PEOPLES BANCORP INC - Quarter Report: 2021 March (Form 10-Q)

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 March 31, 2021


☐			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

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 class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, without par value

PEBO

The Nasdaq Stock Market

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

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

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


Large accelerated filer	o	Accelerated filer	☒
Non-accelerated filer	o	Smaller 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: 19,649,961 common shares, without par value, at April 28, 2021.

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PART I – FINANCIAL INFORMATION			3
ITEM 1. FINANCIAL STATEMENTS			3
CONSOLIDATED BALANCE SHEETS (Unaudited)			3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)			4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)			5
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)			6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)			7
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS			8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			31
SELECTED FINANCIAL DATA			31
EXECUTIVE SUMMARY			37
RESULTS OF OPERATIONS			39
FINANCIAL CONDITION			52
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			65
ITEM 4. CONTROLS AND PROCEDURES			65
PART II – OTHER INFORMATION			65
ITEM 1. LEGAL PROCEEDINGS			65
ITEM 1A. RISK FACTORS			66
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			66
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			66
ITEM 4. MINE SAFETY DISCLOSURES			66
ITEM 5. OTHER INFORMATION			66
ITEM 6. EXHIBITS			67
SIGNATURES			70

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PEOPLES BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	March 31, 2021		December 31, 2020

(Dollars in thousands)	(Unaudited)
Assets
Cash and cash equivalents:
Cash and due from banks	$	55,319	$	60,902
Interest-bearing deposits in other banks	145,056		91,198
Total cash and cash equivalents	200,375		152,100
Available-for-sale investment securities, at fair value (amortized cost of $859,120 at March 31, 2021 and $734,544 at December 31, 2020) (a)	865,347		753,013
Held-to-maturity investment securities, at amortized cost (fair value of $161,983 at March 31, 2021 and $68,082 at December 31, 2020) (a)	166,230		66,458
Other investment securities	34,026		37,560
Total investment securities (a)	1,065,603		857,031
Loans, net of deferred fees and costs (b)	3,409,676		3,402,940
Allowance for credit losses	(44,897)		(50,359)
Net loans	3,364,779		3,352,581
Loans held for sale	2,194		4,659
Bank premises and equipment, net of accumulated depreciation	58,721		60,094
Bank owned life insurance	72,037		71,591
Goodwill	171,260		171,260
Other intangible assets	12,747		13,337
Other assets (c)	195,336		78,111
Total assets	$	5,143,052	$	4,760,764
Liabilities
Deposits:
Non-interest-bearing	$	1,206,034	$	997,323
Interest-bearing	3,098,195		2,913,136
Total deposits	4,304,229		3,910,459
Short-term borrowings	67,868		73,261
Long-term borrowings	110,295		110,568

Accrued expenses and other liabilities	81,767		90,803
Total liabilities	4,564,159		4,185,091
Stockholders’ equity
Preferred shares, no par value, 50,000 shares authorized, no shares issued at March 31, 2021 and December 31, 2020	—		—
Common stock, no par value, 24,000,000 shares authorized, 21,200,940 shares issued at March 31, 2021 and 21,193,402 shares issued at December 31, 2020, including shares held in treasury	422,370		422,536
Retained earnings	199,321		190,691
Accumulated other comprehensive (loss) income, net of deferred income taxes	(4,962)		1,336
Treasury stock, at cost, 1,630,243 shares at March 31, 2021 and 1,686,046 shares at December 31, 2020	(37,836)		(38,890)
Total stockholders’ equity	578,893		575,673
Total liabilities and stockholders’ equity	$	5,143,052	$	4,760,764

(a) Available-for-sale investment securities and held-to-maturity investment securities are presented net of allowance for credit losses of $0 and $182,000, respectively, as of March 31, 2021 and $0 and $60,000, respectively, at December 31, 2020.

(b) Also referred to throughout this document as "total loans" and "loans held for investment."

(c) At the close of business on March 31, 2021, Peoples closed on the business combination under which Peoples Bank acquired assets comprising North Star Leasing's ("NSL") equipment finance business and assumed from NSL certain specified liabilities. Please see Note 11 "Acquisitions" for more detail.

See Notes to the Unaudited Consolidated Financial Statements

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PEOPLES BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended
	March 31,
(Dollars in thousands, except per share data)	2021		2020
Interest income:
Interest and fees on loans	$	35,737	$	34,588
Interest and dividends on taxable investment securities	2,574		5,383
Interest on tax-exempt investment securities	611		655
Other interest income	40		236
Total interest income	38,962		40,862
Interest expense:
Interest on deposits	2,817		4,629
Interest on short-term borrowings	100		1,039
Interest on long-term borrowings	467		558

Total interest expense	3,384		6,226
Net interest income	35,578		34,636
(Recovery of) provision for credit losses	(4,749)		16,969
Net interest income after (recovery of) provision for credit losses	40,327		17,667



Non-interest income:
Insurance income	5,221		4,130
Electronic banking income	3,911		3,280
Trust and investment income	3,845		3,262
Deposit account service charges	1,985		2,820
Mortgage banking income	1,140		750
Bank owned life insurance income	446		582
Commercial loan swap fees	60		244
Net loss on asset disposals and other transactions	(27)		(87)
Net (loss) gain on investment securities	(336)		319
Other non-interest income	658		437
Total non-interest income	16,903		15,737
Non-interest expense:
Salaries and employee benefit costs	20,759		19,918
Professional fees	3,468		1,693
Net occupancy and equipment expense	3,327		3,154
Data processing and software expense	2,454		1,752
Electronic banking expense	1,894		1,865
Marketing expense	911		473
Franchise tax expense	855		882
Amortization of other intangible assets	620		729
FDIC insurance premium	463		(5)
Other loan expenses	462		578
Communication expense	282		280
Other non-interest expense	2,492		3,006
Total non-interest expense	37,987		34,325
Income (loss) before income taxes	19,243		(921)
Income tax expense (benefit)	3,780		(156)
Net income (loss)	$	15,463	$	(765)


Earnings (loss) per common share - basic	$	0.80	$	(0.04)
Earnings (loss) per common share - diluted	$	0.79	$	(0.04)
Weighted-average number of common shares outstanding - basic	19,282,665		20,367,564
Weighted-average number of common shares outstanding - diluted	19,436,311		20,538,214
Cash dividends declared	$	6,833	$	7,038
Cash dividends declared per common share	$	0.35	$	0.34

See Notes to the Unaudited Consolidated Financial Statements

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PEOPLES BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Three Months Ended
	March 31,
(Dollars in thousands)	2021		2020
Net income (loss)	$	15,463	$	(765)
Other comprehensive income:
Available-for-sale investment securities:
Gross unrealized holding (loss) gain arising during the period	(12,578)		22,268
Related tax benefit (expense)	2,642		(4,676)
Reclassification adjustment for net loss (gain) included in net income	336		(319)
Related tax (benefit) expense	(71)		67


Net effect on other comprehensive (loss) income	(9,671)		17,340
Defined benefit plans:
Net gain (loss) arising during the period	5		(365)
Related tax (expense) benefit	(1)		76
Amortization of unrecognized gain and service cost on benefit plans	30		28
Related tax expense	(7)		(6)
Recognition of gain due to settlement and curtailment	—		368
Related tax expense	—		(77)
Net effect on other comprehensive income	27		24
Cash flow hedges:
Net gain (loss) arising during the period	4,236		(9,730)
Related tax (expense) benefit	(890)		2,043
Net effect on other comprehensive income (loss)	3,346		(7,687)
Total other comprehensive (loss) income, net of tax	(6,298)		9,677
Total comprehensive income	$	9,165	$	8,912

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 Shares		Retained Earnings				Treasury Stock
(Dollars in thousands)
Balance, December 31, 2020	$	422,536	$	190,691	$	1,336	$	(38,890)	$	575,673

Net income	—		15,463		—		—		15,463
Other comprehensive loss, net of tax	—		—		(6,298)		—		(6,298)


Cash dividends declared	—		(6,833)		—		—		(6,833)

Reissuance of treasury stock for common share awards	(1,740)		—		—		1,740		—

Reissuance of treasury stock for deferred compensation plan for Boards of Directors	—		—		—		2		2
Repurchase of treasury stock in connection with employee incentive plan and under compensation plan for Boards of Directors	—		—		—		(911)		(911)

Common shares issued under dividend reinvestment plan	288		—		—		—		288
Common shares issued under compensation plan for Boards of Directors	53		—		—		141		194

Common shares issued under employee stock purchase plan	35		—		—		82		117
Stock-based compensation	1,198		—		—		—		1,198



Balance, March 31, 2021	$	422,370	$	199,321	$	(4,962)	$	(37,836)	$	578,893

See Notes to the Unaudited Consolidated Financial Statements

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PEOPLES BANCORP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Three Months Ended
	March 31,
(Dollars in thousands)	2021		2020
Net cash provided by operating activities	$	18,322	$	18,218
Investing activities:
Available-for-sale investment securities:
Purchases	(228,162)		(72,942)
Proceeds from sales	25,015		5,620
Proceeds from principal payments, calls and prepayments	74,377		61,701
Held-to-maturity investment securities:
Purchases	(101,177)		(8,404)
Proceeds from principal payments	1,115		1,354
Other investment securities:
Purchases	(282)		(5,376)
Proceeds from sales	3,878		957

Net increase in loans held for investment	(7,749)		(32,265)
Net expenditures for premises and equipment	(311)		(1,028)
Proceeds from sales of other real estate owned	—		50

Proceeds from bank owned life insurance contracts	—		109
Business acquisitions, net of cash received	(117,000)		(839)
Proceeds from (investment in) limited partnership and tax credit funds	4		(15)
Net cash used in investing activities	(350,292)		(51,078)
Financing activities:
Net increase in non-interest-bearing deposits	208,711		56,058
Net increase in interest-bearing deposits	185,059		50,905
Net decrease in short-term borrowings	(5,393)		(57,316)
Proceeds from long-term borrowings	—		50,000
Payments on long-term borrowings	(311)		(372)


Cash dividends paid	(7,080)		(6,918)
Purchase of treasury stock under share repurchase program	—		(10,226)
Purchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors to be held as treasury stock	(911)		(812)
Proceeds from issuance of common shares	286		—
Contingent consideration payments made after a business acquisition	(116)		—

Net cash provided by financing activities	380,245		81,319
Net increase in cash and cash equivalents	48,275		48,459
Cash and cash equivalents at beginning of period	152,100		115,193
Cash and cash equivalents at end of period	$	200,375	$	163,652

Supplemental cash flow information:
Interest paid	4,199		6,634


Supplemental noncash disclosures:
Transfers from loans to other real estate owned	—		66
Lease right-of-use assets obtained in exchange for lessee operating lease liabilities	14		27

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, 2020 ("Peoples' 2020 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’ 2020 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 March 31, 2021 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, 2020, contained herein, has been derived from the audited Consolidated Balance Sheet included in Peoples’ 2020 Form 10-K.

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year, due in part to seasonal variations and unusual or infrequently occurring items. Peoples' insurance income includes performance-based insurance commissions that are recognized by Peoples when received, which typically occurs, for the most part, during the first quarter of each year. For the three months ended March 31, 2021 and 2020, the amount of performance-based insurance commissions recognized totaled $2.0 million and $1.3 million, respectively.

