Past Due (2)
Construction$99  $—  $411  $—  
Commercial real estate, other9,577  —  6,801  907  
Commercial and industrial5,010  806  2,155  155  
Residential real estate8,640  557  6,361  2,677  
Home equity lines of credit1,152  143  1,165  108  
Consumer, indirect834  —  840  —  
Consumer, direct170  37  48  85  
Total loans, at amortized cost$25,482  $1,543  $17,781  $3,932  
(1) There were 0 nonaccrual loans for which there was at acquisition, evidence of deterioration ofno allowance for credit quality since origination, and for which it was probable that all contractually required payments would not be collected.losses.
(2) 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
Commercial real estate$13,116
$11,955
Commercial and industrial4,479
1,287
Residential real estate23,509
20,062
Consumer640
58
Total outstanding balance$41,744
$33,362
Net carrying amount$28,125
$22,475
Changes in the accretable yieldnew accounting for purchased credit impaireddeteriorated loans forunder ASU 2016-13 resulted in the six months ended June 30 were as follows:
(Dollars in thousands)June 30,
2019
June 30,
2018
Balance, beginning of period$8,955
$6,704
Additions:  
ASB Financial Corp.
2,415
First Prestonsburg Bancshares Inc.3,853

Accretion(1,148)(897)
Balance, June 30$11,660
$8,222
The fair valuemovement of newly acquired$3.9 million of loans is determined atfrom 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 become90+ days past due and actual cash flowsaccruing category to the nonaccrual category as of January 1, 2020. At December 31, 2019, these loans were presented as 90+ days past due and accruing,
The new accounting for purchased credit deteriorated loans under ASU 2016-13 resulted in the movement of $3.9 million of loans from the 90+ days past due and accruing category to the nonaccrual category as of January 1, 2020. As of December 31, 2019, these loans were presented as 90+ days past due and accruing. Although they were not accruing contractual interest income, they were accreting income from the discount that was recognized due to acquisition accounting. The additional increase in nonaccrual loans compared to the projected cash flows from the last re-estimation. Peoples evaluates these changes quarterlyDecember 31, 2019 was due to a $1.5 million commercial relationship 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 June 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 impactseveral smaller commercial relationships being placed on amounts recorded since the last re-estimation. Peoples completed a re-estimation of cash flows on purchased credit impaired loans in August 2018.
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 thenonaccrual. The amount of interest income and possiblyrecognized on nonaccrual loans during the principal expectedfirst quarter of 2020 was $458,000.


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The following table presents the aging of the amortized cost of past due loans:
Loans Past Due
Current
Loans
Total
Loans
(Dollars in thousands)30 - 59 days60 - 89 days90 + DaysTotal
March 31, 2020
Construction$—  $ $94  $98  $110,767  $110,865  
Commercial real estate, other3,707  77  8,929  12,713  885,104  897,817  
Commercial and industrial2,135  42  5,472  7,649  646,881  654,530  
Residential real estate10,790  886  4,467  16,143  609,223  625,366  
Home equity lines of credit626  267  1,055  1,948  126,063  128,011  
Consumer, indirect3,046  502  330  3,878  414,188  418,066  
Consumer, direct457  84  151  692  75,480  76,172  
Deposit account overdrafts—  —  —  —  610  610  
Total loans, at amortized cost$20,761  $1,862  $20,498  $43,121  $2,868,316  $2,911,437  
December 31, 2019
Construction$ $—  $411  $416  $88,102  $88,518  
Commercial real estate, other376  337  7,501  8,214  825,024  833,238  
Commercial and industrial2,780  312  1,244  4,336  658,657  662,993  
Residential real estate10,538  2,918  5,872  19,328  642,148  661,476  
Home equity lines of credit642  510  1,033  2,185  130,519  132,704  
Consumer, indirect3,574  714  370  4,658  412,527  417,185  
Consumer, direct619  117  112  848  75,685  76,533  
Deposit account overdrafts—  —  —  —  878  878  
Total loans, at amortized cost$18,534  $4,908  $16,543  $39,985  $2,833,540  $2,873,525  
The increase in loans 90+ days past due, compared to be collected. In re-forecasting future estimated cash flows, credit loss expectations are adjustedDecember 31, 2019, was mostly due to one $2.5 million commercial relationship. Delinquency trends remained stable, as necessary.98.5% of Peoples' portfolio was considered “current” at March 31, 2020, compared to 98.6% at December 31, 2019.
Pledged Loans
Peoples pledgeshas pledged certain loans secured by 1-4one-to-four family and multifamily residential mortgages and home equity lines of credit 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 million and $505.7 million at June 30, 2019 and December 31, 2018, respectively. Peoples also pledgeshas pledged commercial loans to secure borrowings with the FRB of Cleveland. The outstanding balances of these loans totaled $153.0 million and $180.9 million at June 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 pledged are summarized as follows:
 Nonaccrual Loans Loans 90+ Days Past Due and Accruing
(Dollars in thousands)June 30,
2019
December 31,
2018
 June 30,
2019
December 31,
2018
Originated loans:     
Commercial real estate, construction$688
$710
 $
$
Commercial real estate, other6,241
6,565
 
786
    Commercial real estate6,929
7,275
 
786
Commercial and industrial2,044
1,673
 

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

Consumer, direct12
56
 

    Consumer547
536
 

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

Consumer, direct1

 57

Total acquired loans$2,803
$2,913
 $2,958
$1,065
Total loans$16,591
$17,098
 $3,449
$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
(Dollars in thousands)30 - 59 days60 - 89 days90 + DaysTotal 
June 30, 2019       
Originated loans:       
Commercial real estate, construction$
$
$688
$688
 $102,216
$102,904
Commercial real estate, other

6,050
6,050
 635,011
641,061
    Commercial real estate

6,738
6,738
 737,227
743,965
Commercial and industrial606
3
1,937
2,546
 545,914
548,460
Residential real estate1,391
1,177
2,478
5,046
 294,127
299,173
Home equity lines of credit387
18
461
866
 89,508
90,374
Consumer, indirect3,024
216
111
3,351
 416,244
419,595
Consumer, direct306
17
2
325
 71,884
72,209
    Consumer3,330
233
113
3,676
 488,128
491,804
Deposit account overdrafts



 676
676
Total originated loans$5,714
$1,431
$11,727
$18,872
 $2,155,580
$2,174,452
Acquired loans:       
Commercial real estate, construction$
$
$230
$230
 $6,545
$6,775
Commercial real estate, other661
728
773
2,162
 199,747
201,909
    Commercial real estate661
728
1,003
2,392
 206,292
208,684
Commercial and industrial488
60
297
845
 50,661
51,506
Residential real estate1,685
2,075
2,700
6,460
 341,979
348,439
Home equity lines of credit228
109
563
900
 40,362
41,262
Consumer, indirect



 90
90
Consumer, direct88
52
57
197
 8,903
9,100
    Consumer88
52
57
197

8,993
9,190
Total acquired loans$3,150
$3,024
$4,620
$10,794
 $648,287
$659,081
Total loans$8,864
$4,455
$16,347
$29,666
 $2,803,867
$2,833,533


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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 June 30, 2019, compared to 98.5% at December 31, 2018.
(Dollars in thousands)March 31, 2020December 31, 2019
Loans pledged to FHLB of Cincinnati$484,772  $458,227  
Loans pledged to FRB of Cleveland440,349  172,693  
Credit Quality Indicators
As discussed in "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples' 20182019 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. Loan grades are assigned at the time a new loan or lending commitment is extended by Peoples and may be changed at any time when circumstances warrant. Loans to borrowers with an aggregate unpaid principal balance in excess of $1.0 million are reviewed on an annual basis for possible credit deterioration. Loan relationships whose aggregate credit exposure to Peoples is equal to or less than $1.0 million are reviewed on an event driven basis. Triggers for review include knowledge of adverse events affecting the borrower's business, receipt of financial statements indicating deteriorating credit quality or other similar events. Adversely classified loans are generally reviewed on a quarterly basis. 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

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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


20

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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 loancredit 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.”“pass" for disclosure purposes.

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Table of Contents
The following table summarizes the risk category of loans within Peoples' loan portfolio based upon the most recent analysis performed:performed at March 31, 2020:
 
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      
Originated loans:      
Commercial real estate, construction$100,231
$
$1,431
$
$1,242
$102,904
Commercial real estate, other622,966
7,673
10,416
6

641,061
    Commercial real estate723,197
7,673
11,847
6
1,242
743,965
Commercial and industrial525,738
5,807
16,915


548,460
Residential real estate13,752
201
14,682
249
270,289
299,173
Home equity lines of credit17



90,357
90,374
Consumer, indirect



419,595
419,595
Consumer, direct24



72,185
72,209
   Consumer24



491,780
491,804
Deposit account overdrafts



676
676
Total originated loans$1,262,728
$13,681
$43,444
$255
$854,344
$2,174,452
Acquired loans:      
Commercial real estate, construction$4,338
$1,636
$801
$
$
$6,775
Commercial real estate, other178,425
12,700
10,693
91

201,909
    Commercial real estate182,763
14,336
11,494
91

208,684
Commercial and industrial43,171
3,265
5,038
32

51,506
Residential real estate17,634
2,686
2,564
130
325,425
348,439
Home equity lines of credit81



41,181
41,262
Consumer, indirect1



89
90
Consumer, direct19



9,081
9,100
   Consumer20



9,170
9,190
Total acquired loans$243,669
$20,287
$19,096
$253
$375,776
$659,081
Total loans$1,506,397
$33,968
$62,540
$508
$1,230,120
$2,833,533


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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 six 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 June 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.
(Dollars in thousands)20202019201820172016PriorRevolving LoansRevolving Loans Converted to Term
Total
Loans
Construction

  Pass$4,092  $38,085  $30,264  $34,158  $1,277  $839  $500  $1,085  $109,215  
  Special mention—  —  —  —  —  —  152  —  152  
  Substandard—  —  —  409  —  1,089  —  —  1,498  
     Total4,092  38,085  30,264  34,567  1,277  1,928  652  1,085  110,865  
Commercial real estate, other

  Pass34,844  123,054  83,513  107,026  114,584  261,144  122,359  20,711  846,524  
  Special mention—  44  584  2,054  4,570  6,394  1,634  125  15,280  
  Substandard—  930  1,076  2,198  2,086  21,000  8,604  96  35,894  
  Doubtful—  —  —  —  —  119  —  —  119  
     Total34,844  124,028  85,173  111,278  121,240  288,657  132,597  20,932  897,817  
Commercial and industrial
  Pass27,851  115,319  86,120  53,941  54,880  89,840  203,505  32,037  631,456  
  Special mention—  205  181  168   1,396  4,701  15  6,659  
  Substandard—  2,169  1,002  3,185  470  3,578  5,428  2,147  15,832  
  Doubtful—  —  —  —   233  343  193  583  
     Total27,851  117,693  87,303  57,294  55,365  95,047  213,977  34,392  654,530  
Residential real estate
  Pass8,820  51,870  33,071  37,058  54,563  368,621  71,077  190  625,080  
  Special mention—  —  —  —  —   —  —   
  Substandard—  —  —  —  —  210  74  —  284  
     Total8,820  51,870  33,071  37,058  54,563  368,833  71,151  190  625,366  
Home equity lines of credit
  Pass3,209  14,712  15,145  15,905  14,208  48,551  16,281  4,510  128,011  
     Total3,209  14,712  15,145  15,905  14,208  48,551  16,281  4,510  128,011  
Consumer, indirect
  Pass34,969  122,879  104,388  61,567  29,552  9,438  55,273  —  418,066  
     Total34,969  122,879  104,388  61,567  29,552  9,438  55,273  —  418,066  
Consumer, direct
  Pass7,736  23,732  17,511  8,038  4,697  4,335  10,123  —  76,172  
     Total7,736  23,732  17,511  8,038  4,697  4,335  10,123  —  76,172  
Deposit account overdrafts610  610  
Total loans, at amortized cost$122,131  $492,999  $372,855  $325,707  $280,902  $816,789  $500,054  $61,109  $2,911,437  
At June 30, 2019,March 31, 2020, Peoples had a total of $2.2$2.1 million of loans secured by residential real estate mortgages that were in the process of foreclosure.



23
22


Collateral Dependent Loans
Impaired LoansPeoples has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:
Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.
Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage.
Home equity lines of credit are generally secured by second mortgages on residential real estate property.
Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral.
The following table summarizesdetails Peoples' amortized cost of collateral dependent loans:
(Dollars in thousands)March 31, 2020December 31, 2019
Commercial real estate, other$9,572  $6,818  
Commercial and industrial5,791  1,962  
Residential real estate2,006  1,847  
Home equity lines of credit776  681  
Consumer, indirect—  713  
Consumer, direct—  94  
Total collateral dependent loans$18,145  $12,115  
The increase in collateral dependent commercial and industrial loans classified as impaired:
 
Unpaid
Principal
Balance
Recorded Investment
Total
Recorded
Investment
 
Average
Recorded
Investment
Interest
Income
Recognized
 
With
Allowance
Without
Allowance
Related
Allowance
(Dollars in thousands)
June 30, 2019       
Commercial real estate, construction$1,793
$
$1,706
$1,706
$
$1,728
$29
Commercial real estate, other15,546
4,753
10,296
15,049
520
14,722
250
    Commercial real estate17,339
4,753
12,002
16,755
520
16,450
279
Commercial and industrial4,265
1,485
2,731
4,216
449
3,226
47
Residential real estate22,195
387
23,170
23,557
53
22,086
629
Home equity lines of credit1,469
419
1,051
1,470
68
1,343
40
Consumer, indirect445
96
356
452
23
413
15
Consumer, direct464
49
415
464
18
207
9
    Consumer909
145
771
916
41
620
24
Total$46,177
$7,189
$39,725
$46,914
$1,131
$43,725
$1,019
December 31, 2018       
Commercial real estate, construction$2,376
$
$2,376
$2,376
$
$1,732
$74
Commercial real estate, other15,464
274
14,946
15,220
119
14,043
455
    Commercial real estate17,840
274
17,322
17,596
119
15,775
529
Commercial and industrial3,305
790
2,436
3,226
157
2,423
72
Residential real estate25,990
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
Consumer, indirect496

503
503

278
15
Consumer, direct79
22
57
79
6
63
20
    Consumer575
22
560
582
6
341
35
Total$50,001
$2,154
$46,221
$48,375
$509
$43,140
$1,879
Peoples'at March 31, 2020 compared to December 31, 2019 was mostly due to one commercial relationship that became collateral dependent. In addition, the decline in collateral dependent consumer loans was driven by a change in the threshold for evaluation of individually impaired loans, shown inwhich was previously $100,000 and on January 1, 2020 was changed to $250,000, thereby reducing the tableamount of loans considered collateral dependent which were no longer above included loans that were classified as troubled debt restructurings ("TDRs").the threshold.
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.




2324


The following table summarizes the loans that were modified as a TDRTDRs during the three months ended June 30:March 31:
 Three Months Ended
 
Recorded Investment (a)
Recorded Investment (1)
(Dollars in thousands)Number of ContractsPre-ModificationPost-ModificationRemaining Recorded Investment(Dollars in thousands)Number of ContractsPre-ModificationPost-ModificationRemaining Recorded Investment
June 30, 2019 
March 31, 2020March 31, 2020
Originated loans:Originated loans: Originated loans:
Commercial real estate, otherCommercial real estate, other $265  $265  $265  
Commercial and industrialCommercial and industrial 145  145  145  
Residential real estateResidential real estate 452  483  481  
Home equity lines of creditHome equity lines of credit 41  41  41  
Consumer - indirectConsumer - indirect11  175  175  175  
Consumer - directConsumer - direct 57  57  57  
TotalTotal22  $1,135  $1,166  $1,164  
March 31, 2019March 31, 2019
Originated loans:Originated loans:
Commercial and industrialCommercial and industrial $38  $38  $36  
Residential real estate1
$37
$37
$37
Residential real estate 399  403  403  
Home equity lines of credit2
60
60
60
Home equity lines of credit 79  79  79  
Consumer, indirect7
110
110
110
Consumer, indirect 72  72  72  
Consumer, direct3
41
41
41
Consumer, direct 37  37  37  
Consumer10
151
151
151
Consumer11  109  109  109  
Total originated loans13
$248
$248
$248
TotalTotal17  $625  $629  $627  
Acquired loans:Acquired loans: 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
Residential real estate $24  $24  $24  
Home equity lines of credit7
113
113
113
Home equity lines of credit 65  66  66  
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.
TotalTotal $89  $90  $90  
(1) 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.

(1) 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.



24


  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.


25


The following table presentsrepayment terms, or other delays in payment which are insignificant. Under the guidance, borrowers that are considered current are those acquired loans modified in a TDR during the year that subsequently defaulted (i.e., were 90are less than 30 days or more past due followingon their contractual payments at the time a modification) duringmodification program is implemented. In addition, modification or deferral programs mandated by the six-month periods ended June 30:
 June 30, 2019 June 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 Losses
Acquired loans:       
Consumer, direct1
$34
$
 
$
$
Total1
$34
$
 
$
$
(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.
U.S. federal government or any state government related to COVID-19 are not in the scope of ASC 310-40.
Peoples did not have any originated loans that were modified as a TDR during the last twelve months that subsequently defaulted. Peoples had no0 commitments to lend additional funds to the related debtorsborrowers whose loan terms have been modified in a TDR.


25

Table of Contents
Allowance for Originated LoanCredit Losses
Changes in the allowance for originated loancredit losses for the sixthree months ended June 30 were as follows:March 31, 2020:
(Dollars in thousands)Commercial 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
Charge-offs(153)(63)(176)(9)(819)(96)(349)(1,665)
Recoveries12
2,012
133
2
162
40
106
2,467
Net (charge-offs) recoveries(141)1,949
(43)(7)(657)(56)(243)802
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
         
Balance, January 1, 2018$7,797
$5,813
$904
$693
$2,944
$464
$70
$18,685
Charge-offs(849)(38)(227)(57)(1,479)(219)(420)(3,289)
Recoveries43

67
9
272
84
116
591
Net charge-offs(806)(38)(160)(48)(1,207)(135)(304)(2,698)
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


26


(Dollars in thousands)Beginning Balance,
January 1, 2020
Initial Allowance for Purchased Credit Deteriorated AssetsProvision for Credit LossesCharge-offsRecoveriesEnding Balance, March 31, 2020
Construction$600  $51  $1,091  $—  $—  $1,742  
Commercial real estate, other7,193  1,356  3,487  (10) 116  12,142  
Commercial and industrial4,960  860  2,656  (937) 1,204  8,743  
Residential real estate3,977  383  1,445  (118) 57  5,744  
Home equity lines of credit1,570   136  (14)  1,695  
Consumer, indirect5,389  —  6,085  (721) 125  10,878  
Consumer, direct856  34  961  (62) 14  1,803  
Deposit account overdrafts94  —  145  (213) 60  86  
Total$24,639  $2,686  $16,006  $(2,075) $1,577  $42,833  
The following table detailssignificant increase in the recorded investment and allowance for originated loancredit losses disaggregated based on impairment method:
(Dollars in thousands)Commercial Real EstateCommercial and IndustrialResidential Real EstateHome Equity Lines of CreditConsumer IndirectConsumer DirectDeposit Account OverdraftsTotal
June 30, 2019        
Allowance for loan losses allocated to:       
Loans individually evaluated for impairment$520
$449
$53
$68
$23
$18
$
$1,131
Loans collectively evaluated for impairment7,725
6,748
1,131
530
3,149
324
86
19,693
Ending balance$8,245
$7,197
$1,184
$598
$3,172
$342
$86
$20,824
         
Recorded investment in:       
Loans individually evaluated for impairment$16,755
$4,216
$23,557
$1,470
$452
$464
$
$46,914
Loans collectively evaluated for impairment727,210
544,244
275,616
88,904
419,143
71,745
676
2,127,538
Ending balance$743,965
$548,460
$299,173
$90,374
$419,595
$72,209
$676
$2,174,452
         
December 31, 2018        
Allowance for loan losses allocated to:       
Loans individually evaluated for impairment$119
$157
$154
$73
$
$6
$
$509
Loans collectively evaluated for impairment7,884
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
         
Recorded investment in:       
Loans individually evaluated for impairment$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
Ending balance$756,213
$530,207
$296,860
$93,326
$407,167
$71,674
$583
$2,156,030
         
June 30, 2018        
Allowance for loan losses allocated to:       
Loans individually evaluated for impairment$1
$191
$47
$14
$31
$45
$
$329
Loans collectively evaluated for impairment8,270
5,174
958
604
3,308
420
95
18,829
Ending balance$8,271
$5,365
$1,005
$618
$3,339
$465
$95
$19,158
         
Recorded investment in:       
Loans individually evaluated for impairment$19,162
$3,173
$26,497
$1,736
$441
$150
$
$51,159
Loans collectively evaluated for impairment737,051
468,097
273,437
88,221
372,943
71,395
860
2,012,004
Ending balance$756,213
$471,270
$299,934
$89,957
$373,384
$71,545
$860
$2,063,163


27


Allowance for Loan Losses for Acquired Loans
Acquired loans are recorded at their fair value as of March 31, 2020 compared to January 1, 2020 was mostly due to the acquisition date with no valuationrecent COVID-19 pandemic, and the resulting impact to economic forecasts utilized in the CECL model. Peoples calculates its allowance for credit losses using a discounted cash flow model, and monitored for changesincorporates economic forecasts, including U.S. unemployment, Ohio unemployment, Ohio Gross Domestic Product, and the Ohio Case Shiller Home Price Indices as economic factors. The economic forecast used 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 appropriatenessMarch 31, 2020 calculation of the allowance for loan losses. The methods utilized to estimatecredit losses included higher unemployment rates and lower Ohio Gross Domestic Product, which drove much of 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 activityincrease in the allowance for loancredit 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
Theat March 31, 2020. Approximately 72% of the increase in the allowance for credit losses at March 31, 2020, compared to January 1, 2020, was related to the change in the economic forecast, and the remaining increase was attributable to changes in the composition of the loan portfolio. In addition, Peoples recorded an increase of $5.8 million in allowance for credit losses on January 1, 2020 related to the implementation of ASU 2016-13.
As of March 31, 2020, the CECL model produced results, based on economic forecasts, that were higher than Peoples believed to be appropriate at the time. Peoples believes the actions taken to provide relief to consumer and commercial customers, which include at least 90 days of payment relief for non-impaired acquired loansthose customers, coupled with the Coronavirus Aid, Relief and Economic Security ("CARES") Act stimulus package and the Small Business Administration ("SBA") Paycheck Protection Program ("PPP"), indicate that Peoples would not experience the projected credit losses produced by the model. Therefore, Peoples made certain qualitative adjustments to more closely reflect its estimate of the potential losses of its loan portfolio at March 31, 2020.
During the first quarter of 2020, Peoples recognized a recovery of $1.2 million on a commercial and industrial loan that was established at Decemberpreviously charged-off.
As of March 31, 2018.2020, Peoples had recorded an unfunded commitment liability of $2.4 million, an increase compared to $1.5 million on January 1, 2020. The unfunded commitment liability is presented in the “Accrued expenses and other liabilities” line of the Unaudited Consolidated Balance Sheets.

26

Table of Contents
Note 5 Long-Term Borrowings


The following table summarizes Peoples' long-term borrowings:
June 30, 2019 December 31, 2018 March 31, 2020December 31, 2019
(Dollars in thousands)BalanceWeighted-
Average
Rate
 BalanceWeighted-
Average
Rate
(Dollars in thousands)BalanceWeighted-
Average
Rate
BalanceWeighted-
Average
Rate
FHLB putable, non-amortizing, fixed-rate advances$65,000
2.18% $85,000
2.05%FHLB putable, non-amortizing, fixed-rate advances$115,000  1.57 %$65,000  2.18 %
FHLB amortizing, fixed-rate advances13,324
1.73% 17,361
2.09%FHLB amortizing, fixed-rate advances$10,300  1.74 %$10,672  1.74 %
Junior subordinated debt securities7,367
7.34% 7,283
7.83%Junior subordinated debt securities$7,491  5.21 %$7,451  6.55 %
Total long-term borrowings$85,691
2.55% $109,644
2.44%Total long-term borrowings$132,791  1.78 %$83,123  2.51 %
Peoples continually evaluates its overall balance sheet position given the interest rate environment. During the first sixthree months of 2019, no additional borrowings were2020, Peoples entered into and two long-term FHLB non-amortizing advances totaling $20.01 additional $50.0 million were reclassified to short-term borrowings as the maturity became less than one year.
As of June 30, 2019, Peoples had one remaining FHLB putable, option-based advance. non-amortizing fixed-rate advance with an interest rate of 0.77%, which matures in 2030.
The FHLB putable, non-amortizing, fixed rate advances have maturities ranging from one to ten years that may be repaid prior to maturity, subject to the payment of termination fees. The FHLB has the option, at its sole discretion, to terminate the advance after thean initial fixed rate period of three months or twelve months, requiring full repayment of the advance by Peoples prior to the stated maturity. If thean 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 requiredThese advances require monthly interest payments, with no repayment of principal until the earlier of either an option to make quarterly interest payments.terminate being exercised by the FHLB or the stated maturity.
The amortizing, fixed-rate FHLB advances have a fixed rate for the term of each advance, with remaining maturities ranging from eight6 to thirteeneleven 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.


28

Table of Contents

The aggregate minimum annual retirements of long-term borrowings in future periods are as follows:
(Dollars in thousands)BalanceWeighted-Average Rate (a)
Nine months ending December 31, 2020$2,223  1.48 %
Year ending December 31, 202121,979  1.75 %
Year ending December 31, 202216,521  1.97 %
Year ending December 31, 20231,157  1.39 %
Year ending December 31, 2024869  1.34 %
Thereafter90,042  1.61 %
Total long-term borrowings$132,791  1.68 %
(Dollars in thousands)BalanceWeighted-Average Rate
Six months ending December 31, 2019$2,568
1.48%
Year ending December 31, 20202,555
1.35%
Year ending December 31, 202121,979
1.74%
Year ending December 31, 202216,521
1.95%
Year ending December 31, 20231,157
1.06%
Thereafter40,911
3.41%
Total long-term borrowings$85,691
2.55%
Effective April 3, 2019, Peoples terminated(a) The weighted-average rate includes the Credit Agreement, dated asimpact of March 4, 2016, between Peoples, as Borrower, and Raymond James Bank, N.A., as Lender (the "RJB Credit Agreement"), with a revolving lineaccreting the current book value of creditthe junior subordinated debt securities to face value over the period. The weighted-average rates for the FHLB advances are 1.68% in the maximum aggregate principal amount of $15.0 million. As of the termination date, April 3, 2019, andnine months ending December 31, 2018, there were no borrowings outstanding under the RJB Credit Agreement. Additional information regarding the RJB Credit Agreement can be found2020, 1.78% in "Note 9 Long-Term Borrowings"2021, 2.00% in 2022, 1.73% in 2023, 1.74% in 2024, and 1.43% thereafter.

