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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

(Mark One)
  ☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
            For the quarterly period ended June 30, 2020
OR
 ☐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-20200630_g1.jpg
PEOPLES BANCORP INC.
(Exact name of Registrant as specified in its charter)
Ohio 31-0987416
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
138 Putnam Street, P.O. Box 738,
Marietta,Ohio 45750
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (740) 373-3155
 Not Applicable 
 (Former name, former address and former fiscal year, if changed since last report) 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Shares, without par valuePEBOThe Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated fileroAccelerated filer☒
Non-accelerated fileroSmaller reporting company☐
Emerging growth company☐

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 ☐ No  ☒

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: 19,919,990 common shares, without par value, at July 28, 2020.

Table of Contents

Table of Contents


2
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 June 30,
2020		December 31,
2019
(Dollars in thousands)(Unaudited)
Assets  
Cash and cash equivalents:
Cash and due from banks$58,257  $53,263  
Interest-bearing deposits in other banks161,017  61,930  
Total cash and cash equivalents219,274  115,193  
Available-for-sale investment securities, at fair value (amortized cost of $853,072 at June 30, 2020 and $929,395 at December 31, 2019) (a)
877,851  936,101  
Held-to-maturity investment securities, at amortized cost (fair value of $39,338 at June 30, 2020 and $32,541 at December 31, 2019) (a)(b)
37,367  31,747  
Other investment securities42,656  42,730  
Total investment securities (a)(b)957,874  1,010,578  
Loans, net of deferred fees and costs (b)(c)3,361,019  2,873,525  
Allowance for credit losses (b)(54,362) (21,556) 
Net loans (b)3,306,657  2,851,969  
Loans held for sale17,009  6,499  
Bank premises and equipment, net of accumulated depreciation61,771  61,846  
Bank owned life insurance70,665  69,722  
Goodwill165,805  165,701  
Other intangible assets10,820  11,802  
Other assets175,944  60,855  
Total assets$4,985,819  $4,354,165  
Liabilities  
Deposits:
Non-interest-bearing$1,005,732  $671,208  
Interest-bearing3,019,152  2,620,204  
Total deposits4,024,884  3,291,412  
Short-term borrowings177,912  316,977  
Long-term borrowings112,536  83,123  
Accrued expenses and other liabilities (b)101,310  68,260  
Total liabilities4,416,642  3,759,772  
Stockholders’ equity  
Preferred shares, no par value, 50,000 shares authorized, no shares issued at June 30, 2020 and December 31, 2019
—  —  
Common shares, no par value, 24,000,000 shares authorized, 21,173,862 shares issued at June 30, 2020 and 21,156,143 shares issued at December 31, 2019, including shares held in treasury
421,236  420,876  
Retained earnings (b)173,572  187,149  
Accumulated other comprehensive income (loss), net of deferred income taxes4,634  (1,425) 
Treasury stock, at cost, 1,299,219 shares at June 30, 2020 and 504,182 shares at December 31, 2019
(30,265) (12,207) 
Total stockholders’ equity569,177  594,393  
Total liabilities and stockholders’ equity$4,985,819  $4,354,165  
(a) Available-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 June 30, 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 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 expenses and other liabilities; and a reduction to retained earnings of $3.7 million, net of statutory federal corporate income tax.
(c) Also referred to throughout this document as "total loans" and "loans held for investment."
See Notes to the Unaudited Consolidated Financial Statements

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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months EndedSix Months Ended
June 30,June 30,
(Dollars in thousands, except per share data)2020201920202019
Interest income:
Interest and fees on loans$34,483  $36,660  $69,071  $70,713  
Interest and dividends on taxable investment securities4,141  5,969  9,524  11,779  
Interest on tax-exempt investment securities634  729  1,289  1,266  
Other interest income 48  263  284  439  
Total interest income39,306  43,621  80,168  84,197  
Interest expense:
Interest on deposits3,284  5,719  7,913  10,563  
Interest on short-term borrowings574  1,233  1,613  2,406  
Interest on long-term borrowings588  620  1,146  1,265  
Total interest expense4,446  7,572  10,672  14,234  
Net interest income34,860  36,049  69,496  69,963  
Provision for credit losses (a)11,834  626  28,803  363  
Net interest income after provision for credit losses23,026  35,423  40,693  69,600  
Non-interest income:
Electronic banking income3,523  3,267  6,803  6,254  
Trust and investment income3,316  3,401  6,578  6,513  
Insurance income3,191  3,486  7,321  8,107  
Deposit account service charges1,909  2,977  4,729  5,318  
Commercial loan swap fees955  516  1,199  662  
Mortgage banking income938  1,000  1,688  1,788  
Bank owned life insurance income470  490  1,052  975  
Net gain (loss) on investment securities62  (57) 381  (27) 
Net loss on asset disposals and other transactions(122) (293) (209) (475) 
Other non-interest income422  502  859  1,603  
Total non-interest income14,664  15,289  30,401  30,718  
Non-interest expense:
Salaries and employee benefit costs17,985  20,824  37,903  40,026  
Net occupancy and equipment expense3,151  3,132  6,305  6,110  
Electronic banking expense1,879  1,693  3,744  3,270  
Professional fees1,834  2,344  3,527  3,620  
Data processing and software expense1,754  1,567  3,506  3,112  
Franchise tax expense881  772  1,763  1,477  
Amortization of other intangible assets728  824  1,457  1,518  
Marketing expense632  490  1,105  1,084  
Foreclosed real estate and other loan expenses335  469  913  724  
Communication expense294  317  574  595  
FDIC insurance premium152  381  147  752  
Other non-interest expense2,180  6,063  5,186  8,448  
Total non-interest expense31,805  38,876  66,130  70,736  
Income before income taxes5,885  11,836  4,964  29,582  
Income tax expense 1,136  2,238  980  5,615  
Net income$4,749  $9,598  $3,984  $23,967  
Earnings per common share - basic$0.24  $0.47  $0.19  $1.20  
Earnings per common share - diluted$0.23  $0.46  $0.19  $1.19  
Weighted-average number of common shares outstanding - basic19,720,315  20,277,028  20,043,329  19,824,035  
Weighted-average number of common shares outstanding - diluted19,858,880  20,442,366  20,183,222  19,972,350  
Cash dividends declared$6,814  $7,035  $13,852  $12,903  
Cash dividends declared per common share$0.34  $0.34  $0.68  $0.64  
(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

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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months EndedSix Months Ended
June 30,June 30,
(Dollars in thousands)2020201920202019
Net income $4,749  $9,598  $3,984  $23,967  
Other comprehensive income:
Available-for-sale investment securities:
Gross unrealized holding (loss) gain arising during the period(3,814) 12,947  18,454  21,672  
Related tax benefit (expense)801  (2,719) (3,875) (4,551) 
Reclassification adjustment for net (gain) loss included in net income(62) 57  (381) 27  
Related tax expense (benefit)13  (12) 80  (6) 
Net effect on other comprehensive (loss) income(3,062) 10,273  14,278  17,142  
Defined benefit plans:
Net (loss) gain arising during the period(156) —  (521) 2  
  Related tax benefit33  —  109  —  
Amortization of unrecognized loss and service cost on benefit plans36  20  64  37  
Related tax expense(8) (4) (14) (8) 
Recognition of loss due to settlement and curtailment151  —  519  —  
Related tax expense(32) —  (109) —  
Net effect on other comprehensive (loss) income 24  16  48  31  
Cash flow hedges:
Net loss arising during the period(734) (3,134) (10,464) (4,967) 
  Related tax benefit154  658  2,197  1,043  
Net effect on other comprehensive (loss) income(580) (2,476) (8,267) (3,924) 
Total other comprehensive (loss) income, net of tax(3,618) 7,813  6,059  13,249  
Total comprehensive income$1,131  $17,411  $10,043  $37,216  

See Notes to the Unaudited Consolidated Financial Statements


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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
Accumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
Common StockRetained EarningsTreasury Stock
(Dollars in thousands)
Balance, December 31, 2019$420,876  $187,149  $(1,425) $(12,207) $594,393  
Net income—  3,984  —  —  3,984  
Other comprehensive income, net of tax—  —  6,059  —  6,059  
Cash dividends declared—  (13,852) —  —  (13,852) 
Reissuance of treasury stock for common share awards(2,262) —  —  2,262  —  
Reissuance of treasury stock for deferred compensation plan for Boards of Directors—  —  —  59  59  
Repurchase of treasury stock in connection with employee incentive plan and under compensation plan for Boards of Directors—  —  —  (986) (986) 
Common shares repurchased under share repurchase program—  —  —  (20,000) (20,000) 
Common shares issued under dividend reinvestment plan243  —  —  —  243  
Common shares issued under compensation plan for Boards of Directors20  —  —  253  273  
Common shares issued under performance unit awards41  —  —  138  179  
Common shares issued under employee stock purchase plan(17) —  —  216  199  
Stock-based compensation2,335  —  —  —  2,335  
Impact of adoption of new accounting standard, net of taxes (a)—  (3,709) —  —  (3,709) 
Balance, June 30, 2020$421,236  $173,572  $4,634  $(30,265) $569,177  
(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




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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended
June 30,
(Dollars in thousands)20202019
Net cash provided by operating activities$30,042  $18,821  
Investing activities:
Available-for-sale investment securities:
Purchases(89,445) (116,433) 
Proceeds from sales11,582  72,481  
Proceeds from principal payments, calls and prepayments147,546  70,728  
Held-to-maturity investment securities:
Purchases(8,404) —  
Proceeds from principal payments2,667  1,984  
Other investment securities:
Purchases(5,470) (376) 
Proceeds from sales5,516  3,872  
Proceeds from insurance claim—  26  
Net (increase) decrease in loans held for investment(479,619) 29,219  
Net expenditures for premises and equipment(2,722) (1,233) 
Proceeds from sales of other real estate owned56  143  
Proceeds from bank owned life insurance contracts109  —  
Business acquisitions, net of cash received(96,973) 7,795  
Investment in limited partnership and tax credit funds(15) (44) 
Net cash (used in) provided by investing activities(515,172) 68,162  
Financing activities:  
Net increase (decrease) in non-interest-bearing deposits334,524  (23,318) 
Net increase in interest-bearing deposits398,838  173,571  
Net decrease in short-term borrowings(159,065) (207,329) 
Proceeds from long-term borrowings50,000  —  
Payments on long-term borrowings(667) (849) 
Cash dividends paid(13,473) (12,467) 
Purchase of treasury stock under share repurchase program(20,000) —  
Purchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors to be held as treasury stock
(986) (684) 
Proceeds from issuance of common shares40  6  
Contingent consideration payments made after a business acquisition—  (102) 
Net cash provided by (used in) financing activities589,211  (71,172) 
Net increase in cash and cash equivalents104,081  15,811  
Cash and cash equivalents at beginning of period115,193  77,612  
Cash and cash equivalents at end of period$219,274  $93,423  
Supplemental cash flow information:
     Interest paid11,334  13,765  
     Income taxes paid—  6,150  
Supplemental noncash disclosures:
     Transfers from loans to other real estate owned81  49  
Lease 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") 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, 2019 ("Peoples' 2019 Form 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’ 2019 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, 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, 2019, contained herein, has been derived from the audited Consolidated Balance Sheet included in Peoples’ 2019 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.
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 should be read in conjunction with "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples’ 2019 Form 10-K. Unless otherwise discussed, management believes the impact of any recently issued standards, including those issued but not yet effective, will not have a material impact on Peoples' financial statements taken as a whole.
Accounting Standards Update ("ASU") 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides optional expedients and exceptions for applying US GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This update is effective as of March 12, 2020 through December 31, 2022. Peoples is assessing the impact of ASU 2020-04 on Peoples' consolidated financial statements.
ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This accounting guidance replaces the "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 is 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 Accounting Standards Codification ("ASC") 326-20, and should be accounted for according to ASC 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. The measurement is 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 under previous US GAAP accounting guidance, which delayed recognition until it was probable a loss had been incurred.
Peoples adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized costs on January 1, 2020. Reporting periods beginning after December 31, 2019 are 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 assets 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.

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As of January 1, 2020, Peoples recorded 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 was adjusted to reflect the addition of $2.6 million to establish the allowance for credit losses. The remaining interest-related discount is 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, is based on the specific identification method and recognized as of the trade 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 Federal 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 determining an allowance for credit losses. Peoples has determined that the loss given default for U.S. government sponsored enterprise investment securities is zero, due to the fact that it is unlikely the ultimate guarantor (the U.S. government) would not perform on its implicit guarantee in the 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 principal balance outstanding, net of deferred loan fees and costs, purchase premiums and discounts, charge-offs

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and an allowance for credit losses. The foreseeable 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 foreseeable future.
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 Peoples will be 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 basis 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 segment level.
Peoples models extensions of contractual terms in the following 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 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

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loan portfolio and 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 at least on an annual basis for possible credit deterioration. Loan relationships whose aggregate credit exposure to Peoples is equal to or less than $1 million are reviewed at least 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 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 to 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 historical funding rates of unadvanced 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 acquisition 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 loan 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 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

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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.
Under the Coronavirus Aid, Relief and Economic Security ("CARES") Act, borrowers who were making payments as required and were not considered past due prior to becoming affected by COVID-19 and then receive payment accommodations as a result of the effects of COVID-19 generally would not be reported as past due. If Peoples agrees to a payment deferral for a borrower under the CARES Act, this may result in no contractual payments being past due, and the loans are not considered past due during the period of the deferral. During the time that Peoples maintains these short-term arrangements with borrowers, under the guidance, it is not to report the loans as nonaccrual.
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 all of 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 discount accretion.
Under the CARES Act, Peoples has made certain modifications that include the short-term deferral of interest for certain borrowers. In these cases, Peoples recognizes interest income as earned. The deferred interest will be repaid by the borrower in a future period, and will be evaluated by Peoples for collectibility.
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' 2019 Form 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.

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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
June 30, 2020December 31, 2019
(Dollars in thousands)Level 1Level 2Level 3Level 1Level 2Level 3
Assets:   
Available-for-sale investment securities:
Obligations of:   
  U.S. government sponsored agencies$—  $5,396  $—  $—  $8,209  $—  
  States and political subdivisions
—  107,032  —  —  114,104  —  
Residential mortgage-backed securities—  748,867  —  —  791,009  —  
Commercial mortgage-backed securities—  12,157  —  —  18,088  —  
Bank-issued trust preferred securities—  4,399  —  —  4,691  —  
Total available-for-sale securities—  877,851  —  —  936,101  —  
Equity investment securities (a)97  208  —  123  198  —  
Derivative assets (b)—  32,981  —  —  11,419  —  
Liabilities:
Derivative liabilities (c)$—  $47,136  $—  $—  $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.
(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.
Available-for-Sale Investment Securities: The fair values used by Peoples are obtained from an independent pricing service and represent either quoted market prices for the identical securities (Level 1) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatility, LIBOR yield curves, credit spreads and prices from market makers and live trading systems (Level 2). Management reviews the valuation methodology and quality controls utilized by the pricing services in management's overall assessment of the reasonableness of the fair values provided, and challenges prices when management believes a material discrepancy in pricing exists.
Equity Investment Securities: The fair values of Peoples' equity investment securities are obtained from quoted prices in active exchange markets for identical assets or liabilities (Level 1) or quoted prices in less active markets (Level 2).
Derivative Assets and Liabilities: Derivative assets and liabilities are recognized on the 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
June 30, 2020December 31, 2019
(Dollars in thousands)Level 1Level 2Level 3Level 1Level 2Level 3
Other real estate owned ("OREO")$—  $—  $236  $—  $—  $227  

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
(Dollars in thousands)Fair Value Hierarchy LevelJune 30, 2020December 31, 2019
Carrying AmountFair ValueCarrying AmountFair Value
Assets:
Cash and cash equivalents1$219,274  $219,274  $115,193  $115,193  
Held-to-maturity investment securities:
   Obligations of:
States and political subdivisions23,538  4,029  4,346  4,791  
Residential mortgage-backed securities228,075  29,120  21,494  21,569  
Commercial mortgage-backed securities25,754  6,189  5,907  6,181  
        Total held-to-maturity securities37,367  39,338  31,747  32,541  
Other investment securities:
Federal Home Loan Bank ("FHLB") stock 227,095  27,095  27,235  27,235  
Federal Reserve Bank ("FRB") stock213,311  13,311  13,310  13,310  
Nonqualified deferred compensation21,580  1,580  1,499  1,499  
Other investment securities2365  365  365  365  
Other investment securities (a)42,351  42,351  42,409  42,409  
Net loans33,306,657  3,697,052  2,851,969  3,147,190  
Loans held for sale217,009  18,471  6,499  6,553  
Bank owned life insurance 370,665  70,665  69,722  69,722  
Servicing rights (b)(c)32,482  2,890  2,742  3,881  
Liabilities:
Deposits2$4,024,884  $3,939,885  $3,291,412  $3,292,950  
Short-term borrowings2177,912  181,773  316,977  317,973  
Long-term borrowings2112,536  118,542  83,123  82,701  
(a)  Other investment securities, as reported on the Unaudited Consolidated Balance Sheets, also includes equity investment securities at June 30, 2020 and December 31, 2019, which are reported in the Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis table above and not included in this table.
(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) There were no write-down of servicing rights during the second quarter of 2020. 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 each financial instrument.  These instruments include cash and cash equivalents, demand and other non-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 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

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market factors in estimating the fair value of loans (Level 3). Fair values for loans are estimated using a discounted cash flow methodology. The discount rates take into account interest rates currently being offered to customers for loans with similar terms, the credit risk associated with the loan and other market factors, including liquidity.
Loans Held for Sale: Loans originated and intended to be sold in the secondary market, generally 1-4 family residential loans, are carried, in aggregate, at the lower of cost or estimated fair value. The use of a valuation model using quoted prices of similar instruments represents 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, 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
June 30, 2020    
Obligations of:    
U.S. government sponsored agencies$4,956  $440  $—  $5,396  
States and political subdivisions102,638  4,452  (58) 107,032  
Residential mortgage-backed securities728,760  21,668  (1,561) 748,867  
Commercial mortgage-backed securities12,022  250  (115) 12,157  
Bank-issued trust preferred securities4,696  13  (310) 4,399  
Total available-for-sale securities$853,072  $26,823  $(2,044) $877,851  
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  

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

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The gross gains and losses realized by Peoples from sales of available-for-sale securities for the periods ended June 30 were as follows:
Three Months EndedSix Months Ended
June 30,June 30,
(Dollars in thousands)2020201920202019
Gross gains realized$65  $30  $384  $60  
Gross losses realized3  87  3  87  
Net gain (loss) realized$62  $(57) $381  $(27) 
The cost of investment securities sold, and any resulting gain or loss, were 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
June 30, 2020        
Obligations of:
States and political subdivisions$1,287  $13  1  $2,067  $45  1  $3,354  $58  
Residential mortgage-backed securities
90,635  1,098  37  20,495  463  18  111,130  1,561  
Commercial mortgage-backed securities
—  —  —  1,502  115  2  1,502  115  
Bank-issued trust preferred securities
2,189  8  1  1,698  302  2  3,887  310  
Total$94,111  $1,119  39  $25,762  $925  23  $119,873  $2,044  
December 31, 2019        
Obligations of:
States and political subdivisions$6,226  $74  2  $2,441  $57  1  $8,667  $131  
Residential mortgage-backed securities
284,096  2,527  62  88,993  1,657  39  373,089  4,184  
Commercial mortgage-backed securities
970  21  1  2,409  114  3  3,379  135  
Bank-issued trust preferred securities
—  —  —  1,858  142  2  1,858  142  
Total$291,292  $2,622  65  $95,701  $1,970  45  $386,993  $4,592  

Management evaluates available-for-sale investment securities for an allowance for credit losses on a quarterly basis.  At June 30, 2020, management concluded that no individual securities at an unrealized loss position required an allowance for credit losses. At June 30, 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, 2020 and June 30, 2019 were largely attributable to changes in market interest rates and spreads since the securities were 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 $3.2 million at June 30, 2020 and $3.6 million at December 31, 2019.
At June 30, 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 two positions, consisted of privately issued mortgage-backed securities with all of the underlying mortgages originated prior to 2004. One of the two positions had a fair value of less than 90% of its book value, with an aggregate book and fair value of $59,000 and $53,000, respectively. Management analyzed the underlying credit quality of these mortgage-backed securities and concluded the unrealized losses were primarily attributable to the floating rate nature of these investments and the low remaining number of loans underlying these securities.
The unrealized losses with respect to the two bank-issued trust preferred securities that had been in an unrealized loss position for twelve months or more at June 30, 2020 were primarily attributable to the subordinated nature of the debt.