New Accounting Pronouncements: From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies that are adopted by Peoples as of the required effective dates. The following should be read in conjunction with "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples’ 2020 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. Per the guidance, Peoples is continuing to evaluate the impact of ASU 2020-04 on Peoples' consolidated financial statements.

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' 2020 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

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liabilities required to be measured at fair value on a recurring basis between levels of the fair value hierarchy during the periods presented.

Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis

The following table provides the fair value for assets and liabilities required to be measured and reported at fair value on a recurring basis on the Unaudited Consolidated Balance Sheets by level in the fair value hierarchy.


	Recurring Fair Value Measurements at Reporting Date
	March 31, 2021						December 31, 2020
(Dollars in thousands)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3

Assets:
Available-for-sale investment securities:
Obligations of:

U.S. government sponsored agencies	$	—	$	18,471	$	—	$	—	$	5,363	$	—
States and political subdivisions	—		218,484		—		—		114,919		—
Residential mortgage-backed securities	—		596,181		—		—		623,218		—
Commercial mortgage-backed securities	—		27,481		—		—		4,783		—
Bank-issued trust preferred securities	—		4,730		—		—		4,730		—

Total available-for-sale securities	—		865,347		—		—		753,013		—
Equity investment securities (a)	136		194		—		107		192		—
Derivative assets (b)	—		16,355		—		—		27,332		—
Liabilities:
Derivative liabilities (c)	$	—	$	24,179	$	—	$	—	$	39,395	$	—

(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 8 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 8 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
	March 31, 2021						December 31, 2020
(Dollars in thousands)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3


Other real estate owned ("OREO")	$	—	$	—	$	134	$	—	$	—	$	134
Servicing rights (a)(b)	$	—	$	—	$	2,515	$	—	$	—	$	2,591

(a) Included in other intangible assets on the Consolidated Balance Sheets. Servicing rights are carried at the lower of cost or market value.

(b) Peoples established a valuation allowance on servicing rights of $16,000 as of March 31, 2021 and $161,000 as of December 31, 2020, as the fair value of the servicing rights was less than the carrying value.

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

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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).

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 Level	March 31, 2021				December 31, 2020
		Carrying Amount		Fair Value		Carrying Amount		Fair Value

Assets:
Cash and cash equivalents	1	$	200,375	$	200,375	$	152,100	$	152,100




Held-to-maturity investment securities:
Obligations of:
U.S. Government sponsored agencies	2	30,211		28,517		—		—
States and political subdivisions	2	92,436		89,518		35,139		35,484
Residential mortgage-backed securities	2	24,878		25,552		25,890		26,742
Commercial mortgage-backed securities	2	18,705		18,396		5,429		5,856
Total held-to-maturity securities		166,230		161,983		66,458		68,082


Other investment securities:
Federal Home Loan Bank ("FHLB") stock	2	18,046		18,046		21,718		21,718
Federal Reserve Bank ("FRB") stock	2	13,311		13,311		13,311		13,311
Nonqualified deferred compensation	2	1,975		1,975		1,867		1,867
Other investment securities	2	365		365		365		365
Other investment securities (a)		33,697		33,697		37,261		37,261
Net loans	3	3,364,779		3,357,005		3,352,581		3,408,373
Loans held for sale	2	2,194		2,242		4,659		4,733
Bank owned life insurance	3	72,037		72,037		71,591		71,591
Liabilities:
Deposits	2	$	4,304,229	$	3,982,200	$	3,910,459	$	3,773,602
Short-term borrowings	2	67,868		68,403		73,261		74,170
Long-term borrowings	2	110,295		113,934		110,568		117,364

(a) Other investment securities, as reported on the Unaudited Consolidated Balance Sheets, also includes equity investment securities at March 31, 2021 and December 31, 2020, 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.

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-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).

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Net Loans: The fair value of portfolio loans assumes sale of the notes to a third-party financial investor. Accordingly, this value is not necessarily the value to Peoples if the notes were held to maturity. Peoples considered interest rate, credit and market factors in estimating the fair value of loans (Level 3). Fair values for loans are 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).

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 Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2021
Obligations of:

U.S. government sponsored agencies	$	18,611	$	324	$	(464)	$	18,471
States and political subdivisions	218,621		3,632		(3,769)		218,484
Residential mortgage-backed securities	589,047		12,872		(5,738)		596,181
Commercial mortgage-backed securities	28,145		97		(761)		27,481
Bank-issued trust preferred securities	4,696		217		(183)		4,730

Total available-for-sale securities	$	859,120	$	17,142	$	(10,915)	$	865,347
December 31, 2020
Obligations of:

U.S. government sponsored agencies	$	4,960	$	403	$	—	$	5,363
States and political subdivisions	110,401		4,642		(124)		114,919
Residential mortgage-backed securities	609,865		15,377		(2,024)		623,218
Commercial mortgage-backed securities	4,622		161		—		4,783
Bank-issued trust preferred securities	4,696		192		(158)		4,730

Total available-for-sale securities	$	734,544	$	20,775	$	(2,306)	$	753,013

The gross unrealized losses related to residential mortgage-backed securities at March 31, 2021 and December 31, 2020, 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 March 31 were as follows:


	Three Months Ended
	March 31,
(Dollars in thousands)	2021		2020
Gross gains realized	$	339	$	319
Gross losses realized	675		—
Net (loss) gain realized	$	(336)	$	319

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 Months						12 Months or More						Total
(Dollars in thousands)	Fair Value		Unrealized Loss		No. of Securities		Fair Value		Unrealized Loss		No. of Securities		Fair Value		Unrealized Loss
March 31, 2021
Obligations of:

U.S. government sponsored agencies	$	11,684	$	464	$	3	$	—	$	—	$	—	$	11,684	$	464
States and political subdivisions	116,444		3,769		47		—		—		—		116,444		3,769
Residential mortgage-backed securities	227,145		5,502		40		10,603		236		20		237,748		5,738
Commercial mortgage-backed securities	23,155		761		7		—		—		—		23,155		761
Bank-issued trust preferred securities	—		—		—		1,817		183		2		1,817		183

Total	$	378,428	$	10,496	97		$	12,420	$	419	22		$	390,848	$	10,915
December 31, 2020
Obligations of:


States and political subdivisions	$	17,651	$	124	5		$	—	$	—	—		$	17,651	$	124
Residential mortgage-backed securities	156,659		1,795		45		9,892		229		13		166,551		2,024

Bank-issued trust preferred securities	494		6		1		1,848		152		2		2,342		158

Total	$	174,804	$	1,925	51		$	11,740	$	381	15		$	186,544	$	2,306

Management evaluates available-for-sale investment securities for an allowance for credit losses on a quarterly basis. At March 31, 2021, management concluded that no individual securities at an unrealized loss position required an allowance for credit losses. At March 31, 2021, 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 March 31, 2021 and December 31, 2020 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 $4.7 million at March 31, 2021 and $2.7 million at December 31, 2020.

At March 31, 2021, 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. Neither of the two positions had a fair value of less than 90% of its book value. 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 March 31, 2021 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 March 31, 2021. 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 Year			1 to 5 Years			5 to 10 Years			Over 10 Years			Total
Amortized cost
Obligations of:

U.S. government sponsored agencies	$	—		$	6,248		$	2,500		$	9,863		$	18,611
States and political subdivisions	7,019			28,186			52,478			130,938			218,621
Residential mortgage-backed securities	1			4,909			52,451			531,686			589,047
Commercial mortgage-backed securities	—			2,324			8,980			16,841			28,145
Bank-issued trust preferred securities	—			—			4,696			—			4,696

Total available-for-sale securities	$	7,020		$	41,667		$	121,105		$	689,328		$	859,120
Fair value
Obligations of:

U.S. government sponsored agencies	$	—		$	6,566		$	2,467		$	9,438		$	18,471
States and political subdivisions	7,069			29,240			53,660			128,515			218,484
Residential mortgage-backed securities	1			4,986			52,907			538,287			596,181
Commercial mortgage-backed securities	—			2,368			8,737			16,376			27,481
Bank-issued trust preferred securities	—			—			4,730			—			4,730

Total available-for-sale securities	$	7,070		$	43,160		$	122,501		$	692,616		$	865,347
Total weighted-average yield	2.56		%	2.50		%	2.06		%	1.98		%	2.02		%

Held-to-Maturity

The following table summarizes Peoples’ held-to-maturity investment securities:


(Dollars in thousands)	Amortized Cost		Allowance for Credit Losses		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2021
Obligations of:
U.S. government sponsored agencies	$	30,211	$	—	$	—	$	(1,694)	$	28,517
States and political subdivisions	92,618		(182)		437		(3,355)		89,518
Residential mortgage-backed securities	24,878		—		676		(2)		25,552
Commercial mortgage-backed securities	18,705		—		289		(598)		18,396
Total held-to-maturity securities	$	166,412	$	(182)	$	1,402	$	(5,649)	$	161,983
December 31, 2020
Obligations of:
States and political subdivisions	$	35,199	$	(60)	$	510	$	(165)	$	35,484
Residential mortgage-backed securities	25,890		—		852		—		26,742
Commercial mortgage-backed securities	5,429		—		427		—		5,856
Total held-to-maturity securities	$	66,518	$	(60)	$	1,789	$	(165)	$	68,082

There were no gross gains or gross losses realized by Peoples from sales of held-to-maturity securities for any of the three months ended March 31, 2021 and 2020.

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 obligations of state and political subdivisions with the remaining securities issued by U.S. government sponsored agencies. Peoples analyzed these securities using cumulative default rate averages for investment grade municipal securities. As a result, at March 31, 2021, Peoples recorded $182,000 of allowance for credit losses for held-to-maturity securities, compared to $60,000 at December 31, 2020.

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The following table presents a summary of held-to-maturity investment securities that had an unrealized loss:


	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair Value		Unrealized Loss		No. of Securities	Fair Value		Unrealized Loss		No. of Securities	Fair Value		Unrealized Loss
March 31, 2021
Obligations of:
U.S. government sponsored agencies	$	28,517	$	1,694	6	—		—		—	$	28,517	$	1,694
States and political subdivisions	79,334		3,355		29	—		—		—	79,334		3,355
Residential mortgage-backed securities	622		2		1	—		—		—	622		2
Commercial mortgage-backed securities	12,832		598		2	—		—		—	12,832		598
Total	$	121,305	$	5,649	38	$	—	$	—	—	$	121,305	$	5,649
December 31, 2020
Obligations of:
States and political subdivisions	$	18,662	$	165	5	$	—	$	—	—	$	18,662	$	165


Total	$	18,662	$	165	5	$	—	$	—	—	$	18,662	$	165

The table below presents the amortized cost, fair value and total weighted-average yield of held-to-maturity securities by contractual maturity at March 31, 2021. 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 Year			1 to 5 Years			5 to 10 Years			Over 10 Years			Total
Amortized cost
Obligations of:
U.S. government sponsored agencies	$	—		$	—		$	—		$	30,211		$	30,211
States and political subdivisions	—			988			2,511			89,119			92,618
Residential mortgage-backed securities	—			—			2,488			22,390			24,878
Commercial mortgage-backed securities	—			368			3,710			14,627			18,705
Total held-to-maturity securities	$	—		$	1,356		$	8,709		$	156,347		$	166,412
Fair value
Obligations of:
U.S. government sponsored agencies	$	—		$	—		$	—		$	28,517		$	28,517
States and political subdivisions	—			1,141			2,795			85,582			89,518
Residential mortgage-backed securities	—			—			2,593			22,959			25,552
Commercial mortgage-backed securities	—			374			3,968			14,054			18,396
Total held-to-maturity securities	$	—		$	1,515		$	9,356		$	151,112		$	161,983
Total weighted-average yield	—		%	0.62		%	2.98		%	2.13		%	2.16		%

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)	March 31, 2021		December 31, 2020
FHLB stock	$	18,046	$	21,718
FRB stock	13,311		13,311
Nonqualified deferred compensation	1,974		1,867
Equity investment securities	330		299
Other investment securities	365		365
Total other investment securities	$	34,026	$	37,560

During the three months ended March 31, 2021, Peoples redeemed $3.7 million of FHLB stock during the first quarter of 2021.