27

Table of the Notes to the Consolidated Financial Statements included in Peoples' 2018 Form 10-K.Contents
Note 6 Stockholders’ Equity


The following table details the progression in Peoples’ common shares and treasury stock during the sixthree months ended June 30, 2019:March 31, 2020:
 Common Stock
Treasury
Stock
Shares at December 31, 201921,156,143  504,182  
Changes related to stock-based compensation awards:      
Release of restricted common shares—  21,448  
Cancellation of restricted common shares—  3,602  
Grant of restricted common shares—  (80,338) 
Grant of unrestricted common shares—  (4,030) 
Changes related to deferred compensation plan for Boards of Directors:
Purchase of treasury stock—  3,159  
Common shares repurchased under share repurchase program—  436,137  
Common shares issued under dividend reinvestment plan6,559  —  
Common shares issued under compensation plan for Boards of Directors—  (4,396) 
Gross common shares issued under performance unit awards—  (9,395) 
Common shares issued under employee stock purchase plan—  (4,371) 
Shares at March 31, 202021,162,702  865,998  
 Common Stock
Treasury
Stock
Shares at December 31, 201820,124,378
601,289
Changes related to stock-based compensation awards:  
Release of restricted common shares
17,481
Cancellation of restricted common shares
3,465
Grant of restricted common shares
(122,286)
Grant of common shares
(4,680)
Changes related to deferred compensation plan for Boards of Directors:  
Purchase of treasury stock
3,834
Disbursed out of treasury stock
(2,187)
Common shares issued under dividend reinvestment plan12,400

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

Shares at June 30, 201921,142,256
489,802
On February 27, 2020, Peoples' Board of Directors authorized a share repurchase program authorizing Peoples to purchase up to an aggregate of $40.0 million of its outstanding common shares, replacing the previous share repurchase program which had authorized Peoples to purchase up to an aggregate of $20 million of its outstanding common shares. An aggregate of $6.3 million of Peoples' common shares were purchased under the previous share repurchase program from inception through its termination date, which was February 27, 2020. During the first three months of 2020, Peoples purchased an aggregate of $10.2 million of its outstanding common shares, $0.5 million of which were purchased under the previous share repurchase program pursuant to the previously authorized Rule 10b5-1 plan and $9.7 million of which were purchased under the share repurchase program authorized on February 27, 2020 pursuant to the previously authorized Rule 10b5-1 plan.
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 June 30, 2019,March 31, 2020, Peoples had no0 preferred shares issued or outstanding.
On April 20, 2020, Peoples' Board of Directors declared a quarterly cash dividend of $0.34 per common share, payable on May 18, 2020, to shareholders of record on May 4, 2020. The following table details the cash dividends declared per common share during 20192020 and the comparable period of 2018:2019:
20202019
First quarter$0.34  0.30  
Second quarter0.34  0.34  
Total dividends declared$0.68  $0.64  
 20192018
First quarter$0.30
$0.26
Second quarter0.34
0.28
Third quarter0.34
0.28
Total dividends declared$0.98
$0.82


Accumulated Other Comprehensive Income (Loss)
The following table details the change in the components of Peoples’ accumulated other comprehensive income (loss) for the sixthree months ended June 30, 2019:March 31, 2020:
(Dollars in thousands)Unrealized Gain on SecuritiesUnrecognized Net Pension and Postretirement CostsUnrealized Loss on Cash Flow HedgeAccumulated Other Comprehensive Income (Loss)
Balance, December 31, 2019$5,300  $(3,958) $(2,767) $(1,425) 
Reclassification adjustments to net income:
  Realized gain on sale of securities, net of tax(252) —  —  (252) 
Realized loss due to settlement and curtailment, net of tax—  291  —  291  
Other comprehensive income (loss), net of reclassifications and tax17,592  (267) (7,687) 9,638  
Balance, March 31, 2020$22,640  $(3,934) $(10,454) $8,252  
(Dollars in thousands)Unrealized Gain (Loss) on SecuritiesUnrecognized Net Pension and Postretirement CostsUnrealized Gain (Loss) on Cash Flow HedgeAccumulated Other Comprehensive Income (Loss)
Balance, December 31, 2018$(10,082)$(3,711)$860
$(12,933)
Reclassification adjustments to net income:   

  Realized gain on sale of securities, net of tax21


21
Other comprehensive income (loss), net of reclassifications and tax17,121
31
(3,924)13,228
Balance, June 30, 2019$7,060
$(3,680)$(3,064)$316
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 Benefits
 Three Months Ended
 March 31,
(Dollars in thousands)20202019
Interest cost$94  $109  
Expected return on plan assets(200) (195) 
Amortization of net loss30  19  
Settlement of benefit obligation368  —  
Net periodic loss (income)$292  $(67) 


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Pension BenefitsPostretirement Benefits
Three Months Ended Six Months Ended Three Months Ended
June 30, June 30, March 31,
(Dollars in thousands)20192018 20192018(Dollars in thousands)20202019
Interest cost$110
$105
 $219
$210
Interest cost$ $ 
Expected return on plan assets(196)(146) (391)(293)
Amortization of net loss20
27
 39
55
Amortization of net gainAmortization of net gain(2) (2) 
Net periodic income$(66)$(14) $(133)$(28)Net periodic income$(1) $(1) 
Under US GAAP, Peoples is required to recognize a settlement gain or loss when the aggregate amount of lump-sum distributions to participants equals or exceeds the sum of the service and interest 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 fair value of plan assets are required to be remeasured in order to determine the settlement gain or loss.
 Postretirement Benefits
 Three Months Ended Six Months Ended
 June 30, June 30,
(Dollars in thousands)20192018 20192018
Interest cost$1
$1
 $2
$2
Amortization of prior service cost(1)
 (1)
Amortization of net loss
(1) (2)(3)
Net periodic income$
$
 $(1)$(1)
During the first quarter of 2020, the total lump-sum distributions made to participants under the noncontributory defined benefit pension plan caused the total settlements to exceed the recognition threshold for settlement gains or losses. As a result, Peoples recorded settlement charges of $368,000 in the three months ended March 31, 2020. There were no0 settlement charges recorded during any of the three and six months ended June 30,March 31, 2019 and June 30, 2018 under the noncontributory defined benefit pension plan.
The following table summarizes the change in the projected benefit obligation and funded status as a result of the remeasurement and the aggregate settlements for the three months ended March 31, 2020:

As ofMarch 31, 2020
(Dollars in thousands)December 31,BeforeImpact ofAfter
Funded status:2019SettlementsSettlements Settlements
Projected benefit obligation$12,668  $13,734  $(650) $13,084  
Fair value of plan assets11,865  10,253  (650) 9,603  
Funded status$(803) $(3,481) $—  $(3,481) 
Gross unrealized loss$5,068  $7,823  $(368) $7,455  
Assumptions:
Discount rate3.12 %2.65 %2.65 %
Expected return on plan assets7.50 %7.50 %7.50 %


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Note 8 (Loss) Earnings Per Common Share


The calculations of basic and diluted (loss) earnings per common share were as follows:
Three Months Ended
March 31,
(Dollars in thousands, except per common share data)20202019
Distributed earnings allocated to common shareholders$6,943  $5,777  
Undistributed (loss) earnings allocated to common shareholders(7,782) 8,490  
Net (loss) earnings allocated to common shareholders$(839) $14,267  
Weighted-average common shares outstanding20,367,564  19,366,008  
Effect of potentially dilutive common shares170,650  142,860  
Total weighted-average diluted common shares outstanding20,538,214  19,508,868  
(Loss) earnings per common share:
Basic$(0.04) $0.74  
Diluted$(0.04) $0.73  
Anti-dilutive common shares excluded from calculation:
Restricted shares37,284  2,057  
 Three Months Ended Six Months Ended
 June 30, June 30,
(Dollars in thousands, except per common share data)20192018 20192018
Distributed earnings allocated to common shareholders$6,935
$5,407
 $12,711
$10,123
Undistributed earnings allocated to common shareholders2,568
2,427
 11,067
9,389
Net earnings allocated to common shareholders$9,503
$7,834
 $23,778
$19,512
      
Weighted-average common shares outstanding20,277,028
19,160,728
 19,824,035
18,646,266
Effect of potentially dilutive common shares165,338
132,653
 148,315
126,903
Total weighted-average diluted common shares outstanding20,442,366
19,293,381
 19,972,350
18,773,169
      
Earnings per common share:     
Basic$0.47
$0.41
 $1.20
$1.05
Diluted$0.46
$0.41
 $1.19
$1.04
Anti-dilutive common shares excluded from calculation:     
Restricted shares87

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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. The fair value of derivative financial instruments is included in the other assets and the accrued expenses and other liabilities lines in the accompanying Unaudited Consolidated Balance Sheets and in the net cash provided by operating activities in the Unaudited Consolidated Statements of Cash Flows.
DerivativesDerivative Financial Instruments and Hedging Activities - Risk Management Objective of Using DerivativesDerivative Financial Instruments
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 derivativesderivative financial instruments 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 derivativesderivative financial instruments 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 June 30, 2019,March 31, 2020, Peoples had entered into fifteen17 interest rate swap contracts with an aggregate notional value of $140.0$160.0 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. As of March 31, 2020, the

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interest rate swaps were funded by $110.0 million of rolling three-month FHLB advances and $50.0 million rolling three-month brokered CDs.
Amounts reported in accumulated other comprehensive income (loss) ("AOCI"), related to derivativesderivative financial instruments 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 six months ended June 30, 2019,March 31, 2020, Peoples had reclassifications of gains to interest expense of $70,000 and $153,000, respectively,$118,000 and during the three and six months ended June 30, 2018,March 31, 2019, Peoples had reclassifications of gainsloss to interest expenseearnings of $28,000 and $16,000, respectively.$83,000.
For derivativesderivative financial instruments designated as cash flow hedges, the effective portion of changes in the fair value of each derivative financial instrument 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 hedging derivative hedgingfinancial 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-monththree-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
Notional amount$140,000
$110,000
Weighted average pay rates2.27%2.37%
Weighted average receive rates1.80%2.57%
Weighted average maturity5.6 years
6.2 years
Unrealized gains$3,879
$860


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(Dollars in thousands)March 31,
2020
December 31,
2019
Notional amount$160,000  $160,000  
Weighted average pay rates2.18 %2.18 %
Weighted average receive rates0.58 %1.73 %
Weighted average maturity5.1 years5.4 years
Pre-tax unrealized losses included in AOCI$(13,233) $(3,503) 
The following table presents net losses or gains recorded in AOCI and in the Unaudited Consolidated Statements of IncomeOperations related to the cash flow hedges:
 Three Months Ended Six Months Ended
 June 30, June 30,
(Dollars in thousands)20192018 20192018
Amount of loss (gain) recognized in AOCI, pre-tax$2,994
$(529) $4,661
$(1,907)
Amount of (gain) loss recognized in earnings$
$
 $(19)$30
Three Months Ended
March 31,
(Dollars in thousands)20202019
Amount of loss recognized in AOCI, pre-tax$(9,730) $(1,833) 
Amount of loss recognized in earnings$—  $(19) 
The following table reflects the cash flow hedges, which are included in the Unaudited Consolidated Balance Sheets at fair value:
March 31,
2020
December 31,
2019
(Dollars in thousands)Notional AmountFair ValueNotional AmountFair Value
Included in other assets:
Interest rate swaps related to debt$—  $—  $55,000  $644  
Total included in other assets$—  $—  $55,000  $644  
Included in accrued expenses and other liabilities:
Interest rate swaps related to debt$160,000  $13,424  $105,000  $4,340  
Total included in accrued expenses and other liabilities$160,000  $13,424  $105,000  $4,340  
 June 30,
2019
December 31,
2018
(Dollars in thousands)Notional AmountFair ValueNotional AmountFair Value
Included in other assets:    
Interest rate swaps related to debt$35,000
$316
$60,000
$2,093
Total included in other assets$35,000
$316
$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
Total included in accrued expenses and other liabilities$105,000
$4,363
$50,000
$1,111
At June 30, 2019, Peoples had $14.4 million and no amount of cash pledged at December 31, 2018, against interest rate swaps related to debt, however, the counterparties had pledged no amount of cash and $130,000, respectively.
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 million and fair value of $9.7 million of equally offsetting assets and liabilities at June 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.derivative financial instrument. These interest rate swaps did not have a material impact on Peoples' results of operation or financial condition.

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The following table reflects the non-designated hedges, which are included in the Unaudited Consolidated Balance Sheets at fair value:
March 31,
2020
December 31,
2019
(Dollars in thousands)Notional AmountFair ValueNotional AmountFair Value
Included in other assets:
Interest rate swaps related to commercial loans$337,265  $30,235  $321,394  $10,776  
Total included in other assets$337,265  $30,235  $321,394  $10,776  
Included in accrued expenses and other liabilities:
Interest rate swaps related to commercial loans$337,265  $30,235  $321,394  $10,776  
Total included in accrued expenses and other liabilities$337,265  $30,235  $321,394  $10,776  
 June 30,
2019
December 31,
2018
(Dollars in thousands)Notional AmountFair ValueNotional AmountFair Value
Included in other assets:    
Interest rate swaps related to commercial loans$245,996
$9,656
$226,662
$2,451
Total included in other assets$245,996
$9,656
$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
Total included in accrued expenses and other liabilities$245,996
$9,656
$226,662
$2,451

Peoples had no cash pledged againstPledged Collateral
When the fair value of Peoples' interest rate swaps related to commercial loans.are in a net liability position, Peoples must pledge collateral and when the interest rate swaps are in a net asset position, the counterparties must pledge collateral. At March 31, 2020 and December 31, 2019, Peoples had $44.0 million and $20.0 million, respectively, of cash pledged, while the counterparties had 0 amount of cash pledged at either date. Cash pledged is included in interest-bearing deposits in other banks on the Unaudited Consolidated Balance Sheets.


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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 stockshare 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 20182019 and 2019, the Board of Directors2020, Peoples 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.  In general, the restrictions on the restricted common shares awarded to employees expire after periods ranging from one to five years. 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 sixthree months of 2019,2020, Peoples granted an aggregate of 117,20080,338 restricted common shares subject to performance-based vesting to officers and key employees with restrictions that will lapse three years after the grant datedate; provided that in order for the restricted common shares to vest in full, Peoples must have reported positive net income and maintained a well capitalizedwell-capitalized status by regulatory standards for each of the three fiscal years preceding the vesting date.During the first six months of 2019, Peoples granted, to certain key employees, an aggregate of 5,086 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 sixthree months ended June 30, 2019:March 31, 2020:
Time-Based Vesting Performance-Based VestingTime-Based VestingPerformance-Based Vesting
Number of Common SharesWeighted-Average Grant Date Fair Value 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
Outstanding at January 143,679
$29.64
 175,772
$31.08
Outstanding at January 132,230  $33.05  253,884  $33.29  
Awarded5,086
32.05
 117,200
32.20
Awarded—  —  80,338  32.91  
Released17,500
21.69
 33,400
17.86
Released4,000  31.63  56,827  32.42  
Forfeited2,852
37.79
 613
34.50
Forfeited200  34.14  3,402  33.04  
Outstanding at June 3028,413
$34.16
 258,959
$33.29
Outstanding at March 31Outstanding at March 3128,030  $33.25  273,993  $33.36  
For the sixthree months ended June 30, 2019,March 31, 2020, the total intrinsic value for restricted common shares released was $1.6$2.0 million compared to $3.2$1.1 million for the sixthree months ended June 30, 2018.March 31, 2019.

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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 June 30,During 2019, one of the seven performance unit awards had beenwas forfeited as one of the individuals granted aindividual to whom the performance unit award was granted left Peoples before meeting the minimum service requirement to retain the performance unit award. The performance unit awards granted covercovered the performance period beginning January 1, 2018 and ending on December 31, 2019, and arewere 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 forachieved the first performance goal and/or the maximum level of achievement forby exceeding its target cumulative two-year adjusted earnings per share. However, Peoples failed to achieve the second performance goal is not reached,as its adjusted return on average assets for the dollar amount represented bymeasurement period ranked below the target percentile compared to its peer group. As a result, during the first quarter of 2020, the remaining six officers holding performance units associated with each performance goal will be adjusted to reflect the levelunit awards received an aggregate of performance achieved. After the vesting date, the participant will receive that number of9,395 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 theat a fair market value of a$29.26 per common share of Peoples on the date the performance units arewere deemed to have vested, (which will be the last daywith a related expense of the performance period) and rounded down to the nearest whole common share.$275,000.
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 expected to vest on the grant date, for the portion of awards thatdate. The estimated fair value is expected to vestthen expensed over the vesting period.period, which is normally three years. For performance unit awards, Peoples recognizesrecognized stock-based compensation over the performance period, based on the portion of the awards that iswas 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
June 30, June 30,March 31,
(Dollars in thousands)20192018 20192018(Dollars in thousands)20202019
Employee stock-based compensation expense:Employee stock-based compensation expense:
Stock grant expenseStock grant expense$1,380  $1,153  
Employee stock purchase plan expenseEmployee stock purchase plan expense15  16  
Performance unit (benefit) expensePerformance unit (benefit) expense(12) 39  
Total employee stock-based compensation expenseTotal employee stock-based compensation expense1,383  1,208  
Non-employee director stock-based compensation expenseNon-employee director stock-based compensation expense182  152  
Total stock-based compensation expense$930
$424
 $2,138
$1,510
Total stock-based compensation expense1,565  1,360  
Recognized tax benefit(195)(89) (449)(317)Recognized tax benefit(329) (286) 
Net expense recognized$735
$335
 $1,689
$1,193
Net stock-based compensation expenseNet stock-based compensation expense$1,236  $1,074  
Restricted common shares were the primary form of stock-based compensation awards granted by Peoples in the three and six months ended June 30, 2019March 31, 2020 and 2018.2019. The fair value of restricted common share awards on the grant date is the market price of Peoples' common shares.shares on that date. Total unrecognized stock-based compensation expense related to unvested restricted common share awards was $3.6$3.9 million at June 30, 2019,March 31, 2020, which will be recognized over a weighted-average period of 2.1 years. On February 14, 2018, an aggregate
In addition to the portion of 11,112directors' fees paid in common shares, non-employee director stock-based compensation expense included $120,000 during the first three months of 2020, and $102,000 during the first three months of 2019, reflecting separate grants of unrestricted common shares were granted as a one-time special award to all full-timeaggregating 3,680 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 unrestricted3,200 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 six months ended June 30, 2019, Peoples recorded $11,000 and $50,000, respectively, of stock-based compensation associated with the performance unit awards and for the three and six months ended June 30, 2018 recorded $81,000 and $125,000, respectively. Additionally, Peoples recognized $16,000 and $32,000 of stock-based compensation associated with the employee stock purchase plan, based on purchases by employees thereunder, in the three and six months ended June 30, 2019, respectively, and $14,000 and $28,000 for the three and six months ended June 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
Three Months Ended Six Months EndedMarch 31,
(Dollars in thousands)June 30, 2019June 30, 2018 June 30, 2019June 30, 2018(Dollars in thousands)20202019
Insurance income:   Insurance income:
Commission and fees from sale of insurance policies (a)$3,306
$3,193
 $6,339
$6,382
Commission and fees from sale of insurance policies (a)$2,692  $3,033  
Fees related to third-party administration services (a)178
173
 347
292
Fees related to third-party administration services (a)147  169  
Performance-based commissions (b)2
3
 1,421
1,350
Performance-based commissions (b)1,291  1,419  
Trust and investment income (a)3,401
3,232
 6,513
6,300
Trust and investment income (a)3,262  3,112  
Electronic banking income:   Electronic banking income:
Interchange income (a)2,747
2,520
 5,190
4,784
Interchange income (a)2,401  2,443  
Promotional and usage income (a)520
265
 1,064
786
Promotional and usage income (a)879  544  
Deposit account service charges:   Deposit account service charges:
Ongoing maintenance fees for deposit accounts (a)1,012
646
 1,764
1,321
Ongoing maintenance fees for deposit accounts (a)980  752  
Transactional-based fees (b)1,965
1,742
 3,554
3,187
Transactional-based fees (b)1,840  1,589  
Commercial loan swap fees (b)516
146
 662
262
Commercial loan swap fees (b)244  146  
Other non-interest income transactional-based fees (b)253
262
 424
543
Other non-interest income transactional-based fees (b)218  171  
Total$13,900
$12,182
 $27,278
$25,207
Total revenue from contracts with customersTotal revenue from contracts with customers$13,954  $13,378  
   
Timing of revenue recognition:   Timing of revenue recognition:
Services transferred over time$11,164
$10,029
 $21,217
$19,865
Services transferred over time$10,361  $10,053  
Services transferred at a point in time2,736
2,153
 6,061
5,342
Services transferred at a point in time3,593  3,325  
Total$13,900
$12,182
 $27,278
$25,207
Total revenue from contracts with customersTotal revenue from contracts with customers$13,954  $13,378  
(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 June 30, 2019:March 31, 2020:
 Contract AssetsContract Liabilities
(Dollars in thousands)
Balance, January 1, 2020$600  $5,190  
     Additional income receivable175  —  
     Additional deferred income—  (125) 
     Recognition of income previously deferred—  (21) 
Balance, March 31, 2020$775  $5,044  

 Contract AssetsContract Liabilities
(Dollars in thousands)
Balance, January 1, 2019$207
$5,055
     Additional income receivable183

     Additional deferred income
4,013
     Receipt of income previously receivable(11)
     Recognition of income previously deferred
(3,521)
Balance, June 30, 2019$379
$5,547



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Note 12 Acquisitions


On January 1, 2020, Peoples Insurance acquired a property and casualty-focused independent insurance agency for a purchase price amount equal to $866,000, and recorded $735,000 of customer relationship intangibles, and $27,000 of other assets, resulting in $104,000 of goodwill. The acquisition will not materially impact Peoples' financial position, results of operations or cash flows. As of March 31, 2020, Peoples had $319,000 of contingent consideration payable related to the acquisition.
On April 12, 2019,20, 2020, Peoples completedsigned an asset purchase agreement under which Peoples Bank will acquire the merger with First Prestonsburg Bancshares Inc. ("First Prestonsburg"). First Prestonsburg merged into Peoplesoperations and First Prestonsburg's wholly-owned subsidiary, First Commonwealthassets of Triumph Premium Finance (“TPF”), a division of TBK Bank, SSB. Based in Kansas City, Missouri, TPF provides premium finance services for customers to purchase property and casualty insurance products through its network of Prestonsburg, Inc. ("First Commonwealth"), which operates nine full-service branches located in easternindependent insurance agency customers nationwide. Closing is expected to occur during the third quarter of 2020 and central Kentucky, merged into Peoples Bank. Consideration of $32.4 million was paid by Peoplesis subject to regulatory approval and other conditions set forth in the form of 12.512 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 common shares of Peoples stock. 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 theasset purchase price to its shareholders. As a result, First Prestonsburg shareholders received a total purchase price of $43.7 million.agreement.


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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
Number of common shares of Peoples issued for each common share of acquired company12.512
Price per Peoples common share, based on closing date$32.26
    Common share consideration$32,437
  
Net Assets at Fair Value 
Assets 
  Cash and due from banks$4,998
  Interest-bearing deposits in other banks2,798
    Total cash and cash equivalents7,796
  Available-for-sale investment securities137,658
  Other investment securities3,068
    Total investment securities140,726
  Total loans130,407
  Bank premises and equipment, net of accumulated depreciation8,255
  Other intangible assets4,234
  Other assets2,677
    Total assets$294,095
Liabilities 
Deposits: 
  Non-interest-bearing$40,089
  Interest-bearing217,151
    Total deposits257,240
  Short-term borrowings14,400
  Accrued expenses and other liabilities2,065
    Total liabilities$273,705
Net assets$20,390
Goodwill$12,047
The estimated fair values presented in the above table reflect certain fair value estimates made as of the date of acquisition. Adjustments to acquisition date estimated fair values are recorded in the period in which the adjustment is determined and, as a result, previously recorded results may change.


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Table of Contents

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 Prestonsburg
Non-impaired Loans 
Contractual cash flows$168,903
Nonaccretable difference19,756
Expected cash flows149,147
Accretable yield27,789
Fair value$121,358
Credit Impaired Loans 
Contractual cash flows$17,706
Nonaccretable difference4,804
Expected cash flows12,902
Accretable yield3,853
Fair value$9,049
Peoples recorded non-interest expense related to acquisitions of $6.8 million and $7.0 million for the three and six months ended June 30, 2019, respectively. Total non-interest income declined due to losses of $253,000 associated with the First Prestonsburg merger. For each of the three and six months ended June 30, 2019, salaries and employee benefit costs included $2.4 million, 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 $620,000 for the three and six months ended June 30, 2019, respectively, and other non-interest expenses included $3.7 million and $3.8 million (mainly contract termination fees) for the three and six months ended June 30, 2019, respectively.
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 containmay include options to extend or terminate the lease. Only those renewal and termination options andwhich Peoples is reasonably certain of exercising are included in the calculation of the lease liability. Certain leases contain rent escalation clauses calling for rent increases over the term of the lease.lease, which are included in the calculation of the lease liability.  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 June 30, 2019,March 31, 2020, Peoples did not have any finance leases or any significant lessor agreements. Right of Use ("ROU") assets represent the right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement or remeasurement date of a lease based on the present value of lease payments over the remaining lease term. Operating lease ROU assets include lease payments made at or before the commencement date and initial indirect costs. Operating lease ROU assets exclude lease incentives.
Peoples elected certain practical expedients, in accordance with Accounting Standards Codification ("ASC")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:Operations:
 Three Months Ended
(Dollars in thousands)March 31, 2020March 31, 2019
Operating lease expense$334  $307  
Short-term lease expense76  30  
Total lease expense$410  $337  
 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


38

TablePeoples utilizes an incremental borrowing rate to determine the present value of Contents

lease payments for each lease, as the lease agreements do not provide an implicit rate. The estimated incremental borrowing rate reflects a secured rate and is based on the term of the lease and the interest rate environment at the lease commencement or remeasurement date.
The following table details the right-of-use asset, the lease liability and other information related to Peoples' operating leases:
(Dollars in thousands)March 31, 2020December 31, 2019
Right-of-use asset:
Other assets$7,364  $7,606  
Lease liability:
     Accrued expenses and other liabilities$7,582  $7,813  
Other information:
     Weighted-average remaining lease term12.4 years12.4 years
     Weighted-average discount rate3.15 %3.16 %

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(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 assetDuring the first three months of 2020 and lease liability at June 30, 2019, were due to acquired leases associated with the First Prestonsburg merger.Peoples paid cash of $321,000 and $296,000, respectively, for operating leases.
The following table summarizes the maturity of remaining lease liabilities:
(Dollars in thousands)Balance
Nine months ending December 31, 2020$1,031 
Year ending December 31, 20211,146 
Year ending December 31, 20221,077 
Year ending December 31, 2023883 
Year ending December 31, 2024629 
Thereafter4,750 
Total undiscounted lease payments$9,516 
Imputed interest$(1,934)
Total lease liability$7,582 

(Dollars in thousands)Balance
Six months ending December 31, 2019$10
Year ending December 31, 2020112
Year ending December 31, 2021148
Year ending December 31, 2022700
Year ending December 31, 202363
Thereafter5,806
Total lease liability$6,839





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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis (“MD&A”) represents an overview of the results of operations and financial condition of Peoples for the three months ended March 31, 2020 and March 31, 2019. This discussion and analysis should be read in conjunction with the Unaudited Consolidated Financial Statements and the Notes therein.
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 Ended At or For the Three Months Ended
June 30, June 30, March 31,
20192018 20192018 20202019
Operating Data (a)   Operating Data (a)
Total interest income$43,621
$37,769
 $84,197
$70,995
Total interest income$40,862  $40,576  
Total interest expense7,572
4,961
 14,234
8,828
Total interest expense6,226  6,662  
Net interest income36,049
32,808
 69,963
62,167
Net interest income34,636  33,914  
Provision for loan losses626
1,188
 363
3,171
Net loss on investment securities(57)(147) (27)(146)
Provision for (recovery of) credit losses (b)Provision for (recovery of) credit losses (b)16,969  (263) 
Net gain on investment securitiesNet gain on investment securities319  30  
Net loss on asset disposals and other transactions(293)(405) (475)(331)Net loss on asset disposals and other transactions(87) (182) 
Total non-interest income excluding net gains and losses15,639
13,807
 31,220
28,701
Total non-interest income excluding net gains and losses (c)Total non-interest income excluding net gains and losses (c)15,505  15,581  
Total non-interest expense38,876
35,971
 70,736
64,192
Total non-interest expense34,325  31,860  
Net income9,598
7,892
 23,967
19,633
Net (loss) income (d)Net (loss) income (d)(765) 14,369  
Balance Sheet Data (a)   Balance Sheet Data (a)
Total investment securities$997,711
$876,765
 $997,711
$876,765
Total investment securities (e)Total investment securities (e)$1,046,497  $879,625  
Loans, net of deferred fees and costs ("total loans")2,833,533
2,686,491
 2,833,533
2,686,491
Loans, net of deferred fees and costs ("total loans")2,911,437  2,737,580  
Allowance for loan losses21,357
19,266
 21,357
19,266
Allowance for credit losses (e)Allowance for credit losses (e)42,833  20,939  
Goodwill and other intangible assets176,763
163,953
 176,763
163,953
Goodwill and other intangible assets177,447  161,242  
Total assets4,276,376
3,972,091
 4,276,376
3,972,091
Total assets4,469,120  4,017,119  
Non-interest-bearing deposits643,058
585,861
 643,058
585,861
Non-interest-bearing deposits727,266  628,464  
Brokered certificates of depositsBrokered certificates of deposits133,522  287,345  
Other interest-bearing deposits2,394,398
2,363,398
 2,394,398
2,363,398
Other interest-bearing deposits2,537,642  2,221,604  
Brokered certificates of deposits326,157
211,062
 326,157
211,062
Short-term borrowings186,457
360,727
 186,457
360,727
Short-term borrowings259,661  191,363  
Junior subordinated debentures held by subsidiary trust7,367
7,195
 7,367
7,195
Junior subordinated debentures held by subsidiary trust7,491  7,325  
Other long-term borrowings85,691
113,085
 85,691
113,085
Other long-term borrowings132,791  105,995  
Total stockholders' equity579,022
499,339
 579,022
499,339
Tangible assets (b)4,099,613
3,808,138
 4,099,613
3,808,138
Tangible equity (b)402,259
335,386
 402,259
335,386
Total stockholders' equity (e)Total stockholders' equity (e)583,721  535,121  
Tangible assets (f)Tangible assets (f)4,291,673  3,855,877  
Tangible equity (f)Tangible equity (f)406,274  373,879  
Per Common Share Data (a)   Per Common Share Data (a)
Earnings per common share – basic$0.47
$0.41
 $1.20
$1.05
Earnings per common share – diluted0.46
0.41
 1.19
1.04
(Loss) earnings per common share – basic(Loss) earnings per common share – basic$(0.04) $0.74  
(Loss) earnings per common share – diluted(Loss) earnings per common share – diluted(0.04) 0.73  
Cash dividends declared per common share0.34
0.28
 0.64
0.54
Cash dividends declared per common share0.34  0.30  
Book value per common share (c)27.98
25.57
 27.98
25.57
Tangible book value per common share (b)(c)$19.44
$17.17
 $19.44
$17.17
Book value per common share (g)Book value per common share (g)28.69  27.19  
Tangible book value per common share (f)(g)Tangible book value per common share (f)(g)$19.97  $19.00  
Weighted-average number of common shares outstanding – basic20,277,028
19,160,728
 19,824,035
18,646,266
Weighted-average number of common shares outstanding – basic20,367,564  19,366,008  
Weighted-average number of common shares outstanding – diluted20,442,366
19,283,381
 19,972,350
18,773,169
Weighted-average number of common shares outstanding – diluted20,538,214  19,508,868  
Common shares outstanding at end of period20,696,041
19,528,952
 20,696,041
19,528,952
Common shares outstanding at end of period20,346,843  19,681,692  
Closing stock price at end of period$32.26
$37.78
 $32.26
$37.78
Closing share price at end of periodClosing share price at end of period$22.15  $30.97  