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The table below presents the amortized cost, fair value and total weighted-average yield of available-for-sale securities by contractual maturity at June 30, 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$—  $4,956  $—  $—  $4,956  
States and political subdivisions4,237  24,943  40,933  32,525  102,638  
Residential mortgage-backed securities4  5,061  72,411  651,284  728,760  
Commercial mortgage-backed securities4,486  3,640  967  2,929  12,022  
Bank-issued trust preferred securities—  —  4,696  —  4,696  
Total available-for-sale securities$8,727  $38,600  $119,007  $686,738  $853,072  
Fair value     
Obligations of:     
U.S. government sponsored agencies$—  $5,396  $—  $—  $5,396  
States and political subdivisions4,259  25,730  43,521  33,522  107,032  
Residential mortgage-backed securities4  5,097  73,713  670,053  748,867  
Commercial mortgage-backed securities4,511  3,743  1,017  2,886  12,157  
Bank-issued trust preferred securities—  —  4,399  —  4,399  
Total available-for-sale securities$8,774  $39,966  $122,650  $706,461  $877,851  
Total weighted-average yield2.44 %2.63 %2.61 %2.31 %2.36 %

Held-to-Maturity
The following table summarizes Peoples’ held-to-maturity investment securities:
(Dollars in thousands)Amortized CostAllowance for Credit Losses (a)Gross Unrealized GainsGross Unrealized LossesFair Value
June 30, 2020    
Obligations of:    
States and political subdivisions$3,544  $(6) $491  $—  $4,029  
Residential mortgage-backed securities28,075  —  1,045  —  29,120  
Commercial mortgage-backed securities5,754  —  435  —  6,189  
Total held-to-maturity securities$37,373  $(6) $1,971  $—  $39,338  
December 31, 2019    
Obligations of:    
States and political subdivisions$4,346  $—  $445  $—  $4,791  
Residential mortgage-backed securities21,494  —  169  (94) 21,569  
Commercial mortgage-backed securities5,907  —  275  (1) 6,181  
Total held-to-maturity securities$31,747  $—  $889  $(95) $32,541  
(a) 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.
There were no gross gains or gross losses realized by Peoples from sales of held-to-maturity securities for either of the three and six months ended June 30, 2020 and 2019.

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At June 30, 2020, there were no 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 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  1  $890  $27  1  $8,621  $94  
Commercial mortgage-backed securities
1,666  1  1  —  —  —  1,666  1  
Total$9,397  $68  2  $890  $27  1  $10,287  $95  
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 June 30, 2020, Peoples recorded $6,000 of allowance for credit losses for held-to-maturity securities, compared to $7,000 at January 1, 2020.
The table below presents the amortized cost, fair value and total weighted-average yield of held-to-maturity securities by contractual maturity at June 30, 2020.  The weighted-average yields are based on the amortized cost and are computed on a fully taxable-equivalent basis using a statutory federal corporate income tax rate of 21%.  In some cases, the issuers may have the right to call or prepay obligations without call or prepayment penalties prior to the contractual maturity date.  
(Dollars in thousands)Within 1 Year1 to 5 Years5 to 10 YearsOver 10 YearsTotal
Amortized cost     
Obligations of:     
States and political subdivisions$—  $—  $3,544  $—  $3,544  
Residential mortgage-backed securities—  —  3,253  24,822  28,075  
Commercial mortgage-backed securities—  386  3,790  1,578  5,754  
Total held-to-maturity securities$—  $386  $10,587  $26,400  $37,373  
Fair value     
Obligations of:     
States and political subdivisions$—  $—  $4,029  $—  $4,029  
Residential mortgage-backed securities—  —  3,377  25,743  29,120  
Commercial mortgage-backed securities—  397  4,183  1,609  6,189  
Total held-to-maturity securities$—  $397  $11,589  $27,352  $39,338  
Total weighted-average yield— %2.29 %2.80 %2.49 %2.57 %
Other Investment Securities
Peoples' other investment securities on the Unaudited Consolidated Balance Sheets consist largely of shares of FHLB of Cincinnati and FRB of Cleveland stock.
The following table summarizes the carrying value of Peoples' other investment securities:
(Dollars in thousands)June 30, 2020December 31, 2019
FHLB stock$27,095  $27,235  
FRB stock13,311  13,310  
Nonqualified deferred compensation1,580  1,499  
Equity investment securities305  321  
Other investment securities365  365  
Total other investment securities$42,656  $42,730  
Peoples redeemed FHLB stock in order to be in compliance with the requirements of the FHLB of Cincinnati. These redemptions totaled $4.5 million during the second quarter 2020 and $700,000 during the first quarter 2020. Peoples purchased no additional FHLB Stock during the second quarter 2020 and purchased $5.0 million of additional FHLB stock during the first quarter 2020, as a result of the FHLB of Cincinnati's capital requirements on FHLB advances during the quarter.
During the three and six months ended June 30, 2020, Peoples recorded the change in the fair value of equity investment securities held at June 30, 2020, in other non-interest income, resulting in unrealized gain of $16,000 and unrealized loss of $15,000, respectively. During the three and six months ended June 30, 2019, Peoples recorded the change in the fair value of equity investment

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securities held at June 30, 2019, in other non-interest income, resulting in no unrealized loss and unrealized gain of $22,000, respectively. Net realized gains on sales of equity investment securities, included in other non-interest income during the first six 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, 2020, Peoples' investment in equity investment securities was comprised largely of common stocks issued by various unrelated bank holding companies. There were no equity investment securities of a single issuer that exceeded 10% of Peoples' stockholders' equity.
Pledged Securities
Peoples had pledged available-for-sale investment securities and held-to-maturity investment securities 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 and held-to-maturity securities to secure additional borrowing capacity at the FHLB and the FRB.
The following table summarizes the carrying value of Peoples' pledged securities:
 Carrying Amount
(Dollars in thousands)June 30, 2020December 31, 2019
Securing public and trust department deposits, and repurchase agreements:
     Available-for-sale$559,756  $527,655  
     Held-to-maturity18,848  12,975  
Securing additional borrowing capacity at the FHLB and the FRB:
     Available-for-sale115,742  44,618  
     Held-to-maturity12,849  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, central and eastern Kentucky and west central West Virginia. Acquired loans consist of loans purchased in 2012 or thereafter. Loans that were acquired and subsequently re-underwritten are reported as originated upon execution of such credit actions (for example, renewals and increases in lines of credit).
The major classifications of loan balances (in each case, net of deferred fees and costs) excluding loans held for sale, were as follows:
(Dollars in thousands)June 30,
2020		December 31, 2019
Construction$109,953  $88,518  
Commercial real estate, other914,420  833,238  
Commercial and industrial1,070,326  662,993  
Residential real estate613,084  661,476  
Home equity lines of credit123,384  132,704  
Consumer, indirect450,334  417,185  
Consumer, direct78,926  76,533  
Deposit account overdrafts592  878  
Total loans, at amortized cost$3,361,019  $2,873,525  
Commercial and industrial loan balances grew significantly compared to December 31, 2019. Peoples began participating as a Small Business Administration ("SBA") Paycheck Protection Program ("PPP") lender during the second quarter of 2020, and originated approximately $488.1 million of PPP loans during the first six months of 2020. At June 30, 2020, the PPP loans had an amortized cost of $457.7 million, and were included in commercial and industrial loan balances. Peoples also recorded deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, which totaled $13.6 million at June 30, 2020. During the second quarter of 2020, Peoples recorded amortization of net deferred loan origination fees of $1.9 million on PPP loans. The remaining net deferred loan origination fees will be amortized over the life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income.

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Accrued interest receivable is not included within the loan balances, but 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 $9.2 million at June 30, 2020 and $9.1 million at December 31, 2019.
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 amortized cost of loans on nonaccrual status and loans delinquent for 90 days or more and accruing were as follows:
June 30, 2020December 31, 2019
(Dollars in thousands)
Nonaccrual (a)(b)
Accruing Loans 90+ Days Past Due
Nonaccrual (a)
Accruing Loans 90+ Days Past Due (b)
Construction$4  $—  $411  $—  
Commercial real estate, other9,678  130  6,801  907  
Commercial and industrial4,745  —  2,155  155  
Residential real estate8,905  1,618  6,361  2,677  
Home equity lines of credit687  46  1,165  108  
Consumer, indirect802  57  840  —  
Consumer, direct208  29  48  85  
Total loans, at amortized cost$25,029  $1,880  $17,781  $3,932  
(a) There were $1.4 million of nonaccrual loans for which there was no allowance for credit losses as of June 30, 2020 and $3.1 million at
December 31, 2019.
(b) 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. At December 31, 2019, these loans were presented as 90+ days past due and accruing,
As of June 30, 2020, Peoples had made short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment for borrowers, which were insignificant. Under the CARES Act, 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. As such, these modifications made under the CARES Act are not included in Peoples' nonaccrual or accruing loans 90+ days past due as of June 30, 2020.
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 December 31, 2019 was due to a $1.5 million commercial relationship and several smaller commercial relationships being placed on nonaccrual. The amount of interest income recognized on nonaccrual loans during the three and six months ended June 30, 2020 was $392,000 and $850,000, respectively.


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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
June 30, 2020
Construction—  —  4  $4  $109,949  109,953  
Commercial real estate, other595  1,097  9,235  10,927  903,493  914,420  
Commercial and industrial1,842  35  4,710  6,587  1,063,739  1,070,326  
Residential real estate1,641  3,417  5,576  10,634  602,450  613,084  
Home equity lines of credit511  540  472  1,523  121,861  123,384  
Consumer, indirect1,580  208  219  2,007  448,327  450,334  
Consumer, direct158  24  185  367  78,559  78,926  
Deposit account overdrafts—  —  —  —  592  592  
Total loans, at amortized cost$6,327  $5,321  $20,401  $32,049  $3,328,970  $3,361,019  
December 31, 2019
Construction$5  $—  $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 December 31, 2019, was mostly due to one $2.5 million commercial relationship. Delinquency trends remained stable, as 99.0% of Peoples' portfolio was considered “current” at June 30, 2020, compared to 98.6% at December 31, 2019.
As of June 30, 2020, Peoples had made short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment for borrowers, which were insignificant. Under the CARES Act, 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. As such, these modifications made under the CARES Act are not reflected as loans past due in the table above as of June 30, 2020.
Pledged Loans
Peoples has pledged certain loans secured by one-to-four family and multifamily residential mortgages, and home equity lines of credit under a blanket collateral agreement to secure borrowings from the FHLB. Peoples also has pledged commercial loans to secure borrowings with the FRB. Loans pledged are summarized as follows:
(Dollars in thousands)June 30, 2020December 31, 2019
Loans pledged to FHLB$464,770  $458,227  
Loans pledged to FRB521,094  172,693  
During the second quarter of 2020, Peoples pledged additional collateral to the FRB to secure potential funding needs in light of the COVID-19 pandemic, as well as to fund the PPP loan originations that occurred during the quarter.
Credit Quality Indicators
As discussed in "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples' 2019 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 at least 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

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other similar events. Adversely classified loans are 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 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 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 credit 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,” 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 “pass" for disclosure purposes.

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The following table summarizes the risk category of loans within Peoples' loan portfolio based upon the most recent analysis performed at June 30, 2020:
(Dollars in thousands)20202019201820172016PriorRevolving LoansRevolving Loans Converted to Term
Total
Loans
Construction

  Pass$14,934  $52,867  $3,463  $34,080  $1,406  $705  $444  $35,426  $107,899  
  Special mention$—  —  415  —  —  146  4  —  565  
  Substandard—  —  —  404  —  1,085  —  —  1,489  
     Total14,934  52,867  3,878  34,484  1,406  1,936  448  35,426  109,953  
Commercial real estate, other

  Pass72,717  135,406  107,372  101,444  110,664  233,262  96,499  23,043  857,364  
  Special mention—  3,600  1,132  4,407  558  7,073  4,848  124  21,618  
  Substandard—  1,574  68  2,209  2,016  25,323  4,153  47  35,343  
  Doubtful—  —  —  —  —  95  —  —  95  
     Total72,717  140,580  108,572  108,060  113,238  265,753  105,500  23,214  914,420  
Commercial and industrial
  Pass462,493  106,252  82,797  39,273  50,439  72,763  224,744  42,925  1,038,761  
  Special mention401  398  417  230  1,657  1,445  12,199  1,469  16,747  
  Substandard2,118  2,069  289  2,161  368  4,373  3,226  2,701  14,604  
  Doubtful—  —  —  —  7  207  —  187  214  
     Total465,012  108,719  83,503  41,664  52,471  78,788  240,169  47,282  1,070,326  
Residential real estate
  Pass18,462  46,167  30,246  35,652  52,555  351,179  63,691  —  597,952  
  Special mention—  —  —  —  —  1  —  —  1  
  Substandard—  —  —  —  —  14,560  —  —  14,560  
  Doubtful—  —  —  —  —  363  —  —  363  
   Loss—  —  —  —  —  208  —  —  208  
     Total18,462  46,167  30,246  35,652  52,555  366,311  63,691  —  613,084  
Home equity lines of credit
  Pass7,969  15,083  14,772  14,082  13,372  44,530  13,576  4,173  123,384  
     Total7,969  15,083  14,772  14,082  13,372  44,530  13,576  4,173  123,384  
Consumer, indirect
  Pass98,210  115,808  94,468  54,703  24,863  10,384  51,898  —  450,334  
     Total98,210  115,808  94,468  54,703  24,863  10,384  51,898  —  450,334  
Consumer, direct
  Pass17,557  20,942  15,371  6,847  3,966  4,271  9,972  —  78,926  
     Total17,557  20,942  15,371  6,847  3,966  4,271  9,972  —  78,926  
Deposit account overdrafts592  —  —  —  —  —  —  —  592  
Total loans, at amortized cost$695,453  $500,166  $350,810  $295,492  $261,871  $771,973  $485,254  $110,095  $3,361,019  
During the second quarter of 2020, Peoples downgraded additional credits based upon updated information that became available, and the downgrades were not related to COVID-19. At June 30, 2020, Peoples had a total of $1.6 million of loans secured by residential real estate mortgages that were in the process of foreclosure.

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Collateral Dependent Loans
Peoples 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 details Peoples' amortized cost of collateral dependent loans:
(Dollars in thousands)June 30, 2020December 31, 2019
Commercial real estate, other$9,372  $6,818  
Commercial and industrial4,509  1,962  
Residential real estate1,714  1,847  
Home equity lines of credit411  681  
Consumer, indirect—  713  
Consumer, direct—  94  
Total collateral dependent loans$16,006  $12,115  
The increase in collateral dependent commercial and industrial loans at June 30, 2020 compared to December 31, 2019 was mostly due to one commercial relationship that became collateral dependent, coupled with some smaller relationships. In addition, the increase in collateral dependent consumer loans was driven by a change in the policy threshold for evaluation of individually impaired loans, which was previously $100,000 and on January 1, 2020 was changed to $250,000, thereby reducing the amount of loans considered collateral dependent which were no longer above the threshold.


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The following table summarizes the loans that were modified as TDRs during the three months ended June 30:
Three Months Ended
Recorded Investment (a)
(Dollars in thousands)Number of ContractsPre-ModificationPost-ModificationRemaining Recorded Investment
June 30, 2020
Residential real estate5  303  303  303  
Home equity lines of credit2  14  14  14  
Consumer, indirect8  62  62  62  
Total15  $379  $379  $379  
June 30, 2019
Originated loans:
Residential real estate1  $37  $37  $37  
Home equity lines of credit2  60  60  60  
Consumer, indirect7  110  110  110  
Consumer, direct3  41  41  41  
   Consumer10  151  151  151  
Total13  $248  $248  $248  
Acquired loans:
Commercial real estate, other7  $725  $699  $700  
Commercial and industrial4  1,259  1,259  1,259  
Residential real estate35  $1,823  $1,823  $1,823  
Home equity lines of credit7  113  113  113  
Consumer, direct16  340  340  340  
Total69  $4,260  $4,234  $4,235  
(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.


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Six Months Ended
Recorded Investment (a)
(Dollars in thousands)Number of ContractsPre-ModificationPost-ModificationRemaining Recorded Investment
June 30, 2020
Commercial real estate, other1  $265  $265  $265  
Commercial and industrial1  145  145  145  
Residential real estate8  756  786  783  
Home equity lines of credit4  55  55  53  
Consumer, indirect13  128  128  122  
Consumer, direct3  51  51  49  
   Consumer16  179  179  171  
Total30  $1,400  $1,430  $1,417  
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  
Total22  $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  
Total72  $4,349  $4,324  $4,319  
(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.
On March 22, 2020, federal and state government 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.
Peoples did not have any loans that were modified as a TDR during the last twelve months that subsequently defaulted. Peoples had no commitments to lend additional funds to the related borrowers whose loan terms have been modified in a TDR.


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Allowance for Credit Losses
Changes in the allowance for credit losses for the three months ended June 30, 2020 are summarized below:
(Dollars in thousands)Beginning Balance, March 31, 2020Initial Allowance for Purchased Credit Deteriorated AssetsProvision for (Recovery of) Credit Losses (a)Charge-offsRecoveries
Ending Balance, June 30, 2020
Construction$1,742  $—  $920  $—  $—  $2,662  
Commercial real estate, other12,142  —  7,135  (135) 6  19,148  
Commercial and industrial8,743  —  573  (15) 805  10,106  
Residential real estate5,744  —  552  (16) 100  6,380  
Home equity lines of credit1,695  —  61  (9) 8  1,755  
Consumer, indirect10,878  —  1,679  (336) 72  12,293  
Consumer, direct1,803  —  179  (51) 10  1,941  
Deposit account overdrafts86  —  61  (119) 49  77  
Total$42,833  $—  $11,160  $(681) $1,050  $54,362  
(a)Amount does not include the provision for unfunded commitment liability.

Changes in the allowance for credit losses for the six months ended June 30, 2020 are summarized below:
(Dollars in thousands)Beginning Balance,
January 1, 2020		Initial Allowance for Purchased Credit Deteriorated AssetsProvision for (Recovery of) Credit Losses (a)Charge-offsRecoveries
Ending Balance, June 30, 2020
Construction$600  $51  $2,011  $—  $—  $2,662  
Commercial real estate, other7,193  1,356  10,622  (145) 122  19,148  
Commercial and industrial4,960  860  3,229  (952) 2,009  10,106  
Residential real estate3,977  383  1,997  (134) 157  6,380  
Home equity lines of credit1,570  2  197  (23) 9  1,755  
Consumer, indirect5,389  —  7,764  (1,057) 197  12,293  
Consumer, direct856  34  1,140  (113) 24  1,941  
Deposit account overdrafts94  —  206  (332) 109  77  
Total$24,639  $2,686  $27,166  $(2,756) $2,627  $54,362  
(a)Amount does not include the provision for unfunded commitment liability.
Peoples increased its allowance for credit losses based on CECL model results, which incorporated economic forecasts at the end of June 2020. These forecasts included higher unemployment rates nationally and in Ohio, and lower Ohio Gross Domestic Product, which are the key assumptions within the CECL model, compared to March 31, 2020. This was similar to the impact that COVID-19 had on economic forecasts at March 31, 2020, which also resulted in higher allowance for credit losses compared to December 31, 2019. The PPP loans originated during the second quarter of 2020 are guaranteed by the SBA, and therefore, had no impact on the allowance for credit losses at June 30, 2020. Peoples recorded lower provision for credit losses during the second quarter of 2020, compared to the linked quarter, driven primarily by the deterioration in the one-year economic forecast used for the first quarter, which was more severe than the deterioration in the one-year economic forecast used for the second quarter.
The significant increase in the allowance for credit losses as of June 30, 2020 compared to January 1, 2020 was mostly due to the recent COVID-19 pandemic, and the resulting impact on economic forecasts utilized in the CECL model. Peoples calculates its allowance for credit losses using a discounted cash flow model, and incorporates 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 the June 30, 2020 calculation of the allowance for credit losses included higher unemployment rates and lower Ohio Gross Domestic Product, which drove much of the increase in the allowance for credit losses at June 30, 2020. Approximately 63% of the increase in the allowance for credit losses at June 30, 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

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including recent loan growth. 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 June 30, 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 those customers, coupled with the CARES Act stimulus package and the SBA 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 June 30, 2020.
During the second quarter of 2020, Peoples recognized a recovery of $750,000 on a commercial and industrial loan that was previously charged-off, and recognized a similar $1.2 million recovery during the first quarter of 2020.
As of June 30, 2020, Peoples had recorded an unfunded commitment liability of $3.1 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.