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During the three months ended March 31, 2021 and 2020, Peoples recorded the change in the fair value of equity investment securities held during the period, in other non-interest income, resulting in unrealized gain of $31,000 and and unrealized loss of $31,000, respectively.

At March 31, 2021, 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 has 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 has also pledged available-for-sale investment 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)	March 31, 2021		December 31, 2020

Securing public and trust department deposits, and repurchase agreements:
Available-for-sale	$	660,261	$	547,244
Held-to-maturity	108,047		28,287
Securing additional borrowing capacity at the FHLB and the FRB:
Available-for-sale	2,359		2,175

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. Peoples also originates insurance premium finance loans nationwide through its premium finance division.

The major classifications of loan balances (in each case, net of deferred fees and costs) excluding loans held for sale, were as follows:


(Dollars in thousands)	March 31, 2021		December 31, 2020
Construction	$	78,699	$	106,792
Commercial real estate, other	965,249		929,853
Commercial and industrial	964,761		973,645
Premium finance	110,590		114,758
Residential real estate	573,700		574,007
Home equity lines of credit	117,426		120,913
Consumer, indirect	519,749		503,527
Consumer, direct	79,204		79,094
Deposit account overdrafts	298		351
Total loans, at amortized cost	$	3,409,676	$	3,402,940

Peoples began participating as a Small Business Administration ("SBA") Paycheck Protection Program ("PPP") lender during the second quarter of 2020. Peoples originated PPP loans of $130.8 million in first quarter of 2021 and $488.9 million of PPP loans during the full year of 2020. At March 31, 2021, the PPP loans had an amortized cost of $349.9 million, and were included in commercial and industrial loan balances. As of March 31, 2021, deferred loan origination fees, net of deferred origination costs, totaled $9.3 million. During the first quarter of 2021, Peoples recorded amortization of net deferred loan origination fees of $4.7 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.

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 $10.1 million at March 31, 2021 and $10.9 million at December 31, 2020.

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Nonaccrual and Past Due Loans

A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. A loan may be placed on nonaccrual status regardless of whether or not such loan is considered past due.

The amortized cost of loans on nonaccrual status and loans delinquent for 90 days or more and accruing were as follows:


	March 31, 2021				December 31, 2020
(Dollars in thousands)	Nonaccrual (a)		Accruing Loans 90+ Days Past Due		Nonaccrual (a)		Accruing Loans 90+ Days Past Due
Construction	$	4	$	—	$	4	$	—
Commercial real estate, other	8,421		55		9,111		—
Commercial and industrial	6,101		—		6,192		50
Premium finance	—		109		—		204
Residential real estate	8,246		662		8,375		1,975
Home equity lines of credit	780		180		867		82
Consumer, indirect	1,031		24		1,073		39
Consumer, direct	161		14		171		17
Total loans, at amortized cost	$	24,744	$	1,044	$	25,793	$	2,367

(a) There were $1.1 million of nonaccrual loans for which there was no allowance for credit losses as of March 31, 2021 and $1.3 million at

December 31, 2020.

During the first quarter of 2021, nonaccrual loans decreased compared to December 31, 2020, mostly due to three commercial loans being charged-off coupled with two consumer loan payoffs. As of March 31, 2021, Peoples had made short-term modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment for current 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 March 31, 2021. During first quarter of 2021, accruing loans, 90+ days past due decreased due to several real estate loans becoming less than 90 days past due during the quarter.

The amount of interest income recognized on nonaccrual loans during the three months ended March 31, 2021 was $352,000.

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The following table presents the aging of the amortized cost of past due loans:


	Loans Past Due								Current Loans		Total Loans
(Dollars in thousands)	30 - 59 days		60 - 89 days		90 + Days		Total
March 31, 2021
Construction	$	24	$	889	$	4	$	917	$	77,782	$	78,699
Commercial real estate, other	1,875		127		8,040		10,042		955,207		965,249
Commercial and industrial	3,079		11		6,092		9,182		955,579		964,761
Premium finance	212		130		109		451		110,139		110,590
Residential real estate	5,687		944		3,983		10,614		563,086		573,700
Home equity lines of credit	393		117		784		1,294		116,132		117,426
Consumer, indirect	1,927		350		297		2,574		517,175		519,749
Consumer, direct	207		26		106		339		78,865		79,204
Deposit account overdrafts	—		—		—		—		298		298
Total loans, at amortized cost	$	13,404	$	2,594	$	19,415	$	35,413	$	3,374,263	$	3,409,676
December 31, 2020
Construction	$	—	$	344	$	4	$	348	$	106,444	$	106,792
Commercial real estate, other	1,943		283		8,643		10,869		918,984		929,853
Commercial and industrial	567		552		4,535		5,654		967,991		973,645
Premium finance	928		1,073		204		2,205		112,553		114,758
Residential real estate	6,739		2,688		5,512		14,939		559,068		574,007
Home equity lines of credit	309		58		780		1,147		119,766		120,913
Consumer, indirect	4,362		733		348		5,443		498,084		503,527
Consumer, direct	424		43		123		590		78,504		79,094
Deposit account overdrafts	—		—		—		—		351		351
Total loans, at amortized cost	$	15,272	$	5,774	$	20,149	$	41,195	$	3,361,745	$	3,402,940

Delinquency trends remained stable, as 99.0% of Peoples' portfolio was considered “current” at March 31, 2021, compared to 98.8% at December 31, 2020.

Pledged Loans

Peoples has pledged certain loans secured by one-to-four family and multifamily residential mortgages, home equity lines of credit and commercial real estate loans under a blanket collateral agreement to secure borrowings from the FHLB. Peoples also has pledged eligible commercial and industrial loans to secure borrowings with the FRB. Loans pledged are summarized as follows:


(Dollars in thousands)	March 31, 2021		December 31, 2020
Loans pledged to FHLB	$	730,422	$	740,584
Loans pledged to FRB	111,701		107,340

Credit Quality Indicators

As discussed in "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples' 2020 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 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.

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“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 when they meet those criteria. 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 March 31, 2021:



(Dollars in thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term		Total Loans
Construction
Pass	$	5,669	$	35,741	$	32,155	$	178	$	670	$	1,864	$	163	$	981	$	76,440
Special mention	—		—		—		738		—		141		—		—		879
Substandard	—		—		—		84		177		1,070		49		—		1,380


Total	5,669		35,741		32,155		1,000		847		3,075		212		981		78,699
Commercial real estate, other
Pass	37,694		144,707		157,739		99,426		122,459		323,719		15,395		4,515		901,139
Special mention	—		238		2,771		619		4,544		19,216		—		54		27,388
Substandard	—		—		4,447		922		2,405		28,661		211		74		36,646
Doubtful	—		—		—		—		—		76		—		—		76

Total	37,694		144,945		164,957		100,967		129,408		371,672		15,606		4,643		965,249
Commercial and industrial
Pass	172,691		333,486		96,285		72,607		35,886		113,683		104,507		15,304		929,145
Special mention	662		651		544		1,164		337		1,448		7,255		11		12,061
Substandard	22		2,718		3,487		3,004		2,126		4,402		6,042		1,120		21,801
Doubtful	—		—		—		—		—		1,754		—		187		1,754

Total	173,375		336,855		100,316		76,775		38,349		121,287		117,804		16,622		964,761
Premium finance
Pass	110,590		—		—		—		—		—		—		—		110,590
Total	110,590		—		—		—		—		—		—		—		110,590
Residential real estate
Pass	40,343		51,102		43,026		24,681		31,366		368,742		—		—		559,260

Substandard	—		—		—		—		—		14,263		—		—		14,263

Loss	—		—		—		—		—		177		—		—		177
Total	40,343		51,102		43,026		24,681		31,366		383,182		—		—		573,700
Home equity lines of credit
Pass	4,791		19,303		14,516		12,536		12,941		53,297		42		3,480		117,426




Total	4,791		19,303		14,516		12,536		12,941		53,297		42		3,480		117,426
Consumer, indirect
Pass	65,246		227,871		94,890		72,642		38,982		20,118		—		—		519,749




Total	65,246		227,871		94,890		72,642		38,982		20,118		—		—		519,749
Consumer, direct
Pass	9,732		32,384		16,177		10,974		4,302		5,635		—		—		79,204




Total	9,732		32,384		16,177		10,974		4,302		5,635		—		—		79,204
Deposit account overdrafts	298		—		—		—		—		—		—		—		298
Total loans, at amortized cost	$	447,738	$	848,201	$	466,037	$	299,575	$	256,195	$	958,266	$	133,664	$	25,726	$	3,409,676

At March 31, 2021, Peoples had a total of $1.3 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)	March 31, 2021		December 31, 2020

Construction	$	344		$	—
Commercial real estate, other	8,854			8,467
Commercial and industrial	6,793			6,333
Residential real estate	1,667			1,670
Home equity lines of credit	400			403


Total collateral dependent loans	$	18,058		$	16,873

The increase in collateral dependent loans at March 31, 2021, compared to December 31, 2020, was due to one commercial construction relationship that became collateral dependent in first quarter 2021, coupled with smaller commercial real estate and commercial and industrial loan relationships.