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 At or For the Three Months Ended
 March 31,
 20202019
Significant Ratios (a)  
Return on average stockholders' equity (h)(0.52)%11.12 %
Return on average tangible equity (h)(i)(0.18)%16.69 %
Return on average assets (h)(0.07)%1.46 %
Return on average assets adjusted for non-core items (h)(j)(0.05)%1.49 %
Average stockholders' equity to average assets13.61 %13.15 %
Average total loans to average deposits85.93 %89.36 %
Net interest margin (h)(k)3.51 %3.80 %
Efficiency ratio (l)66.64 %62.71 %
Efficiency ratio adjusted for non-core items (m)65.55 %62.21 %
Pre-provision net revenue to total average assets (n)1.45 %1.79 %
Dividend payout ratio (o)(p)NM  40.84 %
Total loans to deposits (g)85.74 %87.33 %
Total investment securities as percentage of total assets (g)23.42 %21.90 %
Asset Quality Ratios (a)      
Nonperforming loans as a percent of total loans (g)(q)0.93 %0.66 %
Nonperforming assets as a percent of total assets (g)(q)0.61 %0.45 %
Nonperforming assets as a percent of total loans and OREO (g)(q)0.94 %0.67 %
Criticized loans as a percent of total loans (g)(r)3.12 %3.28 %
Classified loans as a percent of total loans (g)(s)2.36 %1.73 %
Allowance for credit losses as a percent of total loans (e)(g)1.47 %0.76 %
Allowance for credit losses as a percent of nonperforming loans (e)(g)(q)158.49 %115.28 %
Provision for (recovery of) credit losses as a percent of average total loans (b)2.37 %(0.04)%
Net charge-offs (recoveries) as a percentage of average total loans0.07 %(0.15)%
Capital Information (a)(g)      
Common equity tier 1 capital ratio (t)13.91 %13.96 %
Tier 1 risk-based capital ratio14.16 %14.22 %
Total risk-based capital ratio (tier 1 and tier 2)15.38 %14.98 %
Tier 1 leverage ratio10.06 %10.31 %
Common equity tier 1 capital$415,768  $389,394  
Tier 1 capital423,259  396,719  
Total capital (tier 1 and tier 2)459,727  417,658  
Total risk-weighted assets$2,988,263  $2,788,935  
Total stockholders' equity to total assets13.06 %13.32
Tangible equity to tangible assets (f)9.47 %9.70 %
(a)Reflects the impact of the acquisition of First Prestonsburg Bancshares Inc. ("First Prestonsburg") beginning April 12, 2019.
(b)On January 1, 2020, Peoples adopted ASU 2016-13 and implemented the current expected credit loss ("CECL") model. Prior to the adoption of CECL, the provision for (recovery of) credit losses was the "provision for (recovery of) loan losses." The provision for credit losses includes changes related to the allowance for credit losses on loans, which includes purchased credit deteriorated loans, held-to-maturity investment securities, and the unfunded commitment liability in 2020.
(c)Total non-interest income excluding net gains and losses, is a non-US GAAP financial measure since it excludes all gains and/or losses included in earnings. Additional information regarding the calculation of total non-interest income excluding net gains and losses can be found under the caption "Efficiency Ratio (non-US GAAP)."
(d)Net income includes non-core non-interest expenses totaling $551,000 for the first three months of 2020 and $253,000 for the first three months of 2019. Additional information regarding the non-core non-interest expense can be found under the caption "Core Non-Interest Expense (non-US GAAP)."
(e)On January 1, 2020, Peoples adopted ASU 2016-13 and implemented the CECL model, which resulted in the establishment of a $7,000 allowance for credit losses for held-to-maturity investment securities; an increase in loan balances of $2.6 million to establish the allowance for credit losses for purchased credit deteriorated loans; an increase to the allowance for credit losses (which was the "allowance for loan losses" prior to January 1, 2020) of $5.8 million; and a reduction to retained earnings of $3.7 million, net of statutory federal corporate income tax.
(f)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.”
(g)Data presented as of the end of the period indicated.
(h)Ratios are presented on an annualized basis.
(i)Return on average tangible equity ratio represents a non-US GAAP financial measure 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 (non-US GAAP).”

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 At or For the Three Months Ended At or For the Six Months Ended
 June 30, June 30,
 20192018 20192018
Significant Ratios (a)     
Return on average stockholders' equity (d)6.81%6.46% 8.87 %8.39%
Return on average tangible equity (d)(e)10.55%10.47% 13.49 %13.21%
Return on average assets (d)0.91%0.81% 1.17 %1.06%
Return on average assets adjusted for non-core items (d)(f)1.44%1.35% 1.47 %1.34%
Average stockholders' equity to average assets13.33%12.57% 13.24 %12.60%
Average total loans to average deposits86.37%89.57% 87.81 %88.37%
Net interest margin (d)(g)3.77%3.74% 3.78 %3.70%
Efficiency ratio (h)73.24%74.96% 68.09 %68.53%
Efficiency ratio adjusted for non-core items (i)60.21%62.03% 61.19 %61.73%
Pre-provision net revenue to total average assets (j)1.21%1.10% 1.49 %1.44%
Dividend payout ratio73.30%69.27% 53.84 %52.15%
Total investment securities as percentage of total assets (c)23.33%22.07% 23.33 %22.07%
Asset Quality Ratios (a)     
Nonperforming loans as a percent of total loans (c)(k)0.71%0.67% 0.71 %0.67%
Nonperforming assets as a percent of total assets (c)(k)0.47%0.46% 0.47 %0.46%
Nonperforming assets as a percent of total loans and OREO (c)(k)0.71%0.67% 0.71 %0.67%
Criticized loans as a percent of total loans (c)(l)3.42%4.50% 3.42 %4.50%
Classified loans as a percent of total loans (c)(m)2.23%2.07% 2.23 %2.07%
Allowance for loan losses as a percent of total loans (c)0.75%0.72% 0.75 %0.72%
Allowance for loan losses as a percent of nonperforming loans (c)(k)106.57%106.77% 106.57 %106.77%
Provision for loan losses as a percent of average total loans0.09%0.18% 0.03 %0.26%
Net charge-offs (recoveries) as a percentage of average total loans0.03%0.11% (0.06)%0.22%
Capital Information (a)(c) 
    
Common equity tier 1 capital ratio (n)14.16%13.03% 14.16 %13.03%
Tier 1 risk-based capital ratio14.41%13.29% 14.41 %13.29%
Total risk-based capital ratio (tier 1 and tier 2)15.14%13.99% 15.14 %13.99%
Leverage ratio10.26%9.73% 10.26 %9.73%
Common equity tier 1 capital$410,979
$358,987
 $410,979
$358,987
Tier 1 capital418,347
366,182
 418,347
366,182
Total capital (tier 1 and tier 2)439,704
385,448
 439,704
385,448
Total risk-weighted assets$2,903,387
$2,755,112
 $2,903,387
$2,755,112
Total stockholders' equity to total assets13.54%12.57% 13.54 %12.57%
Tangible equity to tangible assets (b)9.81%9.07% 9.81 %9.07%
(j)Return on average assets adjusted for non-core items ratio represents a non-US GAAP financial measure since it excludes the after-tax impact of all gains and/or losses, acquisition-related expenses, pension settlement charges, severance charges and COVID-19 expenses included 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 Ratio (non-US GAAP)."
(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.”
(f)
Return on average assets adjusted for non-core items
(k)Information presented on a fully tax-equivalent basis.
(l)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 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, pension settlement charges, and other non-recurring expenses 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."
(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


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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 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.”
(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.”
(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% at June 30, 2019 and 5.99% at June 30, 2018, compared to 2.50% for the fully phased-in capital conservation buffer required at January 1, 2019.
(m)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, acquisition-related expenses, pension settlement charges, severance expenses and COVID-19 expenses included in earnings, and uses FTE net interest income. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption "Efficiency Ratio (non-US GAAP).”
(n)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 credit 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 (non-US GAAP).”
(o)The dividend payout ratio is calculated based on dividends declared during the period divided by net (loss) income for the period.
(p)NM = not meaningful
(q)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. The new accounting for purchased credit deteriorated loans under ASU 2016-13 resulted in the movement of $3.9 million of loans from the 90+ days past due and accruing category to the nonaccrual category as of January 1, 2020. As of December 31, 2019, these loans were presented as 90+ days past due and accruing,
(r)Includes loans categorized as special mention, substandard and doubtful.
(s)Includes loans categorized as substandard and doubtful.
(t)Peoples' capital conservation buffer was 7.38% at March 31, 2020 and 6.98% at March 31, 2019, 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 integrate future 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, 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) 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;

(1)the ever-changing effects of the COVID-19 pandemic - the duration, extent and severity of which are impossible to predict - on economies (local, national and international) and markets, and on Peoples' customers, counterparties, employees and third-party service providers, as well as the effects of various responses of governmental and nongovernmental authorities, including actions directed toward the containment of the COVID-19 pandemic and stimulus packages, which could decrease sales volumes, add volatility to the global stock markets, and increase loan delinquencies and defaults;
(2)the success, impact, and timing of the implementation of Peoples' business strategies and its ability to manage strategic initiatives, including the expansion of commercial and consumer lending activity;
(3)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;
(4)changes in the interest rate environment due to economic conditions related to the COVID-19 pandemic or other factors and/or the fiscal and monetary policy measures taken by the U.S. government and the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") in response to such economic conditions, which may adversely impact interest rates, the interest rate yield curve, interest margins, loan demand and interest rate sensitivity;
(5)uncertainty regarding the nature, timing, cost, and effect of legislative or regulatory changes or actions, or deposit insurance premium levels, 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 Coronavirus Aid, Relief and Economic


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Security ("CARES") Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Basel III regulatory capital reform;
(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 and charge-offs, 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, 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 new current expected credit loss rule issued by the Financial Accounting Standards 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 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;

(6)the effects of easing restrictions on participants in the financial services industry;
(7)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, 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;
(8)Peoples may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to Peoples' current shareholders;
(9)changes in prepayment speeds, loan originations, levels of nonperforming assets, delinquent loans, charge-offs, and customer creditworthiness generally, which may be less favorable than expected in light of the COVID-19 pandemic and adversely impact the amount of interest income generated;
(10)Peoples may have more credit risk and higher credit losses to the extent there are loan concentrations by location or industry of borrowers or collateral;
(11)changes in accounting standards, policies, estimates or procedures may adversely affect Peoples' reported financial condition or results of operations;
(12)the impact of estimates and inputs used within models, which may vary materially from actual outcomes, including under the newly-adopted current expected credit loss model (or "CECL model");
(13)the discontinuation of London Interbank Offered Rates and other reference rates which may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies;
(14)adverse changes in the conditions and trends in the financial markets, including the impacts of the COVID-19 pandemic and the related responses by governmental and nongovernmental authorities to the pandemic, 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;
(15)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;
(16)Peoples' ability to receive dividends from its subsidiaries;
(17)Peoples' ability to maintain required capital levels and adequate sources of funding and liquidity;
(18)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;
(19)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;
(20)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;
(21)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;
(22)changes in consumer spending, borrowing and saving habits, whether due to changes in retail distribution strategies, consumer preferences and behavior, changes in business and economic conditions (including as a result of the COVID-19 pandemic), legislative or regulatory initiatives (including those in response to the COVID-19 pandemic), or other factors, which may be different than anticipated;
(23)the adequacy of Peoples' internal controls and risk management program in the event of changes in strategic, reputational, market, economic, operational, cybersecurity, compliance, legal, asset/liability repricing, liquidity, credit and interest rate risks associated with Peoples' business;
(24)the impact on Peoples' businesses, personnel, facilities, or systems, of losses related to acts of fraud, theft, or violence;


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(25)the impact on Peoples' businesses, as well as on the risks described above, of various domestic or international widespread natural or other disasters, pandemics (including COVID-19), cybersecurity attacks, system failures, civil unrest, military or terrorist activities or international conflicts;
(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, civil unrest, military or terrorist activities or international conflicts;
(32)Peoples' continued ability to grow deposits; and
(33)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.
(26)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;
(27)risks and uncertainties associated with Peoples' entry into new geographic markets and risks resulting from Peoples' inexperience in these new geographic markets;
(28)Peoples' ability to identify, acquire, or integrate suitable strategic acquisitions, which may be unsuccessful, or may be more difficult, time-consuming or costly than expected;
(29)Peoples' continued ability to grow deposits; and
(30)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, 2019 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’ 20182019 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 8988 locations, including 7977 full-service bank branches, and 8685 Automated Teller Machines ("ATMs") in northeastern, central, southwestern and southeastern Ohio, central and eastern Kentucky, and 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 ismust 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 June 30, 2019,March 31, 2020, which were unchanged fromhave been updated in "Note 1 Summary of Significant Accounting Policies" in this Form 10-Q, and should be read in conjunction with the policies disclosed in Peoples’ 20182019 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, 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. 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 Peoples common shares by Peoples. The merger added $130.4 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 $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.
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.
During the second quarter of 2019, Peoples incurred $7.0 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 million during the first six months of 2018. The acquisition costs in 2019 and 2018 were primarily related to the First Prestonsburg and ASB mergers, respectively, and were primarily related to fees associated with early termination of contracts, severance costs and write-offs associated with assets acquired.
During the second quarter of 2019, Peoples entered into $30.0 million of interest rate swaps, with a notional value in 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 first quarter of 2019, Peoples recognized a $1.8 million recovery on a previously charged-off commercial loan.
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. 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 and will serve to help manage Peoples Bank's daily liquidity needs. As of June 30, 2019, Peoples Bank had not borrowed under the agreement.
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



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On April 20, 2020, Peoples signed an asset purchase agreement under which Peoples Bank will acquire the operations and assets of Triumph Premium Finance (“TPF”), a division of TBK Bank, SSB. Based in Kansas City, Missouri, TPF provides premium finance services for customers to purchase property and casualty insurance products through its network of independent insurance agency customers nationwide. Closing is expected to occur during the third quarter of 2020 and is subject to regulatory approval and other conditions set forth in the asset purchase agreement.
On April 2, 2020, Peoples entered into a First Amendment to Loan Agreement to extend the maturity of the Loan Agreement (the “U.S. Bank Loan Agreement”) with U.S. Bank National Association, entered into on April 3, 2019. The First Amendment to Loan Agreement extends the maturity from April 2, 2020 to April 1, 2021. The U.S. Bank Loan Agreement 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 AgreementAgreement; 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"), with a revolving line of credit in the maximum aggregate principal amount of $15.0 million.
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 $91,000 in pension settlement costs 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 or second 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.
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.
The Federal Reserve Board began tightening monetary policy in December 2015 by raising the benchmark Federal Funds Target Rate. Since then, the rate has increased several times from a range of 0.25% to 0.50% to its current range of 2.25% to 2.50%. Market participants are now expecting two eases this year and potentially one early next year. While recent economic numbers have been fairly strong, 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, interest rates will likely remain rather low throughout the rest of 2019. Peoples is closely monitoring interest rates, both foreign and domestic; and potential impacts of changes in interest rates to Peoples' operations.
In March 2020, the CARES Act created a new loan guarantee program called the Paycheck Protection Program ("PPP") targeted to provide small businesses with support to cover payroll and certain other expenses. Loans made under the PPP are fully guaranteed by the Small Business Administration ("SBA"). Peoples is a PPP participating lender. Additional information can be found later in this discussion under the caption “FINANCIAL CONDITION - COVID-19 Loan Impacts."
Peoples has also been selected to partner with JobsOhio, a private nonprofit organization charged with economic development. Additional information can be found later in this discussion under the caption “FINANCIAL CONDITION - COVID-19 Loan Impacts."
Peoples is also providing relief solutions to consumer and commercial borrowers during the COVID-19 pandemic. Additional information can be found later in this discussion under the caption “FINANCIAL CONDITION - COVID-19 Loan Impacts."
During the first quarter of 2020, Peoples recorded a provision for credit losses of $17.0 million, compared to a provision for loan losses of $1.1 million for the linked quarter and a recovery of loan losses of $263,000 for the first quarter of 2019. The increase in the provision for credit losses compared to the fourth and first quarters of 2019 was primarily due to the recent developments related to COVID-19 and the resulting impact on the economic assumptions used in the CECL model. The first quarters of 2020 and 2019 included recoveries of $1.2 million and $1.8 million, respectively, recorded on a previously charged-off commercial loan.
Peoples incurred $368,000 in pension settlement costs during the first quarter of 2020 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 linked quarter or the first quarter of 2019.
On February 27, 2020, Peoples' Board of Directors authorized a share repurchase program authorizing Peoples to purchase up to an aggregate of $40 million of its outstanding common shares. This program replaced the share repurchase program authorizing Peoples to purchase up to an aggregate of $20 million of its outstanding common shares, which Peoples' Board of Directors had authorized on November 3, 2015 and which was terminated on February 27, 2020. During the first quarter of 2020, Peoples repurchased 436,137 of its common shares through its share repurchase programs that existed at that time for a total of $10.2 million. During the first quarter of 2019, Peoples repurchased 26,427 of its common shares through its share repurchase program that existed at that time for a total of $805,000.
During the first quarter of 2020, Peoples recognized an additional $109,000 in bank owned life insurance ("BOLI") income related to tax-free death benefits from the fourth quarter of 2019 that exceeded the cash surrender value of the insurance policies, compared to $482,000 during the fourth quarter of 2019, and none in the first quarter of 2019.
During the first quarter of 2020, Peoples recognized a credit to its FDIC insurance premiums related to its quarterly assessment as a result of the deposit insurance fund reaching its target threshold for smaller banks to recognize a credit to their insurance expense. Peoples also recognized credits during the third and fourth quarters of 2019.
During the first quarter of 2020, Peoples incurred $10,000 of acquisition-related costs, compared to $65,000 in the fourth quarter of 2019, and $253,000 in the first quarter of 2019. The acquisition-related costs in 2020 and 2019 were primarily related to the First Prestonsburg acquisition.
During the first quarter of 2020, Peoples closed one full-service bank branch located in West Virginia when the lease for the location expired in January 2020. Additionally, Peoples provided notification during 2020 that it will be closing one additional full-service bank branch located in Kentucky in July 2020, which is leased. During the fourth quarter of 2019, Peoples closed one full-service bank branch located in Kentucky. During the second quarter of 2019, Peoples closed one full-service bank branch located in West Virginia. During the first quarter of 2019, Peoples closed one full-service bank branch located in West Virginia and one insurance office located in Ohio. The locations closed during 2019 were closed

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when the respective leases for those Kentucky, West Virginia and Ohio locations expired. Most employees at the closed locations filled open positions at other branches or offices.
On January 1, 2020, Peoples adopted ASU 2016-13 and adopted the current expected credit loss("CECL") model, which resulted in the establishment of a $7,000 allowance for credit losses for held-to-maturity investment securities; an increase in loan balances of $2.6 million to establish the allowance for credit losses for purchased credit deteriorated loans; an increase to the allowance for credit losses (which was the "allowance for loan losses" prior to January 1, 2020) of $5.8 million; the addition of a $1.5 million unfunded commitment liability included in the accrued expenses and other liabilities line of the Unaudited Consolidated Balance Sheets; and a reduction to retained earnings of $3.7 million, net of statutory federal corporate income tax.
On January 1, 2020, Peoples Insurance acquired a property and casualty-focused independent insurance agency for a purchase price amount equal to $866,000.
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.
During the fourth quarter of 2019, Peoples entered into one interest rate swap with a notional value of $10.0 million, which will mature in 2024, with an interest rate of 1.59%. During the third quarter of 2019, Peoples entered into one interest rate swap with a notional value of $10.0 million, which will mature in 2029, with an interest rate of 1.44%. During the second quarter of 2019, Peoples entered into three interest rate swaps with a notional value in the aggregate of $30.0 million, which 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.
On August 22, 2019, Peoples Risk Management, Inc., a wholly-owned subsidiary of Peoples, was formed. Peoples Risk Management, Inc. is a Nevada-chartered 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 help minimize the risk allocable to each participating insurer.
At the close of business on April 12, 2019, Peoples completed the merger with First Prestonsburg. First Prestonsburg merged into Peoples and First Prestonsburg's wholly-owned subsidiary, The 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 merger consideration of $43.7 million, of which $11.3 million was in the form of a special cash dividend paid by First Prestonsburg to its shareholders 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.
In an effort to stimulate an economy that was being heavily damaged by the impacts of the COVID-19, the Federal Reserve first lowered the benchmark Federal Funds Target Rate by 50 basis points on March 3, then lowered the target rate another 100 basis points at the next FOMC meeting on March 15. The Federal Funds Target Rate range was 0% - 0.25% as of March 31, 2020 and is not likely to drop below this range. However, the Federal Reserve does have other tools available that it can employ and has expressed an intention to do so in order to maintain a targeted level of liquidity.
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 a net incomeloss of $9.6$0.8 million for the secondfirst quarter of 2019, representing earnings2020, or a loss of $0.04 per diluted common share, of $0.46, compared to net income of $14.9 million, or $0.72 per diluted common share, for the fourth quarter of 2019, and net income of $14.4 million, or $0.73 per diluted common share, for the first quarter of 2019, and $7.9 million, or $0.412019. Non-core items negatively impacted loss per diluted common share by $0.02 for the secondfirst quarter of 2018. During the second quarter of 2019, earnings2020. Earnings per diluted common share were negatively impacted by $0.28 per share$0.01 for acquisition-related costs. Duringthe fourth quarter of 2019, and positively impacted by $0.09 for the first quarter of 2019, earnings per diluted common share were positively impacted by $0.07 per sharenon-core items. The net loss in the first quarter of 2020, was primarily a result of the provision for credit losses recorded during the recovery on a previously charged-off commercial loanquarter, which was driven by the economic developments and by $0.03 per share for incomeuncertainties related to COVID-19. The provision for credit losses was calculated under the sale of restricted Class B Visa stock, partially offset byCECL accounting methodology in accordance with ASU 2016-13, which is sensitive to future economic projections. Additional information regarding the negative impact of $0.01 per shareprovision for acquisition-related costs. Duringcredit losses can be found later in this discussion under the second quarter of 2018, earnings per diluted common share were negatively impacted by $0.25 per share in acquisition-related costs, and were positively impacted by $0.04 per share due to the release of a tax valuation allowance.
During the first six months of 2019, net income was $24.0 million, or $1.19 per diluted share, compared to $19.6 million, or $1.04 per diluted common share,caption “RESULTS OF OPERATIONS - Provision 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, in 2019 compared to 2018. Acquisition-related costs negatively impacted earnings per diluted common share by $0.29 and $0.27 during the first six months of 2019 and 2018, respectively.(Recovery of) Credit Losses.”
Net interest income increased to $36.0was $34.6 million for the secondfirst quarter of 2020, down 1% compared to $35.1 million for the fourth quarter of 2019, up 6%and an increase of 2% compared to $33.9 million for the first quarter of 2019, and increased by 10% compared to $32.8 million for the second quarter of 2018.2019. Net interest margin was 3.77%3.51% for the secondfirst

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quarter of 2020, compared to 3.56% for the fourth quarter of 2019, compared toand 3.80% for the first quarter of 2019, and 3.74% for2019. Net interest income was impacted by one less calendar day in the secondfirst quarter of 2018.2020 compared to the linked quarter. The slight declinedeclines in net interest income and net interest margin compared to the linked quarter were both impacted by the declining interest rate environment during the first quarter was drivenof 2020, which resulted in lower yields on loans and investment security portfolios, partially offset by higher costs for time deposits and governmental deposits, which more than offset increased loan yields, driven by the First Prestonsburg merger.lower deposit costs. Compared to the first quarter of 2019, the improvement in net interest income was positively impacted by the merger of First Prestonsburg. The increase in net interest income comparedprimarily due to the second quarter of 2018 was driven by higher yields on loans combined with the impact of First Prestonsburg earning assets. 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.
Forloans and deposits, while the second quarter of 2019, accretion income from acquisitions, net of amortization expense, was $1.2 million, compared to $722,000 fordecline in the first quarter of 2019 and $523,000 for the second quarter of 2018, which added 13 basis points, 8 basis points, and 6 basis points, respectively, to net interest margin. The growth in net accretion income compared to the first quarter of 2019 and the second quarter of 2018 was due to the First Prestonsburg merger, specifically the loan discount that was accreted during the quarter.
For the first six months of 2019, net interest income was $70.0 million, and net interest margin was 3.78%, compared to $62.2 million and 3.70%, respectively, during 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 higherlower yields from interest rate increases. The interest income from higher average loan balances outpaced interest expense from deposits, which increased due to the recent acquisitions and increased competition for deposits. The first six months of 2018 benefited from proceeds of $589,000 received on investment securities, that had been previously written downgiven accelerated premium amortization due to other-than-temporary impairment ("OTTI"), which added 3 basis points to net interest margin.higher prepayment speeds.
Accretion income, net of amortization expense, from acquisitions was $1.9 million for the first six months of 2019 and $1.1 million for the first six monthsquarter of 2018,2020, $1.8 million for the fourth quarter of 2019, and $722,000 for the first quarter of 2019, which added 1011 basis points, 18 basis points, and 68 basis points, respectively, to net interest margin. The growth in netNet accretion income compared toin the first six monthsfourth quarter of 20182019 was largely due toboosted by an acquired commercial loan that paid off during the First Prestonsburg acquisition.quarter, which positively impacted the net interest margin by 6 basis points.
During the first quarter of 2019,2020, Peoples recorded a provision for credit losses of $17.0 million, compared to a provision for loan losses of $626,000, compared to$1.1 million for the fourth quarter of 2019 and a recovery of loan losses of $263,000 for the first quarter of 2019 and a provision for loan losses of $1.2 million for the second quarter of 2018.2019. Net charge-offs for the secondfirst quarter of 20192020 were $208,000,$498,000, or 0.03%0.07% of average total loans annualized, compared to net charge-offs of $1.2 million, or 0.16% of average total loans annualized, for the linked quarter and net recoveries of $1.0 million, or 0.15% of average total loans annualized, for the linked quarter and net charge-offs of $720,000, or 0.11% of average total loans, for the second 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 in2019. The provision for credit losses during the current quarter combinedwas primarily due to the economic downturn related to COVID-19 and the resulting impact on the economic assumptions used in estimating the allowance of credit losses under the CECL model in accordance with originated loan balances remaining stable duringASU 2016-13.
For the secondfirst quarter of 2020, total non-interest income decreased $1.4 million, or 8%, compared to the fourth quarter of 2019 the provision for loan losses during each of the current and linked quarter was lower than historical trends. Provision for loan losses during the first six months of 2019 was $363,000, compared to $3.2 million for the first six months 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 six months of 2019 included the $1.8 million recovery recorded on a previously charged-off commercial loan. The first six months of 2018 included a charge-off of $827,000 on an acquired commercial loan relationship.