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Note 5 Long-Term Borrowings

The following table summarizes Peoples' long-term borrowings:
 June 30, 2020December 31, 2019
(Dollars in thousands)BalanceWeighted-
Average
Rate		BalanceWeighted-
Average
Rate
FHLB putable, non-amortizing, fixed-rate advances$95,000  1.52 %$65,000  2.18 %
FHLB amortizing, fixed-rate advances$10,005  1.74 %$10,672  1.74 %
Junior subordinated debt securities$7,531  4.37 %$7,451  6.55 %
Total long-term borrowings$112,536  1.73 %$83,123  2.51 %
Peoples continually evaluates its overall balance sheet position given the interest rate environment. During the first six months of 2020, Peoples entered into one additional $50.0 million FHLB putable, non-amortizing fixed-rate advance with an interest rate of 0.77%, which matures in 2030, and two long-term FHLB non-amortizing advances totaling $20.0 million were reclassified to short-term borrowings during the second quarter of 2020, as the maturity became less than one year.
The FHLB putable, non-amortizing, fixed rate advances have maturities ranging from one to nine 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 an initial fixed rate period of three months or twelve months, requiring full repayment of the advance by Peoples prior to the stated maturity. If an 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. These advances require monthly interest payments, with no repayment of principal until the earlier of either an option to 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 six to eleven 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.
At June 30, 2020, the aggregate minimum annual retirements of long-term borrowings in future periods are as follows:
(Dollars in thousands)BalanceWeighted-Average Rate (a)
Six months ending December 31, 2020$1,968  1.57 %
Year ending December 31, 20211,979  1.52 %
Year ending December 31, 202216,521  1.98 %
Year ending December 31, 20231,157  1.48 %
Year ending December 31, 2024869  1.46 %
Thereafter90,042  1.55 %
Total long-term borrowings$112,536  1.61 %
(a) The weighted-average rate includes the impact of accreting the current book value of the junior subordinated debt securities to face value over the period. The weighted-average rates for the FHLB advances are 1.68% in the six months ending December 31, 2020, 1.71% in 2021, 2.00% in 2022, 1.73% in 2023, 1.74% in 2024, and 1.43% thereafter.

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Note 6 Stockholders’ Equity 

The following table details the progression in Peoples’ common shares and treasury stock during the six months ended June 30, 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—  26,991  
Cancellation of restricted common shares—  7,997  
Grant of restricted common shares—  (82,338) 
Grant of unrestricted common shares—  (22,982) 
Changes related to deferred compensation plan for Boards of Directors:
Purchase of treasury stock—  5,822  
Disbursed out of treasury stock—  (2,362) 
Common shares repurchased under share repurchase programs—  884,068  
Common shares issued under dividend reinvestment plan17,719  —  
Common shares issued under compensation plan for Boards of Directors
—  (6,865) 
Common shares issued under performance unit awards—  (6,127) 
Common shares issued under employee stock purchase plan
—  (9,167) 
Shares at June 30, 202021,173,862  1,299,219  
On February 27, 2020, Peoples' Board of Directors approved 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 $20.0 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 six months of 2020, Peoples purchased an aggregate of $20.0 million of its outstanding common shares, $843,000 of which were purchased under the previous share repurchase program and $19.5 million of which were purchased under the share repurchase program authorized on February 27, 2020.
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, 2020, Peoples had no preferred shares issued or outstanding.
On July 20, 2020, Peoples' Board of Directors declared a quarterly cash dividend of $0.34 per common share, payable on August 17, 2020, to shareholders of record on August 3, 2020. The following table details the cash dividends declared per common share during 2020 and the comparable period of 2019:
20202019
First quarter$0.34  0.30  
Second quarter0.34  0.34  
Third quarter0.34  0.34  
Total dividends declared$1.02  $0.98  

Accumulated Other Comprehensive Income (Loss)
The following table details the change in the components of Peoples’ accumulated other comprehensive income (loss) for the six months ended June 30, 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(301) —  —  (301) 
Realized loss due to settlement and curtailment, net of tax—  410  —  410  
Other comprehensive income (loss), net of reclassifications and tax
14,579  (362) (8,267) 5,950  
Balance, June 30, 2020$19,578  $(3,910) $(11,034) $4,634  
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.
The following tables detail the components of the net periodic cost for the plans described above:
Pension Benefits
 Three Months EndedSix Months Ended
 June 30,June 30,
(Dollars in thousands)2020201920202019
Interest cost$82  $110  $176  $219  
Expected return on plan assets(190) (196) (390) (391) 
Amortization of net loss36  20  66  39  
Settlement of benefit obligation151  —  519  —  
Net periodic loss (income) $79  $(66) $371  $(133) 


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Postretirement Benefits
 Three Months EndedSix Months Ended
 June 30,June 30,
(Dollars in thousands)2020201920202019
Interest cost$—  $1  $1  $2  
Amortization of prior service cost—  (1) —  (1) 
Amortization of net gain—  —  (2) (2) 
Net periodic income$—  $—  $(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.
During the first and second quarters 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 $151,000 and $519,000, respectively, in the three and six months ended June 30, 2020. There were no settlement charges recorded during the three and six months ended June 30, 2019 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 six months ended June 30, 2020:
As ofJune 30, 2020
(Dollars in thousands)December 31,BeforeImpact ofAfter
Funded status:2019SettlementsSettlements Settlements
Projected benefit obligation$12,668  $13,119  $(321) $12,798  
Fair value of plan assets11,865  10,891  (321) 10,570  
Funded status$(803) $(2,228) $—  $(2,228) 
Gross unrealized loss$5,068  $6,274  $(151) $6,123  
Assumptions:
Discount rate3.12 %2.63 %2.63 %
Expected return on plan assets7.50 %7.50 %7.50 %


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Note 8 Earnings Per Common Share 

The calculations of basic and diluted earnings per common share were as follows:
Three Months EndedSix Months Ended
June 30,June 30,
(Dollars in thousands, except per common share data)2020201920202019
Distributed earnings allocated to common shareholders$6,709  $6,935  $13,652  $12,711  
Undistributed (loss) earnings allocated to common shareholders(2,051) 2,568  (9,842) 11,067  
Net earnings allocated to common shareholders$4,658  $9,503  $3,810  $23,778  
Weighted-average common shares outstanding19,720,315  20,277,028  20,043,329  19,824,035  
Effect of potentially dilutive common shares138,565  165,338  139,893  148,315  
Total weighted-average diluted common shares outstanding19,858,880  20,442,366  20,183,222  19,972,350  
Earnings per common share:
Basic$0.24  $0.47  $0.19  $1.20  
Diluted$0.23  $0.46  $0.19  $1.19  
Anti-dilutive common shares excluded from calculation:
Restricted shares 77,371  87  57,170  46  

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.
Derivative Financial Instruments and Hedging Activities - Risk Management Objective of Using Derivative 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 derivative 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 derivative 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, 2020, Peoples had entered into seventeen interest rate swap contracts with an aggregate notional value of $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 CDs, which will continue to be rolled through the life of the swaps. As of June 30, 2020, the interest rate swaps were funded by $110.0 million of rolling three-month FHLB advances and $50.0 million rolling three-month brokered deposits.

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Amounts reported in accumulated other comprehensive income (loss) ("AOCI") related to derivative 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, 2020, Peoples had reclassifications of gains to interest expense of $365,000 and $483,000, respectively. During the three and six months ended June 30, 2019, Peoples had reclassifications of losses to earnings of $70,000 and $153,000, respectively.
For derivative 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 financial 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 CDs used to fund the swaps are matched to the reset dates and payment dates on the receipt of the three-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)June 30,
2020		December 31,
2019
Notional amount$160,000  $160,000  
Weighted average pay rates2.18 %2.18 %
Weighted average receive rates0.38 %1.73 %
Weighted average maturity5.1 years5.4 years
Pre-tax unrealized losses included in AOCI$(13,966) $(3,503) 
The following table presents net losses or gains recorded in AOCI and in the Unaudited Consolidated Statements of Operations related to the cash flow hedges:
Three Months EndedSix Months Ended
June 30,June 30,
(Dollars in thousands)2020201920202019
Amount of loss recognized in AOCI, pre-tax$734  $3,134  $10,463  $4,967  
Amount of loss recognized in earnings$—  $—  $—  $(19) 
The following table reflects the cash flow hedges, which are included in the Unaudited Consolidated Balance Sheets at fair value:
June 30,
2020		December 31,
2019
(Dollars in thousands)Notional AmountFair ValueNotional AmountFair Value
Included in other assets:
Interest rate swaps related to debt$—  $—  $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  $14,155  $105,000  $4,340  
Total included in accrued expenses and other liabilities$160,000  $14,155  $105,000  $4,340  

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 financial instrument. 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:

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June 30,
2020		December 31,
2019
(Dollars in thousands)Notional AmountFair ValueNotional AmountFair Value
Included in other assets:
Interest rate swaps related to commercial loans$390,909  $32,981  $321,394  $10,776  
Total included in other assets$390,909  $32,981  $321,394  $10,776  
Included in accrued expenses and other liabilities:
Interest rate swaps related to commercial loans$390,909  $32,981  $321,394  $10,776  
Total included in accrued expenses and other liabilities$390,909  $32,981  $321,394  $10,776  

Pledged Collateral
When the fair value of Peoples' interest rate swaps 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 June 30, 2020 and December 31, 2019, Peoples had $47.1 million and $20.0 million, respectively, of cash pledged, while the counterparties had no amount of cash pledged at either date. Cash pledged is included in interest-bearing deposits in other banks on the Unaudited Consolidated Balance Sheets.
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 share awards, stock appreciation rights, 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.  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 2019 and 2020, Peoples granted unrestricted common shares to non-employee directors (in addition to their directors' fees paid in common shares) and to 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. In the first six months of 2020, Peoples granted an aggregate of 80,338 restricted common shares subject to performance-based vesting to officers and key employees with restrictions that will lapse three years after the grant date; provided that in order for the restricted common shares to vest in full, Peoples must have reported positive net income and maintained a well-capitalized status by regulatory standards for each of the three fiscal years preceding the vesting date. During the first six months of 2020, Peoples granted, to certain key employees, an aggregate of 2,000 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 six months ended June 30, 2020:
Time-Based VestingPerformance-Based Vesting
 Number of Common SharesWeighted-Average Grant Date Fair ValueNumber of Common SharesWeighted-Average Grant Date Fair Value
Outstanding at January 132,230  $33.05  253,884  $33.29  
Awarded2,000  20.85  80,338  32.91  
Released4,000  31.63  56,827  32.42  
Forfeited4,200  31.45  3,797  33.02  
Outstanding at June 3026,030  $32.59  273,598  $33.36  
For the six months ended June 30, 2020, the total intrinsic value for restricted common shares released was $2.0 million compared to $1.6 million for the six months ended June 30, 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. During 2019, one of the seven performance unit awards was forfeited as the individual 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 covered the performance period beginning January 1, 2018 and ending on December 31, 2019, and were subject to two performance goals. Peoples achieved the first performance goal by exceeding its target cumulative two-year adjusted earnings per share. However, Peoples failed to achieve the second performance goal as its adjusted return on average assets for the measurement 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 unit awards received an aggregate of 9,395 common shares at a fair market value of $29.26 per common share on the date the performance units were deemed vested, with a related expense of $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 and unrestricted 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. The estimated fair value is then expensed over the vesting period, which is normally three years. For performance unit awards, Peoples recognized stock-based compensation over the performance period, based on the portion of the awards that was 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 15%. The following table summarizes the amount of stock-based compensation expense and related tax benefit recognized for each period:
Three Months EndedSix Months Ended
June 30,June 30,
(Dollars in thousands)2020201920202019
Employee stock-based compensation expense:
Stock grant expense$955  $903  $2,335  $2,056  
Employee stock purchase plan expense15  11  $30  $50  
Performance unit expense (benefit)—  16  $(12) $32  
Total employee stock-based compensation expense970  930  $2,353  $2,138  
Non-employee director stock-based compensation expense53  50  $235  $202  
Total stock-based compensation expense1,023  980  $2,588  $2,340  
Recognized tax benefit(214) (205) (543) (491) 
Net stock-based compensation expense$809  $775  $2,045  $1,849  
Restricted common shares were the primary form of stock-based compensation awards granted by Peoples in the six months ended June 30, 2020 and 2019. The fair value of restricted common share awards on the grant date is the market price of Peoples' common shares on that date. Total unrecognized stock-based compensation expense related to unvested restricted common share awards was $3.3 million at June 30, 2020, which will be recognized over a weighted-average period of 1.9 years. On April 1, 2020, an aggregate of 18,952 unrestricted common shares were granted as a one-time special award to employees under the level of Vice President, with a related stock-based compensation expense of $396,000 being recognized.
In addition to the portion of directors' fees paid in common shares, non-employee director stock-based compensation expense included $120,000 during the first six months of 2020, and $102,000 during the first six months of 2019, reflecting separate grants of unrestricted common shares aggregating 3,680 and 3,200 common shares, respectively.

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Note 11 Revenue

The following table details Peoples' revenue from contracts with customers:
 Three Months EndedSix Months Ended
June 30,June 30,
(Dollars in thousands)2020201920202019
Insurance income:
Commission and fees from sale of insurance policies (a)$2,933  $3,306  $5,625  $6,339  
Fees related to third-party administration services (a)120  178  267  347  
Performance-based commissions (b)138  2  1,429  1,421  
Trust and investment income (a)3,316  3,401  6,578  6,513  
Electronic banking income:
Interchange income (a)2,844  2,747  5,244  5,190  
Promotional and usage income (a)679  520  1,559  1,064  
Deposit account service charges:
Ongoing maintenance fees for deposit accounts (a)849  1,012  1,829  1,764  
Transactional-based fees (b)1,060  1,965  2,900  3,554  
Commercial loan swap fees (b)955  516  1,199  662  
Other non-interest income transactional-based fees (b)220  253  428  424  
Total revenue from contracts with customers$13,114  $13,900  $27,058  $27,278  
Timing of revenue recognition:
Services transferred over time$10,741  $11,164  $21,102  $21,217  
Services transferred at a point in time2,373  2,736  5,956  6,061  
Total revenue from contracts with customers$13,114  $13,900  $27,058  $27,278  
(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. As of June 30, 2020, there were no material changes to Peoples' revenue contracts related to the COVID-19 pandemic, and there were no changes to the likelihood of collectibility under the contracts.
The following table details the change in Peoples' contract assets and contract liabilities for the period ended June 30, 2020:
 Contract AssetsContract Liabilities
(Dollars in thousands)
Balance, January 1, 2020$600  $5,190  
     Additional income receivable291  —  
     Additional deferred income—  254  
     Recognition of income previously deferred—  (37) 
Balance, June 30, 2020$891  $5,407  


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Note 12 Acquisitions

After the close of business on June 30, 2020, Peoples closed on a business combination under which Peoples Bank acquired the operations and assets of Triumph Premium Finance (“TPF”), a division of TBK Bank, SSB. Based in Kansas City, Missouri, the division operating as Peoples Premium Finance will continue to provide insurance premium financing loans for commercial customers to purchase property and casualty insurance products through its growing network of independent insurance agency partners nationwide. Peoples Bank acquired approximately $86.5 million in loans. Peoples recorded $96.1 million in the “Other assets” line of the Unaudited Consolidated Balance Sheets, as of June 30, 2020. On July 1, 2020, Peoples completed the acquisition.
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 June 30, 2020, Peoples had $319,000 of contingent consideration payable related to the acquisition.

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 thirty years. Certain leases may include options to extend or terminate the lease. Only those renewal and termination options which 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, 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, 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 ASC 842. 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 Operations:
 Three Months EndedSix Months Ended
(Dollars in thousands)June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Operating lease expense$327  $311  661  618  
Short-term lease expense84  32  160  62  
Total lease expense$411  $343  $821  $680  
Peoples utilizes an incremental borrowing rate to determine the present value of 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 ROU asset, the lease liability and other information related to Peoples' operating leases:
(Dollars in thousands)June 30, 2020December 31, 2019
ROU asset:
Other assets$7,052  $7,606  
Lease liability:
     Accrued expenses and other liabilities$7,281  $7,813  
Other information:
     Weighted-average remaining lease term12.5 years12.4 years
     Weighted-average discount rate3.15 %3.16 %

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During the three and six months ended June 30, 2020, Peoples paid cash of $319,000 and $640,000, respectively, for operating leases. During the three and six months ended June 30, 2019, Peoples paid cash of $295,000 and $591,000, respectively, for operating leases.
The following table summarizes the maturity of remaining lease liabilities:
(Dollars in thousands)Balance
Six months ending December 31, 2020$711  
Year ending December 31, 20211,130  
Year ending December 31, 20221,061  
Year ending December 31, 2023873  
Year ending December 31, 2024629  
Thereafter4,750  
Total undiscounted lease payments$9,154  
Imputed interest$(1,873) 
Total lease liability$7,281  



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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 and six months ended June 30, 2020 and June 30, 2019. This discussion and analysis should be read in conjunction with the Unaudited Consolidated Financial Statements and the Notes thereto.
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 EndedAt or For the Six Months Ended
 June 30,June 30,
 (Dollars in thousands, expect per share data)2020201920202019
Operating Data (a)
Total interest income$39,306  $43,621  $80,168  $84,197  
Total interest expense4,446  7,572  10,672  14,234  
Net interest income34,860  36,049  69,496  69,963  
Provision for credit losses (b)11,834  626  28,803  363  
Net gain (loss) on investment securities62  (57) 381  (27) 
Net loss on asset disposals and other transactions(122) (293) (209) (475) 
Total non-interest income excluding net gains and losses (c)14,724  15,639  30,229  31,220  
Total non-interest expense31,805  38,876  66,130  70,736  
Net income (d)4,749  9,598  3,984  23,967  
Balance Sheet Data (a)
Total investment securities (e)$957,874  $997,711  $957,874  $997,711  
Loans, net of deferred fees and costs ("total loans")3,361,019  2,833,533  3,361,019  2,833,533  
Allowance for credit losses (e)54,362  21,357  54,362  21,357  
Goodwill and other intangible assets176,625  176,763  176,625  176,763  
Total assets4,985,819  4,276,376  4,985,819  4,276,376  
Non-interest-bearing deposits1,005,732  643,058  1,005,732  643,058  
Brokered deposits321,247  326,157  321,247  326,157  
Other interest-bearing deposits2,697,905  2,394,398  2,697,905  2,394.398  
Short-term borrowings177,912  186,457  177,912  186,457  
Junior subordinated debentures held by subsidiary trust7,531  7,367  7,531  7,367  
Other long-term borrowings105,005  78,324  105,005  78,324  
Total stockholders' equity (e)569,177  579,022  569,177  579,022  
Tangible assets (f)4,809,194  4,099,613  4,809,194  4,099,613  
Tangible equity (f)392,552  402,259  392,552  402,259  
Per Common Share Data (a)
Earnings per common share – basic$0.24  $0.47  $0.19  $1.20  
Earnings per common share – diluted0.23  0.46  0.19  1.19  
Cash dividends declared per common share0.34  0.34  0.68  0.64  
Book value per common share (g)28.57  27.98  28.57  27.98  
Tangible book value per common share (f)(g)$19.70  $19.44  $19.70  $19.44  
Weighted-average number of common shares outstanding – basic19,720,315  20,277,028  20,043,329  19,824,035  
Weighted-average number of common shares outstanding – diluted19,858,880  20,442,366  20,183,222  19,972,350  
Common shares outstanding at end of period19,925,083  20,696,041  19,925,083  20,696,041  
Closing share price at end of period$21.28  $32.26  $21.28  $32.26  

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 At or For the Three Months EndedAt or For the Six Months Ended
 June 30,June 30,
 (Dollars in thousands, expect per share data)2020201920202019
Significant Ratios (a)  
Return on average stockholders' equity (h)3.34 %6.81 %1.37 %8.87 %
Return on average tangible equity (h)(i)5.42 %10.55 %2.54 %13.49 %
Return on average assets (h)0.40 %0.91 %0.17 %1.17 %
Return on average assets adjusted for non-core items (h)(j)0.48 %1.44 %0.23 %1.47 %
Average stockholders' equity to average assets11.85 %13.33 %12.69 %13.24 %
Average total loans to average deposits85.00 %86.37 %85.43 %87.81 %
Net interest margin (h)(k)3.19 %3.77 %3.34 %3.78 %
Efficiency ratio (l)62.34 %73.24 %64.50 %68.09 %
Efficiency ratio adjusted for non-core items (m)59.94 %60.21 %62.76 %61.19 %
Pre-provision net revenue to total average assets (n)1.48 %1.21 %1.47 %1.49 %
Dividend payout ratio (o)(p)NM73.30 %NM53.84 %
Total loans to deposits (g)83.93 %84.42 %83.93 %84.42 %
Total investment securities as percentage of total assets (g)19.21 %23.33 %19.21 %23.33 %
Asset Quality Ratios (a)  
Nonperforming loans as a percent of total loans (g)(q)0.80 %0.71 %0.80 %0.71 %
Nonperforming assets as a percent of total assets (g)(q)0.54 %0.47 %0.54 %0.47 %
Nonperforming assets as a percent of total loans and OREO (g)(q)0.80 %0.71 %0.80 %0.71 %
Criticized loans as a percent of total loans (g)(r)3.14 %3.42 %3.14 %3.42 %
Classified loans as a percent of total loans (g)(s)1.98 %2.23 %1.98 %2.23 %
Allowance for credit losses as a percent of total loans (e)(g)1.62 %0.75 %1.62 %0.75 %
Allowance for credit losses as a percent of nonperforming loans (e)(g)(q)202.02 %106.57 %202.02 %106.57 %
Provision for credit losses as a percent of average total loans (b)1.46 %0.09 %1.89 %0.03 %
Net (recoveries) charge-offs as a percentage of average total loans(0.05)%0.03 %0.01 %(0.06)%
Capital Information (a)(g)  
Common equity tier 1 capital ratio (t)13.30 %14.16 %13.30 %14.16 %
Tier 1 risk-based capital ratio13.55 %14.41 %13.55 %14.41 %
Total risk-based capital ratio (tier 1 and tier 2)14.80 %15.14 %14.80 %15.14 %
Tier 1 leverage ratio8.97 %10.26 %8.97 %10.26 %
Common equity tier 1 capital$408,619  $410,978  $408,619  $410,978  
Tier 1 capital416,150  418,345  416,150  418,345  
Total capital (tier 1 and tier 2)454,641  439,702  454,641  439,702  
Total risk-weighted assets$3,072,178  $2,903,386  $3,072,178  $2,903,386  
Total stockholders' equity to total assets11.42 %13.54 %11.42 %13.54 %
Tangible equity to tangible assets (f)8.16 %9.81 %8.16 %9.81 %
(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 CECL model. Prior to the adoption of the CECL model, the provision for credit losses was the "provision for 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 $1.2 million for the second quarter of 2020 and $1.7 million for the first six months of 2020. For the second quarter of 2019, net income included non-core non-interest expenses of $6.8 million and the first six months of 2019 included $7.0 million. 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.