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The following tables summarize the loans that were modified as TDRs during the three months ended March 31:


		Three Months Ended
		Recorded Investment (a)
(Dollars in thousands)	Number of Contracts	Pre-Modification		Post-Modification		Remaining Recorded Investment
March 31, 2021
Construction	1	$	344	$	344	$	344


Residential real estate	3	170		174		172
Home equity lines of credit	1	46		46		46
Consumer, indirect	4	78		78		78
Consumer, direct	3	18		18		18
Consumer	7	96		96		96
Total	12	$	656	$	660	$	658

March 31, 2020
Commercial real estate, other	1	$	265	$	265	$	265
Commercial and industrial	1	145		145		145
Residential real estate	3	452		483		481
Home equity lines of credit	2	41		41		41
Consumer, indirect	11	175		175		175
Consumer, direct	4	57		57		57
Consumer	15	232		232		232
Total	22	$	1,135	$	1,166	$	1,164
(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 accounting for troubled debt restructurings, as defined in 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 March 31, 2021 are summarized below:



(Dollars in thousands)	Beginning Balance, December 31, 2020		(Recovery of) Provision for Credit Losses (a)		Charge-offs		Recoveries		Ending Balance, March 31, 2021
Construction	$	1,887	$	(1,058)	$	—	$	—	$	829
Commercial real estate, other	17,536		455		(157)		—		17,834
Commercial and industrial	12,763		(2,362)		(293)		—		10,108
Premium finance	1,095		81		(16)		—		1,160
Residential real estate	6,044		(991)		(133)		15		4,935
Home equity lines of credit	1,860		(358)		(12)		4		1,494
Consumer, indirect	8,030		(108)		(505)		105		7,522
Consumer, direct	1,081		(101)		(36)		26		970
Deposit account overdrafts	63		31		(103)		54		45
Total	$	50,359	$	(4,411)	$	(1,255)	$	204	$	44,897

(a)Amount does not include the provision for unfunded commitment liability.

Peoples recorded a recovery of credit losses during the first quarter of 2021 due to the decline in the allowance for credit losses at March 31, 2021 resulting from improved economic forecasts at the end of March 2021 utilized within the CECL model. The economic forecasts utilized within the CECL model include the following economic factors: U.S. unemployment, Ohio unemployment, Ohio Gross Domestic Product, and the Ohio Case Shiller Home Price Indices. The PPP loans originated during 2021 and 2020 are guaranteed by the SBA, and therefore, had no impact on the allowance for credit losses at March 31, 2021 and December 31, 2020.

As of March 31, 2021, Peoples had recorded an unfunded commitment liability of $2.4 million, a decrease compared to $2.9 million at December 31, 2020. The total amount of unfunded commitments had increased compared to December 31, 2020, but the improved economic forecast resulted in a lower unfunded commitment liability at March 31, 2021. 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 Stockholders’ Equity

The following table details the progression in Peoples’ common shares and treasury stock during the three months ended March 31, 2021:


	Common Shares	Treasury Stock
Shares at December 31, 2020	21,193,402	1,686,046
Changes related to stock-based compensation awards:

Release of restricted common shares	—	26,776
Cancellation of restricted common shares	—	2,133
Exercise of stock appreciation rights	—	—
Grant of restricted common shares	—	(76,819)
Grant of unrestricted common shares	—	(4,897)
Changes related to deferred compensation plan for Boards of Directors:
Purchase of treasury stock	—	2,394
Disbursed out of treasury stock	—	(81)

Common shares issued under dividend reinvestment plan	7,538	—
Common shares issued under compensation plan for Boards of Directors	—	(1,789)

Common shares issued under employee stock purchase plan	—	(3,520)


Shares at March 31, 2021	21,200,940	1,630,243

On January 28, 2021, Peoples' Board of Directors approved a share repurchase program authorizing Peoples to purchase up to an aggregate of $30.0 million of its outstanding common shares, replacing the February 27, 2020 share repurchase program which had authorized Peoples to purchase up to an aggregate of $40.0 million of its outstanding common shares. As of March 31, 2021, Peoples had not repurchased any common shares under the share repurchase program authorized on January 28, 2021.

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 March 31, 2021, Peoples had no preferred shares issued or outstanding.

On April 19, 2021, Peoples' Board of Directors declared a quarterly cash dividend of $0.36 per common share, payable on May 17, 2021, to shareholders of record on May 3, 2021. The following table details the cash dividends declared per common share during the first and second quarters of 2021 and the comparable periods of 2020:


	2021		2020
First quarter	$	0.35	0.34
Second quarter	0.36		0.34


Total dividends declared	$	0.71	$	0.68

Accumulated Other Comprehensive (Loss) Income

The following table details the change in the components of Peoples’ accumulated other comprehensive (loss) income for the three months ended March 31, 2021:


(Dollars in thousands)	Unrealized Gain on Securities		Unrecognized Net Pension and Postretirement Costs		Unrealized Loss on Cash Flow Hedge		Accumulated Other Comprehensive (Loss) Income
Balance, December 31, 2020	$	14,592	$	(3,872)	$	(9,384)	$	1,336
Reclassification adjustments to net income:
Realized gain on sale of securities, net of tax	265		—		—		265

Other comprehensive (loss) income, net of reclassifications and tax	(9,936)		27		3,346		(6,563)
Balance, March 31, 2021	$	4,921	$	(3,845)	$	(6,038)	$	(4,962)

Note 6 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 of health benefits 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 expected long term rate of return on plan assets, which was determined as of January 1, 2021 is 7.0%. The following tables detail the components of the net periodic cost for the plans described above, which is included in salaries and employee benefit costs on the Consolidated Statement of Operations:


	Pension Benefits
	Three Months Ended
	March 31,
(Dollars in thousands)	2021		2020
Interest cost	$	67	$	94
Expected return on plan assets	(174)		(200)
Amortization of net loss	31		30
Settlement of benefit obligation	—		368
Net periodic (income) loss	$	(76)	$	292


	Postretirement Benefits
	Three Months Ended
	March 31,
(Dollars in thousands)	2021		2020
Interest cost	$	—	$	1


Amortization of net gain	(1)		(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.

Peoples did not record a settlement charge for the three months ended March 31, 2021. Peoples recorded a $368,000 settlement charge during the three months ended March 31, 2020 under the noncontributory defined benefit pension plan.

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Note 7 Earnings Per Common Share

The calculations of basic and diluted earnings per common share were as follows:


	Three Months Ended
	March 31,
(Dollars in thousands, except per common share data)	2021		2020
Distributed earnings allocated to common shareholders	$	6,777	$	6,943
Undistributed earnings (loss) allocated to common shareholders	8,617		(7,782)
Net earnings (loss) allocated to common shareholders	$	15,394	$	(839)

Weighted-average common shares outstanding	19,282,665		20,367,564
Effect of potentially dilutive common shares	153,646		170,650
Total weighted-average diluted common shares outstanding	19,436,311		20,538,214

Earnings (loss) per common share:
Basic	$	0.80	$	(0.04)
Diluted	$	0.79	$	(0.04)
Anti-dilutive common shares excluded from calculation:
Restricted shares	—		37,284

Note 8 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 cash activity related to these derivatives is included in the activity 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 March 31, 2021, 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 March 31, 2021, the interest rate swaps were designated as cash flow hedges of $110.0 million in overnight brokered deposits, which are expected to extended every 90 days

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through the maturity dates of the swaps. The remaining $50.0 million of interest rate swaps were designated as cash flow hedges of 90-day brokered deposits, which are also expected to be extended every 90 days through the maturity dates of the swaps.

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 liabilities. During the three months ended March 31, 2021, Peoples had reclassifications of losses to interest expense of $802,000. During the three months ended March 31, 2020, Peoples had reclassifications of gains to interest expense of $118,000.

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 funding associated with 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)	March 31, 2021			December 31, 2020
Notional amount	$	160,000		$	160,000
Weighted average pay rates	2.18		%	2.18		%
Weighted average receive rates	0.77		%	0.38		%
Weighted average maturity	4.1 years			4.4 years
Pre-tax unrealized losses included in AOCI	$	(7,825)		$	(11,879)

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 Ended
	March 31,
(Dollars in thousands)	2021		2020
Amount of loss (gain) recognized in AOCI, pre-tax	$	4,236	$	(9,730)

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


	March 31, 2021				December 31, 2020
(Dollars in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in "Other assets":
Interest rate swaps related to debt	$	10,000	$	135	$	—	$	—
Total included in other assets	$	10,000	$	135	$	—	$	—
Included in "Accrued expenses and other liabilities":
Interest rate swaps related to debt	$	150,000	$	7,960	$	160,000	$	12,063
Total included in accrued expenses and other liabilities	$	150,000	$	7,960	$	160,000	$	12,063

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 operations or financial condition as of or for the three months ended March 31, 2021 and as of or for the year ended December 31, 2020.

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


	March 31, 2021				December 31, 2020
(Dollars in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in "Other assets":
Interest rate swaps related to commercial loans	$	411,704	$	16,355	$	415,044	$	27,332

Included in "Accrued expenses and other liabilities":
Interest rate swaps related to commercial loans	$	411,704	$	16,355	$	415,044	$	27,332

Pledged Collateral

Peoples pledges or receives collateral for all interest rate swaps. When the fair value of Peoples' interest rate swaps is in a net liability position, Peoples must pledge collateral, and, when the fair value of Peoples' interest rate swaps is in a net asset position, the counterparties must pledge collateral. At March 31, 2021 and December 31, 2020, Peoples had zero and $41.0 million, respectively, of cash pledged, while the counterparties had no amount of cash pledged at either date. Cash pledged was included in "interest-bearing deposits in other banks" on the Audited Consolidated Balance Sheet as of December 31, 2020. Peoples had pledged $37.1 million and $0 in investment securities as of March 31, 2021 and December 31, 2020, respectively.

Note 9 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 three months of 2021, Peoples granted an aggregate of 76,819 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.

The following table summarizes the changes to Peoples’ restricted common shares for the three months ended March 31, 2021:


	Time-Based Vesting			Performance-Based Vesting
	Number of Common Shares	Weighted-Average Grant Date Fair Value		Number of Common Shares	Weighted-Average Grant Date Fair Value
Outstanding at January 1	67,758	$	23.71	250,992	$	33.36
Awarded	—	—		76,819	31.48
Released	2,000	35.32		73,611	35.43
Forfeited	500	34.75		1,633	33.31
Outstanding at March 31	65,258	$	23.27	252,567	$	32.18

For the three months ended March 31, 2021, the total intrinsic value for restricted common shares released was $2.4 million compared to $2.0 million for the three months ended March 31, 2020.

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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 Ended
	March 31,
(Dollars in thousands)	2021		2020
Employee stock-based compensation expense:
Stock grant expense	$	1,198	$	1,380
Employee stock purchase plan expense	17		15
Performance unit benefit	—		(12)
Total employee stock-based compensation expense	1,215		1,383
Non-employee director stock-based compensation expense	195		182
Total stock-based compensation expense	1,410		1,565
Recognized tax benefit	(296)		(329)
Net stock-based compensation expense	$	1,114	$	1,236

Restricted common shares were the primary form of stock-based compensation awards granted by Peoples in the three months ended March 31, 2021 and 2020. 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 $3.6 million at March 31, 2021, which will be recognized over a weighted-average period of 2.0 years.

In addition to the portion of directors' fees paid in common shares, non-employee director stock-based compensation expense included $135,000 during the first three months of 2021, and $120,000 during the first three months of 2020, reflecting separate grants of unrestricted common shares aggregating 4,347 and 3,680 common shares, respectively.