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For the second quarter of 2019, total non-interest income declined $140,000,up $308,000, or 1%2%, compared to the first quarter of 2019 and was up $2.0 million, or 15%, from2019. Compared to the secondfourth quarter of 2018. The2019, electronic banking income and mortgage banking income were negatively impacted by traditional seasonality factors combined with declining customer activity as the quarter progressed related to the COVID-19 pandemic. Additionally, mortgage banking income during the first quarter of 20192020 included $1.4 milliona $182,000 write-down of mortgage servicing rights. In the first quarter of 2020, commercial loan swap fees were down considerably from the linked quarter's record high level. These declines were partially offset by an increase in insurance income compared to the linked quarter, mainly due to annual performance-based insurance commissions whichthat are primarily received in the first quarter each year. Additionally, other non-interest income in the first quarteryear and are a core component of 2019 included $787,000 of income related 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, including income from deposit account service charges, commercial loan swap fee income, trust and investment income, electronic banking income, and mortgage bankinginsurance income. The increase in total non-interest income from the secondfirst quarter of 20182019 was driven by increases in all non-interest income categories, with the exception of bank owned life insurance, which had a slight decrease. For the first six months of 2019, total non-interest income grew 9%, as most categories of non-interest income increased, including income from deposit account service charges, electronic banking income, mortgage banking income, and commercial loan swap fee income.trust and investment income, which were positively impacted by the First Prestonsburg acquisition. These increases were partially offset by a decline in insurance income and the impact of additional income recorded during the first quarter of 2019 of $787,000 related to the sale of restricted Class B Visa stock.
Total non-interest expense increased $7.0$804,000, or 2%, for the first quarter of 2020 compared to the fourth quarter of 2019 and grew $2.5 million, or 22%8%, in the second quarter of 2019 compared to the first quarter of 2019 and grew $2.9 million, or 8%, compared to the second2019. The first quarter of 2018.2020 included pension settlement charges of $368,000 and expenses related to COVID-19 totaling $140,000. The increase compared to the linked quarter was driven by a $1.0 million, or 5%, increase in salaries and employee benefit costs, partially offset by declines in professional fees of $238,000, or 12%, and amortization of intangibles of $159,000, or 18%. Salaries and employee benefit costs were driven by additional expenses which occur primarily duein the first quarter of each year related to acquisition-related expenses of First Prestonsburg, coupled with the ongoing cost of running the First Prestonsburg operations.stock-based compensation and contributions to employee health benefit accounts. The growth in total non-interest expense compared to the secondfirst quarter of 20182019 was led by higher salaries and employee benefit costs, professional fees, foreclosed real estate and other loan expenses, and electronic banking expenses, partially offset by a decline in professional fees. Base salaries, stock-based compensation, and medicalFDIC insurance were the main contributors to the increase in salariespremiums. Salaries and employee benefit costs which were impacted by the additional employees that have been added infrom the last twelve months from acquisitions and for future growth, as well as higher medical claims. Base salaries were also impacted byFirst Prestonsburg acquisition, annual merit increases, which includedand the implementation ofcontinued movement towards a $15 per hour minimum wage throughout the company, which began being phased in during 2018 and will be largely implemented by January 1, 2020. Professional fees declined 22% compared to the second quarter of 2018, primarily due to consulting work performed during the second quarter of 2018 which was not repeated in 2019.
During the first six months of 2019, total non-interest expense increased 10% compared to 2018. This increase was led by higher salaries and employee benefitPeoples' organization. These costs were partially offset by a decline in professional fees. Salaries and employee benefit costs were up primarilymedical insurance expenses 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 of a $15 per hour minimum wage throughout the company, and employees that have been added in the last twelve months for future growth. 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 from recent acquisitions and for future growth. Professional fees declined 24%lower claims compared to the first six monthsquarter of 2018, mostly due to consulting work performed during the first six months of 2018 which was not repeated in 2019.
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 secondfirst quarter of 2020 was 66.6%, compared to 61.9% for the fourth quarter of 2019 was 73.2%, compared toand 62.7% for the first quarter of 2019 and 75.0% for2019. The increase in the second quarter of 2018. The efficiency ratio increased compared to the linked quarter drivenwas primarily due to the decline in revenue, which was negatively impacted by higher acquisition-related expenses.the developments related to COVID-19 and its impact on the interest rate environment, combined with the increase in total non-interest expense. The efficiency ratio, when adjusted for non-core items, was 60.2%65.5% for the secondfirst quarter of 2020, compared to 61.3% for the fourth quarter of 2019 compared toand 62.2% for the first quarter of 2019 and 62.0% for the second quarter2019.
Peoples recorded an income tax benefit of 2018. During the first six months of 2019, the efficiency ratio was 68.1%, compared to 68.5% for the same period in 2018. The efficiency ratio, when adjusted for non-core items, during the first six months of 2019 was 61.2% and was 61.7%$156,000 for the first six monthsquarter of 2018.
Income2020, compared to income tax expense was $2.2 million for the second quarter of 2019, compared to $3.4$2.8 million for the linked quarter and $1.0 million for the second quarter of 2018. The decline 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 second quarter of 2018 was primarily due to higher pre-tax income. For the first six months of 2019, Peoples recorded income tax expense of $5.6 million, compared to $3.4 million for the same period in the prior year.first quarter of 2019. The year-over-year increase in income tax expense was primarily due to higher pre-tax income. The first six months of 2019 included a tax benefit of $192,000 recorded for the vesting of restricted stock during the period. The first six monthsquarter of 2018 also included an $805,000 valuation allowance release, as well as2020 was driven by a tax benefitpretax net loss, which was the result of $296,000a $17.0 million provision for credit losses recorded for the vesting of restricted stock during the period.quarter.
At June 30, 2019,March 31, 2020, total assets were $4.28$4.47 billion, compared to $3.99$4.35 billion at December 31, 2018.2019. The 7%3% increase compared to December 31, 20182019 was primarily due to the First Prestonsburg merger, which added $294.1driven by an increase in cash and cash equivalents of $48.5 million, loan growth of assets, including $130.4$37.9 million, coupled with an increase in total investment securities of $35.9 million. The allowance for credit losses increased to $42.8 million, or 1.47% of total loans, after preliminary fair value adjustments.

compared to $21.6 million and 0.75%, respectively, at December 31, 2019.


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Total liabilities were $3.70$3.89 billion at June 30, 2019,March 31, 2020, up $226.0$125.6 million since December 31, 2018.2019. The increase in total liabilities during the first sixthree months of 20192020 was primarily due to an increase in deposits of $408.1$107.0 million, partially offset by a decline in borrowings of $193.7$7.6 million. The growth in deposits compared to December
At March 31, 2018, was mostly due to acquired First Prestonsburg deposit balances, which totaled $232.2 million at June 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 June 30, 2019,2020, total stockholders' equity was $579.0$583.7 million, an increasea decrease of $58.9$10.7 million compared to December 31, 2018.2019. The increasedecrease in total stockholders' equity was mostly duedriven by a combination of the repurchase of 436,137 common shares for a total of $10.2 million during the first quarter of 2020, dividends declared of $7.0 million, a $3.7 million adjustment related to the $32.4 millionadoption of common shares issued in connection with the First Prestonsburg merger,CECL accounting standard, and a net incomeloss of $9.6 million and$765,000. These were partially offset by other comprehensive income of $7.8$9.7 million, which was primarily the result of a higher market value related to the available-for-sale investment securities portfolio, partially offset by dividends paida decline in the value of $7.0 million.cash flow hedges, both of which were driven by overall decreases in market interest rates during the quarter.
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
 March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands)
Net interest income$34,636  $35,121  $33,914  
Taxable equivalent adjustments272  287  200  
Fully tax-equivalent net interest income$34,908  $35,408  $34,114  


 Three Months Ended Six Months Ended
 June 30,
2019
March 31,
2019
June 30,
2018
 June 30,
(Dollars in thousands) 20192018
Net interest income$36,049
33,914
$32,808
 $69,963
$62,167
Taxable equivalent adjustments267
200
223
 467
450
Fully tax-equivalent net interest income$36,316
$34,114
$33,033
 $70,430
$62,617






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The following tables detail Peoples’ average balance sheets for the periods presented:
 For the Three Months Ended
 March 31, 2020December 31, 2019March 31, 2019
(Dollars in thousands)
Average BalanceIncome/ ExpenseYield/CostAverage BalanceIncome/ ExpenseYield/CostAverage BalanceIncome/ ExpenseYield/Cost
Short-term investments (a) $73,798  $236  1.29 %$64,790  $(26) (0.16)%$16,247  $176  4.39 %
Investment securities (b)(c)(d):                            
Taxable  928,182  5,428  2.34 %930,469  5,581  2.40 %780,721  5,847  3.00 %
Nontaxable  106,934  829  3.10 %110,010  854  3.11 %83,319  680  3.26 %
Total investment securities  1,035,116  6,257  2.42 %1,040,479  6,435  2.47 %864,040  6,527  3.03 %
Loans (c)(d)(e):                            
Construction  97,839  1,251  5.06 %87,731  1,308  5.83 %131,683  1,732  5.26 %
Commercial real estate, other  837,602  10,057  4.75 %833,507  11,349  5.33 %806,181  10,596  5.26 %
Commercial and industrial  649,437  7,424  4.52 %624,939  7,739  4.85 %578,954  7,681  5.31 %
Residential real estate (f) 665,737  8,371  5.03 %664,742  7,923  4.77 %603,253  6,927  4.59 %
Home equity lines of credit  131,673  1,775  5.42 %133,534  1,872  5.56 %131,089  1,860  5.75 %
Consumer, indirect  415,986  4,409  4.26 %420,229  4,555  4.30 %409,975  4,088  4.04 %
Consumer, direct  76,707  1,354  7.10 %79,285  1,421  7.11 %73,457  1,189  6.56 %
Total loans  2,874,981  34,641  4.80 %2,843,967  36,167  5.02 %2,734,592  34,073  5.00 %
Allowance for credit losses (d) (27,548) (21,600) (20,406) 
Net loans  2,847,433  34,641  4.84 %2,822,367  36,167  5.05 %2,714,186  34,073  5.04 %
Total earning assets  3,956,347  41,134  4.14 %3,927,636  42,576  4.28 %3,594,473  40,776  4.55 %
Goodwill and other intangible assets  177,984     178,163     161,673     
Other assets  247,296     244,615     229,475     
    Total assets
$4,381,627     $4,350,414     $3,985,621  
Interest-bearing deposits:                             
Savings accounts  $522,893  $74  0.06 %$523,767  $111  0.08 %$472,656  $91  0.08 %
Governmental deposit accounts328,407  715  0.88 %317,819  824  1.03 %297,537  557  0.76 %
Interest-bearing demand accounts628,677  248  0.16 %631,003  254  0.16 %569,472  247  0.18 %
Money market accounts  476,477  673  0.57 %455,595  773  0.67 %395,324  531  0.54 %
Retail certificates of deposit  488,948  2,059  1.69 %490,163  2,252  1.82 %396,977  1,417  1.45 %
Brokered certificates of deposit  191,955  860  1.80 %243,118  1,274  2.08 %314,163  2,001  2.58 %
Total interest-bearing deposits2,637,357  4,629  0.71 %2,661,465  5,488  0.82 %2,446,129  4,844  0.80 %
Borrowed funds:                             
Short-term FHLB advances  206,283  994  1.94 %208,638  1,114  2.12 %198,643  1,115  2.28 %
Repurchase agreements and other  47,351  45  0.38 %48,249  42  0.35 %46,111  58  0.50 %
Total short-term borrowings  253,634  1,039  1.65 %256,887  1,156  1.79 %244,754  1,173  1.94 %
Long-term FHLB advances  101,804  447  1.77 %75,936  405  2.12 %100,930  508  2.04 %
Other borrowings  7,471  111  5.94 %7,431  119  6.41 %7,304  137  7.50 %
Total long-term borrowings  109,275  558  2.05 %83,367  524  2.50 %108,234  645  2.41 %
  Total borrowed funds  362,909  1,597  1.77 %340,254  1,680  1.96 %352,988  1,818  2.09 %
      Total interest-bearing liabilities3,000,266  6,226  0.83 %3,001,719  7,168  0.95 %2,799,117  6,662  0.96 %
Non-interest-bearing deposits  708,512   ��    685,147        613,924     
Other liabilities  76,603        72,436        48,384        
Total liabilities  3,785,381        3,759,302        3,461,425        
Stockholders’ equity  596,246        591,112        524,196        
Total liabilities and stockholders’ equity  $4,381,627        $4,350,414        $3,985,621        
Interest rate spread (c)    $34,908  3.31 %   $35,408  3.33 %   $34,114  3.59 %
Net interest margin (c) 3.51 %      3.56 %      3.80 %


 For the Three Months Ended
 June 30, 2019 March 31, 2019 June 30, 2018
(Dollars in thousands)
Average 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%
Investment securities (a)(b):           
Taxable (c)874,427
6,006
2.75% 780,721
5,847
3.00% 793,497
5,868
2.96%
Nontaxable118,241
923
3.12% 83,319
680
3.26% 96,991
804
3.32%
Total investment securities992,668
6,929
2.79% 864,040
6,527
3.03% 890,488
6,672
3.00%
Loans (b)(d):           
Commercial real estate, construction124,334
1,655
5.27% 131,683
1,732
5.26% 118,206
1,438
4.81%
Commercial real estate, other833,991
11,322
5.37% 806,181
10,596
5.26% 840,677
10,434
4.91%
Commercial and industrial599,432
8,081
5.33% 578,954
7,681
5.31% 503,364
6,216
4.89%
Residential real estate (e)646,978
7,918
4.90% 603,253
6,927
4.59% 600,799
6,749
4.49%
Home equity lines of credit132,395
2,006
6.08% 131,089
1,860
5.75% 131,970
1,701
5.17%
Consumer, indirect412,986
4,255
4.13% 409,975
4,088
4.04% 359,941
3,498
3.90%
Consumer, direct80,442
1,459
7.27% 73,457
1,189
6.56% 72,820
1,230
6.77%
Total loans2,830,558
36,696
5.20% 2,734,592
34,073
5.00% 2,627,777
31,266
4.73%
Allowance for loan losses(21,311)   (20,406)   (19,071)  
Net loans2,809,247
36,696
5.20% 2,714,186
34,073
5.04% 2,608,706
31,266
4.77%
Total earning assets3,829,894
43,888
4.56% 3,594,473
40,776
4.55% 3,510,009
37,994
4.31%
Goodwill and other intangible assets175,169
   161,673
   161,600
  
Other assets234,716
   229,475
   226,348
  
    Total assets
$4,239,779
   $3,985,621
   $3,897,957
  
Deposits: ��         
Savings accounts$523,295
$110
0.08% $472,656
$91
0.08% $477,167
$69
0.06%
Governmental deposit accounts331,607
848
1.03% 297,537
557
0.76% 312,999
273
0.35%
Interest-bearing demand accounts603,494
231
0.15% 569,472
247
0.18% 581,600
202
0.14%
Money market accounts414,307
654
0.63% 395,324
531
0.54% 393,580
323
0.33%
Retail certificates of deposit477,530
2,079
1.75% 396,977
1,417
1.45% 395,304
1,242
1.26%
Brokered certificates of deposit272,693
1,797
2.64% 314,163
2,001
2.58% 187,387
992
2.13%
Total interest-bearing deposits2,622,926
5,719
0.87% 2,446,129
4,844
0.80% 2,348,037
3,101
0.53%
Borrowed funds:           
Short-term FHLB advances193,963
1,140
2.36% 198,643
1,115
2.28% 225,635
966
1.72%
Repurchase agreements and other46,631
93
0.80% 46,111
58
0.50% 85,188
209
0.98%
Total short-term borrowings240,594
1,233
2.06% 244,754
1,173
1.94% 310,823
1,175
1.52%
Long-term FHLB advances96,519
491
2.04% 100,930
508
2.04% 114,287
559
1.96%
Other borrowings7,346
129
7.02% 7,304
137
7.50% 7,766
126
6.49%
Total long-term borrowings103,865
620
2.39% 108,234
645
2.41% 122,053
685
2.25%
  Total borrowed funds344,459
1,853
2.16% 352,988
1,818
2.09% 432,876
1,860
1.72%
      Total interest-bearing liabilities2,967,385
7,572
1.02% 2,799,117
6,662
0.96% 2,780,913
4,961
0.71%
Non-interest-bearing deposits654,468
   613,924
   585,800
  
Other liabilities52,934
 
  48,384
 
  41,368
 
 
Total liabilities3,674,787
   3,461,425
  
3,408,081
  
Total stockholders’ equity564,992
 
  524,196
 
  489,876
 
 
Total liabilities and stockholders’ equity$4,239,779
 
  $3,985,621
 
  $3,897,957
 
 
Interest rate spread (b) $36,316
3.54%  $34,114
3.59%  $33,033
3.60%
Net interest margin (b)3.77%   3.80%   3.74%

(a) The fourth quarter amounts reflect an adjustment related to Peoples' balance sheet interest rate swap transactions of $310,000.

(b) Average balances are based on carrying value.
(c) Interest income and yields are presented on a fully tax-equivalent basis, using a 21% statutory federal corporate income tax rate.


5047


(d) On January 1, 2020, Peoples adopted ASU 2016-13 and adopted the CECL model, which resulted in the establishment of a $7,000 allowance for credit losses for held-to-maturity investment securities; an increase in loan balances of $2.6 million to establish the allowance for credit losses for purchased credit deteriorated loans; an increase to the allowance for credit losses (which was the "allowance for loan losses" prior to January 1, 2020) of $5.8 million; the addition of a $1.5 million unfunded commitment liability included in accrued expense and other liabilities; and a reduction to retained earnings of $3.7 million, net of statutory federal corporate income.
(e) Average balances include nonaccrual and impaired loans. 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.
        
        
 For the Six Months Ended
 June 30, 2019 June 30, 2018
(Dollars in thousands)
Average BalanceIncome/ ExpenseYield/Cost Average BalanceIncome/ ExpenseYield/Cost
Short-term investments$22,145
$439
4.00% $11,052
$106
1.93%
Investment securities (a)(b):       
Taxable827,831
11,853
2.86% 784,628
11,555
2.95%
Nontaxable100,876
1,603
3.18% 97,062
1,618
3.33%
Total investment securities928,707
13,456
2.90% 881,690
13,173
2.99%
Loans (b)(c):       
Commercial real estate, construction127,988
3,387
5.26% 118,396
2,771
4.66%
Commercial real estate, other820,163
21,918
5.32% 803,085
19,558
4.84%
Commercial and industrial589,249
15,762
5.32% 491,643
11,787
4.77%
Residential real estate (d)625,236
14,845
4.75% 546,558
12,058
4.41%
Home equity lines of credit131,746
3,866
5.92% 120,360
2,972
4.98%
Consumer, indirect411,489
8,343
4.09% 351,581
6,628
3.80%
Consumer, other76,969
2,648
6.94% 70,633
2,392
6.83%
Total loans2,782,840
70,769
5.07% 2,502,256
58,166
4.64%
Less: Allowance for loan losses(20,861)   (18,878)  
Net loans2,761,979
70,769
5.12% 2,483,378
58,166
4.68%
Total earning assets3,712,831
84,664
4.55% 3,376,120
71,445
4.23%
Intangible assets168,458
   152,943
  
Other assets232,114
   219,268
  
    Total assets
$4,113,403
   $3,748,331
  
Deposits:       
Savings accounts$498,115
$201
0.08% $465,091
$133
0.06%
Governmental deposit accounts314,666
1,405
0.90% 302,286
490
0.33%
Interest-bearing demand accounts586,577
478
0.16% 574,465
423
0.15%
Money market accounts404,868
1,185
0.59% 380,834
549
0.29%
Retail certificates of deposit437,476
3,496
1.61% 366,923
2,007
1.10%
Brokered certificates of deposit293,313
3,798
2.61% 172,101
1,712
2.01%
Total interest-bearing deposits2,535,015
10,563
0.84% 2,261,700
5,314
0.47%
Borrowed funds:       
Short-term FHLB advances196,290
2,255
2.32% 185,195
1,629
1.77%
Repurchase agreements and other46,373
151
0.65% 93,634
514
1.10%
Total short-term borrowings242,663
2,406
2.00% 278,829
2,143
1.55%
Long-term FHLB advances98,712
999
2.04% 116,628
1,123
1.94%
Other borrowings7,325
266
7.26% 7,439
248
6.67%
Total long-term borrowings106,037
1,265
2.40% 124,067
1,371
2.22%
  Total borrowed funds348,700
3,671
2.12% 402,896
3,514
1.75%
      Total interest-bearing liabilities2,883,715
14,234
0.99% 2,664,596
8,828
0.67%
Non-interest-bearing deposits634,308
   569,711
  
Other liabilities50,674
 
  41,872
 
 
Total liabilities3,568,697
   3,276,179
 
 
Total stockholders’ equity544,706
 
  472,152
 
 
Total liabilities and stockholders’ equity$4,113,403
 
  $3,748,331
 
 
Interest rate spread (b) $70,430
3.56%  $62,617
3.56%
Net interest margin (b)  3.78%   3.70%
(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 six 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.

(f) 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.


51


(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 March 31, 2020 Compared to
(Dollars in thousands)December 31, 2019March 31, 2019
Increase (decrease) in:RateVolume
Total (a)
RateVolume
Total (a)
INTEREST INCOME:
Short-term investments (b)$494  $(232) $262  $(778) $838  $60  
Investment Securities (c):
Taxable(140) (13) (153) (4,967) 4,548  (419) 
Nontaxable(2) (23) (25) (209) 358  149  
Total investment income(142) (36) (178) (5,176) 4,906  (270) 
Loans (c):
      
Construction(665) 608  (57) (63) (418) (481) 
Commercial real estate, other(1,654) 362  (1,292) (2,736) 2,197  (539) 
Commercial and industrial(1,694) 1,379  (315) (4,243) 3,986  (257) 
Residential real estate436  12  448  691  753  1,444  
Home equity lines of credit(62) (35) (97) (141) 56  (85) 
Consumer, indirect(68) (78) (146) 253  68  321  
Consumer, direct(2) (65) (67) 102  63  165  
Total loan income(3,709) 2,183  (1,526) (6,137) 6,705  568  
Total interest income$(3,357) $1,915  $(1,442) $(12,091) $12,449  $358  
INTEREST EXPENSE:  
Deposits:  
Savings accounts$(37) $—  $(37) $(69) $52  $(17) 
Governmental deposit accounts(267) 158  (109) 94  64  158  
Interest-bearing demand accounts(4) (2) (6) (101) 102   
Money market accounts(295) 195  (100) 25  117  142  
Retail certificates of deposit(186) (7) (193) 272  370  642  
Brokered certificates of deposit(161) (253) (414) (499) (642) (1,141) 
Total deposit cost(950) 91  (859) (278) 63  (215) 
Borrowed funds:      
Short-term borrowings(104) (13) (117) (394) 260  (134) 
Long-term borrowings(357) 391  34  (117) 30  (87) 
Total borrowed funds cost(461) 378  (83) (511) 290  (221) 
Total interest expense(1,411) 469  (942) (789) 353  (436) 
Fully tax-equivalent net interest income (b)$(1,946) $1,446  $(500) $(11,302) $12,096  $794  
 Three Months Ended June 30, 2019 Compared to Compared to
(Dollars in thousands)March 31, 2019 June 30, 2018 June 30, 2018
Increase (decrease) in:RateVolume
Total (a)
 RateVolume
Total (a)
 RateVolume
Total (a)
INTEREST INCOME:           
Short-term investments$(155)$242
$87
 $74
$133
$207
 $169
$164
$333
Investment Securities (b): 
           
Taxable(2,234)2,393
159
 (1,908)2,046
138
 282
16
298
Nontaxable(191)434
243
 (271)390
119
 (14)(1)(15)
Total investment income(2,425)2,827
402
 (2,179)2,436
257
 268
15
283
Loans (b):
           
Commercial real estate, construction11
(88)(77) 140
77
217
 380
236
616
Commercial real estate, other280
446
726
 1,424
(536)888
 1,937
423
2,360
Commercial and industrial50
350
400
 604
1,261
1,865
 1,464
2,511
3,975
Residential real estate471
520
991
 629
540
1,169
 965
1,822
2,787
Home equity lines of credit124
22
146
 299
6
305
 595
299
894
Consumer, indirect125
42
167
 219
538
757
 527
1,188
1,715
Consumer, direct145
125
270
 85
144
229
 236
20
256
Total loan income1,206
1,417
2,623
 3,400
2,030
5,430
 6,104
6,499
12,603
Total interest income$(1,374)$4,486
$3,112
 $1,295
$4,599
$5,894
 $6,541
$6,678
$13,219
INTEREST EXPENSE:           
Deposits:           
Savings accounts$8
$11
$19
 $34
$7
$41
 $58
$10
$68
Governmental deposit accounts220
71
291
 558
17
575
 894
21
915
Interest-bearing demand accounts(92)76
(16) 21
8
29
 46
9
55
Money market accounts94
29
123
 313
18
331
 599
37
636
Retail certificates of deposit334
328
662
 544
293
837
 1,051
438
1,489
Brokered certificates of deposit291
(495)(204) 281
524
805
 626
1,460
2,086
Total deposit cost855
20
875
 1,751
867
2,618
 3,274
1,975
5,249
Borrowed funds:           
Short-term borrowings180
(120)60
 886
(828)58
 679
(416)263
Long-term borrowings(13)(12)(25) 136
(201)(65) 171
(277)(106)
Total borrowed funds cost167
(132)35
 1,022
(1,029)(7) 850
(693)157
Total interest expense1,022
(112)910
 2,773
(162)2,611
 4,124
1,282
5,406
Net interest income$(2,396)$4,598
$2,202
 $(1,478)$4,761
$3,283
 $2,417
$5,396
$7,813
(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.
(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.
(b)The comparison to the three months ended December 31, 2019 reflects an adjustment in the fourth quarter of 2019 related to Peoples' balance sheet interest rate swap transactions of $310,000.
(c)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 million forimpacted by one less calendar day in the secondfirst quarter of 2019, an increase of 6%2020 compared to the linked quarter. Net interest income and net interest margin was 3.77% forwere both impacted by the seconddeclining interest rate environment during the first quarter of 2019, compared2020, which resulted in lower yields on the loan and the investment securities portfolios. The Board of Governors of the Federal Reserve System lowered the Federal Funds effective target range by 150 basis points during the first quarter of 2020 to 3.80% for0.00% to 0.25%.

48

Peoples' variable rate commercial loans are subject to changes in the linked quarter. London Interbank Offered Rate and the prime rate, both of which declined during the first quarter of 2020. Yields on investment securities were negatively impacted by higher prepayment speeds, which increased premium amortization. These declines were partially offset by lower deposit costs, primarily due to a decrease in interest rates paid on deposits.
The slight declineincrease in net interest margin during the quarter 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. Comparedincome compared to the first quarter of 2019 netwas driven by higher interest income on loans, combined with lower interest rates paid on deposits, which were partially offset by a decline in interest income on investment securities. The increase in interest income on loans was primarily due to higher loan balances, which were impacted by the acquired First Prestonsburg loans. The decrease in investment securities interest income was positively impactedmostly related to the higher premium amortization associated with faster prepayment speeds. The decline in net interest margin was largely driven by the acquisition of First Prestonsburg.lower yields on investment securities due to a decline in interest rates and higher premium amortization.
Accretion income, net of amortization expense, from acquisitions was $1.2$1.1 million for the secondfirst quarter of 2020, $1.8 million for the fourth quarter of 2019, and $722,000 for the first quarter of 2019, which added 1311 basis points, 18 basis points, and 8 basis points, respectively, to net interest margin.