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(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).”
(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 expenses 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)."
(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 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 (non-US GAAP).”
(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 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 6.80% at June 30, 2020 and 7.14% at June 30, 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 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)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;
(3)the success, impact, and timing of the implementation of Peoples' business strategies and Peoples' ability to manage strategic initiatives, including the expansion of commercial and consumer lending activity;
(4)competitive pressures among financial institutions, or from non-financial institutions, which may increase significantly, including product and pricing pressures, which can in turn impact Peoples' credit spreads, changes to third-party relationships and revenues, changes in the manner of providing services, customer acquisition and retention pressures, and Peoples' ability to attract, develop and retain qualified professionals;
(5)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

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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 Security ("CARES") Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Basel III regulatory capital reform;
(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 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;

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(24)the impact on Peoples' businesses, personnel, facilities, or systems, of losses related to acts of fraud, theft, or violence;
(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;
(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’ 2019 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 88 locations, including 76 full-service bank branches, and 85 Automated Teller Machines ("ATMs") in northeastern, central, southwestern and southeastern Ohio, central and eastern Kentucky, and west central West Virginia 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 must also follow the regulations promulgated 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 a complete line of 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 premium financing solutions, 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.
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, 2020, which have 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’ 2019 Form 10-K.
Goodwill and intangible assets: Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired in the business combination. Goodwill is not amortized but is tested for impairment when indicators of impairment exist, or

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at least annually on October 1. There were no triggering events that were reviewed as of October 1, 2019. There was no indication that the carrying amount of the assets may not be recoverable, based on that analysis. Quarterly, Peoples performs an impairment review of goodwill, core deposit intangibles and customer relationship intangibles. During interim periods, ASC 350 requires companies to focus on those events and circumstances that affect significant inputs used to determine the fair value of goodwill. Paragraph 350-20-35-3C(a) through (g) includes examples of those events or circumstances. Those examples are not all-inclusive, and an entity shall consider other relevant events and circumstances that affect the fair value or carrying amount of the entity (or of a reporting unit) in determining whether to perform the goodwill impairment test. If an entity determines that there are no triggering events, then further testing is unnecessary.
Upon the occurrence of a triggering event, an entity may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the entity (or the reporting unit) is less than its carrying amount, including goodwill. Based on the assessment at June 30, 2020, management concluded that it was not more likely than not that goodwill was impaired.
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 July 1, 2020, Peoples completed its acquisition of Triumph Premium Finance ("TPF"), a division of TBK Bank, SSB. Based in Kansas City, Missouri. The division operating as Peoples Premium Finance will continue to provide insurance premium financing loans for commercial customers to purchase property and casualty insurance products through its network of independent insurance agency partners nationwide. Peoples recorded $96.1 million in the other assets line of the Unaudited Consolidated Balance Sheets, as the payment for the acquisition occurred during business hours, but became effective after close of business on June 30, 2020 (effective July 1, 2020 for accounting purposes).
◦During the second quarter of 2020, Peoples originated $488.1 million of loans under the loan guarantee program created under the CARES Act, called the Paycheck Protection Program ("PPP"). These loans were 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"). Additional information can be found later in this discussion under the caption “FINANCIAL CONDITION - COVID-19 Loan Impacts." As of June 30, 2020, Peoples had $458.0 million in PPP loans outstanding, which were included in commercial and industrial loan balances, compared to none in the first quarter as the program was initiated at the beginning of the second quarter of 2020. Peoples recognized interest income of $1.9 million for deferred fee/cost amortization and $918,000 of interest income on PPP loans during the second quarter of 2020.

◦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."
◦Peoples was 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 incurred $151,000 in the second quarter of 2020, and $368,000 in the first quarter of 2020, in pension settlement charges 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 charges during the first and second quarter of 2019.
◦During the second quarter of 2020, Peoples recorded a provision for credit losses of $11.8 million, compared to $17.0 million in the linked quarter and $0.6 million in the second quarter of 2019. For the first six months of 2020, Peoples has recorded a total provision for credit losses of $28.8 million compared to $0.4 million in 2019. The increases in the provision for credit losses compared to the second quarter of 2019, and first six months of 2019, were related to the impact of COVID-19 on the CECL model, as well as the implementation of the CECL accounting standard. The second quarter of 2020 included a recovery of $750,000 on a previously charged-off commercial loan. The first quarter of 2020 included a recovery of $1.2 million recorded on a previously charged-off commercial loan.

◦During the second quarter of 2020, Peoples recorded $918,000 of costs related to the COVID-19 pandemic, compared to $140,000 for the first quarter of 2020. These costs were primarily related to donations made to community food banks and pantries, as well as contributions to funds to support employees, including the issuance of unrestricted stock awards totaling$396,000 granted to employees at the Assistant Vice President level or below.
◦During the first and second quarters of 2020, Peoples recognized a credit of $289,000 and $172,000, respectively, to its Federal Deposit Insurance Corp. ("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. As of June 30, 2020, Peoples had utilized all credits issued to it by the FDIC.

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◦During the second quarter of 2020, Peoples incurred $47,000 of acquisition-related expenses, compared to $10,000 in the first quarter of 2020 and $6.8 million in the second quarter of 2019. Acquisition-related expenses for the six months ended June 30, 2020 were $77,000, compared to $7.0 million for the same period last year. The acquisition-related expenses in 2020 and 2019 were primarily related to the Triumph Premium Finance and First Prestonsburg acquisitions, respectively.
◦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 Agreement; and (iii) to finance acquisitions permitted under the U.S. Bank Loan Agreement.
◦On February 27, 2020, Peoples' Board of Directors approved 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 approved on November 3, 2015 and which was terminated on February 27, 2020. During the second quarter of 2020, Peoples repurchased 447,931 of its common shares through its share repurchase program for a total of $9.8 million. For the first six months of 2020, Peoples repurchased 884,068 of its common shares for a total of $20.0 million.
◦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 half of 2019.
◦Peoples closed a full-service bank branch located in Kentucky, when the lease for the location expired in July 2020. During the second quarter of 2020, there were no branch closures. 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. 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 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 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 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 transaction 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

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loans and $257.2 million of total deposits at the acquisition date, after fair value adjustments. Peoples also recorded $4.2 million of other intangible assets and $14.5 million of goodwill.
◦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.
◦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 maintained this rate as of June 30, 2020. According to the Chair of the Board of Governors of the Federal Reserve System, the federal funds target rate 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.
EXECUTIVE SUMMARY
Peoples recorded net income of $4.7 million for the second quarter of 2020, or earnings of $0.23 per diluted common share, compared to net loss of $0.8 million, or a loss of $0.04 per diluted common share, for the first quarter of 2020, and net income of $9.6 million, or $0.46 per diluted share, for the second quarter of 2019. Non-core items contained in net income (loss) included gains and losses, acquisition-related expenses, pension settlement charges, severance expenses and COVID-19 expenses. Non-core items negatively impacted income (loss) per diluted common share by $0.06 for the second quarter of 2020, $0.02 for the first quarter of 2020, and by $0.28 for the second quarter of 2019. Net income in the second quarter of 2020, was affected by the provision for credit losses recorded during the quarter, which was driven by the economic developments and uncertainties related to COVID-19. The provision for credit losses was calculated under the CECL accounting methodology in accordance with ASU 2016-13, which is sensitive to future economic projections. Additional information regarding the provision for credit losses can be found later in this discussion under the caption “RESULTS OF OPERATIONS - Provision for Credit Losses.”
During the first six months of 2020, net income was $4.0 million, or earnings of $0.19 per diluted common share, compared to net income of $24.0 million, or $1.19 per diluted share for the six months ended June 30, 2019. The decrease in earnings was impacted primarily by the provision for credit losses calculated using the CECL accounting methodology and the impact COVID-19 had on the inputs in the CECL model. Non-core items negatively impacted earnings per diluted common share by $0.08 and $0.29 for the six months ended June 30, 2020, and 2019, respectively.
Net interest income was $34.9 million for the second quarter of 2020, up 1% compared to $34.6 million for the first quarter of 2020, and a decrease of 3% compared to $36.0 million for the second quarter of 2019. Net interest margin was 3.19% for the second quarter of 2020, compared to 3.51% for the first quarter of 2020, and 3.77% for the second quarter of 2019. Net interest income and net interest margin during the second quarter were both impacted by the declining interest rate environment caused by COVID-19 that continued throughout the second quarter of 2020 and resulted in lower yields on the loan portfolio and accelerated premium amortization on the investment securities portfolio. The PPP loan income (interest and fees) of $2.8 million and a reduction of $1.3 million in interest expense on deposits benefited net interest income compared to the linked quarter.
Accretion income, net of amortization expense, from acquisitions was $955,000 for the second quarter of 2020, $1.1 million for the first quarter of 2020, and $1.2 million for the second quarter of 2019, which added 9 basis points, 11 basis points, and 13 basis points, respectively, to net interest margin. Accretion income, net of amortization expense, from acquisitions was $2.0 million for the six months ended June 30, 2020, compared to $1.9 million for the six months ended June 30, 2019, and added 10 basis points to net interest margin for both periods.
During the second quarter of 2020, Peoples recorded a provision for credit losses of $11.8 million, compared to a provision for credit losses of $17.0 million for the first quarter of 2020 and a provision for loan losses of $626,000 for the second quarter of 2019. Net recoveries for the second quarter of 2020 were $369,000, or (0.05)% of average total loans annualized, compared to net charge-offs of $498,000, or 0.07% of average total loans annualized, for the linked quarter and net charge-offs of $208,000, or 0.03% of average total loans annualized, for the second quarter of 2019. The provision for credit losses during the current quarter was primarily due to the economic forecast and Peoples' own credit portfolio developments related to COVID-19 and their impact on the assumptions used in estimating the allowance of credit losses under the CECL model in accordance with ASU 2016-13.
Provision for credit losses during the first six months of 2020 was $28.8 million, compared to $363,000 for the first six months of 2019. Net charge-offs for the first six months of 2020 were $129,000, or 0.01% of average total loans annualized, compared to net recoveries of $799,000, or (0.06)% of average total loans annualized, for the first six months of 2019. The second quarter of 2020 included the $750,000 recovery recorded on a previously charged-off commercial loan, while a $1.2 million recovery was recognized

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during the first quarter of 2020. The first six months of 2019 included the $1.8 million recovery recorded on a previously charged-off commercial loan.
For the second quarter of 2020, total non-interest income decreased $1.1 million, or 7%, compared to the first quarter of 2020 and was down $625,000, or 4%, compared to the second quarter of 2019. Compared to the first quarter of 2020, insurance income decreased $939,000, or 23%, due to lower performance-based commissions, which are primarily recognized in the first quarter of each year and are a core component of insurance income, partially offset by an increase in health insurance commissions. Deposit account service charges declined $911,000 for this quarterly comparison due primarily to a $773,000 reduction in fees assessed for overdrafts and non-sufficient funds as customers have maintained higher balances in their deposit accounts due to the COVID-19 pandemic. Compared to the second quarter of 2019, non-interest income, excluding net gains and losses, was down $915,000. Income from deposit account service charges decreased $1.1 million, or 36%, compared to the prior year quarter, as a result of lower overdraft and non-sufficient funds fees assessed to customers given higher deposit balances being maintained in relation to the COVID-19 pandemic. Also contributing to the change was a reduction in insurance income of $295,000, driven by businesses that have either closed or declines in assets insured under policies, primarily due to the COVID-19 pandemic.
For the six months ended June 30, 2020, total non-interest income decreased $317,000, or 1%, compared to the six months ended June 30, 2019. Driving the decline was lower deposit account service charges due to a reduction in fees assessed for overdrafts and non-sufficient funds primarily related to customers maintaining higher balances in their accounts. Also affecting the change, other non-interest income was higher during the first six months of 2019 because of the sale of restricted Class B Visa stock last year, when Peoples recognized income of $787,000. Insurance income also decreased compared to the prior year and was mostly related to businesses that have either closed or declines in assets insured under policies, primarily due to the COVID-19 pandemic.
Total non-interest expense decreased $2.5 million, or 7%, for the second quarter of 2020 compared to the first quarter of 2020 and$7.1 million, or 18%, compared to the second quarter of 2019. Salaries and employee benefit costs were down as a result of higher deferred personnel costs associated with PPP loan originations, which were $921,000. Also contributing to the change in salaries and employee benefits was lower stock-based compensation expense due to vesting of prior awards and awards granted to retirement eligible participants that were expensed when granted. A decrease in medical insurance benefits of $622,000 during the second quarter 2020, compared to the linked quarter, also contributed to the change, which was partially due to the annual contributions to employee health benefit accounts that had occurred during the linked quarter, as well as fewer doctor's office visits and the decline in elective procedures, compared to both periods. Total non-interest expense in the second quarter of 2020 included $151,000 in pension settlement charges, while the first quarter of 2020 included pension settlement charges of $368,000 and none in the second quarter of 2019. The decreases in the areas described above were partially offset by increases for COVID-19 expenses, which included a $250,000 donation to food banks and pantries in Peoples' market area and an employee stock award aggregating $396,000 made to employees at the level of Assistant Vice President or below.
During the first six months of 2020, total non-interest expense decreased 7% compared to 2019. The variance was driven primarily by a reduction in acquisition-related expenses that impacted salaries and employee benefits, and other expenses recognized in the previous year related to the First Prestonsburg acquisition, lower FDIC insurance premiums because of the credits mentioned above, and lower travel and entertainment expenses due to COVID-19 restrictions. These changes were partially offset by increases of 14% in electronic banking expenses, 13% in data processing and software expenses, and COVID-19 expenses.
Peoples' efficiency ratio, calculated as total non-interest expense less amortization of other intangible assets divided by fully tax-equivalent ("FTE") net interest income, plus total non-interest income, excluding all gains and losses, for the second quarter of 2020 was 62.3%, compared to 66.6% for the first quarter of 2020 and 73.2% for the second quarter of 2019. The improvement in the efficiency ratio compared to the linked quarter was primarily due to the decline in non-interest expense. The efficiency ratio, when adjusted for non-core items, was 59.9% for the second quarter of 2020, compared to 65.5% for the first quarter of 2020 and 60.2% for the second quarter of 2019. For the first six months of 2020, the efficiency ratio was 64.5% compared to 68.1% for 2019, and was 62.8% and 61.2%, respectively, when adjusted for non-core items.
Peoples recorded income tax expense of $1.1 million for the second quarter of 2020, compared to an income tax benefit of $156,000 for the linked quarter and income tax expense of $2.2 million for the second quarter of 2019. Peoples recognized income tax expense of $1.0 million for the first six months of 2020, compared to $5.6 million for the first six months of 2019. The variance between each of the comparative periods was the result of pre-tax income (loss) recognized, due primarily to the higher allowance for credit losses recorded during the first half of 2020.
At June 30, 2020, total assets were $4.99 billion, compared to $4.35 billion at December 31, 2019. The 15% increase compared to December 31, 2019 was driven by an increase in cash and cash equivalents of $104.1 million, loan growth of $487.5 million, driven by PPP loan originations, along with an increase in other assets of $115.1 million, which included certain activity totaling $96.1 million related to the premium finance acquisition. The allowance for credit losses increased to $54.4 million, or 1.62% of total loans, compared to $21.6 million and 0.75%, respectively, at December 31, 2019.
Total liabilities were $4.42 billion at June 30, 2020, up $656.9 million since December 31, 2019. The increase in total liabilities during the first six months of 2020 was primarily due to an increase in deposits of $773.5 million, partially offset by a decline in total borrowed funds of $109.7 million.