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Note 10 Revenue

The following table details Peoples' revenue from contracts with customers:


	Three Months Ended
	March 31,
(Dollars in thousands)	2021		2020
Insurance income:
Commission and fees from sale of insurance policies (a)	$	3,177	$	2,692
Fees related to third-party administration services (a)	94		147
Performance-based commissions (b)	1,950		1,291
Trust and investment income (a)	3,845		3,262
Electronic banking income:
Interchange income (a)	3,046		2,401
Promotional and usage income (a)	865		879
Deposit account service charges:
Ongoing maintenance fees for deposit accounts (a)	810		980
Transactional-based fees (b)	1,175		1,840
Commercial loan swap fees (b)	60		244
Other non-interest income transactional-based fees (b)	144		218
Total revenue from contracts with customers	$	15,166	$	13,954
Timing of revenue recognition:
Services transferred over time	$	11,837	$	10,361
Services transferred at a point in time	3,329		3,593
Total revenue from contracts with customers	$	15,166	$	13,954

(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 and certain insurance 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 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 related to electronic banking income. As of March 31, 2021, there were no material changes to Peoples' revenue contracts related to the COVID-19 pandemic, and there were no changes to the likelihood of collectability under the contracts.

The following table details the change in Peoples' contract assets and contract liabilities for the period ended March 31, 2021:


	Contract Assets		Contract Liabilities
(Dollars in thousands)
Balance, January 1, 2021	$	1,247	$	5,224
Additional income receivable	125		—


Recognition of income previously deferred	—		(448)
Balance, March 31, 2021	$	1,372	$	4,776

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Note 11 Acquisitions

On March 29, 2021, Peoples announced that it has entered into an Agreement and Plan of Merger dated March 26, 2021 (“Merger Agreement”) with Premier Financial Bancorp, Inc. (“Premier”). The Merger Agreement calls for Premier to merge into Peoples and for Premier’s wholly-owned subsidiaries, Premier Bank, Inc., and Citizens Deposit Bank and Trust, Inc., which combined operate 48 branches in Kentucky, Maryland, Ohio, Virginia, West Virginia and the District of Columbia, to merge into Peoples’ wholly owned subsidiary, Peoples Bank. The transaction is anticipated to close during the third quarter of 2021.

Peoples Bank entered into an Asset Purchase Agreement, dated March 24, 2021 (the “Asset Purchase Agreement”), with NS Leasing, LLC, which is headquartered in Burlington, Vermont, and does business as “North Star Leasing” (“NSL”). Peoples Bank acquired assets comprising NSL’s equipment finance business and assumed from NSL certain specified liabilities for consideration of approximately $116.6 million, plus a potential earnout payment to NSL of up to $3.1 million. Peoples Bank acquired approximately $85.8 million in leases and satisfied, on behalf of NSL, certain third-party debt in the amount of approximately $69.1 million. NSL originates, underwrites and services equipment leases to businesses throughout the United States. The transaction closed after the end of business on March 31, 2021 and Peoples Bank began operating the acquired business as a division of Peoples Bank on April 1, 2021. Consideration totaling $116.6 million related to the purchase price was reflected in other assets as of March 31, 2021.

Note 12 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 March 31, 2021, Peoples did not have any finance leases or any significant lessor agreements. Right of Use ("ROU") assets represent the right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement or remeasurement date of a lease based on the present value of lease payments over the remaining lease term. Operating lease ROU assets include lease payments made at or before the commencement date and initial indirect costs. Operating lease ROU assets exclude lease incentives.

Peoples elected certain practical expedients, in accordance with Accounting Standards Codification 842 - Leases ("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 Ended
(Dollars in thousands)	March 31, 2021		March 31, 2020
Operating lease expense	$	330	$	334
Short-term lease expense	72		76
Total lease expense	$	402	$	410

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)	March 31, 2021			December 31, 2020
ROU asset:
Other assets	$	6,404		$	6,522
Lease liability:
Accrued expenses and other liabilities	$	6,673		$	6,776
Other information:
Weighted-average remaining lease term	12.3 years			12.4 years
Weighted-average discount rate	3.11		%	3.14		%

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During the three months ended March 31, 2021 and March 31, 2020, Peoples paid cash of $320,000 and $321,000 for operating leases, respectively.

The following table summarizes the maturity of remaining lease liabilities:


(Dollars in thousands)	Balance
Remaining nine months ending December 31, 2021	$	1,028
Year ending December 31, 2022	1,097
Year ending December 31, 2023	898
Year ending December 31, 2024	638
Year ending December 31, 2025	502
Thereafter	4,218
Total undiscounted lease payments	$	8,381
Imputed interest	$	(1,708)
Total lease liability	$	6,673

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

Management’s Discussion and Analysis (“MD&A”) represents an overview of the results of operations and financial condition of Peoples for the three months ended March 31, 2021 and March 31, 2020. 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 Ended
	March 31,
(Dollars in thousands, expect per share data)	2021		2020
Operating Data
Total interest income	$	38,962	$	40,862
Total interest expense	3,384		6,226
Net interest income	35,578		34,636
(Recovery of) provision for credit losses	(4,749)		16,969
Net (loss) gain on investment securities	(336)		319
Net loss on asset disposals and other transactions	(27)		(87)
Total non-interest income excluding net gains and losses (a)	17,266		15,505
Total non-interest expense	37,987		34,325
Net income (loss) (b)	15,463		(765)
Balance Sheet Data
Total investment securities	$	1,065,603	$	1,046,497
Loans, net of deferred fees and costs ("total loans")	3,409,676		2,911,437
Allowance for credit losses	44,897		42,833
Goodwill and other intangible assets	184,007		177,447
Total assets	5,143,052		4,469,120
Non-interest-bearing deposits	1,206,034		727,266
Brokered deposits	168,130		133,522
Other interest-bearing deposits	2,930,065		2,537,642
Short-term borrowings	67,868		259,661
Junior subordinated debentures held by subsidiary trust	7,650		7,491
Other long-term borrowings	102,645		125,300
Total stockholders' equity	578,893		583,721
Tangible assets (c)	4,959,045		4,291,673
Tangible equity (c)	394,886		406,274
Per Common Share Data
Earnings (loss) per common share – basic	$	0.80	$	(0.04)
Earnings (loss) per common share – diluted	0.79		(0.04)
Cash dividends declared per common share	0.35		0.34
Book value per common share (d)	29.49		28.69
Tangible book value per common share (c)(d)	$	20.12	$	19.97
Weighted-average number of common shares outstanding – basic	19,282,665		20,367,564
Weighted-average number of common shares outstanding – diluted	19,436,311		20,538,214
Common shares outstanding at end of period (d)	19,629,633		20,346,843
Closing share price at end of period (d)	$	33.17	$	22.15

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	At or For the Three Months Ended
	March 31,
(Dollars in thousands, expect per share data)	2021			2020
Significant Ratios
Return on average stockholders' equity (e)	10.86		%	(0.52)		%
Return on average tangible equity (e)(f)	16.45		%	(0.18)		%
Return on average assets (e)	1.28		%	(0.07)		%
Return on average assets adjusted for non-core items (e)(g)	1.48		%	(0.05)		%
Average stockholders' equity to average assets	11.76		%	13.61		%
Average total loans to average deposits	82.80		%	85.93		%
Net interest margin (e)(h)	3.26		%	3.51		%
Efficiency ratio (i)	70.37		%	66.64		%
Efficiency ratio adjusted for non-core items (j)	65.19		%	65.55		%
Pre-provision net revenue to total average assets (k)	1.23		%	1.45		%
Dividend payout ratio (l)(m)	44.19		%	NM
Total loans to deposits (d)	79.27		%	85.74		%
Total investment securities as percentage of total assets (d)	20.72		%	23.42		%
Asset Quality Ratios
Nonperforming loans as a percent of total loans (d)(n)	0.76		%	0.93		%
Nonperforming assets as a percent of total assets (d)(n)	0.50		%	0.61		%
Nonperforming assets as a percent of total loans and OREO (d)(n)	0.76		%	0.94		%
Criticized loans as a percent of total loans (d)(o)	3.41		%	3.12		%
Classified loans as a percent of total loans (d)(p)	2.23		%	2.36		%
Allowance for credit losses as a percent of total loans (d)	1.32		%	1.47		%
Allowance for credit losses as a percent of nonperforming loans (d)(n)	174.10		%	158.49		%
(Recovery of) provision for credit losses as a percent of average total loans	(0.57)		%	2.37		%
Net charge-offs as a percentage of average total loans	0.13		%	0.07		%
Capital Information (d)
Common equity tier 1 capital ratio (q)	12.42		%	13.91		%
Tier 1 risk-based capital ratio	12.65		%	14.16		%
Total risk-based capital ratio (tier 1 and tier 2)	13.78		%	15.38		%
Tier 1 leverage ratio	9.00		%	10.06		%
Common equity tier 1 capital	$	418,089		$	415,768
Tier 1 capital	425,739			423,259
Total capital (tier 1 and tier 2)	463,872			459,727
Total risk-weighted assets	$	3,365,637		$	2,988,263
Total stockholders' equity to total assets	11.26		%	13.06		%
Tangible equity to tangible assets (c)	7.96		%	9.47		%

(a)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)."

(b)Net income includes non-core non-interest expense totaling $2.8 million for the first three months of 2021, and $552,000 for the first three months of 2020. Additional information regarding the non-core non-interest expense can be found under the caption "Core Non-Interest Expense (Non-US GAAP)."

(c)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.”

(d)Data presented as of the end of the period indicated.

(e)Ratios are presented on an annualized basis.

(f)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).”

(g)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, COVID-19-related expenses and a Peoples Bank Foundation, Inc. contribution 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)."

(h)Information presented on a fully tax-equivalent basis.

(i)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

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intangible assets, and all gains and 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).”

(j)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 losses, acquisition-related expenses, pension settlement charges, severance expenses, COVID-19-related expenses and a Peoples Bank Foundation, Inc. contribution 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).”

(k)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 (recovery of) provision for credit losses and all gains and 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).”

(l)The dividend payout ratio is calculated based on dividends declared during the period divided by net income for the period.

(m)NM = not meaningful.

(n)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.

(o)Includes loans categorized as special mention, substandard and doubtful.

(p)Includes loans categorized as substandard and doubtful.