52


2019 was boosted by an acquired commercial loan that paid off during the quarter, which positively impacted the net interest margin by 6 basis points. The growthincrease in net 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 second quarter of 2018, which added 13 basis points and 6 basis points, respectively, to net interest margin. The increase in accretion income compared to the second quarter of 2018 was due to the First Prestonsburg acquisition.
For the first six months of 2019, net interest income grew 13% compared to 2018, and net interest margin grew 8 basis points to 3.78%. 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 increase in interest income due to loan growth outpaced higher deposit costs, which were due to the recent acquisitions and increased competition for deposits. The first six months of 2018 benefited from proceeds of $589,000 received on investment securities that had been previously written down due to OTTI, which added 3 basis points to net interest margin. Peoples recorded no similar proceeds during the first six months of 2019.
Accretion income, net of amortization expense, from acquisitions was $1.9 million for the first six months of 2019 and $1.1 million for the first six months of 2018, which added 10 basis points and 6 basis points, respectively, to net interest margin. The growth in accretion income compared to the first six months of 2018 was largely due to the First Prestonsburg 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) LoanCredit Losses
The following table details Peoples’ provision for (recovery of) loancredit losses:
Three Months Ended Six Months Ended Three Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30, March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands) 20192018(Dollars in thousands)
Provision for (recovery of) other loan losses$475
$(360)$1,000
 $115
$2,842
Provision for checking account overdrafts151
97
188
 248
329
Provision for (recovery of) loan losses$626
$(263)$1,188
 $363
$3,171
Provision for (recovery of) other credit lossesProvision for (recovery of) other credit losses$16,824  $999  $(360) 
Provision for checking account overdraft credit lossesProvision for checking account overdraft credit losses145  137  97  
Total provision for (recovery of) credit lossesTotal provision for (recovery of) credit losses$16,969  $1,136  $(263) 
As a percentage of average total loans (a)0.09%(0.04)%0.18% 0.03%0.26%As a percentage of average total loans (a)2.37 %0.16 %(0.04)%
(a) Presented on an annualized basis.   (a) Presented on an annualized basis.
The provision for or recovery of, loancredit losses recorded represents the amount needed to maintain the appropriate level of the allowance for loancredit losses based on management’s formal quarterly analysisestimates. During the first quarter of 2020, Peoples adopted ASU 2016-13, and utilized the CECL model to determine its allowance for credit losses, while prior periods used the incurred loss model. The CECL model utilized by Peoples relies on economic forecasts, as well as other key assumptions including prepayments, probability of default and loss given default. Under the incurred loss model, the process for estimating allowance for loan portfolio and procedural methodology that estimates the amount of probable credit losses. This process considerslosses considered various factors that affect losses, such as changes in Peoples’ loan quality and historical loss experience,experience. Given the relatively low recent loss history, the incurred loss model was highly dependent on qualitative factors to arrive at an appropriate allowance for loan losses in periods prior to 2020. These qualitative factors included 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 loancredit losses duringfor the secondfirst quarter of 2020 was primarily due to the economic downturn related to COVID-19 and the first six monthsresulting impact on the economic assumptions used in estimating the allowance of 2019 was lower than historical trends, given low gross charge-offs and high recoveries combined with originated loan balances remaining stable duringcredit losses under the first six months of 2019.CECL model. Net charge-offs for the secondfirst quarter of 20192020 were $208,000,$498,000, or 0.03%0.07% of average total loans annualized, compared to net charge-offs of $1.2 million, or 0.16% of average total loans annualized, for the linked quarter and net recoveries of $1.0 million, or 0.15% of average total loans for the linked quarter and $720,000, or 0.11% of average total loans, for the second 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. 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,annualized, for the first quarter of 2019, and


53


$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 six 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% 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 2018.2019.
Additional information regarding changes in the allowance for loancredit losses and loan credit quality can be found later in this discussion under the caption “FINANCIAL CONDITION - Allowance for LoanCredit Losses.”

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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
 March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands)
Net gain on investment securities$319  $94  $30  
Net loss on asset disposals and other transactions:
Net loss on other assets$(70) $(188) $(157) 
Net loss on OREO(17) (44) (25) 
Net gain on other transactions—   —  
Net loss on asset disposals and other transactions$(87) $(229) $(182) 
 Three Months Ended Six Months Ended
 June 30,
2019
March 31,
2019
June 30,
2018
 June 30,
(Dollars in thousands) 20192018
Net (loss) gain on investment securities$(57)$30
$(147) $(27)$(146)
       
Net (loss) gain on asset disposals and other transactions:      
Net loss on other assets$(274)$(157)$(330) $(431)$(251)
Net (loss) gain on OREO(24)(25)14
 (49)9
Net loss on debt extinguishment

(13) 
(13)
Net gain (loss) on other transactions5

(76) 5
(76)
Net loss on asset disposals and other transactions$(293)$(182)$(405)
$(475)$(331)
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 2019,2020, Peoples sold investment securities to lock in gains. Net losses on other assets during the first quarter of 2020 and the linked quarter were driven by net losses on repossessed assets. Net loss on other assets was primarily due toduring the first quarter of 2019 included $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 June 30, 2019 were driven by the write-offs of fixed assets acquired from First Prestonsburg, combined with market value write-downs related to closed offices that were held for sale. For the year-to-date period in 2018, the second quarter losses on 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 quarter of 2018.
Total Non-Interest Income, Excluding Net Gains and Losses
Insurance income comprised the largest portion of the secondfirst quarter 20192020 total non-interest income. The following table details Peoples' insurance income:
 Three Months Ended
 March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands)
Property and casualty insurance commissions2,590  2,645  2,674  
Life and health insurance commissions102  513  359  
Performance-based commissions1,291  35  1,419  
Other fees and charges147  116  169  
Insurance income$4,130  $3,309  $4,621  
 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 revenueRevenue 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 areis a core component of insurance income.


54


Life The decline in life and health insurance commissions were low incompared to 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 secondfourth quarter of 2019 increased comparedwas related to the first quartertiming of 2019 and the second quarterrecognition 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
premiums.
Peoples' electronic 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 Ended Three Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30, March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands) 20192018(Dollars in thousands)
Interchange fees$2,747
$2,443
$2,520
 $5,190
$4,784
Promotional and usage income520
544
265
 1,064
786
E-banking income$3,267
$2,987
$2,785
 $6,254
$5,570
E-banking income$3,280  $3,849  $2,987  
Peoples' e-banking revenueincome 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 increasesdecrease in e-banking income compared to the linked quarter was driven by the reduced usage of debit cards, which is typically higher in all comparisons werethe fourth quarter of each year and was negatively impacted during the first quarter of 2020 by the stay-at-home orders put in place in Peoples' markets at the end of the quarter related to COVID-19. The increase in e-banking income compared to the first quarter of 2019 was the result of the increased usage of debit cards by more customers, which includes the impact of additional cardholders obtained in the mergeracquisition of First Prestonsburg.
Peoples' fiduciary and brokerage revenues continued to be based primarily upon the value of assets under administration and management, with First Prestonsburg.additional income generated from transaction commissions, cross-selling of products and additional retirement plan

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services business. The following tables detail Peoples’ trust and investment income and related assets under administration and management:
 Three Months Ended
 March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands)
Fiduciary income$1,622  $1,667  $1,636  
Brokerage income1,160  1,147  965  
Employee benefits fees480  627  511  
Trust and investment income$3,262  $3,441  $3,112  
Employee benefits income for the first quarter of 2020 declined compared to the fourth quarter of 2019 primarily due to a decrease in the assets under administration and management at the end of the first quarter of 2020 resulting from the market decline.
 March 31,
2020
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
(Dollars in thousands)
Assets under administration and management:
Trust$1,385,161  $1,572,933  $1,504,036  $1,501,110  $1,471,422  
Brokerage816,260  944,002  904,191  887,745  863,286  
Total$2,201,421  $2,516,935  $2,408,227  $2,388,855  $2,334,708  
Quarterly average$2,425,849  $2,458,770  $2,397,515  $2,356,121  $2,312,098  
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
 March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands)
Overdraft and non-sufficient funds fees$1,649  $1,920  $1,433  
Account maintenance fees980  1,019  752  
Other fees and charges191  210  156  
Deposit account service charges$2,820  $3,149  $2,341  
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. IncomeThe decline in the first quarter of 2020 in overdraft and non-sufficient funds fees from deposit account service charges were up compared to the linkedfourth quarter of 2019 was primarily due to seasonality of customer activity combined with a combinationdisruption of customer activity at the end of the additional accounts acquired from First Prestonsburg andfirst quarter of 2020 as a new deposit account fee schedule that was implemented in March 2019.result of the developments related to COVID-19. Income from deposit account service charges for the first six monthsquarter of 20192020 were up compared to a year agothe year-ago quarter primarily due to the ASB and First Prestonsburg acquisitions,acquisition, coupled with changesfully implemented new deposit account fee schedules which were put in fee schedules.place in March 2019.
The following table details the other items included within Peoples' total non-interest income:
Three Months Ended Six Months Ended Three Months Ended
June 30,
2019
March 31,
2019
June 30,
2018
 June 30, March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands) 20192018(Dollars in thousands)
Mortgage banking income$1,000
$788
$969
 $1,788
$1,320
Mortgage banking income$750  $1,336  $788  
Bank owned life insurance income490
485
497
 975
965
Bank owned life insurance income582  968  485  
Commercial loan swap fees516
146
146
 662
262
Commercial loan swap fees244  794  146  
Other non-interest income502
1,101
421
 1,603
1,752
Other non-interest income437  452  1,101  
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 increasedecrease in mortgage banking income from the firstfourth quarter of 2019 was mainly due to a seasonal decline combined with a disruption of customer demand which is typically seasonally low inactivity as a result of the developments related to the COVID-19 pandemic. Additionally, mortgage banking income during the first quarter of each year. For the first six months2020 included a $182,000 write-down of 2019, compared to the same period in 2018, the increase in mortgage banking income was largely attributable to gains on sale of real estate loans originated by the mortgage origination operation acquired as part of the ASB acquisition.servicing rights.
In the secondfirst quarter of 2019,2020, Peoples sold approximately $24.9$22.0 million in loans to the secondary market with servicing retained and sold approximately $11.4$14.0 million in loans with servicing released, compared to approximately $27.8 million and $17.6 million,

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respectively, in the linked quarter, and approximately $13.7 million and $10.9 million, respectively, in the linked quarter. For the first six monthsquarter of 2019, Peoples sold approximately $38.6 million in loans to the secondary market with servicing retained and sold approximately $22.3 million in loans with servicing released, compared to approximately $29.2 million and $13.6 million, respectively, in the first six months of 2018.2019. The volume of sales has a direct impact on the amount of mortgage banking income.
Bank owned life insurance income during the first quarter of 2020 included the recognition of an additional $109,000 of tax-free death benefits during the fourth quarter of 2019 that exceeded the cash surrender value of the insurance policies, compared to $482,000 during the fourth quarter of 2019, and none in the first quarter of 2019.
Commercial loan swap fees are largely dependent on timing, interest rates, and the volume of customer activity. Commercial loan swap fees declined from a record high in the linked quarter, reflecting a typically slower first quarter and the impact of COVID-19, which slowed customer demand late in the first quarter of 2020. The increase in all comparisonscompared to the first quarter of 2019 was driven by a combination of an increase in the average size of each transaction andslightly higher customer demand, given the currentlow rate environment and the favorable longer term rates that customers can lock in by utilizing a swap.
Compared to the linked quarter, otherOther non-interest income declined primarily due to lower income from equity investment securities, which was down $809,000. Duringfor the first quarter of 2019 Peoples recognizedincluded $787,000 of income 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. Other non-interest income forduring the first six monthsquarter of 2019 was down compared to the same period of 2018, due to a decrease 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 $585,000.2019.


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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
 March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands)
Base salaries and wages$12,696  $13,016  $11,874  
Sales-based and incentive compensation2,662  3,159  2,609  
Employee benefits2,544  1,972  2,690  
Stock-based compensation1,383  567  1,208  
Payroll taxes and other employment costs1,362  950  1,377  
Deferred personnel costs(729) (761) (556) 
Salaries and employee benefit costs$19,918  $18,903  $19,202  
Full-time equivalent employees:     
Actual at end of period898  900  859  
Average during the period898  910  869  
 Three Months Ended Six Months Ended
 June 30,
2019
March 31,
2019
June 30,
2018
 June 30,
(Dollars in thousands) 20192018
Base salaries and wages$14,353
$11,874
$12,656
 $26,227
$23,028
Employee benefits1,966
2,690
1,485
 4,656
3,028
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
Stock-based compensation930
1,208
424
 2,138
1,510
Deferred personnel costs(729)(556)(579) (1,285)(1,010)
Salaries and employee benefit costs$20,824
$19,202
$18,025
 $40,026
$34,015
Full-time equivalent employees:   
   
Actual at end of period918
859
862
 918
862
Average during the period906
869
844
 891
820

In both comparisons, base salaries and wages were impacted by merit increases and the continued movement towards a $15 per hour minimum wage throughout Peoples' organization. The $15 per hour minimum wage was phased in beginning in 2018 and was largely implemented as of January 1, 2020. Compared to the linked quarter, these increases were offset by a decline in severance expense of $257,000 and additional expense during the fourth quarter of 2019 related to employees who carried paid-time-off balances into 2020. Compared to the first quarter of 2019, base salaries and wages were also impacted by additional employees, primarily as a result of the First Prestonsburg acquisition in April 2019.
The decrease in sales-based and incentive compensation for the first quarter of 2020 compared to the fourth quarter of 2019, was related to overall company performance measures used in calculating incentive awards, combined with lower sales-based compensation from mortgage banking reflecting the reduced volume of real estate loans for sale in the secondary market.
The increase in full-time equivalent employees inemployee benefits for the secondfirst quarter of 2019 and the first six months of 2019 compared to previous periods 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.
The increase in base salaries and wages for the second quarter of 20192020, 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, annual merit increases, which included the implementation of a $15 per hour minimum wage throughout the company, and an increase in acquisition-related expenses of $594,000. The $15 per hour minimum wage began being phased in during 2018 and is expected to be largely implemented by January 1, 2020. For the first six months of 2019 compared to the same period of 2018, the increase was impacted by the First Prestonsburg and ASB acquisitions, as well as the employees that have been added in the last twelve months for future growth.
The decline in employee benefits for the second quarter of 2019, compared to the linked quarter, was primarily due to lower medical insurance costs of $817,000. Medical insurance costs in the linked quarter included annual contributions to employee health benefit accounts resultingwhich resulted in an expense of $450,000.$427,000. These contributions occur primarily in the first quarter of each year. Additionally, Peoples' 401(k) contributions increased $174,000 compared to the linked quarter due to 401(k) contributions for employees who reached maximum contributions during 2019, which reset at January 1, 2020, as well as a higher percentage match (from 4% match to 5%) incentive. Compared to the secondfirst quarter of 2018,2019, the increasedecline in employee benefits was driven by higherlower medical insurance costs, due primarily to higher medical claims and the increase in the number of plan participants, which was impactedpartially offset by the First Prestonsburg acquisition. The increase in employee benefits in the six-month periods comparison was impacted by the First Prestonsburg and ASB acquisitions, and included an increase in medical insurance costs of $1.3 million.
The increase in sales-based and incentive compensation for the second quarter of 2019, comparedexpense related to 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 growth401(k) contributions compared to the first six monthsquarter of 2018 was largely attributable to the mortgage origination operation acquired as part of the ASB acquisition.
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.2019.
Stock-based compensation declinedis generally recognized over the vesting period, which generally ranges from immediate vesting to vesting at the end of three years, adjusted for an estimate of the portion of awards that will be forfeited. At the vesting date, an adjustment is made to increase or reverse expense for the amount of actual forfeitures compared to the linked quarter due largely to annual stock grants, which occur primarily in the first quarter of each year. The majority of the grants are expensed over the three-year vesting period, with the exception of those made to retirement eligible grantees.estimate. Stock grants to retirement eligible grantees are expensed either immediately or over a shorter period than three years. The $1.2majority of Peoples' stock-based compensation is attributable to annual equity-based incentive awards to employees, which are awarded in the first quarter of each year and are based upon Peoples achieving certain performance goals during the prior year. The $1.4 million of stock-based

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compensation for the first quarter of 2020, which was an increase of $816,000 compared to the fourth quarter of 2019, included $469,000$464,000 of expense related to stock grants to retirement eligible individuals, and $128,000$349,000 of expense related


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to the annual vesting of prior stock grants.
The increase in stock-based compensationpayroll taxes and other employment costs, compared to the 2018 periods was driven bylinked quarter, included higher social security and unemployment taxes. Certain higher earners reached their individual taxable earnings limit for social security and unemployment taxes prior to or during the fourth quarter of 2019. Those limits reset at the beginning of the new calendar year, resulting in a higher expense relatedduring the first quarter of 2020 compared to stock grants madethe fourth quarter of 2019.
Deferred personnel costs represent the portion of current period salaries and employee benefit costs considered to retirement eligible grantees combinedbe direct loan origination costs.  These costs are capitalized and recognized over the life of the loan as a yield adjustment in interest income.  As a result, the amount of deferred personnel costs for each period corresponds directly with Peoples' improved performance during recent years.the volume of loan originations, coupled with the average deferred costs per loan that are updated annually at the beginning of each year, which increased in 2020 compared to 2019.
The increase in full-time equivalent employees compared to the first quarter of 2019 was mainly due to additional employees from the First Prestonsburg acquisition.

Peoples' net occupancy and equipment expense was comprised of the following:
 Three Months Ended
 March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands)
Depreciation$1,455  $1,508  $1,249  
Repairs and maintenance costs757  728  770  
Net rent expense305  302  288  
Property taxes, utilities and other costs637  685  671  
Net occupancy and equipment expense$3,154  $3,223  $2,978  
 Three Months Ended Six Months Ended
 June 30,
2019
March 31,
2019
June 30,
2018
 June 30,
(Dollars in thousands) 20192018
Depreciation$1,494
$1,249
$1,248
 $2,743
$2,466
Repairs and maintenance costs715
770
659
 1,485
1,507
Net rent expense250
288
235
 538
444
Property taxes, utilities and other costs673
671
661
 1,344
1,252
Net occupancy and equipment expense$3,132
$2,978
$2,803
 $6,110
$5,669
NetCompared to the first quarter of 2019, net occupancy and equipment expense for the second quarter of 2019was impacted by increased primarily due to costsdepreciation related to investments in technological infrastructure and equipment (mainly ATMs), and the addition of nineadditional 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 by 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.which are owned.
The following table details the other items included in total non-interest expense:
 Three Months Ended
 March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands)
E-banking expense$1,865  $1,846  $1,577  
Data processing and software expense1,752  1,648  1,545  
Professional fees1,693  1,931  1,276  
Franchise tax expense882  797  705  
Amortization of other intangible assets729  888  694  
Foreclosed real estate and other loan expenses578  632  255  
Marketing expense473  573  594  
Communication expense280  318  278  
FDIC insurance (credits) premiums(5) (150) 371  
Other non-interest expense3,006  2,912  2,385  
 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%, fromE-banking expense was up compared to the first quarter of 2019 due to customers completing a higher volume of transactions using their debit cards, and Peoples' Internet and mobile banking service.  The increase in expenses related to Peoples' Internet and mobile banking services was 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.
Electronic banking expense was up in each comparison due to an increaseincreases in customer accounts and customer usage of mobile and online banking tools, which were impacteddriven by the acquisition of First Prestonsburg in April 2019, as well as the annual increase in the cost of each unit of service in Internet and ASB mergers.mobile banking.
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
Professional fees decreased from the fourth quarter of acquisition-related expenses in2019, primarily due to lower legal expenses. Compared to the first six monthsquarter of 2019, professional fees were up due to recruiting fees and $59,000 inconsulting work performed during the first six monthsquarter of 2018.2020.
Peoples' amortization of other intangible assets is driven by acquisition-related activity. Amortization of other intangible assets for the secondfirst quarter of 2019 was up2020 declined compared to the firstfourth quarter of 2019 as a result of the core depositdeclining amortization from previous

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acquisitions. Compared to the first quarter of 2019, amortization of intangible assetassets increased mainly due to additional amortization related to the acquisition of First Prestonsburg.


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TablePeoples 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 as of Contents

Marketing expense was down $104,000, or 18%, for the secondmost recent year-end. Expenses related to state franchise taxes, which includes Ohio FIT, increased in the first quarter of 2020 compared to the fourth quarter of 2019 due to higher equity as of December 31, 2019 compared to December 31, 2018. Expenses related to state franchise taxes increased in the first quarter of 2020 compared to the first quarter of 2019 and down $166,000, or 25%,primarily due to additional taxes in Kentucky as a result of the First Prestonsburg acquisition in 2019.
Marketing expense decreased compared to the secondfourth quarter of 2018,2019 and the first quarter of 2019, due to the timing of product marketing campaigns. Marketing expense during 2019 included brand awareness and product marketing campaigns due to Peoples' expanded footprint as a result of the First Prestonsburg acquisition in 2019.
TheForeclosed real estate and other loan expenses increased compared to the first quarter of 2019 primarily due to the increase in other non-interestcosts 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 latter half of 2019 and the first quarter of 2020. Higher credit bureau expense of $3.5 millionand dealer participation payments related to higher indirect consumer lending for the secondquarter also contributed to the increase.
Peoples recognized credits to its FDIC insurance premiums related to its quarterly assessments during the first quarter of 2020 and the fourth quarter of 2019, compared to an expense during the linkedfirst quarter of 2019. The FDIC insurance premiums credits were related to the level of the federal Deposit Insurance Fund ("DIF") that continued to be above the target threshold for banks with total consolidated assets of less than $10 billion to recognize credits. Peoples cannot reasonably anticipate any future recognition of credits, as the DIF is analyzed on a quarterly basis, and is the premise for receiving credits.
Other non-interest expense for the first quarter of 2020 increased $621,000 compared to the first quarter of 2019. The increase was primarily due to acquisition-relatedpension settlement charges of $368,000 and expenses of $3.7 million (mainly contract termination fees)$135,000 related to COVID-19 included in other non-interest expense during the first quarter of 2020, for which there were no similar expenses in the currentfirst quarter comparedof 2019. COVID-19 expenses consisted of a $100,000 donation to $54,000 in the linked quarter.Peoples' employee hardship and disaster relief fund and technology costs related to remote access for employees.
Income Tax Expense (Benefit)
IncomePeoples recorded an income tax expense was $2.2 millionbenefit of $156,000 for the secondfirst quarter of 2019,2020, compared to $3.4an expense of $2.8 million for the linked quarter and $1.0 million for the second quarter of 2018. The decline 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 second quarter of 2018 was due to higher pre-tax income combined with the release of a valuation allowance during the second quarter of 2018 of $805,000.
For the first six months of 2019, Peoples recorded income taxan expense of $5.6 million, compared to $3.4 million for the same period in the prior year, and the effective tax rate for the first six monthsquarter of 2019 was 18.9%, compared to 14.7% for the first six months of 2018.2019. The year-over-year increase in income tax expense was primarily due to higher pre-tax income combined with the release of a valuation allowancebenefit during the first six monthsquarter of 20182020 was driven by a pretax net loss, which was the result of $805,000. The first six months of 2019 included a tax benefit of $192,000$17.0 million provision for credit losses recorded for the vesting of restricted stock during the period, compared to a tax benefit of $296,000 in the first six months of 2018.quarter.
Additional information regarding income taxes can be found in "Note 12 Income Taxes" of the Notes to the Consolidated Financial Statements included in Peoples' 20182019 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.minus total non-interest expense. 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 loancredit losses and all gains and/or losses included in earnings.



54
59


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 Ended
 June 30,
2019
March 31,
2019
June 30,
2018
 June 30,
(Dollars in thousands) 20192018
Pre-provision net revenue:      
Income before income taxes$11,836
$17,746
$8,904
 $29,582
$23,028
Add: provision for loan losses626

1,188
 363
3,171
Add: loss on debt extinguishment

13
 
13
Add: net loss on OREO24
25

 49

Add: net loss on investment securities57

147
 27
146
Add: net loss on other assets274
157
330
 431
251
Add: net loss on other transactions

76
 
76
Less: net gain on OREO

14
 
9
Less: recovery of loan losses
263

 

Less: net gain on investment securities
30

 

Less: gain on other transactions5



 5

Pre-provision net revenue$12,812
$17,635
$10,644
 $30,447
$26,676
Total average assets$4,239,779
$3,985,621
$3,897,957
 $4,113,403
$3,748,331
Pre-provision net revenue to total average assets (a)1.21%1.79%1.10% 1.49%1.44%
(a) Presented on an annualized basis.      
Three Months Ended
March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands)
Pre-provision net revenue:
(Loss) income before income taxes$(921) $17,627  $17,746  
Add: provision for credit losses (a)16,969  1,136  —  
Add: net loss on OREO17  44  25  
Add: net loss on other assets70  188  157  
Less: recovery of credit losses (a)—  —  263  
Less: net gain on investment securities319  94  30  
Less: gain on other transactions—   —  
Pre-provision net revenue$15,816  $18,898  $17,635  
Total average assets$4,381,627  $4,350,414  $3,985,621  
Pre-provision net revenue to total average assets (annualized)1.45 %1.72 %1.79 %
Weighted-average common shares outstanding - diluted20,538,21420,559,12719,508,868
Pre-provision net revenue per common share - diluted$0.77$0.91$0.90
Pre-provision net revenue(a) On January 1, 2020, Peoples adopted ASU 2016-13 and implemented the CECL model. Prior to the adoption of CECL, the provision for (recovery of) credit losses was the "provision for (recovery of) loan losses." The provision for credit losses includes changes related to the allowance for credit losses on loans, which includes purchased credit deteriorated loans, held-to-maturity investment securities, and the unfunded commitment liability.
The decline in PPNR, the ratio of pre-provision net revenuePPNR, and PPNR per diluted common share to total average assets decreased in the second quarter of 2019 compared to the linked quarter, due primarily to decreased income before income taxes mainly as a result of acquisition-related expenses of $6.8 million. Compared to the second quarter of 2018, the increase in pre-provision net revenue and pre-provision net revenue to total average assetsboth comparisons was driven by higher net interest income. Pre-provision net revenuethe impact of traditional seasonal factors, combined with the recent developments related to COVID-19 and the ratioreactions of pre-provision net revenue to total average assets forgovernmental authorities, individuals and businesses, and the first six months of 2019, compared toimpact on the first six months of 2018, increased primarily due to higher income before income taxes, as both periods wereeconomy, which negatively impacted by acquisition-related expenses.revenues while expenses increased.
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, pension settlement charges, severance expenses, and COVID-19 expenses.
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
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands) 20192018(Dollars in thousands)
Core non-interest expense:   Core non-interest expense:  
Total non-interest expense$38,876
$31,860
$35,971
 $70,736
$64,192
Total non-interest expense$34,325  $33,521  $31,860  
Less: acquisition-related expenses6,770
253
6,056
 7,023
6,205
Less: acquisition-related expenses30  65  253  
Less: pension settlement chargesLess: pension settlement charges368  —  —  
Less: severance expensesLess: severance expenses13  270  —  
Less: COVID-19 expensesLess: COVID-19 expenses140  —  —  
Core non-interest expense$32,106
$31,607
$29,915
 $63,713
$57,987
Core non-interest expense$33,774  $33,186  $31,607  




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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
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands) 20192018(Dollars in thousands)
   
Efficiency ratio:   Efficiency ratio:
Total non-interest expense$38,876
$31,860
$35,971
 $70,736
$64,192
Total non-interest expense$34,325  $33,521  $31,860  
Less: amortization of other intangible assets824
694
861
 1,518
1,615
Less: amortization of other intangible assets729  888  694  
Adjusted total non-interest expense$38,052
$31,166
$35,110
 $69,218
$62,577
Adjusted total non-interest expense$33,596  $32,633  $31,166  
   
Total non-interest income$15,289
$15,429
$13,255
 $30,718
$28,224
Total non-interest income$15,737  $17,163  $15,429  
Less: net (loss) gain on investment securities(57)30
(147) (27)(146)
Less: net gain on investment securitiesLess: net gain on investment securities319  94  30  
Less: net loss on asset disposals and other transactions(293)(182)(405) (475)(331)Less: net loss on asset disposals and other transactions(87) (229) (182) 
Total non-interest income excluding net gains and losses$15,639
$15,581
$13,807
 $31,220
$28,701
Total non-interest income excluding net gains and losses$15,505  $17,298  $15,581  
   
Net interest income$36,049
$33,914
$32,808
 $69,963
$62,167
Net interest income$34,636  $35,121  $33,914  
Add: fully tax-equivalent adjustment (a)267
200
225
 467
450
Add: fully tax-equivalent adjustment (a)272  287  200  
Net interest income on a fully tax-equivalent basis$36,316
$34,114
$33,033
 $70,430
$62,617
Net interest income on a fully tax-equivalent basis$34,908  $35,408  $34,114  
   
Adjusted revenue$51,955
$49,695
$46,840
 $101,650
$91,318
Adjusted revenue$50,413  $52,706  $49,695  
   
Efficiency ratio73.24%62.71%74.96% 68.09%68.53%Efficiency ratio66.64 %61.92 %62.71 %
   
Efficiency ratio adjusted for non-core items:   Efficiency ratio adjusted for non-core items:
Core non-interest expense$32,106
$31,607
$29,915
 $63,713
$57,987
Core non-interest expense$33,774  $33,186  $31,607  
Less: amortization of other intangible assets824
694
861
 1,518
1,615
Less: amortization of other intangible assets729  888  694  
Adjusted core non-interest expense$31,282
$30,913
$29,054
 $62,195
$56,372
Adjusted core non-interest expense$33,045  $32,298  $30,913  
   
Total non-interest income excluding net gains and losses$15,639
$15,581
$13,807
 $31,220
$28,701
Core non-interest income excluding net gains and lossesCore non-interest income excluding net gains and losses$15,505  $17,298  $15,581  
Net interest income on a fully tax-equivalent basis36,316
34,114
33,033
 70,430
62,617
Net interest income on a fully tax-equivalent basis34,908  35,408  34,114  
Adjusted revenue$51,955
$49,695
$46,840
 $101,650
$91,318
Adjusted revenue$50,413  $52,706  $49,695  
   
Efficiency ratio adjusted for non-core items60.21%62.21%62.03% 61.19%61.73%Efficiency ratio adjusted for non-core items65.55 %61.28 %62.21 %
(a) Based on a 21% statutory federal corporate income tax rate.
The increase in the efficiency ratio compared toand the linked quarter was driven by an increase in acquisition-related expenses of $6.5 million. The efficiency ratio adjusted for non-core items declined comparedfor the first quarter of 2020 were negatively impacted by traditional seasonal factors, combined with the recent developments related to both the linked quarterCOVID-19 and the second quarterreactions of 2018, mostly due to higher net interest income. Management is targeting an efficiency ratiogovernmental authorities, individuals and businesses, and the impact on the economy. These factors drove the decline in revenue, while expenses increased.