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At June 30, 2020, total stockholders' equity was $569.2 million, a decrease of $25.2 million compared to December 31, 2019. The decrease in total stockholders' equity was mainly due to the repurchase of 884,068 shares for a total of $20.0 million, dividends paid of $13.9 million and a $3.7 million adjustment related to the adoption of the CECL accounting standard, partially offset by net income of $4.7 million and a $6.1 million increase in accumulated other comprehensive income.
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 EndedSix Months Ended
 June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
Net interest income$34,860  $34,636  $36,049  $69,496  $69,963  
Taxable equivalent adjustments269  272  267  541  467  
Fully tax-equivalent net interest income$35,129  $34,908  $36,316  $70,037  $70,430  

The following tables detail Peoples’ average balance sheets for the periods presented:

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 For the Three Months Ended
 June 30, 2020March 31, 2020June 30, 2019
(Dollars in thousands)
Average BalanceIncome/ ExpenseYield/CostAverage BalanceIncome/ ExpenseYield/CostAverage BalanceIncome/ ExpenseYield/Cost
Short-term investments (a)$164,487  $48  0.12 %$73,798  $236  1.29 %$27,979  $263  3.77 %
Investment securities (b)(c)(d):     
Taxable903,227  4,188  1.85 %928,182  5,428  2.34 %874,427  6,006  2.75 %
Nontaxable103,169  802  3.11 %106,934  829  3.10 %118,241  923  3.12 %
Total investment securities1,006,396  4,990  1.98 %1,035,116  6,257  2.42 %992,668  6,929  2.79 %
Loans (c)(d)(e):      
Construction121,982  1,226  3.98 %97,839  1,251  5.06 %124,334  1,655  5.27 %
Commercial real estate, other849,070  8,873  4.13 %837,602  10,057  4.75 %833,991  11,322  5.37 %
Commercial and industrial979,206  8,842  3.57 %649,437  7,424  4.52 %599,432  8,081  5.33 %
Residential real estate (f)682,216  8,257  4.84 %665,737  8,371  5.03 %646,978  7,918  4.90 %
Home equity lines of credit128,632  1,493  4.67 %131,673  1,775  5.42 %132,395  2,006  6.08 %
Consumer, indirect421,972  4,554  4.34 %415,986  4,409  4.26 %412,986  4,255  4.13 %
Consumer, direct77,830  1,292  6.68 %76,707  1,354  7.10 %80,442  1,459  7.27 %
Total loans3,260,908  34,537  4.22 %2,874,981  34,641  4.80 %2,830,558  36,696  5.20 %
Allowance for credit losses (d)(48,768) (27,548) (21,311) 
Net loans3,212,140  34,537  4.28 %2,847,433  34,641  4.84 %2,809,247  36,696  5.20 %
Total earning assets4,383,023  39,575  3.60 %3,956,347  41,134  4.14 %3,829,894  43,888  4.56 %
Goodwill and other intangible assets177,012   177,984  175,169   
Other assets267,981   247,296  234,716   
    Total assets
$4,828,016   $4,381,627  $4,239,779  
Interest-bearing deposits:      
Savings accounts$563,213  $33  0.02 %$522,893  $74  0.06 %$523,295  $110  0.08 %
Governmental deposit accounts
370,999  445  0.48 %328,407  715  0.88 %331,607  848  1.03 %
Interest-bearing demand accounts
655,711  71  0.04 %628,677  248  0.16 %603,494  231  0.15 %
Money market accounts575,858  360  0.25 %476,477  673  0.57 %414,307  654  0.63 %
Retail certificates of deposit481,305  1,870  1.56 %488,948  2,059  1.69 %477,530  2,079  1.75 %
Brokered deposits192,230  505  1.06 %191,955  860  1.80 %272,693  1,797  2.64 %
Total interest-bearing deposits
2,839,316  3,284  0.47 %2,637,357  4,629  0.71 %2,622,926  5,719  0.87 %
Borrowed funds:      
Short-term FHLB advances137,659  559  1.63 %206,283  994  1.94 %193,963  1,140  2.36 %
Repurchase agreements and other46,330  15  0.13 %47,351  45  0.38 %46,631  93  0.80 %
Total short-term borrowings183,989  574  1.25 %253,634  1,039  1.65 %240,594  1,233  2.06 %
Long-term FHLB advances122,960  491  1.61 %101,804  447  1.77 %96,519  491  2.04 %
Other borrowings12,438  97  3.12 %7,471  111  5.94 %7,346  129  7.02 %
Total long-term borrowings135,398  588  1.75 %109,275  558  2.05 %103,865  620  2.39 %
  Total borrowed funds319,387  1,162  1.46 %362,909  1,597  1.77 %344,459  1,853  2.16 %
      Total interest-bearing liabilities
3,158,703  4,446  0.57 %3,000,266  6,226  0.83 %2,967,385  7,572  1.02 %
Non-interest-bearing deposits997,179    708,512  654,468   
Other liabilities99,993    76,603  52,934    
Total liabilities4,255,875    3,785,381  3,674,787    
Stockholders’ equity572,141    596,246  564,992    
Total liabilities and stockholders’ equity$4,828,016    $4,381,627  $4,239,779    
Interest rate spread (c) $35,129  3.03 %$34,908  3.31 % $36,316  3.54 %
Net interest margin (c)3.19 %  3.51 %  3.77 %



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 For the Six Months Ended
 June 30, 2020June 30, 2019
(Dollars in thousands)
Average BalanceIncome/ ExpenseYield/CostAverage BalanceIncome/ ExpenseYield/Cost
Short-term investments (a)$119,143  $284  0.48 %$22,145  $439  4.00 %
Investment securities (b)(c)(d):   
Taxable 915,704  9,616  2.10 %827,831  11,853  2.86 %
Nontaxable105,051  1,631  3.11 %100,876  1,603  3.18 %
Total investment securities1,020,755  11,247  2.20 %928,707  13,456  2.90 %
Loans (c)(d)(e):   
Construction109,910  2,477  4.46 %127,988  3,387  5.26 %
Commercial real estate, other843,336  18,930  4.44 %820,163  21,918  5.32 %
Commercial and industrial814,321  16,266  3.95 %589,249  15,762  5.32 %
Residential real estate (f)673,976  16,628  4.93 %625,236  14,845  4.75 %
Home equity lines of credit130,152  3,268  5.05 %131,746  3,866  5.92 %
Consumer, indirect418,979  8,963  4.30 %411,489  8,343  4.09 %
Consumer, direct77,269  2,646  6.89 %76,969  2,648  6.94 %
Total loans3,067,943  69,178  4.49 %2,782,840  70,769  5.07 %
Less: Allowance for credit losses(d)
(38,158) (20,861) 
Net loans3,029,785  69,178  4.54 %2,761,979  70,769  5.12 %
Total earning assets4,169,683  80,709  3.85 %3,712,831  84,664  4.55 %
Goodwill and other intangible assets177,498   168,458  
Other assets257,640   232,114  
    Total assets
$4,604,821   $4,113,403  
Interest-bearing deposits:   
Savings accounts$543,053  $107  0.04 %$498,115  $201  0.08 %
Governmental deposit accounts
349,703  1,160  0.67 %314,666  1,405  0.90 %
Interest-bearing demand accounts
642,194  319  0.10 %586,577  478  0.16 %
Money market accounts526,168  1,033  0.39 %404,868  1,185  0.59 %
Retail certificates of deposit
485,126  3,929  1.63 %437,476  3,496  1.61 %
Brokered deposits192,093  1,365  1.43 %293,313  3,798  2.61 %
Total interest-bearing deposits
2,738,337  7,913  0.58 %2,535,015  10,563  0.84 %
Borrowed funds:   
Short-term FHLB advances171,971  1,553  1.82 %196,290  2,255  2.32 %
Repurchase agreements and other46,840  60  0.26 %46,373  151  0.65 %
Total short-term borrowings218,811  1,613  1.48 %242,663  2,406  2.00 %
Long-term FHLB advances112,382  938  1.68 %98,712  999  2.04 %
Repurchase agreement and other borrowings9,954  208  4.18 %7,325  266  7.26 %
Total long-term borrowings122,336  1,146  1.88 %106,037  1,265  2.40 %
  Total borrowed funds341,147  2,759  1.62 %348,700  3,671  2.12 %
      Total interest-bearing liabilities
3,079,484  10,672  0.70 %2,883,715  14,234  0.99 %
Non-interest-bearing deposits852,846    634,308  
Other liabilities88,298    50,674  
Total liabilities4,020,628    3,568,697  
Total stockholders’ equity584,193    544,706  
Total liabilities and stockholders’ equity$4,604,821    $4,113,403  
Interest rate spread (c) $70,037  3.15 %$70,430  3.56 %
Net interest margin (c)3.34 %3.78 %
(a) The three and six month periods ended June 30, 2019 do not reflect an adjustment related to the balance sheet interest rate swap transactions.
(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.
(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.

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(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.

Average total loan balances were impacted during the second quarter of 2020 and the first six months of 2020 due to the PPP loan growth. During the second quarter of 2020, Peoples funded approximately $488.1 million of PPP loans, which added to the commercial and industrial average loan balances for the quarterly and six month period.

The following table provides an analysis of the changes in FTE net interest income:
Three Months Ended June 30, 2020 Compared to
Six Months Ended June 30, 2020 Compared to
(Dollars in thousands)March 31, 2020June 30, 2019June 30, 2019
Increase (decrease) in:RateVolume
Total (a)
RateVolume
Total (a)
RateVolume
Total (a)
INTEREST INCOME:
Short-term investments $(908) $720  $(188) $(1,696) $1,481  $(215) $(1,306) $1,151  $(155) 
Investment Securities (b) (c):
Taxable(1,097) (143) (1,240) (3,088) 1,270  (1,818) (1,823) (414) (2,237) 
Nontaxable15  (42) (27) (3) (118) (121) 28  —  28  
Total investment income(1,082) (185) (1,267) (3,091) 1,152  (1,939) (1,795) (414) (2,209) 
Loans (b)(c):
   
Construction(1,146) 1,121  (25) (398) (31) (429) (473) (437) (910) 
Commercial real estate, other(2,056) 872  (1,184) (3,774) 1,325  (2,449) (4,653) 1,665  (2,988) 
Commercial and industrial(8,314) 9,732  1,418  (13,618) 14,379  761  (9,438) 9,942  504  
Residential real estate(1,067) 953  (114) (525) 864  339  596  1,187  1,783  
Home equity lines of credit(242) (40) (282) (457) (56) (513) (553) (45) (598) 
Consumer, indirect81  64  145  209  90  299  460  160  620  
Consumer, direct(177) 115  (62) (123) (44) (167) (2) —  (2) 
Total loan income(12,921) 12,817  (104) (18,686) 16,527  (2,159) (14,063) 12,472  (1,591) 
Total interest income$(14,911) $13,352  $(1,559) $(23,473) $19,160  $(4,313) $(17,164) $13,209  $(3,955) 
INTEREST EXPENSE:   
Deposits:   
Savings accounts$(76) $35  $(41) $(130) $53  $(77) $(143) $49  $(94) 
Governmental deposit accounts(790) 520  (270) (989) 586  (403) (612) 367  (245) 
Interest-bearing demand accounts(248) 71  (177) (286) 126  (160) (275) 116  (159) 
Money market accounts(1,050) 737  (313) (1,421) 1,127  (294) (813) 661  (152) 
Retail certificates of deposit(157) (32) (189) (317) 108  (209) 39  394  433  
Brokered deposits(364) 9  (355) (865) (427) (1,292) (1,383) (1,050) (2,433) 
Total deposit cost(2,685) 1,340  (1,345) (4,008) 1,573  (2,435) (3,187) 537  (2,650) 
Borrowed funds:   
Short-term borrowings(169) (296) (465) (377) (282) (659) (707) (86) (793) 
Long-term borrowings(466) 496  30  (507) 475  (32) (365) 246  (119) 
Total borrowed funds cost(635) 200  (435) (884) 193  (691) (1,072) 160  (912) 
Total interest expense(3,320) 1,540  (1,780) (4,892) 1,766  (3,126) (4,259) 697  (3,562) 
Fully tax-equivalent net interest income $(11,591) $11,812  $221  $(18,581) $17,394  $(1,187) $(12,905) $12,512  $(393) 
(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)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.
(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 increased 1% compared to the linked quarter, as reductions in loan yields were more than offset by the PPP loan income, reduced deposit rates and lower borrowing costs. Federal, state and local responses to COVID-19 have included travel restrictions, prohibition and cancellation of large-scale gatherings, restrictions on commerce and movement, and the closure of schools

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and colleges. The impact caused by the closures had a significant impact on the economy. During the second quarter of 2020, net interest income was heavily impacted by the actions taken by the Federal Reserve in response to the COVID-19 pandemic. In late March, the Federal Reserve lowered the Federal Funds effective target range 150 basis points during the first quarter of 2020 to 0.00% to 0.25%. The majority of Peoples' variable rate loan portfolio is tied to LIBOR or a prime rate, which continued to be lower than historical levels. The low interest rate environment also drove higher premium amortization on Peoples' investment securities portfolio, which was $720,000 higher than in the linked quarter, thereby reducing net interest income and net interest margin. Net interest margin decreased 32 basis points compared to the linked quarter driven by lower loan and investment yields.
Net interest income for the second quarter of 2020 decreased $1.2 million, or 3%, compared to the second quarter of 2019. Net interest margin decreased 58 basis points compared to 3.77% for the second quarter of 2019. The decrease in net interest income compared to the second quarter of 2019 was driven by lower yields on loans and investments, offset by PPP loan income and lower interest rates paid on deposits, all of which were impacted by the Federal Reserve's reaction to COVID-19.
For the first six months of 2020, net interest income declined $467,000, or 1%, compared to the first six months of 2019 and net interest margin decreased 44 basis points to 3.34%. The lower net interest income and net interest margin compared to 2019 were the result of lower interest rates, increased premium amortization on Peoples' investment securities portfolio and loans repricing faster than deposits, caused by the Federal Reserve's reaction to COVID-19. Funding costs declined compared to the first six months of 2019, as interest rates on deposits were lowered and borrowing costs were controlled.
Accretion income, net of amortization expense, from acquisitions was $955,000 for the second quarter of 2020, $1.1 million for the linked quarter and $1.2 million for the second quarter of 2019, which added 9 basis points, 11 basis points and 13 basis points, respectively, to net interest margin. Accretion income, net of amortization expense, from acquisitions was $2.0 million for the six months ended June 30, 2020, compared to $1.9 million for the six months ended June 30, 2019, which in both periods added 10 basis points, to net interest margin.
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 Credit Losses
The following table details Peoples’ provision for credit losses:
 Three Months EndedSix Months Ended
 June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
Provision for other credit losses$11,773  $16,824  $475  $28,597  $115  
Provision for checking account overdraft credit losses61  145  151  206  248  
Provision for credit losses$11,834  $16,969  $626  $28,803  $363  
As a percentage of average total loans (a)1.46 %2.37 %0.09 %1.89 %0.03 %
(a) Presented on an annualized basis.
The provision for credit losses recorded represents the amount needed to maintain the appropriate level of the allowance for credit losses based on management’s quarterly estimates. During the second quarter of 2020, the provision for credit losses was driven by the economic forecasts utilized within Peoples' CECL model, which predicted higher levels of defaults due to the COVID-19 pandemic. Peoples recorded lower provision for credit losses during the second quarter of 2020, compared to the linked quarter, driven primarily by the deterioration in the one-year economic forecast used for the first quarter, which was more severe than the deterioration in the one-year economic forecast used for the second quarter. For the first six months of 2020, Peoples recorded significant provision for credit losses related to the impacts from the economic assumptions used in estimating the allowance for credit losses under the CECL model. Net recoveries for the second quarter of 2020 were $369,000, or (0.05)% of average total loans annualized, compared to net charge-offs of $498,000, or 0.07% of average total loans annualized, for the linked quarter and net charge-offs of $208,000, or 0.03% of average total loans annualized, for the second quarter of 2019.
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 accounting methodology prior to 2020), the process for estimating allowance for loan losses considered various factors that affect losses, such as changes in Peoples’ loan quality and historical loss 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.

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Additional information regarding changes in the allowance for credit losses and loan credit quality can be found later in this discussion under the caption “FINANCIAL CONDITION - Allowance for Credit Losses.”
Net Gains (Losses) Included in Total Non-Interest Income
Net gains (losses) include gains and losses on investment securities, asset disposals and other transactions, which are recognized in total non-interest income. The following table details Peoples’ net gains (losses):
 Three Months EndedSix Months Ended
 June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
Net gain (loss) on investment securities$62  $319  $(57) $381  $(27) 
Net (loss) gain on asset disposals and other transactions:
Net loss on other assets$(145) $(70) $(274) $(215) $(431) 
Net gain (loss) on OREO1  (17) (24) (16) (49) 
Net gain on other transactions22  —  5  22  5  
Net loss on asset disposals and other transactions$(122) $(87) $(293) $(209) $(475) 
During the second quarter of 2020, Peoples primarily recognized net losses on repossessed assets. During the first quarter of 2020, Peoples sold investment securities to lock in gains, while also recognizing net losses on repossessed assets. During the second quarter of 2019, net losses included $253,000 of write-offs of fixed assets acquired from First Prestonsburg.
For the first six months of 2020, net gains on investment securities were recorded related to sales of investment securities that primarily occurred in the first quarter, while the net loss on other assets was driven by losses on repossessed assets. For the first half of 2019, the net loss on other assets was mostly due to the write-off of fixed assets acquired from First Prestonsburg, coupled with market value write-downs related to closed offices that were held for sale.
Total Non-Interest Income, Excluding Net Gains and Losses
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 EndedSix Months Ended
 June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
E-banking income$3,523  $3,280  $3,267  $6,803  $6,254  
Peoples' e-banking income is derived largely from ATM and debit cards, as other services are mainly provided at no charge to customers. The amount of e-banking income is largely dependent on the timing and volume of customer activity. The increase in e-banking income compared to the linked quarter was driven by the increased usage of debit cards, due to the lifting of many restrictions and the stay-at-home orders put in place in Peoples' markets at the end of the previous quarter in response to COVID-19. In the first six months, e-banking grew 9% compared to the previous year due partially to the full six-month impact of the First Prestonsburg acquired accounts and the increased usage of debit cards by more customers.
The following table details Peoples' insurance income:
 Three Months EndedSix Months Ended
 June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
Property and casualty insurance commissions
2,506  2,590  2,680  5,096  5,354  
Life and health insurance commissions
427  102  626  529  985  
Performance-based commissions
138  1,291  2  1,429  1,421  
Other fees and charges
120  147  178  267  347  
Insurance income$3,191  $4,130  $3,486  $7,321  $8,107  
The 23% decline in insurance income for the second quarter of 2020, compared to the linked quarter, was largely related to the annual performance-based commissions of $1.3 million, which are primarily recognized in the first quarter of each year and are a core component of insurance income. The remaining decreases in insurance income compared to prior periods were mostly related to timing and businesses that have either closed or declines in assets insured under policies, primarily due to the COVID-19 pandemic.

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Peoples' fiduciary and brokerage revenues continued to be based primarily upon the value of assets under administration and management, with additional income generated from transaction commissions, cross-selling of products and additional retirement plan services business. The following tables detail Peoples’ trust and investment income and related assets under administration and management:
 Three Months EndedSix Months Ended
 June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
Fiduciary income$1,780  $1,622  $1,837  $3,402  $3,473  
Brokerage income999  1,160  1,038  2,159  2,003  
Employee benefits fees537  480  526  1,017  1,037  
Trust and investment income$3,316  $3,262  $3,401  $6,578  $6,513  
Fiduciary income and employee benefits fees benefited from higher managed asset balances near the end of the second quarter of 2020 compared to the first quarter of 2020, mostly due to the recent changes in market values. Brokerage income is also driven by managed asset balances, however, it is generally calculated based on balances at the beginning of each quarter, which caused the decline compared to the first quarter of 2020.
June 30,
2020		March 31,
2020		December 31,
2019		September 30,
2019		June 30,
2019
(Dollars in thousands)
Assets under administration and management:
Trust$1,552,785  $1,385,161  $1,572,933  $1,504,036  $1,501,110  
Brokerage
885,138  816,260  944,002  904,191  887,745  
Total
$2,437,923  $2,201,421  $2,516,935  $2,408,227  $2,388,855  
Quarterly average$2,351,701  $2,425,849  $2,458,770  $2,397,515  $2,356,121  
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 EndedSix Months Ended
 June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
Overdraft and non-sufficient funds fees$876  $1,649  $1,746  $2,525  $3,179  
Account maintenance fees849  980  1,012  1,829  1,764  
Other fees and charges184  191  219  375  375  
Deposit account service charges$1,909  $2,820  $2,977  $4,729  $5,318  
The amount of deposit account service charges, particularly fees for overdrafts and non-sufficient funds, is largely dependent on the timing and volume of customer activity. Management periodically evaluates its cost recovery fees to ensure they are reasonable based on operational costs and similar to fees charged in Peoples' markets by competitors. Income from deposit account service charges decreased compared to the linked quarter, second quarter of 2019 and first six months of 2019. The declines were a result of lower overdraft, non-sufficient funds and account maintenance fees assessed to customers given higher deposit balances held by Peoples' customers. The decline in assessed fees was directly correlated to the developments related to COVID-19, specifically the PPP loan proceeds, fiscal stimulus and changed customer habits.
The following table details the other items included within Peoples' total non-interest income:
 Three Months EndedSix Months Ended
 June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
Commercial loan swap fees$955  $244  $516  $1,199  $662  
Mortgage banking income938  750  1,000  1,688  1,788  
Bank owned life insurance income470  582  490  1,052  975  
Other non-interest income422  437  502  859  1,603  
Commercial loan swap fees are largely dependent on timing, interest rates, and the volume of customer activity. Commercial loan swap fees in the second quarter of 2020 increased $711,000, driven by customer demand in the current low rate environment, when compared to the linked quarter. The increase compared to the second quarter of 2019 was driven by slightly higher customer demand, given the low rate environment and the favorable rates that customers could lock in by utilizing a swap. For the first six months of 2020, commercial loan swap income has nearly doubled compared to the same period in 2019, due to the larger size of the transactions, as the quantity of transactions was largely similar to 2019.

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Mortgage banking income is comprised mostly of net gains from the origination and sale of real estate loans in the secondary market, and, to a lesser extent, 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 increases in mortgage banking income from the linked quarter, second quarter of 2019 and first six months of 2019 were mainly due to higher refinancings because of the interest rate environment. Also contributing to the fluctuation compared to the linked quarter was seasonality in the housing market, coupled with a $182,000 write-down of mortgage servicing rights during the first quarter of 2020.
In the second quarter of 2020, Peoples sold $21.4 million in loans to the secondary market with servicing retained and sold $42.0 million in loans with servicing released, compared to approximately $22.0 million and $14.0 million, respectively, in the linked quarter, and $24.9 million and $11.4 million, respectively, in the second quarter of 2019. The volume of sales has a direct impact on the amount of mortgage banking income.
Bank owned life insurance income decreased $112,000, compared to the prior quarter as a result of $109,000 of tax-free death benefits recognized in the first quarter of 2020, which was not duplicated in the second quarter.