(q)Peoples' capital conservation buffer was 5.78% at March 31, 2021 and 7.38% at March 31, 2020, 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, including the possibility of further resurgence in the spread of COVID-19 - on economies (local, national and international) and markets, and on our customers, counterparties, employees and third-party service providers, as well as the effects of various responses of governmental and nongovernmental authorities to the COVID-19 pandemic, including public health actions directed toward the containment of the COVID-19 pandemic (such as quarantines, shut downs and other restrictions on travel and commercial, social and other activities), the development, availability and effectiveness of vaccines, and the implementation of fiscal stimulus packages, which could adversely impact 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 undertaken 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 completion and successful integration of planned acquisitions, including the pending merger with Premier and the recently-completed acquisition of NSL, expansion of commercial and consumer lending activities, in light of the continuing impact of the COVID-19 pandemic on customers' operations and financial condition;

(4)Peoples' ability to obtain governmental approvals of the proposed merger of Peoples with Premier on the proposed terms and schedule, and approval of the merger and adoption of the merger agreement by shareholders of Peoples or of Premier may be unsuccessful;

(5)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;

(6)uncertainty regarding the nature, timing, cost, and effect of legislative or regulatory changes or actions, or deposit insurance premium levels, promulgated and to be promulgated by governmental and regulatory agencies in the State of Ohio, the Federal Deposit Insurance Corporation, the Federal Reserve Board and the Consumer Financial Protection Bureau, which may subject Peoples, its subsidiaries, or one or more acquired companies to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses, including in particular

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the rules and regulations promulgated and to be promulgated under the CARES Act, and the follow-up legislation enacted as the Consolidated Appropriations Act, 2021, the American Rescue Plan Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Basel III regulatory capital reform;

(7)the effects of easing restrictions on participants in the financial services industry;

(8)local, regional, national and international economic conditions (including the impact of potential or imposed tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations, and changes in 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;

(9)Peoples may issue equity securities in connection with future acquisitions, including the proposed merger of Peoples and Premier, if consummated, which could cause ownership and economic dilution to Peoples' current stockholders;

(10)changes in prepayment speeds, loan originations, levels of nonperforming assets, delinquent loans, charge-offs, and customer and other counterparties' performance and 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;

(11)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;

(12)changes in accounting standards, policies, estimates or procedures may adversely affect Peoples' reported financial condition or results of operations;

(13)the impact of assumptions, estimates and inputs used within models, which may vary materially from actual outcomes, including under the CECL model;

(14)the discontinuation of the London Interbank Offered Rate ("LIBOR") and other reference rates which may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies;

(15)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;

(16)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;

(17)Peoples' ability to receive dividends from its subsidiaries;

(18)Peoples' ability to maintain required capital levels and adequate sources of funding and liquidity;

(19)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;

(20)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;

(21)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;

(22)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;

(23)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;

(24)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;

(25)the impact on Peoples' businesses, personnel, facilities, or systems, of losses related to acts of fraud, theft, or violence;

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(26)the impact on Peoples' businesses, as well as on the risks described above, of various domestic or international widespread natural or other disasters, pandemics (including COVID-19), cybersecurity attacks, system failures, civil unrest, military or terrorist activities or international conflicts;

(27)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;

(28)risks and uncertainties associated with Peoples' entry into new geographic markets and risks resulting from Peoples' inexperience in these new geographic markets;

(29)Peoples' ability to integrate the NSL acquisition and any future acquisitions, including the pending merger of Premier into Peoples, which may be unsuccessful, or may be more difficult, time-consuming or costly than expected;

(30)the risk that expected revenue synergies and cost savings from the proposed merger of Peoples and Premier may not be fully realized or realized within the expected time frame;

(31)the risk that customer and employee relationships and business operations may be disrupted by the proposed merger of Peoples and Premier;

(32)Peoples' continued ability to grow deposits;

(33)the impact of future governmental and regulatory actions upon Peoples' participation in and execution of government programs related to the COVID-19 pandemic;

(34)uncertainty regarding the impact of changes to the U.S. presidential administration and Congress on the regulatory landscape, capital markets, elevated government debt, potential changes in tax legislation that may increase tax rates and the response to and management of the COVID-19 pandemic; and,

(35)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, 2020.

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’ 2020 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 also offers insurance premium finance lending nationwide through its premium finance division and, as of April 1, 2021, offers lease financing offered through its North Star Leasing division. 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.

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Critical Accounting Policies

The accounting and reporting policies of Peoples conform to US GAAP and to general practices within the financial services industry. The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Management has identified the accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to understanding Peoples’ Unaudited Consolidated Financial Statements, and Management’s Discussion and Analysis at March 31, 2021, 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’ 2020 Form 10-K.

Summary of Recent Transactions and Events

The following is a summary of recent transactions and events that have impacted or are expected to impact Peoples’ results of operations or financial condition:

◦On March 26, 2021, Peoples and Premier Financial Bancorp, Inc. (“Premier”), signed a definitive agreement and plan of merger (the “Merger Agreement”) pursuant to which Peoples will acquire, in an all-stock merger, Premier, a bank holding company headquartered in Huntington, West Virginia, and the parent company of Premier Bank, Inc. (“Premier Bank”) and Citizens Deposit Bank & Trust, Inc. (“Citizens”). Under the terms of the Merger Agreement, Premier will merge with and into Peoples (the “Merger”), and Premier Bank and Citizens will subsequently merge with and into Peoples’ wholly-owned subsidiary, Peoples Bank, in a transaction valued at approximately $292.3 million. The merger is expected to close during the third quarter of 2021, subject to the satisfaction of customary closing conditions, including regulatory approvals and the approval of the shareholders of Peoples and Premier. At that time, the financial services offices of Premier Bank and Citizens will become branches of Peoples Bank.

◦Peoples Bank entered into an Asset Purchase Agreement, dated March 24, 2021 (the “Asset Purchase Agreement”), with NS Leasing, LLC, which is headquartered in Burlington, Vermont, and does business as “North Star Leasing” (“NSL”). Peoples Bank acquired assets comprising NSL’s equipment finance business and assumed from NSL certain specified liabilities for consideration of approximately $116.6 million, plus a potential earnout payment to NSL of up to $3.1 million. Peoples Bank acquired approximately $84 million in leases and satisfied, on behalf of NSL, certain third-party debt in the amount of approximately $69.1 million. NSL originates, underwrites and services equipment leases to businesses throughout the United States. The transaction closed after the end of business on March 31, 2021 and Peoples Bank began operating the acquired business as a division of Peoples Bank on April 1, 2021. Consideration totaling $116.6 million related to the purchase price was reflected in other assets as of March 31, 2021.

◦Peoples began originating loans during the second quarter of 2020 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 specified types of 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." Peoples originated PPP loans of $130.8 million in first quarter of 2021. As of March 31, 2021, Peoples had $349.9 million in PPP loans outstanding, which were included in commercial and industrial loan balances, compared to $366.9 million at December 31, 2020. Peoples recognized interest income of $4.7 million for deferred loan fee/cost accretion and $869,000 of interest income on PPP loans during the first quarter of 2021, compared to $3.7 million and $1.1 million, respectively, for the fourth quarter of 2020.

◦Peoples provided relief solutions to consumer and commercial borrowers, including forbearance and modifications, during the COVID-19 pandemic. Additional information can be found later in this discussion under the caption “FINANCIAL CONDITION - COVID-19 Loan Impacts."

◦On January 29, 2021, Peoples announced that on January 28, 2021, Peoples' Board of Directors authorized a share repurchase program authorizing Peoples to purchase up to an aggregate of $30 million of its outstanding common shares. This program replaced the share repurchase program authorizing Peoples to purchase up to an aggregate of $40 million of its outstanding common shares, which Peoples' Board of Directors had authorized on February 27, 2020 and which was terminated on January 28, 2021.

◦During the first quarter of 2021, Peoples recorded a recovery of credit losses of $4.7 million, compared to a recovery of credit losses of $7.3 million in the linked quarter and a provision for credit losses of $17.0 million in the first quarter of 2020. The changes in the amount of the (recovery of) provision for credit losses compared to the linked quarter and first quarter of 2020, were related to the impact of COVID-19 on economic forecasts utilized in the CECL model.

◦For the first quarter of 2021, Peoples recorded $292,000 of expenses related to the COVID-19 pandemic, compared to $126,000 for the fourth quarter of 2020. These expenses were primarily related to a software application to assist with PPP loan origination and forgiveness, donations made to community food banks and pantries, as well as contributions to funds to support employees.

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◦During the first quarter of 2021, Peoples incurred $1.9 million of acquisition-related expenses, compared to $77,000 in the fourth quarter of 2020 and $31,000 in the first quarter of 2020. The acquisition-related expenses in 2021 were primarily related to the NSL acquisition and the pending merger with Premier. The acquisition-related expenses in 2020 were primarily related to the Triumph Premium Finance acquisition.

◦Peoples incurred no pension settlement charges for the first quarter of 2021, $4,000 for linked quarter and $368,000 for the first quarter of 2020, in each of the latter two periods, 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.

◦Effective July 1, 2020, Peoples completed the business combination under which Peoples Bank acquired the operations and assets of Triumph Premium Finance (referred to as "premium finance acquisition"), a division of TBK Bank, SSB. Based in Kansas City, Missouri, the division operating as Peoples Premium Finance continues 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 $84.7 million in loans, at acquisition date, after fair value adjustments. Peoples also recorded $4.3 million of other intangible assets and $5.5 million of goodwill. As of March 31, 2021, Peoples Premium Finance loans had grown to $110.6 million.

◦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 Peoples' outstanding common shares. This program replaced the share repurchase program authorizing Peoples to purchase up to an aggregate of $20.0 million of Peoples' outstanding common shares, which Peoples' Board of Directors had approved on November 3, 2015 and which was terminated on February 27, 2020. During the first quarter of 2020, Peoples repurchased 436,137 of its common shares through its share repurchase program for a total of $10.2 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.

◦In an effort to stimulate an economy that was being adversely impacted by the impacts of the COVID-19 pandemic, the Federal Reserve first lowered the benchmark Federal Funds Target Rate by 50 basis points on March 3, 2020, then lowered the target rate another 100 basis points at the next FOMC meeting on March 15, 2020. The Federal Funds Target Rate range was 0% - 0.25% as of March 31, 2020 and maintained this rate as of March 31, 2021. According to the Chair of the Board of Governors of the Federal Reserve, 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. Furthermore, the Federal Reserve has indicated it is committed to a target 0% - 0.25% range for Federal Funds through at least 2023.

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 $15.5 million for the first quarter of 2021, or earnings of $0.79 per diluted common share, compared to net income of $20.6 million, or $1.05 per diluted common share, for the fourth quarter of 2020, and net loss of $0.8 million, or $0.04 per diluted share, for the first quarter of 2020. Non-core items contained in net income included gains and losses, acquisition-related expenses, pension settlement charges, severance expenses, a donation to Peoples Bank Foundation, Inc. and COVID-19-related expenses. Non-core items negatively impacted earnings per diluted common share by $0.11 for the first quarter of 2021, by $0.07 for the fourth quarter of 2020, and by $0.02 for the first quarter of 2020. Net income in the first quarter of 2021, was largely affected by the recovery of credit losses recorded during the quarter. The recovery of credit losses was lower than in the linked quarter due to the changes in economic developments and forecasts used in the CECL model. The recovery of 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.”

Net interest income was $35.6 million for the first quarter of 2021, up 4% compared to $34.3 million for the fourth quarter of 2020, and an increase of 3% compared to $34.6 million for the first quarter of 2020. Net interest margin was 3.26% for the first quarter of 2021, compared to 3.13% for the fourth quarter of 2020, and 3.51% for the first quarter of 2020. The increases in net interest income and net interest margin in the first quarter of 2021 were positively impacted by PPP loan forgiveness payments received during the first quarter. Net interest income and net interest margin continue to be impacted by the low interest rate environment caused by COVID-19 that continued throughout the first quarter of 2021. The increase in net interest income compared to the first quarter of 2020 was driven by PPP loan income, premium finance loan income and a reduction of 35 basis points on the cost of funds, which were offset partially by a reduction in the yield on loans, other than PPP and premium finance loans, and investment securities.

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Accretion income, net of amortization expense, from acquisitions was $383,000 for the first quarter of 2021, $207,000 for the fourth quarter of 2020, and $1.1 million for the first quarter of 2020, which added 4 basis points, 2 basis points, and 11 basis points, respectively, to net interest margin.