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Table of 59% to 61% for the full year of 2019, after excluding acquisition-related expenses and other non-core acquisition-related expenses.Contents
Return on Average Assets Adjusted for Non-Core Items Ratio (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 ratio represents a non-US GAAP financial measure since it excludes the after-tax impact of all gains and losses, acquisition-related expenses, pension settlement charges, severance expenses, and acquisition-related expenses.


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COVID-19 expenses..
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
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands) 20192018(Dollars in thousands)
   
Annualized net income adjusted for non-core items:  
Net income$9,598
$14,369
$7,892
 $23,967
$19,633
Add: net loss on investment securities57

147
 27
146
Less: tax effect of net loss on investment securities (a)12

31
 6
31
Annualized net (loss) income adjusted for non-core items:Annualized net (loss) income adjusted for non-core items:
Net (loss) incomeNet (loss) income$(765) $14,860  $14,369  
Less: net gain on investment securities
30

 

Less: net gain on investment securities319  94  30  
Add: tax effect of net gain on investment securities (a)
6

 

Add: tax effect of net gain on investment securities (a)67  20   
Add: net loss on asset disposals and other transactions293
182
405
 475
331
Add: net loss on asset disposals and other transactions87  229  182  
Less: tax effect of net loss on asset disposals and other transactions (a)62
38
85
 100
70
Less: tax effect of net loss on asset disposals and other transactions (a)18  48  38  
Add: acquisition-related expenses6,770
253
6,056
 7,023
6,205
Add: acquisition-related expenses30  65  253  
Less: tax effect of acquisition-related expenses (a)1,422
53
1,272
 1,475
1,303
Less: tax effect of acquisition-related expenses (a) 14  53  
Net income adjusted for non-core items$15,222
$14,689
$13,112
 $29,911
$24,911
Days in the quarter91
90
91
 181
181
Add: pension settlement chargesAdd: pension settlement charges368  —  —  
Less: tax effect of pension settlement charges (a)Less: tax effect of pension settlement charges (a)77  —  —  
Add: severance expensesAdd: severance expenses13  270  —  
Less: tax effect of severance expenses (a)Less: tax effect of severance expenses (a) 57  —  
Add: COVID-19 expensesAdd: COVID-19 expenses140  —  —  
Less: tax effect of COVID-19 (a)Less: tax effect of COVID-19 (a)29  —  —  
Net (loss) income adjusted for non-core items (after tax)Net (loss) income adjusted for non-core items (after tax)$(512) $15,231  $14,689  
Days in the periodDays in the period91  92  90  
Days in the year365
365
365
 365
365
Days in the year366  365  365  
Annualized net income$38,497
$58,274
$31,655
 $48,331
$39,591
Annualized net income adjusted for non-core items$61,055
$59,572
$52,592
 $60,318
$50,235
Annualized net (loss) incomeAnnualized net (loss) income$(3,077) $58,955  $58,274  
Annualized net (loss) income adjusted for non-core items (after tax)Annualized net (loss) income adjusted for non-core items (after tax)$(2,059) $60,427  $59,572  
Return on average assets:   Return on average assets:
Annualized net income$38,497
$58,274
$31,655
 $48,331
$39,591
Annualized net (loss) incomeAnnualized net (loss) income$(3,077) $58,955  $58,274  
Total average assets4,239,779
3,985,621
3,897,957
 4,113,403
3,748,331
Total average assets4,381,627  4,350,414  3,985,621  
Return on average assets0.91%1.46%0.81% 1.17%1.06%Return on average assets(0.07)%1.36 %1.46 %
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
$50,235
Annualized net (loss) income adjusted for non-core items (after tax)Annualized net (loss) income adjusted for non-core items (after tax)$(2,059) $60,427  $59,572  
Total average assets4,239,779
3,985,621
3,897,957
 4,113,403
3,748,331
Total average assets4,381,627  4,350,414  3,985,621  
Return on average assets adjusted for non-core items1.44%1.49%1.35% 1.47%1.34%Return on average assets adjusted for non-core items(0.05)%1.39 %1.49 %
(a) Based on a 21% statutory federal corporate income tax rate.
The returnnegative returns on average assets declined in the second quarter of 2019 compared to the linked quarter, driven by an increase in acquisition-related expenses of $6.5 million compared to the linked quarter, combined with higher average assets which resulted from the First Prestonsburg merger. Compared to the second quarter of 2018, the increase in return on average assets 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 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 secondfirst quarter of 2019 compared to the linked quarter,2020 were driven by the increase in average assets, combined with relatively unchanged non-interest income. Compared$17.0 million provision for credit losses recorded for expected credit losses due to the secondeconomic downturn related to the impacts of COVID-19 pandemic during the quarter and the resulting impact on the economic assumptions used in estimating the allowance of 2018,credit losses under 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 increasedCECL model. Future provisioning will be directly related to changes 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,economic assumptions, mainly U.S. and higher non-interest income compared to theOhio unemployment levels and Ohio Gross Domestic Product, as well as other credit quality indicators.




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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 Ratio (non-US GAAP)
The return on average tangible equity ratio is a key financial measure used to monitor performance. The return on tangible equityThis ratio is calculated as annualized net income (less after-tax impact of amortization of other intangible assets) divided by tangible equity. The return on tangible equity is calculated as net(loss) income (less the after-tax impact of amortization of other intangible assets) divided by average 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
June 30,
2019
March 31,
2019
June 30,
2018
 June 30,March 31,
2020
December 31,
2019
March 31,
2019
(Dollars in thousands) 20192018(Dollars in thousands)
Annualized net income excluding amortization of other intangible assets:  
Net income$9,598
$14,369
$7,892
 $23,967
$19,633
Annualized net (loss) income excluding amortization of other intangible assets:Annualized net (loss) income excluding amortization of other intangible assets:
Net (loss) incomeNet (loss) income$(765) $14,860  $14,369  
Add: amortization of other intangible assets824
694
861
 1,518
1,615
Add: amortization of other intangible assets729  888  694  
Less: tax effect of amortization of other intangible assets (a)173
146
181
 319
339
Less: tax effect of amortization of other intangible assets (a)153  186  146  
Net income excluding amortization of other intangible assets$10,249
$14,917
$8,572
 $25,166
$20,909
Days in the quarter91
90
91
 181
181
Net (loss) income excluding amortization of other intangible assetsNet (loss) income excluding amortization of other intangible assets$(189) $15,562  $14,917  
Days in the periodDays in the period91  92  90  
Days in the year365
365
365
 365
365
Days in the year366  365  365  
Annualized net income$38,497
$58,274
$31,655
 $48,331
$39,591
Annualized net income excluding amortization of other intangible assets$41,109
$60,497
$34,382
 $50,749
$42,165
Annualized net (loss) incomeAnnualized net (loss) income$(3,077) $58,955  $58,274  
Annualized net (loss) income excluding amortization of other intangible assetsAnnualized net (loss) income excluding amortization of other intangible assets$(760) $61,741  $60,497  
Average tangible equity:Average tangible equity:   Average tangible equity:
Total average stockholders' equity$564,992
$524,196
$489,876
 $544,706
$472,152
Total average stockholders' equity$596,246  $591,112  $524,196  
Less: average goodwill and other intangible assets175,169
161,673
161,600
 168,458
152,943
Less: average goodwill and other intangible assets177,984  178,163  161,673  
Average tangible equity$389,823
$362,523
$328,276
 $376,248
$319,209
Average tangible equity$418,262  $412,949  $362,523  
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
$39,591
Annualized net (loss) incomeAnnualized net (loss) income$(3,077) $58,955  $58,274  
Average stockholders' equity$564,992
$524,196
$489,876
 $544,706
$472,152
Average stockholders' equity$596,246  $591,112  $524,196  
Return on average stockholders' equity6.81%11.12%6.46% 8.87%8.39%Return on average stockholders' equity(0.52)%9.97 %11.12 %
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
$42,165
Annualized net (loss) income excluding amortization of other intangible assetsAnnualized net (loss) income excluding amortization of other intangible assets$(760) $61,741  $60,497  
Average tangible equity$389,823
$362,523
$328,276
 $376,248
$319,209
Average tangible equity$418,262  $412,949  $362,523  
Return on average tangible equity10.55%16.69%10.47% 13.49%13.21%Return on average tangible equity(0.18)%14.95 %16.69 %
(a) Based on a 21% statutory federal corporate income tax rate.
The returnnegative returns on average stockholders' equity and on average tangible stockholders' equity ratios were impacted byduring the First Prestonsburg acquisition, which created increases in capital and decreased income for the secondfirst quarter of 20192020 were primarily due to the acquisition-related costs. The return$17.0 million provision for credit losses recorded for expected credit losses due to the economic downturn related to the COVID-19 pandemic during the quarter and the resulting impact on average stockholders' equity and on average tangible stockholders' equity ratios increasedthe economic assumptions used in estimating the allowance of credit losses under the CECL model, which resulted in a net loss for the first six monthsquarter of 2019 compared to the first six months of 2018, reflecting an increase in net income, which was partially offset by dividends declared and paid during the period.

2020.


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FINANCIAL CONDITION
Cash and Cash Equivalents
At June 30, 2019,March 31, 2020, Peoples' interest-bearing deposits in other banks increased $20.9$45.2 million from December 31, 2018. 2019. The total cash and cash equivalent balance included $19.8$34.6 million of excess cash reserves being maintained at the FRB of Cleveland at June 30, 2019,March 31, 2020, compared to $11.2$15.6 million at December 31, 2018.2019. 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 sixthree months of 2019,2020, Peoples' total cash and cash equivalents increased $15.8$48.5 million as Peoples' net cash provided used in financinginvesting activities of $71.2$51.1 million was less than the sum of net cash provided by investingfinancing and operating activities of $68.2$81.3 million and $18.8$18.2 million, respectively. Peoples' investing activities reflected a net decrease of $29.2$32.3 million in loans and $145.2$72.9 million in purchases of available-for-sale investment securities, which were partially offset by $68.7 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$107.0 million net increase in deposits and $50.0 million of proceeds from long-term borrowings, offset partially by a decrease of $57.3 million in short-term borrowings, as well as $12.5the purchase of $10.2 million of treasury stock under the share repurchase program and $6.9 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)March 31,
2020
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
Available-for-sale securities, at fair value:    
Obligations of:               
U.S. government sponsored agencies$6,361  $8,209  $12,145  $19,051  $—  
States and political subdivisions108,812  114,104  115,613  125,418  84,827  
Residential mortgage-backed securities823,893  791,009  835,172  748,132  706,976  
Commercial mortgage-backed securities17,061  18,088  20,461  22,664  6,649  
Bank-issued trust preferred securities4,708  4,691  4,644  4,099  4,118  
Total fair value$960,835  $936,101  $988,035  $919,364  $802,570  
Total amortized cost$932,179  $929,395  $976,286  $910,431  $806,641  
Net unrealized gain (loss)$28,656  $6,706  $11,749  $8,933  $(4,071) 
Held-to-maturity securities, at amortized cost:
Obligations of:
States and political subdivisions (a)3,838  $4,346  $4,395  $4,398  $4,401  
Residential mortgage-backed securities29,070  21,494  22,412  23,335  28,348  
Commercial mortgage-backed securities5,830  5,907  7,022  7,106  2,857  
Total amortized cost$38,738  $31,747  $33,829  $34,839  $35,606  
Other investment securities$46,924  $42,730  $43,045  $43,508  $41,449  
Total investment securities:
Amortized cost$1,017,841  $1,003,872  $1,053,160  $988,778  $883,696  
Carrying value$1,046,497  $1,010,578  $1,064,909  $997,711  $879,625  
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Available-for-sale securities, at fair value:    
Obligations of:     
U.S. Treasury and government agencies$
$
$
$
$43
U.S. government sponsored agencies19,051




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



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

    
Amortized cost$988,778
$883,696
$884,601
$900,265
$897,058
Carrying value$997,711
$879,625
$871,837
$874,159
$876,765
(a) Amortized cost is presented net of the allowance for credit losses of $6,000.

During the second quarter of 2019, Peoples acquired, in the First Prestonsburg acquisition, investment securities totaling $140.7 million and subsequently sold approximately $65.1 million of acquired available-for-sale investment securities. In April and May of 2019, $53.7 million in proceeds were reinvested. Available-for-sale residential mortgage-backed securities


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were up atAt March 31, 2019,2020, available-for-sale securities were up compared to December 31, 2018,2019 primarily due to an increaseincreases in fair value driven by overall declines in market interest rates during the quarter. Atfirst quarter of 2020. Compared to December 31, 2018,2019, the amortized cost of available-for-saleincrease in held-to-maturity securities declinedwas driven by purchases during the quarter. The increases in investment securities at March 31, 2020 compared to September 30, 2018, asMarch 31, 2019 was driven by the investment securities maturedacquired in the First Prestonsburg acquisition, combined with increases in fair value driven by overall declines in market interest rates during the latter half of 2019 and were not replaced.the first quarter of 2020.
Additional information regarding Peoples' investment portfolio can be found in "Note 3 Investment Securities" of the Notes to the Unaudited Consolidated Financial Statements.



59
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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
(Dollars in thousands)March 31,
2020
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
Gross originated loans: 
Commercial real estate, construction$102,904
$116,992
$124,013
$103,562
$107,255
Originated loans:Originated loans: 
ConstructionConstruction$106,415  $83,283  $100,338  $102,904  $116,992  
Commercial real estate, other641,061
630,679
632,200
630,720
650,512
Commercial real estate, other707,339  671,576  659,103  641,061  630,679  
Commercial real estate743,965
747,671
756,213
734,282
757,767
Commercial real estate813,754  754,859  759,441  743,965  747,671  
Commercial and industrial548,460
558,070
530,207
510,591
471,270
Commercial and industrial611,791  622,175  564,279  548,460  558,070  
Residential real estate299,173
297,667
296,860
299,768
299,934
Residential real estate293,078  314,935  308,964  299,173  297,667  
Home equity lines of credit90,374
90,831
93,326
92,892
89,957
Home equity lines of credit91,344  93,013  92,910  90,374  90,831  
Consumer, indirect419,595
410,172
407,167
396,701
373,384
Consumer, indirect418,022  417,127  423,217  419,595  410,172  
Consumer, direct72,209
69,710
71,674
72,601
71,545
Consumer, direct71,230  70,852  72,699  72,209  69,710  
Consumer491,804
479,882
478,841
469,302
444,929
Consumer489,252  487,979  495,916  491,804  479,882  
Deposit account overdrafts676
518
583
649
860
Deposit account overdrafts610  878  1,081  676  518  
Total originated loans$2,174,452
$2,174,639
$2,156,030
$2,107,484
$2,064,717
Total originated loans$2,299,829  $2,273,839  $2,222,591  $2,174,452  $2,174,639  
Gross acquired loans (a): 
Commercial real estate, construction$6,775
$7,966
$12,404
$13,050
$14,780
Acquired loans (a):Acquired loans (a):
ConstructionConstruction$4,450  $5,235  $4,435  $6,775  $7,966  
Commercial real estate, other201,909
171,785
184,711
191,993
207,195
Commercial real estate, other190,478  161,662  171,096  201,909  171,785  
Commercial real estate208,684
179,751
197,115
205,043
221,975
Commercial real estate194,928  166,897  175,531  208,684  179,751  
Commercial and industrial51,506
34,837
35,537
41,188
40,938
Commercial and industrial42,739  40,818  43,961  51,506  34,837  
Residential real estate348,439
308,137
296,937
308,178
309,629
Residential real estate332,288  346,541  358,053  348,439  308,137  
Home equity lines of credit41,262
38,084
40,653
42,961
45,933
Home equity lines of credit36,667  39,691  41,942  41,262  38,084  
Consumer, indirect90
111
136
161
198
Consumer, indirect44  58  67  90  111  
Consumer, direct9,100
2,021
2,370
2,712
3,101
Consumer, direct4,942  5,681  8,171  9,100  2,021  
Consumer9,190
2,132
2,506
2,873
3,299
Consumer4,986  5,739  8,238  9,190  2,132  
Total acquired loans$659,081
$562,941
$572,748
$600,243
$621,774
Total acquired loans$611,608  $599,686  $627,725  $659,081  $562,941  
Total loans$2,833,533
$2,737,580
$2,728,778
$2,707,727
$2,686,491
Total loans$2,911,437  $2,873,525  $2,850,316  $2,833,533  $2,737,580  
Average total loans$2,830,558
$2,734,592
$2,718,620
$2,717,200
$2,627,777
Average allowance for loan losses(21,311)(20,406)(20,079)(19,584)(19,071)
Average loans, net of average allowance for loan losses$2,809,247
$2,714,186
$2,698,541
$2,697,616
$2,608,706
Percent of loans to total loans: Percent of loans to total loans: 
Commercial real estate, construction3.9%4.6%5.1%4.3%4.5%
ConstructionConstruction3.8 %3.1 %3.8 %3.9 %4.6 %
Commercial real estate, other29.7%29.3%29.9%30.4%31.9%Commercial real estate, other30.8 %29.0 %29.1 %29.7 %29.3 %
Commercial real estate33.6%33.9%35.0%34.7%36.4% Commercial real estate34.6 %32.1 %32.9 %33.6 %33.9 %
Commercial and industrial21.2%21.7%20.7%20.3%19.1%Commercial and industrial22.5 %23.1 %21.3 %21.2 %21.7 %
Residential real estate22.9%22.1%21.8%22.5%22.7%Residential real estate21.5 %23.0 %23.4 %22.9 %22.1 %
Home equity lines of credit4.6%4.7%4.9%5.0%5.1%Home equity lines of credit4.4 %4.6 %4.7 %4.6 %4.7 %
Consumer, indirect14.8%15.0%14.9%14.7%13.9%Consumer, indirect14.4 %14.5 %14.9 %14.8 %15.0 %
Consumer, direct2.9%2.6%2.7%2.8%2.8%Consumer, direct2.6 %2.7 %2.8 %2.9 %2.6 %
Consumer17.7%17.6%17.6%17.5%16.7% Consumer17.0 %17.2 %17.7 %17.7 %17.6 %
Deposit account overdrafts (b)NM
NM
NM
NM
NM
Total percentage100.0%100.0%100.0%100.0%100.0%Total percentage100.0 %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
Residential real estate loans being serviced for others$503,158  $496,802  $488,724  $473,443  $464,575  
(a)
(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 June 30, 2019, balances in loan accounts acquired from First Prestonsburg totaled $125.3 million, including $52.1 million in residential real estate loans, $42.4 million in commercial real estate loans, $7.4 million in consumer, direct loans, $17.7 million in commercial and industrial loans, and $5.8 million in home equity lines of credit.
Period-end total loan balances at June 30,March 31, 2020 increased $37.9 million, or 5% annualized, compared to December 31, 2019, increased $96.0and $173.9 million, or 6%, compared to March 31, 2019.
The increase compared to December 31, 2019 was driven by growth in originated and acquired commercial real estate loan balances, and originated construction loan balances. These increases were partially offset by declines in originated and acquired residential real estate loan balances and originated commercial and industrial loan balances.
The increase compared to March 31, 2019 $104.8 million compared to December 31, 2018, and $147.0 million compared to June 30, 2018. Originatedwas driven by originated loan balances, declined $187,000which increased $125.2 million, or 6%. The increase in originated loan balances compared to March 31, 2019, and increased $18.4 million compared to December 31, 2018, and $109.7 million compared to June 30, 2018. Loan originations during the first half of 2019 were higher thanwas driven by growth in recent years for the same period, however, significantly higher loan paydowns experienced during the first half of 2019 minimized the impact of the increased production on loan growth for all comparison periods. Compared to period-end totaloriginated commercial real estate loan balances at March 31, 2019,and originated commercial and industrial loan balances, declined $9.6 million, partially offset by growtha decline in originated consumer indirect loans of $9.4 million.
Commercial and industrialconstruction loan balances. Acquired loan balances grew $18.3increased $48.7 million, compared to December 31, 2018. Growth inor 9%, driven by loans acquired from First Prestonsburg and the purchase of residential real estate loansloans.

60

Table of $71.2 million was driven by the First Prestonsburg acquisition, combined with the purchase of $19.0 million of 1-4 family first lien mortgages, during the first quarter of 2019.Contents
Compared to June 30, 2018, originated loan growth of $109.7 million, or 5%, was led by an increase in commercial and industrial loans of $77.2 million, or 16%, and indirect consumer lending growth of $46.2 million, or 12%.
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 June 30, 2019:March 31, 2020:
(Dollars in thousands)Outstanding BalanceLoan CommitmentsTotal Exposure% of Total
Construction:            
Assisted living facilities and nursing homes$29,020  $32,719  $61,739  31.5 %
Apartment complexes24,780  24,450  49,230  25.1 %
Educational services18,623  —  18,623  9.5 %
Mixed used facilities6,650  663  7,313  3.7 %
Land development4,786  2,161  6,947  3.5 %
Retail3,431  2,363  5,794  3.0 %
Land only5,031  851  5,882  3.0 %
Residential property1,880  3,386  5,266  2.7 %
Office buildings3,178  2,176  5,354  2.7 %
Other (a)13,486  16,593  29,977  15.3 %
Total construction$110,865  $85,362  $196,125  100.0 %
(a) All other outstanding balances are less than 2% of the total loan portfolio.

(Dollars in thousands)Outstanding BalanceLoan CommitmentsTotal Exposure% of Total
Commercial real estate, construction:    
Assisted living facilities and nursing homes$17,745
$29,268
$47,013
23.7%
Apartment complexes15,767
14,818
30,585
15.4%
Educational services8,538
19,895
28,433
14.3%
Office buildings15,775
7,702
23,477
11.8%
Mixed used facility17,729
4,902
22,631
11.4%
Industrial8,271

8,271
4.2%
Child care5,930
95
6,025
3.0%
Retail1,797
4,035
5,832
2.9%
Warehouse4,280
1,333
5,613
2.9%
Residential property2,465
2,714
5,179
2.6%
Other (a)11,382
4,057
15,439
7.8%
Total commercial real estate, construction$109,679
$88,819
$198,498
100.0%
61
(a)All other outstanding balances are less than 2% of the total loan portfolio.


67


(Dollars in thousands)Outstanding BalanceLoan CommitmentsTotal Exposure% of Total
Commercial real estate, other:    
Office buildings and complexes:      
Owner occupied$74,850  $3,180  $78,030  8.9 %
Non-owner occupied66,680  4,126  70,806  8.1 %
Total office buildings and complexes141,530  7,306  148,836  17.0 %
Mixed-use facilities:
Owner occupied58,394  1,493  59,887  6.9 %
Non-owner occupied42,580  532  43,112  4.9 %
Total mixed-use facilities100,974  2,025  102,999  11.8 %
Retail facilities:         
Owner occupied39,005  612  39,617  4.5 %
Non-owner occupied56,931  98  57,029  6.5 %
Total retail facilities95,936  710  96,646  11.0 %
Apartment complexes83,031  4,596  87,627  10.0 %
Warehouse facilities64,935  6,528  71,463  8.2 %
Light industrial facilities:   
Owner occupied45,602  1,078  46,680  5.3 %
Non-owner occupied22,235  1,088  23,323  2.7 %
Total light industrial facilities67,837  2,166  70,003  8.0 %
Lodging and lodging related52,396  846  53,242  6.1 %
Assisted living facilities and nursing homes42,710  250  42,960  4.9 %
Land only18,611  1,679  20,290  2.3 %
Day care facilities:
     Owner occupied16,143  544  16,687  1.9 %
Non-owner occupied2,288  —  2,288  0.3 %
Total day care facilities18,431  544  18,975  2.2 %
Health care facilities:
Owner occupied8,539  140  8,679  1.0 %
Non-owner occupied9,859   9,861  1.1 %
Total health care facilities18,398  142  18,540  2.1 %
Gas station facilities:            
Owner occupied12,718  —  12,718  1.5 %
Non-owner occupied4,543  —  4,543  0.5 %
Total gas station facilities17,261  —  17,261  2.0 %
Other (a)175,767  4,281  125,046  14.4 %
Total commercial real estate, other$897,817  $31,073  $873,888  100.0 %
(a) All other outstanding balances are less than 2% of the total loan portfolio.
(Dollars in thousands)Outstanding BalanceLoan CommitmentsTotal Exposure% of Total
Commercial real estate, other:    
Office buildings and complexes:    
Owner occupied$73,617
$1,822
$75,439
8.6%
Non-owner occupied52,739
4,591
57,330
6.5%
Total office buildings and complexes126,356
6,413
132,769
15.1%
Mixed-use facilities:    
Owner occupied36,567
864
37,431
4.3%
Non-owner occupied71,527
785
72,312
8.2%
Total mixed-use facilities108,094
1,649
109,743
12.5%
Apartment complexes77,535
849
78,384
8.9%
Retail facilities:    
Owner occupied29,202
714
29,916
3.5%
Non-owner occupied39,602
98
39,700
4.5%
Total retail facilities68,804
812
69,616
8.0%
Industrial facilities:    
Owner occupied46,056
127
46,183
5.2%
Non-owner occupied16,782
1,088
17,870
2.0%
Total light industrial facilities62,838
1,215
64,053
7.2%
Warehouse facilities56,048
4,898
60,946
6.9%
Lodging and lodging related30,901

30,901
3.5%
Assisted living facilities and nursing homes30,915
282
31,197
3.5%
Land only16,383
2,177
18,560
2.1%
Other (a)265,096
18,693
283,788
32.3%
Total commercial real estate, other$842,970
$36,988
$879,957
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, Kentucky and West Virginia and Kentucky.Virginia. In all other states, the aggregate outstanding balances of commercial loans in each state were not material at either June 30, 2019March 31, 2020 or December 31, 2018.2019.

COVID-19 Loan Impacts
Small Business Administration Paycheck Protection Program
In March 2020, the CARES Act created a new loan guarantee program called the PPP targeted to provide small businesses with support to cover payroll and certain other expenses. Loans made under the PPP are fully guaranteed by the SBA. The PPP loans also afford borrowers forgiveness up to the principal amount of the PPP covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll or to make certain mortgage interest, lease and utility payments, and certain other criteria are satisfied. The SBA will reimburse PPP lenders for any amount of a PPP covered loan that is forgiven, and PPP lenders will not be held liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness. Peoples is a PPP participating lender, and has authorized approximately $480 million of loans through May 1, 2020. Peoples will continue to provide PPP loans, to the extent that increases are made to the program.