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 EndedSix Months Ended
 June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
Base salaries and wages$12,774  $12,696  $14,353  $25,470  $26,227  
Sales-based and incentive compensation3,165  2,662  3,096  5,827  5,705  
Employee benefits1,997  2,544  1,966  4,541  4,656  
Payroll taxes and other employment costs1,074  1,362  1,208  2,436  2,585  
Stock-based compensation970  1,383  930  2,353  2,138  
Deferred personnel costs(1,995) (729) (729) (2,724) (1,285) 
Salaries and employee benefit costs$17,985  $19,918  $20,824  $37,903  $40,026  
Full-time equivalent employees:   
Actual at end of period894  898  918  894  918  
Average during the period892  898  906  895  891  
Base salaries and wages increased 1% compared to the linked quarter and decreased 11% compared to the second quarter of 2019. During the second quarter of 2019, Peoples incurred acquisition-related expenses related to the First Prestonsburg acquisition totaling $2.4 million, which was the key driver of the decline, and was partially offset by merit increases and the continued movement towards a $15 per hour minimum wage throughout Peoples' organization that was largely implemented as of January 1, 2020. For the first six months of 2020, base salaries and wages decreased 3% compared to 2019, as acquisition-related expenses of $2.4 million were recognized during the first six months of 2019.
The increase in sales-based and incentive compensation for the second quarter of 2020 compared to the first quarter of 2020 was related to overall company performance measures used in calculating incentive awards, combined with higher sales-based compensation related to mortgage banking reflecting the increased volume of real estate loans sold in the secondary market.
The decrease in employee benefits for the second quarter of 2020, compared to the linked quarter, was partially due to the annual contribution of $427,000 to employee health benefit accounts occurring primarily in the first quarter of 2020, coupled with the restrictions on elective medical procedures due to COVID-19.
Stock-based compensation is 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 estimate. Stock grants to retirement eligible grantees are expensed either immediately or over a shorter period than three years. The majority 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. Stock-based compensation for the second quarter of 2020 declined compared to the linked quarter, as an additional $396,000 of unrestricted grants of common share awards to associates at the level of Assistant Vice President or below during the second quarter of 2020 was more than offset by a reduction of $813,000 related to additional expense recorded during the first quarter of 2020 from stock grants to retirement eligible

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individuals and the annual vesting of prior stock grants. The unrestricted common share grant during the second quarter of 2020 contributed to the increase in stock-based compensation for the first six months of 2020 compared to 2019.
The decrease in payroll taxes and other employment costs, compared to the linked quarter included lower social security and unemployment taxes recognized during the second quarter of 2020.
Deferred personnel costs represent the portion of current period salaries and employee benefit costs considered to be 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 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. Materially impacting the comparison was the recognition of $921,000 in deferred personnel costs during the second quarter related to the origination of PPP loans. In addition, higher production in residential real estate and commercial loans during the second quarter of 2020 contributed to the increased deferral compared to the linked quarter. Increased production in all categories of loans drove the higher deferred personnel costs compared to the first six months of 2019, with the first six months of 2020 also being impacted by the additional deferred costs related to the PPP loan originations.
Peoples' net occupancy and equipment expense was comprised of the following:
 Three Months EndedSix Months Ended
 June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
Depreciation$1,557  $1,455  $1,494  $3,012  $2,743  
Repairs and maintenance costs701  757  715  1,458  1,485  
Net rent expense315  305  250  620  538  
Property taxes, utilities and other costs578  637  673  1,215  1,344  
Net occupancy and equipment expense$3,151  $3,154  $3,132  $6,305  $6,110  
Compared to the second quarter of 2019, net occupancy and equipment expense was impacted by increased depreciation related to investments in technological infrastructure and equipment (mainly ATMs), as well as branding for additional full-service bank branches from the First Prestonsburg acquisition. Net occupancy and equipment expense increased 3% compared to the first six months of 2019 mainly due to additional assets and costs associated with maintaining the First Prestonsburg locations for a full period.
The following table details the other items included in total non-interest expense:
 Three Months EndedSix Months Ended
 June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
E-banking expense$1,879  1,865  $1,693  $3,744  $3,270  
Professional fees1,834  1,693  2,344  3,527  3,620  
Data processing and software expense1,754  1,752  1,567  3,506  3,112  
Franchise tax expense881  882  772  1,763  1,477  
Amortization of other intangible assets728  729  824  1,457  1,518  
Marketing expense632  473  490  1,105  1,084  
Foreclosed real estate and other loan expenses335  578  469  913  724  
Communication expense294  280  317  574  595  
FDIC insurance premiums (credits)152  (5) 381  147  752  
Other non-interest expense2,180  3,006  6,063  5,186  8,448  
E-banking expense was up compared to the second quarter of 2019 due to an increased number of customers as a result of the addition of First Prestonsburg customers, which increased the volume of transactions involving debit cards and Peoples' internet and mobile banking service.  The increase in expenses related to Peoples' internet and mobile banking services was driven by increases in customer accounts and customer usage of mobile and online banking tools, driven by the acquisition of First Prestonsburg in April 2019, as well as the annual contractual increase in the cost of each unit of service in internet and mobile banking.
The increase in data processing and software expense compared to prior periods was driven by systems and software upgrades, annual contractual increases and overall growth, which included: the implementation of enhanced functionalities for Peoples' core banking system, including making certain mobile banking tools available to customers; software upgrades; and additional network capacity and security features.
Professional fees increased from the first quarter of 2020, primarily due to higher legal expenses and other professional services. Compared to the second quarter of 2019, professional fees were down due to $562,000 of fees incurred in 2019 as a result of the First Prestonsburg acquisition.

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Peoples' amortization of other intangible assets is driven by acquisition-related activity. Amortization of other intangible assets for the second quarter of 2020 was flat compared to the first quarter of 2020 and was down compared to the second quarter of 2019, as a result of the declining amortization from previous acquisitions.
Peoples is subject to state franchise taxes, which are based largely on Peoples' equity, in the states where Peoples has a physical presence. Franchise tax expense also includes the Ohio Financial Institution Tax ("FIT"), which is a business privilege tax that is imposed on financial institutions organized for profit and doing business in Ohio. The Ohio FIT is based on the total equity capital in proportion to the taxpayer's gross receipts in Ohio as of the most recent year-end. Expenses related to state franchise taxes, which includes Ohio FIT, increased in the second quarter of 2020 compared to the second quarter of 2019 due to higher equity as of December 31, 2019 compared to December 31, 2018, coupled with additional taxes in Kentucky as a result of the First Prestonsburg acquisition in 2019.
Marketing expense increased compared to the first quarter of 2020 and the second quarter of 2019, due to COVID-19 expenses incurred during the second quarter of 2020, which included a $250,000 donation to food banks and pantries in Peoples' market area.
Foreclosed real estate and other loan expenses decreased compared to the prior quarter and the second quarter of 2019 primarily due to higher deferred costs associated with increased origination volume of consumer indirect loans during the second quarter of 2020.
Peoples used credits to partially offset its FDIC insurance premiums related to its quarterly assessments during the second quarter of 2020 and used credits to fully offset the first quarter of 2020 premiums, compared to having no credits available to offset the second quarter of 2019 premiums. 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 utilized the remaining credits that had been issued to it in the second quarter of 2020.
Compared to the linked quarter, other non-interest expense declined due to lower travel and entertainment costs, which was driven by the stay-at-home orders in place for part of the quarter, as well as reductions in other ancillary costs. Other non-interest expense for the second quarter of 2020 decreased $3.9 million compared to the second quarter of 2019. The decrease was primarily due to a decline in acquisition-related expenses of $3.8 million, which had been incurred with the acquisition of First Prestonsburg. For the first six months of 2020, other non-interest expense decreased $3.3 million, and was mostly driven by a reduction of $3.8 million in acquisition-related expenses, which were partially offset by pension settlement charges of $519,000 recognized during 2020, while no similar costs were incurred during 2019.
Income Tax Expense (Benefit)
Peoples recorded income tax expense of $1.1 million for the second quarter of 2020, compared to a benefit of $156,000 for the linked quarter and an expense of $2.2 million for the second quarter of 2019. The income tax expense during the second quarter of 2020 was driven by pre-tax income of $5.9 million, which was impacted by the $11.8 million provision for credit losses recorded during the quarter. During the linked quarter, Peoples recorded an income tax benefit due to the pre-tax loss as a result of higher provision for credit losses during the period.
Additional information regarding income taxes can be found in "Note 12 Income Taxes" of the Notes to the Consolidated Financial Statements included in Peoples' 2019 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. 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 credit losses and all gains and/or losses included in earnings.

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The following table provides a reconciliation of this non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented: 
Three Months EndedSix Months Ended
June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
Pre-provision net revenue:
Income (loss) before income taxes$5,885  $(921) 11,836  $4,964  $29,582  
Add: provision for credit losses (a)11,834  16,969  626  28,803  363  
Add: net loss on OREO—  17  24  17  49  
Add: net loss on investment securities —  —  57  —  27  
Add: net loss on other assets145  70  274  215  431  
Add: net loss on other transactions—  —  —  —  —  
Less: net gain on OREO1  —  —  1  —  
Less: net gain on investment securities62  319  —  381  —  
Less: gain on other transactions22  —  5  22  5  
Pre-provision net revenue$17,779  $15,816  $12,812  $33,595  $30,447  
Total average assets$4,828,016  $4,381,627  $4,239,779  $4,604,821  $4,113,403  
Pre-provision net revenue to total average assets (annualized)1.48 %1.45 %1.21 %1.47 %1.49 %
Weighted-average common shares outstanding - diluted19,858,88020,538,214  20,442,36620,183,222  19,972,350  
Pre-provision net revenue per common share - diluted$0.89  $0.77$0.63$1.66  $0.62  
(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 increase in PPNR during the second quarter of 2020 was mostly due to reductions in non-interest expense compared to the linked quarter. Compared to the second quarter of 2019, and the first six months of 2019, PPNR increase mostly due to acquisition-related expenses incurred during the 2019 periods.
Core Non-Interest Expense (non-US GAAP)
Core non-interest expense is a financial measure 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 EndedSix Months Ended
June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
Core non-interest expense:
Total non-interest expense$31,805  $34,325  $38,876  $66,130  70,736  
Less: acquisition-related expenses47  30  6,770  777,023  
Less: pension settlement charges151  368  —  519  —  
Less: severance expenses79  13  —  92  —  
Less: COVID-19 expenses918  140  —  1,058  —  
Core non-interest expense$30,610  $33,774  $32,106  $64,384  $63,713  


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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 EndedSix Months Ended
June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
Efficiency ratio:
Total non-interest expense$31,805  $34,325  $38,876  $66,130  $70,736  
Less: amortization of other intangible assets728  729  824  1,457  1,518  
Adjusted total non-interest expense$31,077  $33,596  $38,052  $64,673  $69,218  
Total non-interest income$14,664  $15,737  $15,289  $30,401  $30,718  
Less: net gain (loss) on investment securities62  319  (57) 381  (27) 
Less: net loss on asset disposals and other transactions(122) (87) (293) (209) (475) 
Total non-interest income excluding net gains and losses$14,724  $15,505  $15,639  $30,229  $31,220  
Net interest income$34,860  $34,636  $36,049  $69,496  $69,963  
Add: fully tax-equivalent adjustment (a)269  272  267  541  467  
Net interest income on a fully tax-equivalent basis$35,129  $34,908  $36,316  $70,037  $70,430  
Adjusted revenue$49,853  $50,413  $51,955  $100,266  $101,650  
Efficiency ratio62.34 %66.64 %73.24 %64.50 %68.09 %
Efficiency ratio adjusted for non-core items:
Core non-interest expense$30,610  $33,774  $32,106  $64,384  $63,713  
Less: amortization of other intangible assets728  729  824  1,457  1,518  
Adjusted core non-interest expense$29,882  $33,045  $31,282  $62,927  $62,195  
Core non-interest income excluding net gains and losses$14,724  $15,505  $15,639  $30,229  $31,220  
Net interest income on a fully tax-equivalent basis35,129  34,908  36,316  70,037  70,430  
Adjusted revenue$49,853  $50,413  $51,955  $100,266  $101,650  
Efficiency ratio adjusted for non-core items59.94 %65.55 %60.21 %62.76 %61.19 %
(a) Based on a 21% statutory federal corporate income tax rate.
The efficiency ratio and the efficiency ratio adjusted for non-core items improved compared to the linked quarter, and was driven by lower total non-interest expense. Compared to the second quarter of 2019, and the first six months of 2019, the efficiency ratio improved mainly due to the acquisition-related expenses that were recognized during the 2019 periods. The efficiency ratio adjusted for non-core items was impacted by lower core non-interest expenses in the second quarter of 2020, compared to the second quarter of 2019. The efficiency ratio adjusted for non-core items was negatively impacted by lower revenue and higher core non-interest expenses compared to the first six months of 2019.


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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 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 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 EndedSix Months Ended
June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
Annualized net income (loss) adjusted for non-core items:
Net income (loss)
$4,749  $(765) $9,598  $3,984  $23,967  
Add: net loss on investment securities
—  —  57  —  27  
Less: tax effect of net loss on investment securities (a)
—  —  12  —  6  
Less: net gain on investment securities
62  319  —  381  —  
Add: tax effect of net gain on investment securities (a)
13  67  —  80  —  
Add: net loss on asset disposals and other transactions
122  87  293  209  475  
Less: tax effect of net loss on asset disposals and other transactions (a)
26  18  62  44  100  
Add: acquisition-related expenses
47  30  6,770  77  7,023  
Less: tax effect of acquisition-related expenses (a)
10  6  1,422  16  1,475  
Add: pension settlement charges
151  368  —  519  —  
Less: tax effect of pension settlement charges (a)
32  77  —  109  —  
Add: severance expenses79  13  —  92  —  
Less: tax effect of severance expenses (a)17  3  —  20  —  
Add: COVID-19 expenses918  140  —  1,058  —  
Less: tax effect of COVID-19 expenses (a)193  29  —  222  —  
Net income (loss) adjusted for non-core items (after tax)
$5,739  $(512) $15,222  $5,227  $29,911  
Days in the period91  91  91  182  181  
Days in the year366  366  365  366  365  
Annualized net income (loss)
$19,100  $(3,077) $38,497  $8,012  $48,331  
Annualized net income (loss) adjusted for non-core items (after tax)
$23,082  $(2,059) $61,055  $10,511  $60,318  
Return on average assets:
Annualized net income (loss)
$19,100  $(3,077) $38,497  $8,012  $48,331  
Total average assets4,828,016  4,381,627  4,239,779  4,604,821  4,113,403  
Return on average assets
0.40 %(0.07)%0.91 %0.17 %1.17 %
Return on average assets adjusted for non-core items:
Annualized net income (loss) adjusted for non-core items (after tax)
$23,082  $(2,059) $61,055  $10,511  $60,318  
Total average assets
4,828,016  4,381,627  4,239,779  4,604,821  4,113,403  
Return on average assets adjusted for non-core items
0.48 %(0.05)%1.44 %0.23 %1.47 %
(a) Based on a 21% statutory federal corporate income tax rate.
The return on average assets and the return on average assets adjusted for non-core items both improved during the second quarter of 2020, compared to the linked quarter. The improvements were mostly due to a reduction in provision for credit losses compared to the linked quarter, coupled with lower total non-interest expense. Compared to the second quarter of 2019, the provision for credit

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losses of $11.8 million recorded during the second quarter of 2020 drove most of the decline in the ratios. For the first six months of 2020, provision for credit losses totaled $28.8 million, and was largely the reason for the decrease in the ratios. For additional information related to the increased provision for credit losses, refer to the sections in this discussion titled “Provision for Credit Losses" and "Allowance for Credit Losses.”
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. This ratio is calculated as annualized 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 EndedSix Months Ended
June 30,
2020		March 31,
2020		June 30,
2019		June 30,
(Dollars in thousands)20202019
Annualized net income (loss) excluding amortization of other intangible assets:
Net income (loss)
$4,749  $(765) $9,598  $3,984  $23,967  
Add: amortization of other intangible assets
728  729  824  1,457  1,518  
Less: tax effect of amortization of other intangible assets (a)
153  153  173  306  319  
Net income (loss) excluding amortization of other intangible assets
$5,324  $(189) $10,249  $5,135  $25,166  
Days in the period
91  91  91  182  181  
Days in the year
366  366  365  366  365  
Annualized net income (loss)
$19,100  $(3,077) $38,497  $8,012  $48,331  
Annualized net income (loss) excluding amortization of other intangible assets
$21,413  $(760) $41,109  $10,326  $50,749  
Average tangible equity:
Total average stockholders' equity
$572,141  $596,246  $564,992  $584,193  $544,706  
Less: average goodwill and other intangible assets
177,012  177,984  175,169  177,498  168,458  
Average tangible equity
$395,129  $418,262  $389,823  $406,695  $376,248  
Return on average stockholders' equity ratio:
Annualized net income (loss)
$19,100  $(3,077) $38,497  $8,012  $48,331  
Average stockholders' equity
$572,141  $596,246  $564,992  $584,193  $544,706  
Return on average stockholders' equity
3.34 %(0.52)%6.81 %1.37 %8.87 %
Return on average tangible equity ratio:
Annualized net income (loss) excluding amortization of other intangible assets
$21,413  $(760) $41,109  $10,326  $50,749  
Average tangible equity
$395,129  $418,262  $389,823  $406,695  $376,248  
Return on average tangible equity
5.42 %(0.18)%10.55 %2.54 %13.49 %
(a) Based on a 21% statutory federal corporate income tax rate.
The return on average stockholders' equity and average tangible equity ratios continued to be impacted by higher provision for credit losses during the second quarter of 2020. Compared to the linked quarter, the ratios improved due to a decline in the provision for credit losses of $5.1 million. The negative return on average stockholders' equity and average tangible equity ratios during the first quarter of 2020 were primarily due to the $17.0 million provision for credit losses recorded.
For additional information related to the increased provision for credit losses, refer to the sections in this discussion titled “Provision for Credit Losses" and "Allowance for Credit Losses.”

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FINANCIAL CONDITION
Cash and Cash Equivalents
At June 30, 2020, Peoples' interest-bearing deposits in other banks increased $99.1 million from December 31, 2019. The total cash and cash equivalent balance included $84.7 million of excess cash reserves being maintained at the FRB of Cleveland at June 30, 2020, compared to $15.6 million at December 31, 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, coupled with increased liquidity due to the COVID-19 pandemic.
Through the first six months of 2020, Peoples' total cash and cash equivalents increased $104.1 million as Peoples' net cash used in investing activities of $515.2 million was less than the sum of net cash provided by financing and operating activities of $589.2 million and $30.0 million, respectively. Peoples' investing activities reflected a net increase of $479.6 million in loans and $89.4 million in purchases of available-for-sale investment securities, which were partially offset by $161.8 million in net proceeds from sales, principal payments, calls and prepayments on available-for-sale and held-to-maturity investment securities. Financing activities included a $733.4 million net increase in deposits and $50.0 million of proceeds from long-term borrowings, offset partially by a decrease of $159.1 million in short-term borrowings, as well as the purchase of $20.0 million of treasury stock under the share repurchase program and $13.5 million of cash dividends paid.
Further information regarding the management of Peoples' liquidity position can be found later in this discussion under “Interest Rate Sensitivity and Liquidity.”
Investment Securities
The following table provides information regarding Peoples’ investment portfolio:
(Dollars in thousands)June 30,
2020		March 31,
2020		December 31,
2019		September 30,
2019		June 30,
2019
Available-for-sale securities, at fair value:    
Obligations of:     
U.S. government sponsored agencies$5,396  $6,361  $8,209  $12,145  $19,051  
States and political subdivisions107,032  108,812  114,104  115,613  125,418  
Residential mortgage-backed securities748,867  823,893  791,009  835,172  748,132  
Commercial mortgage-backed securities12,157  17,061  18,088  20,461  22,664  
Bank-issued trust preferred securities4,399  4,708  4,691  4,644  4,099  
Total fair value$877,851  $960,835  $936,101  $988,035  $919,364  
Total amortized cost$853,072  $932,179  $929,395  $976,286  $910,431  
Net unrealized gain $24,779  $28,656  $6,706  $11,749  $8,933  
Held-to-maturity securities, at amortized cost:
Obligations of:
States and political subdivisions (a)3,538  3,838  $4,346  $4,395  $4,398  
Residential mortgage-backed securities28,075  29,070  21,494  22,412  23,335  
Commercial mortgage-backed securities5,754  5,830  5,907  7,022  7,106  
Total amortized cost$37,367  $38,738  $31,747  $33,829  $34,839  
Other investment securities$42,656  $46,924  $42,730  $43,045  $43,508  
Total investment securities:
Amortized cost$933,095  $1,017,841  $1,003,872  $1,053,160  $988,778  
Carrying value$957,874  $1,046,497  $1,010,578  $1,064,909  $997,711  
(a) Amortized cost is presented net of the allowance for credit losses of $6,000 at June 30, 2020 and March 31, 2020.
At June 30, 2020, the fair value of available-for-sale securities declined $83.0 million, or 9%, compared to March 31,2020. The decrease compared to all prior periods was driven by the paydowns and maturities of securities, primarily residential mortgage-backed securities. These proceeds were not reinvested into the investment portfolio mostly due to liquidity needs for funding of PPP loans, anticipation of funding needs for the acquisition of Peoples Premium Finance, and the limited attractive investment securities available.
Additional information regarding Peoples' investment portfolio can be found in "Note 3 Investment Securities" of the Notes to the Unaudited Consolidated Financial Statements.

