Peoples utilizes interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

Derivatives and Hedging Activities - Risk Management Objective of Using Derivatives

Peoples is exposed to certain risks arising from both its business operations and economic conditions. Peoples principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. Peoples manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities, and through the use of derivative financial instruments. Specifically, Peoples enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known or expected cash amounts, the values of which are determined by interest rates. Peoples’ derivative financial instruments are used to manage differences in the amount, timing and duration of Peoples' known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings. Peoples also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in Peoples' assets or liabilities. Peoples manages a matched book with respect to customer-related derivative financial instruments in order to minimize its net risk exposure resulting from such transactions.

Cash Flow Hedges of Interest Rate Risk

Peoples' objectives in using interest rate derivatives are to add stability to interest income and expense, and to manage its exposure to interest rate movements. To accomplish these objectives, Peoples has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for Peoples making fixed payments. As of September 30, 2019, Peoples had entered into sixteen interest rate swap contracts with an aggregate notional value of $150.0 million. Peoples will pay a fixed rate of interest for up to ten years while receiving a floating rate component of interest equal to the three-month LIBOR rate. The interest received on the floating rate component is intended to offset the interest paid on rolling three-month FHLB advances or rolling three-month brokered certificates of deposit, which will continue to be rolled through the life of the swaps. Amounts reported in accumulated other comprehensive income (loss) ("AOCI"), related to derivatives will be reclassified to interest income or expense as interest payments are made or received on Peoples' variable-rate assets or liabilities. During the three and nine months ended September 30, 2019, Peoples had reclassifications of gains to interest expense of $30,000 and $183,000, respectively, and during the three and nine months ended September 30, 2018, Peoples had reclassifications of gains to interest expense of $2,000 and $18,000, respectively.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of each derivative is reported in AOCI (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. Peoples assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transaction. The reset dates and the payment dates on the 90-day advances or brokered certificates of deposit used to fund the swaps are matched to the reset dates and payment dates on the receipt of the 3-month LIBOR floating portion of the swaps to ensure effectiveness of the cash flow hedge. Effectiveness is measured by ensuring that reset dates and payment dates are matched.

The following table summarizes information about the interest rate swaps designated as cash flow hedges:



(Dollars in thousands)	September 30, 2019			December 31, 2018
Notional amount	$	150,000		$	110,000
Weighted average pay rates	2.22		%	2.37		%
Weighted average receive rates	1.53		%	2.57		%
Weighted average maturity	5.7 years			6.2 years
Pre-tax unrealized gains included in AOCI	$	5,736		$	860

The following table presents net losses or gains recorded in AOCI and in the Unaudited Consolidated Statements of Income related to the cash flow hedges:



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(Dollars in thousands)	2019		2018			2019			2018
Amount of loss (gain) recognized in AOCI, pre-tax	$	1,796	$	(651	)	$	6,457		$	(2,558	)
Amount of (loss) gain recognized in earnings	$	—	$	—		$	(19	)	$	30

The following table reflects the cash flow hedges, which are included in the Unaudited Consolidated Balance Sheets at fair value:



	September 30, 2019				December 31, 2018
(Dollars in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in other assets:
Interest rate swaps related to debt	$	20,000	$	105	$	60,000	$	2,093
Total included in other assets	$	20,000	$	105	$	60,000	$	2,093

Included in accrued expenses and other liabilities:
Interest rate swaps related to debt	$	130,000	$	6,026	$	50,000	$	1,111
Total included in accrued expenses and other liabilities	$	130,000	$	6,026	$	50,000	$	1,111

Peoples had $21.2 million and no amount of cash pledged at September 30, 2019 and December 31, 2018, respectively, against interest rate swaps related to debt; however, the counterparties had pledged no amount of cash and $130,000, respectively, at those dates.

Non-Designated Hedges

Peoples maintains an interest rate protection program for commercial loan customers, which was established in 2010. Under this program, Peoples originates variable rate loans with interest rate swaps, where the customer enters into an interest rate swap with Peoples on terms that match the terms of the loan. By entering into the interest rate swap with the customer, Peoples Bank effectively provides the customer with a fixed rate loan while creating a variable rate asset for Peoples Bank. Peoples Bank offsets its exposure in the swap by entering into an offsetting interest rate swap with an unaffiliated institution. These interest rate swaps do not qualify as designated hedges; therefore, each swap is accounted for as a standalone derivative. Peoples had interest rate swaps associated with commercial loans with a gross notional value of $590.0 million and fair value of $14.2 million of equally offsetting assets and liabilities at September 30, 2019, and a gross notional value of $453.4 million and fair value of $2.5 million of equally offsetting assets and liabilities at December 31, 2018. These interest rate swaps did not have a material impact on Peoples' results of operation or financial condition.

The following table reflects the non-designated hedges, which are included in the Unaudited Consolidated Balance Sheets at fair value:



	September 30, 2019				December 31, 2018
(Dollars in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in other assets:
Interest rate swaps related to commercial loans	$	295,070	$	14,197	$	226,662	$	2,451
Total included in other assets	$	295,070	$	14,197	$	226,662	$	2,451

Included in accrued expenses and other liabilities:
Interest rate swaps related to commercial loans	$	295,070	$	14,197	$	226,662	$	2,451
Total included in accrued expenses and other liabilities	$	295,070	$	14,197	$	226,662	$	2,451

Peoples had no cash pledged against interest rate swaps related to commercial loans.