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JobsOhio Partnership
Peoples has also been selected to partner with JobsOhio, a private nonprofit organization charged with economic development. JobsOhio will provide a 90% guarantee on the first $25 million of increased exposure to small businesses, where customers may obtain up to $200,000 of additional financing, subject to certain eligibility requirements.
Payment Relief and Loan Modifications
Peoples is also providing relief solutions to consumer and commercial borrowers. For consumer borrowers, Peoples is providing interest-only payment options to customers for a period of up to 90 days, with the ability to extend if needed and qualifications are met. Peoples is also providing forbearance to its consumer borrowers which allows to defer their principal and interest payments for up to 90 days for non-residential real estate consumer loans and up to 180 days for residential real estate consumer loans. As of May 1, 2020, Peoples had approved forbearance or payment relief for 1,137 customers, for loan balances of $39 million, and executed forbearance or payment relief for over 819 consumer loan customers, with loan balances of nearly $22 million, in obtaining relief through forbearance programs or deferred payments.
In addition, for commercial borrowers who meet certain criteria, Peoples is providing principal and interest deferrals, and increased financing. As of May 1, 2020, Peoples had approved $534 million of loan modifications to commercial loan customers. Peoples will continue to work with its customers in identifying relief solutions during this economic downturn.
Portfolio Exposure
Peoples has evaluated its portfolio exposure to certain industries most impacted by the COVID-19 pandemic, which includes restaurants, lodging and lodging related businesses, floorplans, office and retail facilities, as well as daycare facilities. Peoples has been proactive in working with clients within these industries, and is keeping in close communication. Peoples has made loan modifications, when it is prudent to do so, and is monitoring early warnings signs of risk within these industry segments. These segments comprise approximately 70% of the total commercial loan modifications approved in response to COVID-19.
Below is a table detailing Peoples' outstanding balance of loans within certain industries that have been impacted:
(Dollars in thousands)Outstanding Balance% of Total LoansLoan-to-ValueTotal Commitment
Restaurants$157,485  5.4 %62.1 %$171,051  
Multifamily117,175  4.0 %60.1 %146,225  
Floorplans (a)96,536  3.3 %100.0 %128,350  
Assisted living facilities and nursing homes79,515  2.7 %72.9 %111,084  
Lodging and lodging related70,605  2.4 %64.8 %82,203  
Total$521,316  17.8 %$638,913  
(a) Individual units financed under dealer floor plan agreements are generally financed in line with industry standards at 100% of manufacturer invoice, auction cost, or wholesale value.
Approximately 77% of Peoples' outstanding balance to restaurants is to McDonald's franchise operators, which have additional guarantor support, as well as corporate assistance with rent and service fee deferments. Of the remaining outstanding balance of restaurant loans, approximately 20% are enhanced with SBA guarantees. As of May 1, 2020, Peoples had modified approximately $129 million of restaurant loans. Peoples approved $121 million in modifications to McDonald’s operators and $8 million to non-McDonald’s operators. The total portfolio outstanding balances of non-McDonald’s operators was $37 million at March 31, 2020.
In addition, for multifamily loans, Peoples has sponsors with extensive experience and substantial liquidity. The top five relationships, in terms of aggregate credit exposures, account for 40% of the portfolio balances. The top five relationships consist of five properties with an average loan-to-value of 68%. Peoples' commercial loan policy for this specific property type is a maximum loan-to-value of 80%. These relationships have average liquidity greater than $1 million. Additional support is provided by guarantor strength on the majority of these relationships. The largest loan in the portfolio accounts for 14% of the portfolio balance. The loan has notable guarantor support, with a reported unencumbered liquidity level of more than $200 million.
For floorplan loans, Peoples has a robust monitoring and audit process, and performs collateral audits frequently.
Approximately 80% of the assisted living facilities and nursing homes are private pay and are not dependent upon Medicare, and as of May 1, 2020, Peoples had no requests from these customers for relief.

63

The majority of Peoples' lodging and lodging related outstanding balances are larger established franchises. The top five relationships, in terms of aggregate credit exposures, account for 84% of the portfolio balance. The top five relationships consist of six properties with an average loan-to-value of 56%. Peoples' commercial loan policy for this specific property type is a maximum loan-to-value of 65%. These relationships have average liquidity of greater than $1 million. Additional support is provided by guarantor strength on the majority of these relationships. As of May 1, 2020, Peoples had modified approximately $70 million of lodging and lodging related loans.
Peoples' exposure to energy loans was not material at March 31, 2020. Energy loan balances were $6.1 million, or less than 1% of total loans, as of March 31, 2020, with a total commitment of $8.7 million. Peoples' energy loans are mostly operators with support services for oil and gas companies.
Allowance for LoanCredit Losses
The amount of the allowance for loancredit 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 incurredexpected within the loan portfolio.
The following details management's allocation of the allowance for loancredit losses:
(Dollars in thousands)March 31,
2020
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
Commercial real estate$13,884  $7,333  $8,466  $8,245  $8,297  
Commercial and industrial8,743  8,432  7,162  7,197  6,743  
     Total commercial22,627  15,765  15,628  15,442  15,040  
Residential real estate5,744  1,191  1,162  1,184  1,213  
Home equity lines of credit1,695  546  567  598  608  
Consumer, indirect10,878  2,937  3,247  3,172  3,133  
Consumer, direct1,803  294  339  342  351  
    Consumer12,681  3,231  3,586  3,514  3,484  
Deposit account overdrafts86  94  128  86  61  
Originated allowance for credit losses42,833  20,827  21,071  20,824  20,406  
Acquired allowance for credit losses(1)
—  729  514  533  533  
Allowance for credit losses(2)
$42,833  $21,556  $21,585  $21,357  $20,939  
As a percent of total loans1.47 %0.75 %0.76 %0.75 %0.76 %
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Commercial real estate$8,245
$8,297
$8,003
$7,966
$8,271
Commercial and industrial7,197
6,743
6,178
6,138
5,365
     Total commercial15,442
15,040
14,181
14,104
13,636
Residential real estate1,184
1,213
1,214
999
1,005
Home equity lines of credit598
608
618
708
618
Consumer, indirect3,172
3,133
3,214
3,423
3,339
Consumer, direct342
351
351
395
465
    Consumer3,514
3,484
3,565
3,818
3,804
Deposit account overdrafts86
61
81
95
95
Originated allowance for loan losses20,824
20,406
19,659
19,724
19,158
Acquired allowance for loan losses533
533
536
155
108
Allowance for loan losses$21,357
$20,939
$20,195
$19,879
$19,266
As a percent of total loans0.75%0.76%0.74%0.73%0.72%
(1) As of March 31, 2020, the amounts previously included in "acquired allowance for credit losses" is included in the originated allowance for credit losses under the current expected credit loss model.
(2) As of March 31, 2020, Peoples calculated the allowance for credit losses using the current expected credit loss model, while previous periods used the incurred loss model.
At June 30, 2019,March 31, 2020, the allowance for loan losses was $21.4$42.8 million, compared to $20.2$21.6 million at December 31, 20182019 and $19.3$20.9 million at June 30, 2018.March 31, 2019. The ratio of the allowance for loan losses as a percent of total loans was 0.75%1.47% at June 30, 2019,March 31, 2020, compared to 0.74%0.75% at December 31, 20182019 and 0.72%0.76% at June 30, 2018. The ratio includes all acquired loans, from both First Prestonsburg and previous acquisitions since 2012,March 31, 2019. Peoples implemented ASU 2016-13 on January 1, 2020, which resulted in an increase of $659.1$5.8 million andin allowance for acquired loan losses of $533,000.credit losses. The remaining significant increase in the allowance for loancredit losses over time was mainly the result of loan growth. The increase during the first quarter ofat March 31, 2020 compared to December 31, 2019 was also impacted bymostly due to the specific reserve on a non-accrual loan.
The significant allocations ofrecent COVID-19 pandemic, and the resulting impact to economic forecasts utilized in the CECL model. Peoples calculates its allowance for loancredit losses to commercial loans reflect the higher credit risk associated with this type of lendingusing a discounted cash flow model, and incorporates economic forecasts, including U.S. unemployment, Ohio unemployment, Ohio Gross Domestic Product, and the sizeOhio Case Shiller Home Price Indices as economic factors. The economic forecast used in the March 31, 2020 calculation of this loan categorythe allowance for credit losses included higher unemployment rates and lower Ohio Gross Domestic Product, which drove much of the increase in relationshipthe allowance for credit losses at March 31, 2020.
Additional information regarding Peoples' allowance for credit losses can be found in "Note 1 Summary of Significant Accounting Policies" and "Note 4 Loans" of the Notes 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.

Unaudited Consolidated Financial Statements.


6964


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
(Dollars in thousands)March 31,
2020
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
Gross charge-offs:     Gross charge-offs:  
Commercial real estate, other$43
$113
$
$
$7
Commercial real estate, other$10  $—  $—  $43  $113  
Commercial and industrial
63


7
Commercial and industrial937  738  261  —  63  
Residential real estate67
109
64
66
82
Residential real estate118  55  81  67  109  
Home equity lines of credit
9
40
10
20
Home equity lines of credit14  10  36  —   
Consumer, indirect346
473
548
488
550
Consumer, indirect721  563  447  346  473  
Consumer, direct33
63
61
78
109
Consumer, direct62  61  54  33  63  
Consumer379
536
609
566
659
Consumer783  624  501  379  536  
Deposit account overdrafts176
173
234
311
215
Deposit account overdrafts213  219  283  176  173  
Total gross charge-offs$665
$1,003
$947
$953
$990
Total gross charge-offs$2,075  $1,646  $1,162  $665  $1,003  
Recoveries: Recoveries:      
Commercial real estate, other$2
$10
$2
$15
$28
Commercial real estate, other$116  $53  $86  $ $10  
Commercial and industrial228
1,784
8
10

Commercial and industrial1,204  322  81  228  1,784  
Residential real estate102
31
133
32
41
Residential real estate57   87  102  31  
Home equity lines of credit1
1
2
3
2
Home equity lines of credit     
Consumer, indirect47
115
71
131
138
Consumer, indirect125  41  67  47  115  
Consumer, direct27
13
25
31
15
Consumer, direct14    27  13  
Consumer74
128
96
162
153
Consumer139  48  72  74  128  
Deposit account overdrafts50
56
45
44
46
Deposit account overdrafts60  48  51  50  56  
Total recoveries$457
$2,010
$286
$266
$270
Total recoveries$1,577  $481  $385  $457  $2,010  
Net charge-offs (recoveries): Net charge-offs (recoveries):               
Commercial real estate, other$41
$103
$(2)$(15)$(21)Commercial real estate, other$(106) $(53) $(86) $41  $103  
Commercial and industrial(228)(1,721)(8)(10)7
Commercial and industrial(267) 416  180  (228) (1,721) 
Residential real estate(35)78
(69)34
41
Residential real estate61  46  (6) (35) 78  
Home equity lines of credit(1)8
38
7
18
Home equity lines of credit13   28  (1)  
Consumer, indirect299
358
477
357
412
Consumer, indirect596  522  380  299  358  
Consumer, direct6
50
36
47
94
Consumer, direct48  54  49   50  
Consumer305
408
513
404
506
Consumer644  576  429  305  408  
Deposit account overdrafts126
117
189
267
169
Deposit account overdrafts153  171  232  126  117  
Total net charge-offs (recoveries)$208
$(1,007)$661
$687
$720
Total net charge-offs (recoveries)$498  $1,165  $777  $208  $(1,007) 
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 estate, otherCommercial real estate, other(0.01)%— %(0.01)%0.01 %0.02 %
Commercial real estate0.01 %0.02 % %%%Commercial real estate(0.01)%(0.01)%(0.01)%0.01 %0.02 %
Commercial and industrial(0.03)%(0.26)% %%%Commercial and industrial(0.04)%0.06 %0.03 %(0.03)%(0.26)%
Residential real estate %0.01 %(0.01)%%0.01%Residential real estate0.01 %0.01 %— %— %0.01 %
Home equity lines of credit % % %%%
Consumer, indirect0.03 %0.05 %0.07 %0.05%0.06%Consumer, indirect0.08 %0.07 %0.05 %0.03 %0.05 %
Consumer, other %0.01 %0.01 %0.01%0.01%Consumer, other0.01 %0.01 %0.01 %— %0.01 %
Consumer0.03 %0.06 %0.08 %0.06%0.07% Consumer0.09 %0.08 %0.06 %0.03 %0.06 %
Deposit account overdrafts0.02 %0.02 %0.03 %0.04%0.03%Deposit account overdrafts0.02 %0.02 %0.03 %0.02 %0.02 %
Total0.03 %(0.15)%0.10 %0.10%0.11%Total0.07 %0.16 %0.11 %0.03 %(0.15)%
Each with "--%" not meaningful.


70


During the second quarter of 2019, netNet charge-offs remained low, as gross charge-offs were down compared to prior periods. The net recoveries during the first quarter of 2020 continued to be low as a result of relatively stable asset quality metrics. The first quarters of 2020 and 2019 were driven by the recognitionincluded recoveries of a$1.2 million and $1.8 million, recoveryrespectively, recorded on a previously charged-off commercial loan. During the third and fourth quarters

65

Table of 2018, the net charge-offs decreased as Peoples' asset quality remained stable.Contents
The following table details Peoples’ nonperforming assets: 
(Dollars in thousands)March 31,
2020
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
Loans 90+ days past due and accruing (a):     
Construction$—  $—  $—  $230  $—  
Commercial real estate, other—  907  582  557  15  
   Commercial real estate—  907  582  787  15  
Commercial and industrial806  155  572  261  50  
Residential real estate557  2,677  3,095  2,291  963  
Home equity lines of credit143  108  183  53  42  
Consumer, indirect—  —  —  —   
Consumer, direct37  85  83  57  —  
   Consumer37  85  83  57   
Total loans 90+ days past due and accruing$1,543  $3,932  $4,515  $3,449  $1,074  
Nonaccrual loans (a):      
Construction$99  411  $230  $688  $703  
Commercial real estate, other9,167  6,699  6,723  6,427  6,459  
   Commercial real estate9,266  7,110  6,953  7,115  7,162  
Commercial and industrial4,408  1,824  883  1,748  1,719  
Residential real estate6,156  4,471  4,237  3,868  4,479  
Home equity lines of credit978  955  893  1,001  1,065  
Consumer, indirect637  629  568  383  440  
Consumer, direct122  48  55  13  17  
   Consumer759  677  623  396  457  
Total nonaccrual loans$21,567  $15,037  $13,589  $14,128  $14,882  
Nonaccrual troubled debt restructurings ("TDRs"):
Commercial real estate, other$410  $102  $112  $122  $127  
Commercial and industrial602  331  332  332  332  
Residential real estate2,484  1,890  1,770  1,664  1,389  
Home equity lines of credit174  210  194  193  195  
Consumer, indirect197  211  203  152  159  
Consumer, direct48  —  —  —   
   Consumer245  211  203  152  164  
Total nonaccrual TDRs$3,915  $2,744  $2,611  $2,463  $2,207  
Total nonperforming loans ("NPLs")$27,025  $21,713  $20,715  $20,040  $18,163  
OREO:      
Commercial$145  $145  $145  $—  $—  
Residential$81  $82  $144  $123  $81  
Total OREO$226  $227  $289  $123  $81  
Total nonperforming assets ("NPAs")$27,251  $21,940  $21,004  $20,163  $18,244  
Criticized loans (b)$90,881  $96,830  $100,434  $97,016  $89,812  
Classified loans (c)68,787  66,154  58,938  63,048  47,327  
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Loans 90+ days past due and accruing:     
Commercial real estate, construction$230
$
$
$401
$
Commercial real estate, other557
15
801
60
615
   Commercial real estate787
15
801
461
615
Commercial and industrial261
50
18


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

2

Consumer, direct57



46
   Consumer57
4

2
46
Total loans 90+ days past due and accruing$3,449
$1,074
$2,256
$1,885
$1,975
Nonaccrual loans:     
Commercial real estate, construction$688
$703
$710
$725
$725
Commercial real estate, other6,427
6,459
6,730
6,751
6,422
   Commercial real estate7,115
7,162
7,440
7,476
7,147
Commercial and industrial1,748
1,719
1,304
939
1,265
Residential real estate3,868
4,479
4,075
3,725
3,770
Home equity lines of credit1,001
1,065
1,023
796
681
Consumer, indirect383
440
324
286
221
Consumer, direct13
17
56
14
12
   Consumer396
457
380
300
233
Total nonaccrual loans$14,128
$14,882
$14,222
$13,236
$13,096
Nonaccrual troubled debt restructurings ("TDRs"):     
Commercial real estate, other$122
$127
$154
$186
$236
Commercial and industrial332
332
405
430
436
Residential real estate1,664
1,389
1,951
2,087
2,132
Home equity lines of credit193
195
210
160
71
Consumer, indirect152
159
156
119
93
Consumer, direct
5

17
5
   Consumer152
164
156
136
98
Total nonaccrual TDRs$2,463
$2,207
$2,876
$2,999
$2,973
Total nonperforming loans ("NPLs")$20,040
$18,163
$19,354
$18,120
$18,044
OREO:     
Residential$123
$81
$94
$106
$63
Total OREO$123
$81
$94
$106
$63
Total nonperforming assets ("NPAs")$20,163
$18,244
$19,448
$18,226
$18,107
Criticized loans (a)$97,016
$89,812
$114,188
$118,703
$120,809
Classified loans (b)63,048
47,327
43,818
49,058
55,596




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Table of Contents


(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Asset Quality Ratios:     
NPLs as a percent of total loans (c)(d)0.71%0.66%0.71%0.67%0.67%
NPAs as a percent of total assets (c)(d)0.47%0.45%0.49%0.46%0.46%
NPAs as a percent of total loans and OREO (c)(d)0.71%0.67%0.71%0.67%0.67%
Allowance for loan losses as a percent of NPLs (c)106.57%115.28%104.35%109.71%106.77%
Criticized loans as a percent of total loans (a)(c)3.42%3.28%4.18%4.38%4.50%
Classified loans as a percent of total loans (b)(c)2.23%1.73%1.61%1.81%2.07%
(Dollars in thousands)March 31,
2020
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
Asset Quality Ratios:
NPLs as a percent of total loans (d)(e)0.93 %0.75 %0.73 %0.71 %0.66 %
NPAs as a percent of total assets (d)(e)0.61 %0.50 %0.48 %0.47 %0.45 %
NPAs as a percent of total loans and OREO (d)(e)0.94 %0.76 %0.74 %0.71 %0.67 %
Allowance for loan losses as a percent of NPLs (d)158.49 %99.28 %104.20 %106.57 %115.28 %
Criticized loans as a percent of total loans (b)(d)3.12 %3.37 %3.52 %3.42 %3.28 %
Classified loans as a percent of total loans (c)(d)2.36 %2.30 %2.07 %2.23 %1.73 %
(a) The new accounting for purchased credit deteriorated loans under ASU 2016-13 resulted in the movement of $3.9 million of loans from the 90+ days past due and accruing category to the nonaccrual category as of January 1, 2020. As of December 31, 2019, these loans were presented as 90+ days past due and accruing. Although they were not accruing contractual interest income, they were accreting income from the discount that was recognized due to acquisition accounting.
(b) Includes loans categorized as special mention, substandard or doubtful.
(b)(c) Includes loans categorized as substandard or doubtful.
(c) (d) Data presented as of the end of the period indicated.
(d)(e) Nonperforming loans include loans 90+ days past due and accruing, troubled debt restructuringsTDRs and nonaccrual loans. Nonperforming assets include nonperforming loans and OREO.

NonperformingThe new accounting for purchased credit deteriorated loans under ASU 2016-13 resulted in the movement of $3.9 million of loans from the 90+ days past due and accruing category to the nonaccrual category as of January 1, 2020. As of December 31, 2019, these loans were presented as 90+ days past due and accruing. Although they were not accruing contractual interest income, they were accreting income from the discount that was recognized due to acquisition accounting. The remaining increases in nonperforming assets increased $1.9compared to December 31, 2019 and March 31, 2019, were primarily due to a $1.5 million or 11%,commercial relationship and several smaller commercial relationships being placed on nonaccrual. The increase in nonperforming assets at March 31, 2020 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, was also partially due to acquired loans from First Prestonsburg, which comprised $0.7 million of nonperforming assets at June 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 $15.7 million, or 33%, compared to March 31, 2019, and were up $7.5 million, or 13%, from June 30, 2018. The increase in classified loans 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. Prestonsburg.
Criticized loans, which are those categorized as special mention, substandard or doubtful, increased $7.2decreased $5.9 million, or 8%6%, compared to December 31, 2019. The decline was mostly due to paydowns and upgrades of several loans during the quarter. The increase in criticized loans compared to March 31, 2019 and decreased $23.8 million, or 20%, compared to June 30, 2018. The increase in criticized loans was largely related to acquired First Prestonsburg loans.loans, partially offset by the upgrade of several commercial relationships. Classified loans, which are those categorized as substandard or doubtful, increased $2.6 million, or 4%, compared to December 31, 2019, driven by the downgrade of a commercial loan relationship totaling $3.6 million. The increase in classified loans compared to March 31, 2019 was driven by the downgrades of four commercial loan relationships totaling $18.8 million.
Deposits
The following table details Peoples’ deposit balances:
(Dollars in thousands)March 31,
2020
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
Non-interest-bearing deposits (a)$727,266  $671,208  $677,232  $643,058  $628,464  
Interest-bearing deposits:  
Interest-bearing demand accounts (a)637,011  635,720  622,496  610,464  572,316  
Savings accounts527,295  521,914  526,372  526,746  477,824  
Retail certificates of deposit ("CDs")487,153  490,830  488,942  497,221  404,186  
Money market deposit accounts485,999  469,893  441,989  428,213  403,642  
Governmental deposit accounts400,184  293,908  337,941  331,754  363,636  
Brokered CDs133,522  207,939  262,230  326,157  287,345  
Total interest-bearing deposits2,671,164  2,620,204  2,679,970  2,720,555  2,508,949  
  Total deposits$3,398,430  $3,291,412  $3,357,202  $3,363,613  $3,137,413  
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Non-interest-bearing deposits (a)$643,058
$628,464
$607,877
$617,447
$585,861
Interest-bearing deposits:     
Interest-bearing demand accounts (a)610,464
572,316
573,702
547,172
570,359
Savings accounts526,746
477,824
468,500
473,240
480,615
Retail certificates of deposit ("CDs")497,221
404,186
394,335
402,309
406,214
Money market deposit accounts428,213
403,642
379,878
391,377
389,893
Governmental deposit accounts331,754
363,636
267,319
344,320
305,255
Brokered CDs326,157
287,345
263,854
265,258
211,062
Total interest-bearing deposits2,720,555
2,508,949
2,347,588
2,423,676
2,363,398
  Total deposits$3,363,613
$3,137,413
$2,955,465
$3,041,123
$2,949,259
(a)(a)The sum of amounts presented is considered total demand deposits.
As of June 30, 2019, the balances in deposit accounts acquired from First Prestonsburg totaled $232.2 million, including $65.3 million of retail CDs, $62.8 million of interest-bearingamounts presented is considered total demand accounts, $55.7 million of savings accounts, $33.4 million of non-interest-bearing demand accounts, and $15.1 million of money market accounts.deposits.
At June 30, 2019,March 31, 2020, period-end deposits increased $226.2were up $107.0 million, or 7%3% compared to December 31, 2019, and increased $261.0 million, or 8%, compared to March 31, 2019. Compared to December 31, 2019, $408.1the majority of the increase was seasonal, driven by an increase in governmental deposits of $106.3 million. Non-interest-bearing deposit account balances grew $56.1 million, or 14%8%, and brokered CDs were down $74.4 million, or 36%, compared to December 31, 2018, and $414.4 million, or 14%,the linked quarter. The increase in period-end deposits compared to June 30, 2018. Compared to the linked quarter, the growthMarch 31, 2019 was primarily driven by the deposits acquired in the First Prestonsburg acquisition,acquisition.

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Over the past four quarters, Peoples has reduced its reliance on higher-rate brokered CDs, which include one-way buy Certificate of Deposit Account Registry Services. This was partially offset by a seasonal declinethe issuance of $31.9 million in governmental deposits, which are typically higher during90-day brokered CDs to fund interest rate swaps. During each of the firstfourth and third quarter of each year.2019, Peoples issued $10.0 million of 90-day brokered CDs to fund one 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 during the second quarter of 2019.million. 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 37%40% of total deposits at June 30,both March 31, 2020 and December 31, 2019, compared to 38% of total deposits at March 31, 2019, 40% at December 31, 2018, 38% at September 30, 2018, and 39% at June 30, 2018.2019. 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)March 31,
2020
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
Short-term borrowings:     
Overnight borrowings$64,000  $141,000  $106,000  $—  $24,000  
FHLB 90-day advances110,000  110,000  110,000  117,200  110,000  
Current portion of long-term FHLB advances45,000  23,009  23,069  23,129  13,188  
Retail repurchase agreements40,661  42,968  49,081  46,128  44,175  
Total short-term borrowings$259,661  $316,977  $288,150  $186,457  $191,363  
Long-term borrowings:      
FHLB advances$125,300  $75,672  $76,785  $78,324  $98,670  
Junior subordinated debt securities7,491  7,451  7,409  7,367  7,325  
Total long-term borrowings$132,791  $83,123  $84,194  $85,691  $105,995  
Total borrowed funds$392,452  $400,100  $372,344  $272,148  $297,358  
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Short-term borrowings:     
FHLB overnight borrowings$
$24,000
$165,000
$102,000
$173,000
FHLB 90-day advances117,200
110,000
110,000
100,000
13,000
Current portion of long-term FHLB advances23,129
13,188
30,000
30,000
98,566
Retail repurchase agreements46,128
44,175
51,202
64,840
76,177
Unamortized debt issuance cost (a)

(4)(10)(16)
Total short-term borrowings$186,457
$191,363
$356,198
$296,830
$360,727
Long-term borrowings:     
FHLB advances$78,324
$98,670
$102,361
$103,860
$105,890
Junior subordinated debt securities7,367
7,325
7,283
7,239
7,195
Total long-term borrowings$85,691
$105,995
$109,644
$111,099
$113,085
Total borrowed funds$272,148
$297,358
$465,842
$407,929
$473,812
(a)Unamortized debt issuance cost is related to the cost associated with the Credit Agreement with Raymond James Bank, N.A. which was a short-term obligation as of March 31, 2019.
Peoples' short-term FHLB advances generally consist of overnight borrowings are 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 decrease in overnight borrowings of $141.0 million as of June 30, 2019 declined $24 millionMarch 31, 2020 compared to MarchDecember 31, 2019, was primarily duetied to the increasegrowth in deposit balancesdeposits during the quarter. As of June 30, 2019,March 31, 2020, Peoples had fifteenseventeen effective interest rate swaps, with an aggregate notional value of $140.0$160.0 million, $110.0 million of which waswere funded by FHLB 90-day advances, which are expected to extendbe extended every 90 days through the maturity dates of the swaps. The remaining $30.0$50.0 million of interest rate swaps waswere funded by 90-day brokered CDs, which willare also expected to 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-termDuring the first quarter of 2020, Peoples borrowed $50.0 million of long-term FHLB advances declined at June 30, 2019 comparedputable, non-amortizing fixed-rates advances. Compared to March 31, 2019, due to transfers to short-term borrowings. At March 31, 2019 compared to December 31, 2018, long-termthe increase in FHLB advances declined due towas partially offset by principal payments.
Additional information regarding Peoples' interest rate swaps can be found in "Note 9 Derivative Financial Instruments" of the Notes to the UnconsolidatedUnaudited Consolidated Financial Statements.
Capital/Stockholders’ Equity
At June 30, 2019,March 31, 2020, 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, 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 toof 2.50% by January 1, 2019, and, which applies to the common equity tier 1 ("CET1") ratio, the tier 1 capital ratio and the total risk-based capital ratio. At June 30, 2019,March 31, 2020, Peoples had a capital conservation buffer of 7.14%, compared to 2.50% for the fully phased-in capital conservation buffer required at January 1, 2019.7.38%. As such, Peoples exceeded the minimum ratios including the capital conservation buffer at June 30, 2019.

March 31, 2020.