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Loans
The following table provides information regarding outstanding loan balances:
(Dollars in thousands)June 30,
2020		March 31,
2020		December 31,
2019		September 30,
2019		June 30,
2019
Originated loans:
     
Construction
$105,493  $106,415  $83,283  $100,338  $102,904  
Commercial real estate, other
738,292  707,339  671,576  659,103  641,061  
     Commercial real estate
843,785  813,754  754,859  759,441  743,965  
Commercial and industrial
1,032,970  611,791  622,175  564,279  548,460  
Residential real estate
285,407  293,078  314,935  308,964  299,173  
Home equity lines of credit
90,612  91,344  93,013  92,910  90,374  
Consumer, indirect
450,296  418,022  417,127  423,217  419,595  
Consumer, direct
74,614  71,230  70,852  72,699  72,209  
    Consumer
524,910  489,252  487,979  495,916  491,804  
Deposit account overdrafts
592  610  878  1,081  676  
Total originated loans
$2,778,276  $2,299,829  $2,273,839  $2,222,591  $2,174,452  
Acquired loans (a):
Construction
$4,460  $4,450  $5,235  $4,435  $6,775  
Commercial real estate, other
176,128  190,478  161,662  171,096  201,909  
     Commercial real estate
180,588  194,928  166,897  175,531  208,684  
Commercial and industrial
37,356  42,739  40,818  43,961  51,506  
Residential real estate
327,677  332,288  346,541  358,053  348,439  
Home equity lines of credit
32,772  36,667  39,691  41,942  41,262  
Consumer, indirect
38  44  58  67  90  
Consumer, direct
4,312  4,942  5,681  8,171  9,100  
    Consumer
4,350  4,986  5,739  8,238  9,190  
Total acquired loans
$582,743  $611,608  $599,686  $627,725  $659,081  
Total loans
$3,361,019  $2,911,437  $2,873,525  $2,850,316  $2,833,533  
Percent of loans to total loans:
  
Construction
3.3 %3.8 %3.1 %3.8 %3.9 %
Commercial real estate, other
27.2 %30.8 %29.0 %29.1 %29.7 %
     Commercial real estate
30.5 %34.6 %32.1 %32.9 %33.6 %
Commercial and industrial
31.9 %22.5 %23.1 %21.3 %21.2 %
Residential real estate
18.2 %21.5 %23.0 %23.4 %22.9 %
Home equity lines of credit
3.7 %4.4 %4.6 %4.7 %4.6 %
Consumer, indirect
13.4 %14.4 %14.5 %14.9 %14.8 %
Consumer, direct
2.3 %2.6 %2.7 %2.8 %2.9 %
    Consumer
15.7 %17.0 %17.2 %17.7 %17.7 %
Total percentage
100.0 %100.0 %100.0 %100.0 %100.0 %
Residential real estate loans being serviced for others
$491,545  $503,158  $496,802  $488,724  $473,443  
(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).
Period-end total loan balances at June 30, 2020 increased $449.6 million, or 15%, compared to March 31, 2020, and $527.5 million, or 19%, compared to June 30, 2019. The increase compared to March 31, 2020 was mostly driven by the PPP loans originated during the second quarter of 2020, which totaled $457.7 million at June 30, 2020, and were included in commercial and industrial loan balances. Excluding acquired loans and the PPP loans, Peoples' originated loans grew by 4% annualized compared to March 31, 2020. The growth was due to higher consumer indirect loan balances, which were up $32.2 million, or 31% annualized, while commercial real estate loan balances increased $30.9 million, or 18% annualized, compared to March 31, 2020.
The increase compared to June 30, 2019 was largely due to the PPP loans added during the second quarter of 2020, coupled with growth in commercial real estate, commercial and industrial, and home equity lines of credit balances. Acquired loan balances continued to decline compared to prior periods, as these loans either payoff or are re-underwritten, at which point Peoples no longer considers the loan acquired.


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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, 2020:
(Dollars in thousands)Outstanding BalanceLoan CommitmentsTotal Exposure% of Total
Construction:    
Assisted living facilities and nursing homes$31,992  $43,579  $75,571  36.2 %
Apartment complexes31,396  22,478  53,874  25.8 %
Retail4,139  17,659  21,798  10.4 %
Land development5,142  1,337  6,479  3.1 %
Office buildings5,561  631  6,192  3.0 %
Gas station facilities6,024  143  6,167  3.0 %
Land only5,076  1,044  6,120  2.9 %
Residential property2,009  3,234  5,243  2.5 %
Mixed used facilities4,600  560  5,160  2.5 %
Other (a)14,667  7,448  22,115  10.6 %
Total construction$110,606  $98,113  $208,719  100.0 %
(a) All other outstanding balances are less than 2% of the total loan portfolio.

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(Dollars in thousands)Outstanding BalanceLoan CommitmentsTotal Exposure% of Total
Commercial real estate, other:    
Office buildings and complexes:  
Owner occupied$75,991  $2,378  $78,369  8.8 %
Non-owner occupied63,031  3,991  67,022  7.5 %
Total office buildings and complexes139,022  6,369  145,391  16.3 %
Apartment complexes101,885  6,660  108,545  12.1 %
Mixed-use facilities:
Owner occupied58,855  1,592  60,447  6.8 %
Non-owner occupied39,062  721  39,783  4.4 %
Total mixed-use facilities97,917  2,313  100,230  11.2 %
Retail facilities:   
Owner occupied40,591  707  41,298  4.6 %
Non-owner occupied54,641  348  54,989  6.1 %
Total retail facilities95,232  1,055  96,287  10.7 %
Warehouse facilities67,627  6,377  74,004  8.3 %
Light industrial facilities: 
Owner occupied46,794  1,156  47,950  5.4 %
Non-owner occupied22,714  1,088  23,802  2.7 %
Total light industrial facilities69,508  2,244  71,752  8.1 %
Lodging and lodging related52,465  779  53,244  5.9 %
Education services35,167  98  35,265  3.9 %
Assisted living facilities and nursing homes29,732  250  29,982  3.3 %
Day care facilities:
     Owner occupied19,055  —  19,055  2.1 %
Non-owner occupied2,282  —  2,282  0.3 %
Total day care facilities21,337  —  21,337  2.4 %
Agriculture20,511  744  21,255  2.4 %
Gas station facilities:
Owner occupied15,885  —  15,885  1.8 %
Non-owner occupied4,484  —  4,484  0.5 %
Total health care facilities20,369  —  20,369  2.3 %
Health care facilities:    
Owner occupied8,466  276  8,742  1.0 %
Non-owner occupied10,013  —  10,013  1.1 %
Total gas station facilities18,479  276  18,755  2.1 %
Other (a)93,635  5,436  99,070  11.0 %
Total commercial real estate, other$862,886  $32,601  $895,486  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. In all other states, the aggregate outstanding balances of commercial loans in each state were not material at either June 30, 2020 or December 31, 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 funded $488.1 million of loans through June 30, 2020. As of June 30, 2020, Peoples had principal balances of PPP loans of $457.7 million, net of payoffs during the quarter, included in commercial and

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industrial loans. Peoples also recorded deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, which totaled $13.6 million at June 30, 2020. For the second quarter of 2020, Peoples recorded amortization of net deferred loan origination fees of $1.9 million on PPP loans. The net deferred loan origination fees will be amortized over the life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income.
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. Through June 30, 2020, Peoples originated 114 loans for $7.1 million of principal balances under this program. As of July 17, 2020, Peoples had approved a total of $8.6 million in JobsOhio loans for 140 customers.
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 specified qualifications are met. Peoples is also providing forbearance to its consumer borrowers which allows them 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 July 6, 2020, Peoples had completed forbearance or payment relief for 1,369 customers, for loan balances of $43 million, which included $7.4 million of relief for the Federal National Mortgage Association and Federal Home Loan Mortgage Corp secondary market loans. Peoples is proactively reaching out to customers to which it granted payment relief previously to determine if there is any additional need for relief beyond the initial period granted.
In addition, for commercial borrowers who meet certain criteria, Peoples is providing interest-only payment options, principal and interest deferrals, and increased financing. As of July 17, 2020, Peoples had approved $486 million of loan modifications to commercial loan customers. As of July 17, 2020, the portfolio had experienced a small number of borrowers requesting extensions of the originally approved deferment periods. The requests for additional payment relief account for $42 million, or 9%, of the total commercial loan balance modifications approved. Peoples continues to prudently work with borrowers and review any second requests for deferment more closely. These requests are maintained within the CARES Act guidance and have not exceeded six consecutive months of deferred payment.
Borrowers within the lodging industry account for nearly 60% of the total $42 million of additional extension requests. The lodging industry continues to be impacted by the COVID-19 pandemic, with a negative outlook for travel demand among both business and leisure customers. The remaining borrowers that have requested additional payment relief are primarily within the daycare and retail sectors. 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 with them. 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 60% of the total commercial loan modifications approved in response to COVID-19.
Below is a table detailing Peoples' outstanding balance of loans as of June 30, 2020, within certain industries that have been impacted:
(Dollars in thousands)Outstanding Balance% of Total LoansLoan-to-ValueTotal Commitment
Restaurants (a)$217,493  6.5 %59.2 %$231,645  
Multifamily128,076  3.8 %60.7 %157,219  
Floorplans (b)76,216  2.3 %100.0 %128,600  
Assisted living facilities and nursing homes (c)94,411  2.8 %74.2 %145,005  
Lodging and lodging related (d)73,130  2.2 %64.8 %84,660  
Total$589,326  17.6 %$747,129  
(a)Restaurant outstanding balance includes $60.5 million in PPP loans.
(b)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.
(c)Assisted living facilities and nursing homes outstanding balance includes $15.5 million in PPP loans.
(d)Lodging and lodging related outstanding balance includes $2.3 million in PPP loans.

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Approximately 79% 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 16% are enhanced with SBA guarantees. As of July 17, 2020, Peoples had modified approximately $112 million of restaurant loans. Peoples approved $105 million in modifications to McDonald’s operators and $7.3 million to non-McDonald’s operators. The total portfolio outstanding balances of non-McDonald’s operators was $60.7 million at June 30, 2020, which included $28 million of PPP loans.
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 33% of the portfolio balances. The top five relationships consist of five properties with an average loan-to-value of 64%. 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 13% 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 June 30, 2020, Peoples had no requests from these customers for relief.
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 85% of the portfolio balance. The five largest loans have an average loan-to-value of 60%. Peoples' commercial loan policy for this specific property type is a maximum loan-to-value of 65%. These relationships have average liquidity of more than $1 million. Additional support is provided by guarantor strength on the majority of these relationships. As of June 30, 2020, Peoples had modified approximately $56 million, or 81%, of the lodging and lodging related loan balances.
Peoples' exposure to energy loans was not material at June 30, 2020. Energy loan balances were $5.9 million, or less than 1% of total loans, as of June 30, 2020, with a total commitment of $7.6 million. Peoples' energy loans are mostly operators in support services for oil and gas companies.
Allowance for Credit Losses
The amount of the allowance for credit 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 expected within the loan portfolio.
The following details management's allocation of the allowance for credit losses:
(Dollars in thousands)June 30,
2020		March 31,
2020		December 31,
2019		September 30,
2019		June 30,
2019
Commercial real estate$21,810  $13,884  $7,333  $8,466  $8,245  
Commercial and industrial10,106  8,743  8,432  7,162  7,197  
     Total commercial31,916  22,627  15,765  15,628  15,442  
Residential real estate6,380  5,744  1,191  1,162  1,184  
Home equity lines of credit1,755  1,695  546  567  598  
Consumer, indirect12,293  10,878  2,937  3,247  3,172  
Consumer, direct1,941  1,803  294  339  342  
    Consumer14,234  12,681  3,231  3,586  3,514  
Deposit account overdrafts77  86  94  128  86  
Originated allowance for credit losses54,362  42,833  20,827  21,071  20,824  
Acquired allowance for credit losses(1)
—  —  729  514  533  
Allowance for credit losses(2)
$54,362  $42,833  $21,556  $21,585  $21,357  
As a percent of total loans1.62 %1.47 %0.75 %0.76 %0.75 %
(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 CECL model.
(2) As of March 31, 2020, Peoples calculated the allowance for credit losses using the CECL model, while previous periods used the incurred loss model.
Peoples implemented ASU 2016-13 on January 1, 2020, which resulted in an increase of $5.8 million in allowance for credit losses. The remaining significant increase in the allowance for credit losses at March 31, 2020 compared to December 31, 2019 was mostly due to the recent 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 incorporates economic forecasts, including U.S. unemployment, Ohio unemployment, Ohio Gross Domestic Product, and the Ohio Case Shiller Home Price Indices as economic factors.

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At June 30, 2020, the allowance for credit losses was $54.4 million, compared to $42.8 million at March 31, 2020, $21.6 million at December 31, 2019 and $21.4 million at June 30, 2019. The ratio of the allowance for loan losses as a percent of total loans was 1.62% at June 30, 2020, compared to 1.47% at March 31, 2020, and 0.75% at both December 31, 2019 and June 30, 2019. During the second quarter of 2020, Peoples increased its allowance for credit losses based on CECL model results, which incorporated economic forecasts at the end of June 2020. These forecasts included higher unemployment rates nationally and in Ohio, and lower Ohio Gross Domestic Product, which are the key assumptions within the CECL model, compared to March 31, 2020 and January 1, 2020. This was similar to the impact that COVID-19 had on economic forecasts at March 31, 2020, which also resulted in higher allowance for credit losses compared to December 31, 2019. The PPP loans originated during the second quarter of 2020 are guaranteed by the SBA, and therefore, had no impact on the allowance for credit losses at June 30, 2020. The PPP loans did have a negative impact on the allowance for credit losses as a percent of total loans at June 30, 2020, as they were included in total loans but had no related allowance for credit losses.
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 Unaudited Consolidated Financial Statements.

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The following table summarizes Peoples’ net charge-offs and recoveries:
Three Months Ended
(Dollars in thousands)June 30,
2020		March 31,
2020		December 31,
2019		September 30,
2019		June 30,
2019
Gross charge-offs:  
Commercial real estate, other$135  $10  $—  $—  $43  
Commercial and industrial15  937  738  261  —  
Residential real estate16  118  55  81  67  
Home equity lines of credit9  14  10  36  —  
Consumer, indirect336  721  563  447  346  
Consumer, direct51  62  61  54  33  
    Consumer387  783  624  501  379  
Deposit account overdrafts119  213  219  283  176  
Total gross charge-offs$681  $2,075  $1,646  $1,162  $665  
Recoveries:  
Commercial real estate, other$6  $116  $53  $86  $2  
Commercial and industrial805  1,204  322  81  228  
Residential real estate100  57  9  87  102  
Home equity lines of credit8  1  1  8  1  
Consumer, indirect72  125  41  67  47  
Consumer, direct10  14  7  5  27  
    Consumer82  139  48  72  74  
Deposit account overdrafts49  60  48  51  50  
Total recoveries$1,050  $1,577  $481  $385  $457  
Net charge-offs (recoveries):     
Commercial real estate, other$129  $(106) $(53) $(86) $41  
Commercial and industrial(790) (267) 416  180  (228) 
Residential real estate(84) 61  46  (6) (35) 
Home equity lines of credit1  13  9  28  (1) 
Consumer, indirect264  596  522  380  299  
Consumer, direct41  48  54  49  6  
    Consumer305  644  576  429  305  
Deposit account overdrafts70  153  171  232  126  
Total net (recoveries) charge-offs $(369) $498  $1,165  $777  $208  
Ratio of net (recoveries) charge-offs to average total loans (annualized):
Commercial real estate0.02 %(0.01)%(0.01)%(0.01)%0.01 %
Commercial and industrial(0.11)%(0.04)%0.06 %0.03 %(0.03)%
Residential real estate(0.01)%0.01 %0.01 %— %— %
Consumer, indirect0.03 %0.08 %0.07 %0.05 %0.03 %
Consumer, direct0.01 %0.01 %0.01 %0.01 %— %
    Consumer0.04 %0.09 %0.08 %0.06 %0.03 %
Deposit account overdrafts0.01 %0.02 %0.02 %0.03 %0.02 %
Total(0.05)%0.07 %0.16 %0.11 %0.03 %
Each with "--%" not meaningful.
Net recoveries during the second quarter of 2020 were (0.05)% of average total loans on an annualized basis. During the second quarter of 2020, Peoples recorded a $750,000 recovery on a commercial loan relationship that had been previously charged-off. Also contributing to the declining net charge-off level was the low amount of gross charge-offs during the second quarter of 2020. The first quarter of 2020 included a recovery of $1.2 million recorded on a previously charged-off commercial loan.