During the first quarter of 2021, Peoples recorded a recovery of credit losses of $4.7 million, compared to a recovery of credit losses of $7.3 million for the fourth quarter of 2020 and a provision for credit losses of $17.0 million for the first quarter of 2020. Net charge-offs for the first quarter of 2021 were $1.1 million, or 0.13% of average total loans annualized, compared to net charge-offs of $899,000, or 0.10% of average total loans annualized, for the linked quarter and net charge-offs of $498,000, or 0.07% of average total loans annualized, for the first quarter of 2020. Changes in the amount of (recovery of) provision for credit losses compared to the linked quarter and the first quarter of 2020 were primarily due to the impact of economic assumptions used in the CECL model and Peoples' own credit portfolio developments related to COVID-19.

For the first quarter of 2021, total non-interest income increased $402,000, or 2%, compared to the fourth quarter of 2020 and $1.2 million, or 7%, from the first quarter of 2020. During the first quarter of 2021, insurance income increased $2.1 million, due to the annual performance-based insurance commissions recognized in the first quarter of each year, along with growth in all lines of insurance business. The increase in insurance income was offset partially by decreases in mortgage banking income, deposit account service charges, commercial loan swap fees and other non-interest income. Non-interest income was up $1.2 million, or 7%, compared to the first quarter of 2020. Insurance income increased $1.1 million, trust and investment income increased $583,000, electronic banking income increased $631,000 and mortgage banking increased $390,000 on a quarter versus quarter basis.

Total non-interest expense increased $4.7 million, or 14%, for the first quarter of 2021 compared to the fourth quarter of 2020 and $3.7 million, or 11%, compared to the first quarter of 2020. Compared to the linked quarter, salaries and employee benefit costs were up as a result of increases of $757,000 in payroll taxes, $586,000 in stock-based compensation expense and $538,000 for an annual contribution to employees' HSA accounts. Total non-interest expense in the first quarter of 2021 contained non-core expenses including acquisition-related expenses of $1.9 million, a $500,000 contribution to Peoples Bank Foundation, Inc., $292,000 in COVID-19-related expenses and $49,000 in severance expenses. During the last quarter of 2020, non-core expenses included severance expenses of $771,000, COVID-19-related expenses of $126,000 and acquisition-related expenses of $77,000. Compared to the first quarter of 2020, total non-interest expense increased primarily due to an increase in acquisition-related expenses of $1.9 million, salaries and employee benefits of $841,000 and FDIC insurance premiums of $468,000. Acquisition-related expenses increased in the first quarter of 2021 due to the announced acquisition of NSL and the pending merger with Premier. The increase in salaries and employee benefits was due to higher sales-based commissions paid and higher employee benefits related to an increase in the annual contribution to employees' HSA accounts. FDIC insurance premiums increased as a result of the credits that Peoples had recognized at the beginning of 2020, which were fully utilized in the second quarter of 2020.

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 first quarter of 2021 was 70.4%, compared to 62.4% for the fourth quarter of 2020, and 66.6% for the first quarter of 2020. The change in the efficiency ratio compared to the linked quarter was primarily due to the increase in total non-core non-interest expense mentioned above. The efficiency ratio, when adjusted for non-core items, was 65.2% for the first quarter of 2021, compared to 60.5% for the fourth quarter of 2020 and 65.5% for the first quarter of 2020.

Peoples recorded income tax expense of $3.8 million for the first quarter of 2021, compared to $4.3 million for the linked quarter and an income tax benefit of $156,000 for the first quarter of 2020. The variance between each of the comparative periods was the result of changes in pre-tax income in 2020 related to the variability in the allowance for credit losses recorded during the first three months of 2021, compared to the linked quarter and the first quarter of 2020.

At March 31, 2021, total assets were $5.14 billion, compared to $4.76 billion at December 31, 2020. The 8% increase compared to December 31, 2020 was driven by investment securities growth of $208.6 million, which was primarily the result of purchases made during the quarter to reinvest excess cash resulting from sales as part of a reorganization of a portion of the investment securities portfolio. Period-end total loan balances at March 31, 2021 increased $6.7 million, compared to December 31, 2020. The increase was driven by increases in commercial real estate balances of $7.2 million, consumer indirect loan balances of $16.2 million and commercial and industrial loan balances of $8.1 million, excluding PPP loans. The allowance for credit losses decreased to $44.9 million, or 1.32% of total loans, compared to $50.4 million and 1.48%, respectively, at December 31, 2020.

Total liabilities were $4.56 billion at March 31, 2021, up $379.1 million since December 31, 2020. The increase in total liabilities during the first three months of 2021 was primarily due to an increase in deposits of $393.8 million, or 10%, compared to December 31, 2020. The increase was driven by a growth in non-interest bearing checking accounts of $208.7 million, seasonal growth in governmental deposits of $126.6 million and an increase in savings deposits of $48.2 million, offset partially by decreases in retail and brokered certificates of deposit. The overall increase in non-interest bearing checking accounts was the result of recent economic stimulus payments to consumers and new PPP loan disbursements provided by the Consolidated Appropriations Act, 2021.

At March 31, 2021, total stockholders' equity was $578.9 million, an increase of $3.2 million compared to December 31, 2020. The increase in total stockholders' equity was driven by net income for the quarter, offset partially by a decrease in accumulated other comprehensive income of $6.3 million and dividends paid to shareholders of $6.8 million. The change in accumulated other comprehensive income was the result of the changes in the market value of available-for-sale investment securities during the period.

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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’s monetary policy, the level and degree of pricing competition for both loans and deposits in Peoples’ markets, and the amount and composition of Peoples' earning assets and interest-bearing liabilities.

Net interest margin, which is calculated by dividing FTE net interest income by average interest-earning assets, serves as an important measurement of the net revenue stream generated by the volume, mix and pricing of interest-earning assets and interest-bearing liabilities. FTE net interest income is calculated by increasing interest income to convert tax-exempt income earned on obligations of states and political subdivisions and tax-exempt loans to the pre-tax equivalent of taxable income using a federal corporate income tax rate of 21%.

The following table details the calculation of FTE net interest income:


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 2020
(Dollars in thousands)
Net interest income	$	35,578	$	34,308	$	34,636
Taxable equivalent adjustments	257		251		272
Fully tax-equivalent net interest income	$	35,835	$	34,559	$	34,908

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


	For the Three Months Ended
	March 31, 2021						December 31, 2020						March 31, 2020
(Dollars in thousands)	Average Balance		Income/ Expense		Yield/Cost		Average Balance		Income/ Expense		Yield/Cost		Average Balance		Income/ Expense		Yield/Cost
Short-term investments	$	146,957	$	40	0.11	%	$	79,685	$	26	0.13	%	$	73,798	$	236	1.29	%

Investment securities (a)(b):
Taxable	833,769		2,620		1.26	%	794,237		1,922		0.97	%	928,182		5,428		2.34	%
Nontaxable	106,698		773		2.90	%	96,421		737		3.06	%	106,934		829		3.10	%
Total investment securities	940,467		3,393		1.44	%	890,658		2,659		1.19	%	1,035,116		6,257		2.42	%
Loans (b)(c):
Construction	114,204		994		3.48	%	106,181		1,227		4.52	%	97,839		1,251		5.06	%
Commercial real estate, other	879,335		8,602		3.91	%	874,248		8,715		3.90	%	837,602		10,057		4.75	%
Commercial and industrial	941,625		10,592		4.50	%	1,022,086		10,047		3.85	%	649,437		7,424		4.52	%
Premium finance	107,390		1,297		4.83	%	109,228		984		3.53	%	—		—		—	%
Residential real estate (d)	614,692		6,672		4.34	%	630,755		6,657		4.22	%	665,737		8,371		5.03	%
Home equity lines of credit	121,864		1,187		3.95	%	124,218		1,253		4.01	%	131,673		1,775		5.42	%
Consumer, indirect	509,845		5,203		4.14	%	496,846		5,298		4.24	%	415,986		4,409		4.26	%
Consumer, direct	79,022		1,239		6.36	%	79,835		1,308		6.52	%	76,707		1,354		7.10	%
Total loans	3,367,977		35,786		4.26	%	3,443,397		35,489		4.06	%	2,874,981		34,641		4.80	%
Allowance for credit losses	(49,854)						(57,725)						(27,548)
Net loans	3,318,123		35,786		4.33	%	3,385,672		35,489		4.13	%	2,847,433		34,641		4.84	%
Total earning assets	4,405,547		39,219		3.57	%	4,356,015		38,174		3.46	%	3,956,347		41,134		4.14	%
Goodwill and other intangible assets	184,253						185,093						177,984
Other assets	322,276						296,870						247,296
Total assets	$	4,912,076					$	4,837,978					$	4,381,627
Interest-bearing deposits:
Savings accounts	$	646,750	$	35	0.02	%	$	610,876	$	35	0.02	%	$	522,893	$	74	0.06	%
Governmental deposit accounts	429,503		594		0.56	%	402,605		555		0.55	%	328,407		715		0.88	%
Interest-bearing demand accounts	700,160		65		0.04	%	676,133		70		0.04	%	628,677		248		0.16	%
Money market accounts	564,836		132		0.09	%	555,188		145		0.10	%	476,477		673		0.57	%
Retail certificates of deposit	439,819		1,123		1.04	%	455,552		1,295		1.13	%	488,948		2,059		1.69	%
Brokered deposits (e)	175,326		868		2.01	%	252,007		818		1.29	%	191,955		860		1.80	%
Total interest-bearing deposits	2,956,394		2,817		0.39	%	2,952,361		2,918		0.39	%	2,637,357		4,629		0.71	%
Borrowed funds:
Short-term FHLB advances (e)	20,000		88		1.78	%	39,511		204		2.05	%	206,283		994		1.94	%
Repurchase agreements and other	51,089		12		0.09	%	49,962		12		0.10	%	47,351		45		0.38	%
Total short-term borrowings	71,089		100		0.57	%	89,473		216		0.96	%	253,634		1,039		1.65	%
Long-term FHLB advances	102,753		390		1.54	%	103,167		399		1.54	%	101,804		447		1.77	%

Other borrowings	7,631		77		4.04	%	7,592		82		4.32	%	7,471		111		5.94	%
Total long-term borrowings	110,384		467		1.71	%	110,759		481		1.73	%	109,275		558		2.05	%
Total borrowed funds	181,473		567		1.26	%	200,232		697		1.39	%	362,909		1,597		1.77	%
Total interest-bearing liabilities	3,137,867		3,384		0.44	%	3,152,593		3,615		0.46	%	3,000,266		6,226		0.83	%
Non-interest-bearing deposits	1,110,993						1,021,586						708,512
Other liabilities	85,628						97,507						76,603
Total liabilities	4,334,488						4,271,686						3,785,381


Total stockholders’ equity	577,588						566,292						596,246
Total liabilities and stockholders’ equity	$	4,912,076					$	4,837,978					$	4,381,627
Interest rate spread (b)			$	35,835	3.13	%			$	34,559	3.00	%			$	34,908	3.31	%
Net interest margin (b)					3.26	%					3.13	%					3.51	%

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(a)Average balances are based on carrying value.