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The following table details Peoples' risk-based capital levels and corresponding ratios:
(Dollars in thousands)March 31,
2020
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
Capital Amounts:       
Common Equity Tier 1$415,768  $427,415  $417,468  $410,978  $389,394  
Tier 1423,259  434,866  424,877  418,345  396,719  
Total (Tier 1 and Tier 2)459,727  456,422  446,462  439,702  417,658  
Net risk-weighted assets$2,988,263  $2,930,355  $2,933,848  $2,903,386  $2,788,935  
Capital Ratios:
Common Equity Tier 113.91 %14.59 %14.23 %14.16 %13.96 %
Tier 114.16 %14.84 %14.48 %14.41 %14.22 %
Total (Tier 1 and Tier 2)15.38 %15.58 %15.22 %15.14 %14.98 %
Tier 1 leverage ratio10.06 %10.41 %10.28 %10.26 %10.31 %
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Capital Amounts: 
    
Common Equity Tier 1$410,979
$389,393
$378,855
$367,537
$358,987
Tier 1418,347
396,719
386,138
374,776
366,182
Total (Tier 1 and Tier 2)439,704
417,657
406,333
394,655
385,448
Net risk-weighted assets$2,903,387
$2,788,934
$2,782,995
$2,764,951
$2,755,112
Capital Ratios:     
Common Equity Tier 114.16%13.96%13.61%13.29%13.03%
Tier 114.41%14.22%13.87%13.55%13.29%
Total (Tier 1 and Tier 2)15.14%14.98%14.60%14.27%13.99%
Leverage ratio10.26%10.31%9.99%9.69%9.73%
As a result of the implementation of ASU 2016-13 on January 1, 2020, Peoples recorded a one-time transition adjustment to retained earnings of $3.7 million. This adjustment reflected the increase in the allowance for credit losses for loans (excluding the gross up of loan balances related to the establishment of an allowance for credit losses for purchased credit deteriorated loans), the allowance for credit losses for held-to-maturity investment securities and the addition of an unfunded commitment liability, net of statutory federal corporate income taxes. Based on current accounting guidance, Peoples is electing to utilize the five-year phase-in period for the transition adjustment due to the implementation of ASU 2016-13. This phase-in period also includes a 25% deferment of the impact on regulatory capital of the estimated increase in the allowance for credit losses related to the CECL model, which is applied during the first two years of application. For the first two years of the phase-in period, 100% of the transition adjustment due to ASU 2016-13 is excluded for regulatory capital purposes, along with 25% of the increase in the allowance for credit losses compared to the January 1, 2020 allowance for credit losses. In year three of the phase-in, 75% of the transition adjustment, and the cumulative 25% increase in the allowance for credit losses compared to January 1, 2020, are excluded from regulatory capital, while 50% and 25% of these amounts are excluded in years four and five, respectively, under this phase-in period.
During the first quarter of 2020, Peoples repurchased 436,137, or $10.2 million, of common shares pursuant to a previously authorized Rule 10b5-1 plan. Peoples continues to evaluate repurchases under its program as appropriate, based on market conditions and other relevant factors. At March 31, 2020, Peoples continued to have strong capital levels. Peoples is closely monitoring capital levels, in light of the COVID-19 pandemic, and the potential impact of its effect upon future earnings. Peoples has stress tested its capital metrics, and will continue to adjust capital levers as necessary to ensure adequate capital is maintained.
In addition to the implementation of ASU 2016-13 and the repurchase of common shares during the first quarter of 2020, Peoples' capital ratios at March 31, 2020 compared to December 31, 2019, were impacted by dividends declared of $7.0 million and the net loss of $765,000 during the first quarter of 2020. During 2019, Peoples' capital ratios increased primarily due to earnings, which exceeded dividends declared and paid. 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,March 31, 2019 were also impacted by the increase in risk-weighted assets, which was largely attributable to the First Prestonsburg merger. 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.acquisition.
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)March 31,
2020
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
Tangible equity:     
Total stockholders' equity$583,721  $594,393  $588,533  $579,022  $535,121  
Less: goodwill and other intangible assets177,447  177,503  179,126  176,763  161,242  
Tangible equity$406,274  $416,890  $409,407  $402,259  $373,879  
Tangible assets:      
Total assets$4,469,120  $4,354,165  $4,396,148  $4,276,376  $4,017,119  
Less: goodwill and other intangible assets177,447  177,503  179,126  176,763  161,242  
Tangible assets$4,291,673  $4,176,662  $4,217,022  $4,099,613  $3,855,877  
Tangible book value per common share:            
Tangible equity$406,274  $416,890  $409,407  $402,259  $373,879  
Common shares outstanding20,346,843  20,698,941  20,700,630  20,696,041  19,681,692  
Tangible book value per common share$19.97  $20.14  $19.78  $19.44  $19.00  
Tangible equity to tangible assets ratio:
Tangible equity$406,274  $416,890  $409,407  $402,259  $373,879  
Tangible assets$4,291,673  $4,176,662  $4,217,022  $4,099,613  $3,855,877  
Tangible equity to tangible assets9.47 %9.98 %9.71 %9.81 %9.70 %
(Dollars in thousands)June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Tangible equity:     
Total stockholders' equity$579,022
$535,121
$520,140
$504,290
$499,339
Less: goodwill and other intangible assets176,763
161,242
162,085
163,401
163,953
Tangible equity$402,259
$373,879
$358,055
$340,889
$335,386
Tangible assets:     
Total assets$4,276,376
$4,017,119
$3,991,454
$4,003,089
$3,972,091
Less: goodwill and other intangible assets176,763
161,242
162,085
163,401
163,953
Tangible assets$4,099,613
$3,855,877
$3,829,369
$3,839,688
$3,808,138
Tangible book value per common share:    
Tangible equity$402,259
$373,879
$358,055
$340,889
$335,386
Common shares outstanding20,696,041
19,681,692
19,565,029
19,550,014
19,528,952
Tangible book value per common share$19.44
$19.00
$18.30
$17.44
$17.17
Tangible equity to tangible assets ratio:    
Tangible equity$402,259
$373,879
$358,055
$340,889
$335,386
Tangible assets$4,099,613
$3,855,877
$3,829,369
$3,839,688
$3,808,138
Tangible equity to tangible assets9.81%9.70%9.35%8.88%8.81%
Tangible book value per common share declined at March 31, 2020 compared to December 31, 2019, due to the decrease in tangible equity, partially offset by the decline in common shares outstanding resulting from the repurchase of common shares. The decline in the tangible equity to tangible assets ratio at March 31, 2020 compared to December 31, 2019, was a result of asset growth, driven primarily by an increase in cash and cash equivalents, combined with the decrease in tangible equity. During 2019, the primary contributor to the increases in tangible book value per common share and the tangible equity to tangible assets ratio 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. Tangible book value per common share and 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 withwere also impacted by the First Prestonsburg merger combined with higher retained earnings and other comprehensive income during the second quarter of 2019, offset partially by higher tangible assets attributable primarily to the First Prestonsburg merger. The increase in theacquisition, which increased tangible equity, tocommon shares outstanding, and tangible assets ratio compared to December 31, 2018, as well as previous periods, was the result of higher retained earnings, combined with an increase in the market value of available-for-sale investment securities.assets.
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 level of IRR. The methods used by ALCO to assess IRR remain largely unchanged from those disclosed in Peoples' 20182019 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):
 

70

Increase (Decrease) in Interest Rate
Estimated Increase (Decrease) in
Net Interest Income
 Estimated (Decrease) Increase in Economic Value of EquityIncrease (Decrease) in Interest Rate
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, 2018(in Basis Points)March 31, 2020December 31, 2019March 31, 2020December 31, 2019
300$13,557
 10.1 % $7,351
5.5 % $(11,969) (1.1)% $(22,088)(2.1)%300$27,315  23.1 %$14,806  11.2 %$239,503  23.8 %$35,743  3.2 %
20011,046
 8.3 % 5,780
4.3 % 24,680
 2.2 % (7,191)(0.7)%20021,966  18.6 %12,063  9.1 %205,089  20.4 %45,651  4.0 %
1007,478
 5.6 % 3,588
2.7 % 25,125
 2.2 % 3,926
0.4 %10013,172  11.1 %7,895  6.0 %107,683  10.7 %39,137  3.5 %
(100)(11,962) (9.0)% (9,075)(6.8)% (41,465) (3.7)% (44,512)(4.2)%(100)(7,451) (6.3)%(12,524) (9.5)%(69,697) (6.9)%(63,964) (5.7)%
(200)(23,702) (17.7)% (23,712)(17.6)% (95,175) (8.5)% (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 on an ongoing basis.
With respect to investment prepayment speeds, the assumptions used are the results of a third-party prepayment model which projects the rate at which the underlying mortgages prepay. These prepayment speeds effect the amount forecasted for cash flow reinvestment, premium amortization, and are updated at least annually. The actual deposit betas experienced recently by Peoplesdiscount accretion assumed in the repricing of non-maturity deposits are lower than those used in Peoples’ current interest rate risk modeling. Peoples has benefited from this trendmodeling results. This prepayment activity is generally the result of refinancing activity and tends to increase as longer term interest rates decline, much like the current environment. The assumptions in the current interest rate and competitor environment as it has provided for growth in Peoples’risk model could be incorrect, leading to either a lower or higher impact on net interest income. However,Peoples generally takes a more conservative approach regarding prepayment speed assumptions.
While parallel interest rate shock scenarios are useful in recent months, Peoples has experienced more pressure on margin expansionassessing the level of IRR inherent in the balance sheet, interest rates typically move in a nonparallel manner with differences in the timing, direction and rate competitionmagnitude of changes in its markets.
short-term and long-term interest rates. Thus, any benefit that might occur as a result of the Federal Reserve Board increasing short-term interest rates in the future could be offset by an inverse movement in long-term rates, and vice versa. For this reason, Peoples considers other interest rate scenarios in addition to analyzing the impact of parallel yield curve shifts. This includesThese include 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 June 30, 2019, the U.S. Treasury and LIBOR swap curves were inverted for certain tenors. Given the shape of market yield curves at June 30, 2019,March 31, 2020, consideration of the bear steepener and bull steepener scenario yieldsflattener scenarios provide insights which were not captured by parallel shifts. These scenarios were evaluated as the current environment suggests these may be possible outcomes for the trajectory of interest rates.
The key insight presented by the bullbear steepener scenario highlights the risk to net interest income and the economic value of equity when long-term yieldsshort-term rates remain constant while long-term rates rise. In such a scenario, Peoples' deposit and borrowing costs, which are correlated with short-term rates, remain constant, while asset yields, which are correlated with long-term rates, rise. Increased asset yields largely driven by higher rates on floating rate loans would not be offset by increases in deposit or funding costs; resulting in an increased amount of net interest income and higher net interest margin.
The bull flattener scenario highlights the risk to net interest income and the economic value of equity when short-term rates remain constant while long-term rates fall. In such a scenario, Peoples’ fundingdeposit and borrowing costs, which are correlated with short-term rates, decline,remain constant while asset yields, which are correlated with long-term rates, remain constant.
At June 30, 2019, Peoples' consolidated balance sheet was positioned to benefit from rising interestfall. Asset yields driven lower by increased investment securities premium amortization and lower rates on floating rate loans would not be offset by reductions in termsdeposit or funding costs; resulting in a decreased amount 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 sensitivity in the first half of the year. The increased public funds deposit balances are expected to decline through September 2019. While paralleland lower net 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 and long-term interest rates. Thus, any benefit that might occur as a result of the Federal Reserve increasing short-term interest rates in the future could be offset by an inverse movement in long-term interest rates.margin.
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,March 31, 2020, Peoples hadhas entered into fifteenseventeen interest rate swap contracts with an aggregate notional value of $140.0$160.0 million. Additional information regarding Peoples'Peoples’ interest rate swaps can be found in "Note“Note 14 Derivative Financial Instruments"Instruments” of the Notes to the Unaudited Consolidated Financial Statements included in Peoples' 2018 Form 10-K and "Note 9 Derivative Financial Instruments" of the Notes to the Unconsolidated Financial StatementsStatement included in this Form 10-Q.
At March 31, 2020, Peoples' Unaudited Consolidated Balance Sheet was positioned to benefit from rising interest rates in terms of potential impact on net interest income and the economic value of equity. The table above illustrates this point as changes to net interest income increase in the rising rate scenarios. While the heavy concentration of floating rate loans remains the largest contributor to the level of asset sensitivity, the increase in asset sensitivity from December 31, 2019 was largely attributable to greater forecasted impacts of interest rate movements on the amount of premium amortization in the investment portfolio. The table also illustrates a significant reduction in long-term interest rate risk as evidenced by the change in the modeled impact of rising interest rates on the economic value of equity. The reduction is largely attributable to increased forecasted base case investment portfolio prepayments, which shortens the effective duration of assets and, ultimately, equity.
As interest rates across the yield curve have fallen, Peoples has experienced and will most likely continue to experience net interest margin compression. The confluence of lower LIBOR rates and increased investment securities prepayment speeds has created further headwinds which prevent margin expansion. Peoples should experience positive impacts from retail CDs and term

71

borrowings maturing and re-pricing lower, the expiration of promotional and contractual interest rates, and recently implemented non-maturity deposit rate reductions should begin to materialize over the next one to two quarters.
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' 20182019 Form 10-K.
At June 30, 2019,March 31, 2020, Peoples Bank had liquid assets of $261.9$249.8 million, which represented 5.6%5.0% of total assets and unfunded loan commitments. This amount exceeded the minimum level by $168.2$150.4 million, or 3.6%3.0% of total loans and


76


unfunded commitments, currently required under Peoples' liquidity policy. Peoples also had an additional $115.0$106.8 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.
The COVID-19 pandemic presents a unique set of challenges and considerations which necessitate an abundance of caution when addressing liquidity risk. Management has taken action intended to ensure that liquidity levels are more than sufficient to meet the challenges posed by the current environment. Steps taken, before March 31, 2020 and after, to reinforce Peoples' liquidity position include, but are not limited to, the pledging of additional loan and investment securities collateral to counterparties in exchange for additional borrowing capacity, accumulation of larger than normal cash reserves, and purchasing of short-term brokered deposits.
At March 31, 2020 Peoples had $1.03 billion of loans and investment securities pledged to secure borrowing capacities with the Federal Reserve of Cleveland and Federal Home Loan Bank of Cincinnati. As of April 30, 2020, loans and investment securities pledged to these counterparties had increased by $129.8 million to $1.16 billion to secure additional borrowing capacity. Additionally, Peoples plans to utilize the Federal Reserve's Paycheck Protection Program Liquidity Facility (PPPLF) to fund originations under the PPP.
Since March 31, 2020, there has been an increase in deposit balances due to the influx of funds from government stimulus, the PPP and other government actions. At the same time, we have experienced a decrease in the utilization rate for commercial lines of credit, which is related to the increase in cash flow to certain companies, mainly from PPP proceeds. The utilization percentage for consumer line of credit products has been relatively steady. Peoples anticipates that deposit balances will decline over time as the funds are used for intended business purposes and the commercial line of credit utilization percentage should revert back to normal averages as time progresses.
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 Unaudited 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.

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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
(Dollars in thousands)
March 31,
2020
December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
Home equity lines of credit$106,456
$103,343
$101,265
$101,651
$103,975
Home equity lines of credit$113,605  $112,464  $110,127  $106,456  $103,343  
Unadvanced construction loans95,266
80,916
74,734
71,836
87,477
Unadvanced construction loans97,153  102,491  87,063  95,266  80,916  
Other loan commitments360,872
308,103
314,271
324,059
319,519
Other loan commitments413,515  353,137  365,343  360,872  308,103  
Loan commitments$562,594
$492,362
$490,270
$497,546
$510,971
Loan commitments$624,273  $568,092  $562,533  $562,594  $492,362  
Standby letters of credit$14,658
$12,371
$10,214
$9,979
$20,354
Standby letters of credit$12,883  $12,498  $14,983  $14,658  $12,371  
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.
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 June 30, 2019.March 31, 2020.  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.
(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 June 30, 2019,March 31, 2020, 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
The disclosures below supplement the risk factors previously disclosed under “ITEM 1A. RISK FACTORS” of Part I of Peoples’ 2019 Form 10-K.
The COVID-19 pandemic has adversely impacted Peoples' business and financial results, and the ultimate impact on both will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental and nongovernmental authorities in response to the pandemic.

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Table of Contents
The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other Federal Reserve monetary policy. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, lowered equity market valuations, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in Peoples' 2019 Form 10-K could be exacerbated and such effects could have a material adverse impact on Peoples has entered into interest rate swaps as partin a number of itsways related to credit, collateral, customer demand, funding, operations, interest rate risk, management strategy. Theseand human capital, as described in more detail below.
Credit Risk. Peoples' risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of the business of Peoples' commercial borrowers and the financial circumstances of Peoples' consumer borrowers. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, which may affect individuals, households and business differently, and decreased consumer confidence generally, all of which may cause Peoples' customers to be unable to make scheduled loan payments.
If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in Peoples' portfolio, Peoples could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover Peoples' exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with existing loans, the ability to liquidate the real estate collateral securing residential and commercial real estate loans, Peoples' ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of Peoples' lending and services, and the financial condition and credit risk of Peoples' customers, both commercial and consumer. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent Peoples from making business decisions or may result in a delay in taking certain remediation actions, such as foreclosure. In addition, Peoples has unfunded commitments to extend credit to customers. During a challenging economic environment like now, customers are more dependent on credit commitments and increased borrowings under these commitments could adversely impact Peoples' liquidity.
Furthermore, in an effort to support Peoples' communities during the pandemic, Peoples is participating in the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit Peoples' ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, Peoples is at the heightened risk of holding the loan at an unfavorable interest rate swapsas compared to the loans to customers that Peoples would have otherwise extended credit.
As described in Peoples' 2019 Form 10-K, on January 1, 2020, Peoples adopted ASU 2016-13, Financial Instruments - Credit Losses (“CECL”), which upon adoption resulted in a reduction to the retained earnings balance of $3.7 million, net of income tax, and a pre-tax increase to the allowance for loan losses of approximately $5.8 million. Due to the adoption of ASU 2016-13, Peoples' financial results may be negatively affected as soon as weak or deteriorating economic conditions are designatedforecasted and alter Peoples' expectations for credit losses. In addition, due to the expansion of the time horizon over which Peoples is required to estimate future credit losses under CECL, Peoples may experience increased volatility in future provisions for credit losses. Peoples may also experience a higher or more volatile provision for credit losses due to higher levels of non-performing loans and net charge-offs if commercial and consumer customers are unable to make scheduled loans payments.
Strategic Risk. Peoples' success may be affected by a variety of external factors that may affect the price or marketability of products and services, changes in interest rates that may increase funding costs, reduced demand for financial products due to economic conditions, and the various response of governmental and nongovernmental authorities. In recent weeks, the COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets. Furthermore, many of the governmental actions to curtail the spread of the virus have been directed toward curtailing household and business activity to contain COVID-19. These actions have been rapidly expanding in scope and intensity. For example, in many of Peoples' markets, local governments have acted to temporarily close or restrict the operations of most businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking products Peoples provides, including a decline in loan originations.
Operational Risk. Current and future restrictions on the access of Peoples' workforce to its facilities could limit Peoples' ability to meet customer service expectations and have a material adverse effect on operations. Peoples relies on business

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Table of Contents
processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties.
In response to COVID-19, Peoples has modified its business practices with a portion of employees working remotely from their homes to limit interruptions to operations as much as possible and to help reduce the risk of COVID-19 infecting entire departments. Reduced workforces which may be caused by, but not limited to, illness, quarantine, stay at home or other government mandates, or difficulties transitioning back to an in office environment, could result in an adverse impact to Peoples' operations and financial performance. Employees with health conditions putting them at higher risk of adverse effects from COVID-19 are working remotely. Peoples is encouraging virtual meetings and conference calls in place of in-person meetings, including the annual shareholders meeting which was held virtually this year. Additionally, travel has been restricted. Peoples is promoting social distancing, frequent hand washing and thorough disinfection of all surfaces. Peoples financial service location lobbies have been closed except for advance appointments only. Branch drive-ups, call center, ATMs and online/mobile banking services continue to operate and are the preferred option of service. Even with the precautions undertaken, the continued spread or prolonged impact of the COVID-19 could negatively impact the availability of key personnel or significant numbers of Peoples' staff, who are necessary to conduct Peoples' business.
Further, technology in employees’ homes may not be as robust as in Peoples' offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in the offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. These cybersecurity risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of Peoples' information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of Peoples' ability to perform critical functions, including wiring funds, all of which could expose Peoples to risks of data or financial loss, litigation and liability and could seriously disrupt operations and the operations of any impacted customers.
Moreover, Peoples relies on many third parties in business operations, including appraisers of real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. For example, loan origination could be delayed due to the limited availability of real estate appraisers for the underlying collateral. Loan closings could be delayed due to reductions in available staff in recording offices or the closing of courthouses in certain counties, which slows the process for title work, and mortgage and UCC filings in those counties. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect Peoples' operations.
Interest Rate Risk. Peoples' net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0% to 0.25%, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase Peoples' funding costs and negatively affect market risk mitigation strategies. Higher revenue volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in the fair market values of Peoples' assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of Peoples' assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on Peoples' net income, results of operations and financial condition. Low rates increase the risk in the U.S. of a negative interest rate environment in which interest rates drop below zero, either broadly or for some types of instruments. Such an occurrence would likely further reduce the interest Peoples earns on loans and other earning assets, while also likely requiring Peoples to pay to maintain its deposits with the Federal Reserve. Peoples' systems may not be able to adequately handle a negative interest rate environment and not all variable rate instruments are designed for such a circumstance. Peoples cannot predict the nature or timing of future changes in monetary policies in response to the outbreak or the precise effects that they may have on Peoples activities and financial results.
Liquidity Risk. Peoples' ability to access short-term funding or liquidity may be limited as a result of the impact of COVID-19 on local and global markets. This situation could further be exacerbated by a reduced deposit base either through customer withdrawals or non-renewal of term deposits. Market stress from the virus could result in reduced cash flow hedgesfrom earning assets including other-than-temporary impairment on investment securities and involvesustained repayment shortfalls on loans. It is possible that sources of wholesale funding such as the receiptFederal Home Loan Bank, the Federal Reserve Bank, or the brokered certificate of variable rate amounts fromdeposit market would no longer be accessible to fund daily liquidity needs.
Because there have been no comparable recent global pandemics that resulted in similar global impact, Peoples does not yet know the full extent of COVID-19’s effects on its business, operations, or the global economy as a counterparty in exchange for Peoples making fixed payments. Aswhole. Any future developments will be

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Table of June 30, 2019, Peoples had entered into fifteen interest rate swap contracts, which were effective with an aggregate notional value of $140.0 million. Although Peoples expects that eachContents
highly uncertain and cannot be predicted, including the scope and duration of the hedging relationships willpandemic, the effectiveness of Peoples' work from home arrangements, third-party providers’ ability to support operations, and any actions taken by governmental authorities and other third parties in response to the pandemic and how quickly and to what extent normal economic and operating conditions can resume. Even after COVID-19 has subsided, Peoples may continue to be highly effectiveexperience material adverse impacts on its business as described above, ita result of the virus' global economic impact, including the availability of credit, adverse impacts on Peoples' liquidity and any recession that has not assumed that there will be no ineffectivenessoccurred or may occur 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.future.
There have been no other material changes from those risk factors previously disclosed in “ITEM 1A. RISK FACTORS” of Part I of Peoples’ 20182019 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 June 30, 2019:March 31, 2020:
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)
January 1 – 31, 2020530  
(2)
$34.70  
(2)
—  $14,245,071  
February 1 – 29, 202060,387  
(1)(3)
$30.94  
(1)(3)
39,296  $39,328,468  
March 1 – 31, 2020397,742  
(1)(2)(3)
$22.78  
(1)(2)(3)
396,841  $30,293,671  
Total458,659   $23.87   436,137  $30,293,671  
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
(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. No common shares were purchased under this share repurchase program during the three months ended June 30, 2019.
(2)Information reported includes 3,160 common shares and 2,239 common shares withheld to pay income taxes associated with restricted common shares which vested during May and June, respectively.
(3)Information reported includes 568 common shares and 485 common shares purchased in open market transactions during May and June, 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.

(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 an aggregate of $20 million of its outstanding common shares. Peoples repurchased 16,340 common shares for $498,000 under this share repurchase program during February 2020. On February 28, 2020, Peoples announced that on February 27, 2020, Peoples' Board of Directors authorized a share repurchase program authorizing Peoples to purchase up to an aggregate of $40 million of its outstanding common shares. The share repurchase program announced on February 28, 2020 replaced the previous repurchase program which was terminated on February 27, 2020. Peoples repurchased 22,956 and 396,841 common shares for $672,000 and $9.0 million under this share repurchase program during February and March 2020, respectively.
(2)Information reported includes 530 common shares and 544 common shares purchased in open market transactions during January and March, 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.
(3)Information reported includes 21,091 common shares and 357 common shares withheld to satisfy income taxes associated with restricted common shares, which vested during February and March, respectively.

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


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79



ITEM 6 EXHIBITS
Exhibit
Number
Description
Exhibit Location
Exhibit
Number2.1
Description
Exhibit Location
Agreement and Plan of Merger, dated as of October 23, 2017,29, 2018, as amended by Amendment No. 1, made and entered into as of December 18, 2018, between Peoples Bancorp Inc. and ASB Financial Corp.First Prestonsburg Bancshares Inc.+
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)333-228745)
3.1(a)
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 on 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 Ohio 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 the 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, 2003Incorporated 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, 2004Incorporated 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 werehave been 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 by Peoples Bancorp Inc. to the SEC on a confidential basis upon request.
PFiled thePeoples Bancorp Inc. filed this exhibit with the SEC in paper form originally and this exhibit has not been filed with the SEC in electronic format.



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Exhibit
Number
Description
Exhibit Location
Exhibit
Number3.2(d)
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, 2006Incorporated 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, 2010Incorporated 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 the Code of Regulations of Peoples Bancorp Inc. by the Shareholders at the Annual Meeting of Shareholders on April 26, 2018Incorporated 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 asSummary of April 3, 2019, between Peoples Bancorp Inc., as Borrower, Annual Incentive Program for executive officers and U.S. Bank National Association, as Lenderother employees of Peoples Bancorp Inc. and subsidiaries of Peoples Bancorp Inc. [Effective beginning with the fiscal year beginning January 1, 2020]Incorporated herein by reference to Exhibit 10.110.3 to Peoples' CurrentAnnual Report on Form 8-K dated and filed on April 9,10-K for the fiscal year ended December 31, 2019 (File No. 0-16772) ("Peoples' April 9,Peoples 2019 Form 8-K"10-K")
Revolving Credit Note issued bySummary of perquisites for Executive Officers of Peoples Bancorp Inc. on April 3,Incorporated herein by reference to 10.4 to Peoples' 2019 to U.S. Bank National Association in the principal amountForm 10-K
Summary of $20,000,000Base Salaries for Named Executive Officers of Peoples Bancorp Inc.Filed herewith
Summary of Compensation for Directors of Peoples Bancorp Inc.Incorporated herein by reference to Exhibit 10.210.6 to Peoples' April 9, 2019 Form 8-K10-K
Peoples Bancorp Inc. Amended and Restated Nonqualified Deferred Compensation Plan (adopted effective July 11, 2019)Filed herewith
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 CertificationsFurnished herewith
101.INSInline XBRL Instance Document ##Submitted electronically herewith #
101.SCHInline XBRL Taxonomy Extension Schema DocumentSubmitted electronically herewith #
101.CALInline XBRL Taxonomy Extension Calculation Linkbase DocumentSubmitted electronically herewith #
101.LABInline XBRL Taxonomy Extension Label Linkbase DocumentSubmitted electronically herewith #
101.PREInline XBRL Taxonomy Extension Presentation Linkbase DocumentSubmitted electronically herewith #
101.DEFInline XBRL Taxonomy Extension Definition Linkbase DocumentSubmitted electronically herewith #
104Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)Submitted electronically herewith
# Attached as Exhibit 101 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019March 31, 2020 of Peoples Bancorp Inc. are the following documents formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (Unaudited) at June 30, 2019March 31, 2020 (Unaudited) and December 31, 2018;2019; (ii) Consolidated Statements of IncomeOperations (Unaudited) for the three and six months ended June 30, 2019March 31, 2020 and 2018;2019; (iii) Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2019March 31, 2020 and 2018;2019; (iv) Consolidated Statement of Stockholders' Equity (Unaudited) for the sixthree months ended June 30, 2019;March 31, 2020; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the sixthree months ended March 31, 20192020 and 2018;2019; and (vi) Notes to the Unaudited Consolidated Financial Statements.
## The instance document does not appear in the interactive data file because its XBRL tags are imbedded within the Inline XBRL document.





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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:May 6, 2020By: /s/CHARLES W. SULERZYSKI
Charles W. Sulerzyski
President and Chief Executive Officer
Date:May 6, 2020PEOPLES BANCORP INC.
Date:August 1, 2019By: /s/CHARLES W. SULERZYSKI
Charles W. Sulerzyski
President and Chief Executive Officer
Date:August 1, 2019By: /s/JOHN C. ROGERS
John C. Rogers
Executive Vice President,
Chief Financial Officer and Treasurer





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