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The following table details Peoples’ nonperforming assets: 
(Dollars in thousands)June 30,
2020		March 31,
2020		December 31,
2019		September 30,
2019		June 30,
2019
Loans 90+ days past due and accruing (a):     
Construction$—  $—  $—  $—  $230  
Commercial real estate, other130  —  907  582  557  
   Commercial real estate130  —  907  582  787  
Commercial and industrial—  806  155  572  261  
Residential real estate1,618  557  2,677  3,095  2,291  
Home equity lines of credit46  143  108  183  53  
Consumer, indirect57  —  —  —  —  
Consumer, direct29  37  85  83  57  
   Consumer86  37  85  83  57  
Total loans 90+ days past due and accruing$1,880  $1,543  $3,932  $4,515  $3,449  
Nonaccrual loans (a): 
Construction$4  $99  411  $230  $688  
Commercial real estate, other9,413  9,167  6,699  6,723  6,427  
   Commercial real estate9,417  9,266  7,110  6,953  7,115  
Commercial and industrial4,745  4,408  1,824  883  1,748  
Residential real estate8,867  6,156  4,471  4,237  3,868  
Home equity lines of credit687  978  955  893  1,001  
Consumer, indirect802  637  629  568  383  
Consumer, direct208  122  48  55  13  
   Consumer1,010  759  677  623  396  
Total nonaccrual loans$24,726  $21,567  $15,037  $13,589  $14,128  
Nonaccrual troubled debt restructurings ("TDRs"):
Commercial real estate, other$265  $410  $102  $112  $122  
Commercial and industrial—  602  331  332  332  
Residential real estate38  2,484  1,890  1,770  1,664  
Home equity lines of credit—  174  210  194  193  
Consumer, indirect—  197  211  203  152  
Consumer, direct—  48  —  —  —  
   Consumer—  245  211  203  152  
Total nonaccrual TDRs$303  $3,915  $2,744  $2,611  $2,463  
Total nonperforming loans ("NPLs")$26,909  $27,025  $21,713  $20,715  $20,040  
OREO: 
Commercial$145  $145  $145  $145  $—  
Residential$91  $81  $82  $144  $123  
Total OREO$236  $226  $227  $289  $123  
Total nonperforming assets ("NPAs")$27,145  $27,251  $21,940  $21,004  $20,163  
Criticized loans (b)$105,499  $90,881  $96,830  $100,434  $97,016  
Classified loans (c)66,567  68,787  66,154  58,938  63,048  

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(Dollars in thousands)June 30,
2020		March 31,
2020		December 31,
2019		September 30,
2019		June 30,
2019
Asset Quality Ratios:
NPLs as a percent of total loans (d)(e)0.80 %0.93 %0.75 %0.73 %0.71 %
NPAs as a percent of total assets (d)(e)0.54 %0.61 %0.50 %0.48 %0.47 %
NPAs as a percent of total loans and OREO (d)(e)0.80 %0.94 %0.76 %0.74 %0.71 %
Allowance for loan losses as a percent of NPLs (d)(e)202.02 %158.49 %99.28 %104.20 %106.57 %
Criticized loans as a percent of total loans (b)(d)3.14 %3.12 %3.37 %3.52 %3.42 %
Classified loans as a percent of total loans (c)(d)1.98 %2.36 %2.30 %2.07 %2.23 %
(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.
(c) Includes loans categorized as substandard or doubtful.
(d) Data presented as of the end of the period indicated.
(e) Nonperforming loans include loans 90+ days past due and accruing, TDRs and nonaccrual loans. Nonperforming assets include nonperforming loans and OREO.
As of June 30, 2020, nonperforming loans and assets were relatively unchanged from March 31, 2020. The nonperforming loans as a percent of total loans and nonperforming assets as a percent of total assets ratios declined compared to March 31, 2020, largely due to the increased total loans and total assets balances related to the PPP loans added during the quarter.
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.
Criticized loans, which are those categorized as special mention, substandard or doubtful, increased $14.6 million, or 16%, compared to March 31, 2020 and $8.7 million, or 9%, compared to December 31, 2019. The increase was related to additional loans being downgraded during the second quarter of 2020 based upon updated information that was available, and were not driven by COVID-19. The increase in criticized loans compared to June 30, 2019 was mostly related to the additional loans downgraded during the second quarter of 2020. Classified loans, which are those categorized as substandard or doubtful, declined $2.2 million, or 3%, compared to March 31, 2020, and are relatively flat compared to December 31, 2019.
On March 22, 2020, federal and state government 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.
Deposits
The following table details Peoples’ deposit balances:

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(Dollars in thousands)June 30,
2020		March 31,
2020		December 31,
2019		September 30,
2019		June 30,
2019
Non-interest-bearing deposits (a)$1,005,732  $727,266  $671,208  $677,232  $643,058  
Interest-bearing deposits: 
Interest-bearing demand accounts (a)666,181  637,011  635,720  622,496  610,464  
Savings accounts580,703  527,295  521,914  526,372  526,746  
Retail certificates of deposit ("CDs") 474,593  487,153  490,830  488,942  497,221  
Money market deposit accounts598,641  485,999  469,893  441,989  428,213  
Governmental deposit accounts377,787  400,184  293,908  337,941  331,754  
Brokered deposits321,247  133,522  207,939  262,230  326,157  
Total interest-bearing deposits3,019,152  2,671,164  2,620,204  2,679,970  2,720,555  
  Total deposits$4,024,884  $3,398,430  $3,291,412  $3,357,202  $3,363,613  
(a)The sum of amounts presented is considered total demand deposits.
At June 30, 2020, period-end deposits grew $626.5 million, or 18%, compared to March 31, 2020, and increased $661.3 million, or 20%, compared to June 30, 2019. The growth in balances compared to all prior periods was related to customers maintaining higher balances, as a result of PPP loan proceeds, fiscal stimulus and changes in customer habits in light of the COVID-19 pandemic. Peoples experienced increases in mostly low-cost deposit categories, while also driving increases in brokered deposits as a low-cost funding source compared to other alternatives.
In prior periods, Peoples had reduced its reliance on higher-rate brokered deposits, which included one-way buy Certificate of Deposit Account Registry Services. This was partially offset by the issuance of 90-day brokered deposits to fund interest rate swaps. During each of the fourth and third quarters of 2019, Peoples issued $10.0 million of 90-day brokered deposits to fund one interest rate swap with a notional value of $10.0 million. The swap will pay a fixed rate of interest while receiving three-month LIBOR, which offsets the rate on the brokered deposits. The brokered deposits are expected to be extended every 90 days through the maturity dates of the swaps.
Total demand deposit accounts comprised 42% of total deposits at June 30, 2020, compared to 40% at March 31, 2020, and 37% at June 30, 2019. Peoples continues its deposit strategy of growing low-cost core deposits, such as checking and savings accounts, while utilizing brokered deposits as a funding source when necessary.
Borrowed Funds
The following table details Peoples’ short-term and long-term borrowings:
(Dollars in thousands)June 30,
2020		March 31,
2020		December 31,
2019		September 30,
2019		June 30,
2019
Short-term borrowings:
     
Overnight borrowings
$—  $64,000  $141,000  $106,000  $—  
FHLB 90-day advances
110,000  110,000  110,000  110,000  117,200  
Current portion of long-term FHLB advances
25,000  45,000  23,009  23,069  23,129  
Retail repurchase agreements
42,912  40,661  42,968  49,081  46,128  
Total short-term borrowings
$177,912  $259,661  $316,977  $288,150  $186,457  
Long-term borrowings:
 
FHLB advances
$105,005  $125,300  $75,672  $76,785  $78,324  
Junior subordinated debt securities
7,531  7,491  7,451  7,409  7,367  
Total long-term borrowings
$112,536  $132,791  $83,123  $84,194  $85,691  
Total borrowed funds
$290,448  $392,452  $400,100  $372,344  $272,148  
Peoples' 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. The decrease in overnight borrowings of $64.0 million, and the decline of $40.3 million in FHLB advances compared to March 31, 2020 were primarily tied to the growth in deposits during the quarter. As of June 30, 2020, Peoples had seventeen effective interest rate swaps, with an aggregate notional value of $160.0 million, $110.0 million of which were funded by FHLB 90-day advances, which are expected to be extended every 90 days through the maturity dates of the swaps. The remaining $50.0 million of interest rate swaps were funded by 90-day brokered deposits, which are 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. During the first quarter 2020, Peoples borrowed $50.0 million through long-term FHLB putable, non-amortizing fixed-rates advances.
Additional information regarding Peoples' interest rate swaps can be found in "Note 9 Derivative Financial Instruments" of the Notes to the Unaudited Consolidated Financial Statements.

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Capital/Stockholders’ Equity
At June 30, 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 of 2.50%, 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, 2020, Peoples had a capital conservation buffer of 6.80%. As such, Peoples exceeded the minimum ratios including the capital conservation buffer at June 30, 2020.
The following table details Peoples' risk-based capital levels and corresponding ratios:
(Dollars in thousands)June 30,
2020		March 31,
2020		December 31,
2019		September 30,
2019		June 30,
2019
Capital Amounts:     
Common Equity Tier 1$408,619  $415,768  $427,415  $417,468  $410,978  
Tier 1416,150  423,259  434,866  424,877  418,345  
Total (Tier 1 and Tier 2)454,641  459,727  456,422  446,462  439,702  
Net risk-weighted assets$3,072,178  $2,988,263  $2,930,355  $2,933,848  $2,903,386  
Capital Ratios:
Common Equity Tier 113.30 %13.91 %14.59 %14.23 %14.16 %
Tier 113.55 %14.16 %14.84 %14.48 %14.41 %
Total (Tier 1 and Tier 2)14.80 %15.38 %15.58 %15.22 %15.14 %
Tier 1 leverage ratio8.97 %10.06 %10.41 %10.28 %10.26 %
During the second quarter of 2020, Peoples repurchased 447,931, or $9.8 million, of common shares under Peoples' share repurchase program pursuant to the then effective Rule 10b5-1 plan. Peoples continues to evaluate repurchases under its share-repurchase program as appropriate, based on market conditions and other relevant factors. At June 30, 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 repurchase of common shares during the second quarter of 2020, Peoples' capital ratios at June 30, 2020 compared to March 31, 2020, were impacted by dividends declared of $6.8 million, which exceeded net income of $4.7 million. The decline in capital ratios at March 31, 2020, compared to December 31, 2019 was related to the net loss recorded during the first quarter of 2020, coupled with common share repurchases and dividends declared. During 2019, Peoples' capital ratios increased primarily due to earnings, which exceeded dividends declared and paid.
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.
In addition to traditional capital measurements, management uses tangible capital measures to evaluate the adequacy of Peoples' stockholders' equity. Such ratios represent non-US GAAP financial measures since their calculation removes the impact of goodwill and other intangible assets acquired through acquisitions on amounts reported in the Unaudited Consolidated Balance Sheets. Management believes this information is useful to investors since it facilitates the comparison of Peoples' operating performance, financial condition and trends to peers, especially those without a similar level of intangible assets to that of Peoples. Further, intangible assets generally are difficult to convert into cash, especially during a financial crisis, and could decrease substantially in value should there be deterioration in the overall franchise value. As a result, tangible equity represents a conservative measure of the capacity for Peoples to incur losses but remain solvent.

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The following table reconciles the calculation of these non-US GAAP financial measures to amounts reported in Peoples' Unaudited Consolidated Financial Statements:
(Dollars in thousands)June 30,
2020		March 31,
2020		December 31,
2019		September 30,
2019		June 30,
2019
Tangible equity:     
Total stockholders' equity
$569,177  $583,721  $594,393  $588,533  $579,022  
Less: goodwill and other intangible assets
176,625  177,447  177,503  179,126  176,763  
Tangible equity
$392,552  $406,274  $416,890  $409,407  $402,259  
Tangible assets:
 
Total assets
$4,985,819  $4,469,120  $4,354,165  $4,396,148  $4,276,376  
Less: goodwill and other intangible assets
176,625  177,447  177,503  179,126  176,763  
Tangible assets
$4,809,194  $4,291,673  $4,176,662  $4,217,022  $4,099,613  
Tangible book value per common share:    
Tangible equity
$392,552  $406,274  $416,890  $409,407  $402,259  
Common shares outstanding
19,925,083  20,346,843  20,698,941  20,700,630  20,696,041  
Tangible book value per common share
$19.70  $19.97  $20.14  $19.78  $19.44  
Tangible equity to tangible assets ratio:
Tangible equity
$392,552  $406,274  $416,890  $409,407  $402,259  
Tangible assets
$4,809,194  $4,291,673  $4,176,662  $4,217,022  $4,099,613  
Tangible equity to tangible assets
8.16 %9.47 %9.98 %9.71 %9.81 %
Tangible book value per common share declined at June 30, 2020 compared to March 31, 2020. This decline was driven by the increased tangible assets arising from the PPP loan originations, which negatively impacted the ratio at June 30, 2020 by 86 basis points. In addition, tangible equity declined due to dividends declared exceeding net income during the second quarter of 2020, coupled with the common share repurchases during the quarter. Compared to December 31, 2019, Peoples' net income has been reduced by higher provision for credit losses, and when coupled with the dividends declared and common share repurchases, has driven tangible equity lower.
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' 2019 Form 10-K.
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):
 

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Increase (Decrease) in Interest Rate
Estimated Increase (Decrease) in
Net Interest Income
Estimated Increase (Decrease) in Economic Value of Equity
(in Basis Points)June 30, 2020December 31, 2019June 30, 2020December 31, 2019
300$18,183  14.9 %$14,806  11.2 %$209,974  20.7 %$35,743  3.2 %
20014,876  12.2 %12,063  9.1 %187,794  18.5 %45,651  4.0 %
1009,048  7.4 %7,895  6.0 %104,390  10.3 %39,137  3.5 %
(100)(5,392) (4.4)%(12,524) (9.5)%(74,835) (7.4)%(63,964) (5.7)%
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 as well as assumptions regarding prepayment speeds on mortgage-backed securities. These and other modeling 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 affect the amount forecasted for cash flow reinvestment, premium amortization, and discount accretion assumed in interest rate risk modeling 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 interest rate risk model could be incorrect, leading to either a lower or higher impact on net interest income. Peoples generally takes a more conservative approach regarding prepayment speed assumptions.
While parallel interest rate shock scenarios are useful in assessing the level of IRR inherent in the balance sheet, interest rates typically move in a nonparallel 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 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. These 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. Given the shape of market yield curves at June 30, 2020, consideration of the bear steepener and bull flattener 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 bear steepener scenario highlights the risk to net interest income and the economic value of equity when short-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. At June 30, 2020, the bear steepener scenario resulted in an increase in both net interest income and economic value of equity of 4.0% and 7.7%, respectively.
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’ deposit and borrowing costs, which are correlated with short-term rates, remain constant while asset yields, which are correlated with long-term rates, fall. Asset yields driven lower by increased investment securities premium amortization and lower rates on floating rate loans would not be offset by reductions in deposit or funding costs; resulting in a decreased amount of net interest income and lower net interest margin. At June 30, 2020, the bull flattener scenario resulted in a decrease in both net interest income and economic value of equity of 1.3% and 0.6%, respectively. Peoples was within the policy limitations for this alternative scenario as of June 30, 2020, which sets the maximum allowable downside exposure as 5.0% of net interest income and 10.0% of economic value of equity.
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, 2020, Peoples has entered into seventeen interest rate swap contracts with an aggregate notional value of $160.0 million. Additional information regarding Peoples’ interest rate swaps can be found in “Note 9 Derivative Financial Instruments” of the Notes to the Unaudited Consolidated Financial Statements.
At June 30, 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.

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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 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' 2019 Form 10-K.
At June 30, 2020, Peoples Bank had liquid assets of $209.5 million, which represented 3.8% of total assets and unfunded loan commitments. This amount exceeded the minimum level by $99.3 million, or 1.8% of total loans and unfunded commitments, currently required under Peoples' liquidity policy. Peoples also had an additional $105.0 million of unpledged investment securities not included in the measurement of liquid assets.
Management believes the current balance of cash and cash equivalents, anticipated investment portfolio cash flows and 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.
Peoples is authorized to utilize the Federal Reserve's Paycheck Protection Program Liquidity Facility (PPPLF) to fund originations under the PPP. During the second quarter of 2020, Peoples borrowed a small amount under the PPPLF in order to test the funding source, which is available if needed.
Since March 31, 2020, there was an increase in deposit balances due to the influx of funds from government stimulus, the PPP and other government actions. Peoples anticipates that these deposit balances will decline over time as the funds are used for intended business purposes; however, this deposit outflow should be partially offset as the associated PPP loans are forgiven and loan reimbursement is received. At the same time, we have experienced a decrease in the utilization rate for commercial lines of credit. This decrease is related to the receipt of PPP loan proceeds and other increased cash flows to certain companies. Peoples expects the commercial line of credit utilization percentage to revert back to more historical averages as time progresses. The utilization percentage for consumer line of credit products has been relatively steady.
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,
2020		March 31,
2020		December 31,
2019		September 30,
2019		June 30,
2019
Home equity lines of credit$116,634  $113,605  $112,464  $110,127  $106,456  
Unadvanced construction loans113,119  97,153  102,491  87,063  95,266  
Other loan commitments426,776  413,515  353,137  365,343  360,872  
Loan commitments$656,529  $624,273  $568,092  $562,533  $562,594  
Standby letters of credit$12,280  $12,883  $12,498  $14,983  $14,658  
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.
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, 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.
 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, 2020, that have materially affected, or are reasonably likely to materially affect, Peoples’ internal control over financial reporting.
PART II - OTHER INFORMATION
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 continued impact on both will depend on future developments, which are highly uncertain and cannot be predicted, including the scope

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and duration of the pandemic and actions taken by governmental and nongovernmental authorities in response to the pandemic.
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 in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, and 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 had caused and is likely to continue to cause business shutdowns and slowdowns, 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 as compared to the loans to customers that Peoples would have otherwise extended credit. Rules providing for forgiveness have been constantly evolving, including an automatic forgiveness if the amount of the PPP loan was not larger than a specified floor.
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 forecasted 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 nonperforming 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 months, 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 in the first and early second quarters of 2020 to temporarily close or restrict the operations of most businesses. Many businesses have re-opened; however, the future effects of COVID-19 on economic activity could negatively affect the future banking products Peoples

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provides, including a decline in loan originations if there are renewed or additional restrictions placed on businesses, including the potential of closing again.
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 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 re-opened in June 2020. 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 risks. 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 and maintained this target range as of June 30, 2020. 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 United States 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 from earning assets including other-than-temporary impairment on investment securities and sustained repayment shortfalls on

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loans. It is possible that sources of wholesale funding such as the Federal Home Loan Bank, the Federal Reserve Bank, or the brokered certificate of deposit market would no longer be accessible to fund daily liquidity needs.
Peoples does not yet know the full extent of COVID-19’s effects on its business, operations, or the global economy as a whole, despite experience and knowledge gained throughout the second quarter of 2020. Any future developments will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the continued 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 to restrict or close businesses 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 experience material adverse impacts on its business as a result of the virus' global economic impact, including the availability of credit, adverse impacts on Peoples' liquidity and any recession that has occurred or may occur in the future.
There have been no other material changes from those risk factors previously disclosed in “ITEM 1A. RISK FACTORS” of Part I of Peoples’ 2019 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.
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, 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)
April 1 – 30, 2020297,227  
(1)(2)(3)
$21.82  
(1)(2)(3)
290,673  $23,946,721  
May 1 – 31, 2020157,258  (1)$21.65  (1)157,258  $20,542,307  
June 1 – 30, 2020780  (2)$21.28  (2)—  $20,542,307  
Total455,265   $21.76   447,931  $20,542,307  
(1)On February 28, 2020, Peoples announced that on February 27, 2020, Peoples' Board of Directors approved 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 290,673 and 157,258 common shares for $6.3 million and $3.4 million under the current share repurchase program during April and May 2020, respectively.
(2)Information reported includes 1,011 common shares and 780 common shares purchased in open market transactions during April 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.
(3)Information reported includes: an aggregate of 5,543 common shares withheld to satisfy income taxes associated with unrestricted common shares which were granted under the Peoples Bancorp Inc. Third Amended and Restated 2006 Equity Plan during April 2020 and were not subject to vesting requirements.

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

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ITEM 6 EXHIBITS
Exhibit
Number		 
 
Description
 
 
Exhibit Location
Agreement and Plan of Merger, dated as of October 29, 2018, as amended by Amendment No. 1, to Agreement and Plan of Merger made and entered into as of 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 Bancorp ("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 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, 2003 Incorporated herein by reference to Exhibit 3(c) to Peoples’ March 31, 2003 Form 10-Q
 Certificate regarding adoption of amendments to Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.07, 3.08 and 3.11 of the Code of Regulations of Peoples Bancorp Inc. by shareholders on April 8, 2004 Incorporated herein by reference to Exhibit 3(a) to Peoples’ Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004 (File No. 0-16772)
 +Schedules and exhibits have 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.
PPeoples 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
 Certificate regarding adoption of amendments to Sections 2.06, 2.07, 3.01 and 3.04 of Peoples Bancorp Inc.’s Code of Regulations by the shareholders on April 13, 2006 Incorporated herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K dated and filed on April 14, 2006 (File No. 0-16772)
 Certificate regarding adoption of an amendment to Section 2.01 of Peoples Bancorp Inc.’s Code of Regulations by the shareholders on April 22, 2010 Incorporated herein by reference to Exhibit 3.2(e) to Peoples’ Quarterly Report on Form 10-Q/A (Amendment No. 1) for the quarterly period ended June 30, 2010 (File No. 0-16772)
Certificate regarding Adoption of Amendment to Division (D) of Section 2.02 of 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
Summary of Base Salaries for Named Executive Officers of Peoples Bancorp Inc.Incorporated herein by reference to Exhibit 10.3 to Peoples' Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 (File No. 0-16772)
First Amendment to Loan Agreement, made and entered into as of April 2, 2020, by and between Peoples Bancorp Inc., as Borrower, and U.S. Bank National Association, as LenderIncorporated herein by reference to 10.1 to Peoples' Current Report on Form 8-K dated and filed on April 6, 2020 (File No. 0-16772)
Peoples Bancorp Inc. Change in Control Agreement between Peoples Bancorp Inc. and Jason M. Eakle (adopted April 1, 2020). 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 Certifications Furnished 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, 2020 of Peoples Bancorp Inc. are the following documents formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2020 (Unaudited) and December 31, 2019; (ii) Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2020 and 2019; (iii) Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2020 and 2019; (iv) Consolidated Statement of Stockholders' Equity (Unaudited) for the six months ended June 30, 2020; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2020 and 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:July 29, 2020By: /s/CHARLES W. SULERZYSKI
  Charles W. Sulerzyski
  President and Chief Executive Officer
Date:July 29, 2020By: /s/JOHN C. ROGERS
  John C. Rogers
  Executive Vice President,
  Chief Financial Officer and Treasurer


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