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

(c)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.

(d)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.

(e)Interest related to interest rate swap transactions is included in interest expense on short-term FHLB advances and interest expense on brokered certificates of deposit.

Average total loan balances were impacted during the first quarter of 2021 and the fourth quarter of 2020 due to the PPP loans and the premium finance loans acquired.

The following table provides an analysis of the changes in FTE net interest income:




	Three Months Ended March 31, 2021 Compared to
(Dollars in thousands)	December 31, 2020						March 31, 2020
Increase (decrease) in:	Rate		Volume		Total (a)		Rate		Volume		Total (a)
INTEREST INCOME:
Short-term investments	$	(27)	$	41	$	14	$	(857)	$	661	$	(196)

Investment Securities (b):
Taxable	598		100		698		(2,301)		(507)		(2,808)
Nontaxable	(191)		227		36		(54)		(2)		(56)
Total investment income	407		327		734		(2,355)		(509)		(2,864)
Loans (b):
Construction	(722)		489		(233)		(1,245)		988		(257)
Commercial real estate, other	(40)		(73)		(113)		(4,225)		2,770		(1,455)
Commercial and industrial	4,601		(4,056)		545		(259)		3,427		3,168
Premium finance	424		(111)		313		—		1,297		1,297
Residential real estate	723		(708)		15		(1,089)		(610)		(1,699)
Home equity lines of credit	(30)		(36)		(66)		(461)		(127)		(588)
Consumer, indirect	(578)		483		(95)		(823)		1,617		794
Consumer, direct	(49)		(20)		(69)		(352)		237		(115)
Total loan income	4,329		(4,032)		297		(8,454)		9,599		1,145
Total interest income	$	4,709	$	(3,664)	$	1,045	$	(11,666)	$	9,751	$	(1,915)
INTEREST EXPENSE:
Deposits:
Savings accounts	$	(6)	$	6	$	—	$	(129)	$	90	$	(39)
Governmental deposit accounts	10		29		39		(1,022)		901		(121)
Interest-bearing demand accounts	(18)		13		(5)		(356)		173		(183)
Money market accounts	(29)		16		(13)		(1,298)		757		(541)
Retail certificates of deposit	(122)		(50)		(172)		(744)		(192)		(936)
Brokered deposits	1,311		(1,261)		50		373		(365)		8
Total deposit cost	1,146		(1,247)		(101)		(3,176)		1,364		(1,812)
Borrowed funds:
Short-term borrowings	(25)		(91)		(116)		(128)		(811)		(939)
Long-term borrowings	(6)		(8)		(14)		(135)		44		(91)
Total borrowed funds cost	(31)		(99)		(130)		(263)		(767)		(1,030)
Total interest expense	1,115		(1,346)		(231)		(3,439)		597		(2,842)
Fully tax-equivalent net interest income	$	3,594	$	(2,318)	$	1,276	$	(8,227)	$	9,154	$	927

(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 change in each.

(b)Interest income and yields are presented on a fully tax-equivalent basis using a 21% statutory federal corporate income tax rate.

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Net interest income increased 4% compared to the linked quarter, as the PPP loan income and premium finance loan income, coupled with higher investment income, benefited net interest income. PPP loan income during the first quarter of 2021 included $4.7 million related to the accretion of net deferred loan fees, which was largely driven by the forgiveness of loans by the SBA, as the fees are recognized over the life of the loans, or until forgiven by the SBA. Net interest margin grew 13 basis points to 3.26% for the first quarter of 2021 compared to 3.13% for the fourth quarter of 2020. The higher net interest margin was mainly driven by the increased PPP income related to the accretion of net deferred loan fees.

Compared to the first quarter of 2020, net interest income grew 3%, as the income from PPP and premium finance loans, coupled with lower funding costs, offset the impact of reductions in variable rate loan income and increased premium amortization on investment securities, which were driven by higher prepayment speeds. In late March of 2020, the Federal Reserve lowered the Federal Funds effective target range 150 basis points 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. Net interest margin declined 25 basis points from 3.51% for the first quarter of 2020, largely due to the lower loan and investment yields, which were partially offset by reduced funding costs.

Accretion income, net of amortization expense, from acquisitions was $383,000 for the first quarter of 2021, $207,000 for the linked quarter and $1.1 million for the first quarter of 2020, which added 4 basis points, 2 basis points and 11 basis points, respectively, 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."

(Recovery of) Provision for Credit Losses

The following table details Peoples’ (recovery of) provision for credit losses:


	Three Months Ended
	March 31, 2021			December 31, 2020			March 31, 2020
(Dollars in thousands)
(Recovery of) provision for other credit losses	$	(4,780)		$	(7,373)		$	16,824
Provision for checking account overdraft credit losses	31			96			145
(Recovery of) provision for credit losses	$	(4,749)		$	(7,277)		$	16,969
As a percentage of average total loans (a)	(0.57)		%	(0.84)		%	2.37		%
(a) Presented on an annualized basis.

The (recovery of) 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 first quarter of 2021, the recovery of credit losses was driven by the economic forecasts utilized within Peoples' CECL model, which predicted lower levels of defaults due to the COVID-19 pandemic in the current quarter. Changes in the recovery of credit losses compared to the level of recovery of credit losses during the linked quarter and the provision for credit losses during the first quarter of 2020 were primarily due to the impact of economic assumptions used in the CECL model and Peoples' own credit portfolio developments related to COVID-19. Net charge-offs for the first quarter of 2021 were $1.1 million, or 0.13% of average total loans annualized, compared to $899,000, or 0.10% of average total loans annualized, for the linked quarter and $498,000, or 0.07% of average total loans annualized, for the first quarter of 2020.

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.”

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Net Losses Included in Total Non-Interest Income

Net 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 losses:


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 2020
(Dollars in thousands)
Net loss on investment securities	$	(336)	$	(751)	$	319

Net loss on asset disposals and other transactions:
Net loss on other assets	$	(27)	$	(109)	$	(70)
Net loss on OREO	—		(119)		(17)

Net gain on other transactions	—		175		—
Net loss on asset disposals and other transactions	$	(27)	$	(53)	$	(87)

During the first quarter of 2021 and fourth quarter of 2020, Peoples recognized net losses on investment securities related to the sale of investment securities in order to reinvest proceeds into higher yielding investment securities, while also reducing sensitivity to prepayment speeds. For the first quarter of 2020, Peoples sold several investment securities in order to recognize gains.

During the linked quarter, net loss on other assets included a market value write-down of $108,000 related to closed offices that were held for sale. Net loss on OREO during the linked quarter included a loss of $140,000 on the sale of a leasehold interest. These losses were partially offset by the net gain on other transactions due to receiving $174,000 in funds from a limited partnership investment.

During the first quarter of 2020, net loss on other assets was driven by a net loss of $95,000 on repossessed assets, which was partially offset by a net gain on the sale of a closed branch.

Total Non-Interest Income, Excluding Net Gains and Losses

For the first quarter of 2021, insurance income comprised the largest portion of Peoples' total non-interest income, excluding net gains and losses. The following table details Peoples' insurance income:


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 2020
(Dollars in thousands)


Property and casualty insurance commissions	2,755		2,616		2,590



Performance-based commissions	1,950		20		1,291
Life and health insurance commissions	422		403		102
Other fees and charges	94		74		147
Insurance income	$	5,221	$	3,113	$	4,130

Insurance income grew 68% compared to the linked quarter, which was largely driven by annual performance-based insurance commissions that are received during the first quarter of each year. Compared to the first quarter of 2020, insurance income increased 26%, and was due to higher annual performance-based insurance commissions, which grew $659,000, coupled with increased property and casualty insurance commissions.

Peoples' electronic banking ("e-banking") services include ATM and debit cards, direct deposit services, internet and mobile banking, and remote deposit capture, and serve as alternative delivery channels to traditional sales offices for providing services to clients. The following table details Peoples' e-banking income:


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 2020
(Dollars in thousands)


E-banking income	$	3,911	$	3,678	$	3,280

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 increases in e-banking income compared to each of the linked quarter and prior year quarter were driven by the increased usage of debit cards by customers, resulting from 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 Ended
	March 31, 2021		December 31, 2020		March 31, 2020
(Dollars in thousands)
Fiduciary income	$	1,902	$	1,794	$	1,622
Brokerage income	1,337		1,236		1,160
Employee benefits fees	606		619		480
Trust and investment income	$	3,845	$	3,649	$	3,262

Fiduciary income is driven by managed asset balances, which grew 6% compared to the linked quarter and 17% compared to the first quarter of 2020. Increased market values of assets under administration and management, coupled with additional accounts drove the increases compared to the prior periods. Brokerage income is also driven by assets under administration and management balances, and was positively impacted by the increased market values of assets under management and new accounts compared to the linked quarter and prior year quarter.

The following table details Peoples' assets under administration and management:


	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
(Dollars in thousands)	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020

Trust	$	1,916,892	$	1,885,324	$	1,609,270	$	1,552,785	$	1,385,161
Brokerage	1,071,126		1,009,521		921,688		885,138		816,260
Total	$	2,988,018	$	2,894,845	$	2,530,958	$	2,437,923	$	2,201,421
Quarterly average	$	2,927,458	$	2,663.485	$	2,510,978	$	2,351,701	$	2,425,849

The increase in assets under administration and management at March 31, 2021, compared to each period end for 2020, was largely driven by recovery of market values, coupled with increases related to new accounts opened.

Deposit account service charges are based on the recovery of costs associated with services provided. The following table details Peoples' deposit account service charges:


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 2020
(Dollars in thousands)
Overdraft and non-sufficient funds fees	$	997	$	1,332	$	1,649
Account maintenance fees	810		896		980
Other fees and charges	178		195		191
Deposit account service charges	$	1,985	$	2,423	$	2,820

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. Deposit account service charges were negatively impacted during the first quarter of 2021 compared to both the fourth quarter of 2020 and first quarter of 2020, mostly due to continued fiscal stimulus payments and PPP loan proceeds provided to customers, along with changed customer spending habits due to the COVID-19 pandemic.

The following table details the other items included within Peoples' total non-interest income:


	Three Months Ended
	March 31, 2021	December 31, 2020	March 31, 2020
(Dollars in thousands)

Mortgage banking income	1,140	2,153	750
Bank owned life insurance income	446	463	582
Commercial loan swap fees	60	474	244
Other non-interest income	658	1,352	437

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

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secondary market. Compared to the fourth quarter of 2020, mortgage banking income declined 47% as customer demand fell, and refinancing activity slowed. Mortgage banking income was 52% higher than the first quarter of 2020, as lower interest rates during the first quarter of 2021 resulted in higher customer demand than in the prior year quarter.

In the first quarter of 2021, Peoples sold $17.2 million in loans to the secondary market with servicing retained and sold $9.6 million in loans with servicing released, compared to $33.3 million and $26.7 million, respectively, in the linked quarter, and $22.0 million and $14.0 million, respectively, in the first quarter of 2020. The volume of sales has a direct impact on the amount of mortgage banking income.

Commercial loan swap fees are largely dependent on timing, interest rates, and the volume of customer activity. Commercial loan swap fees declined compared to both the fourth quarter of 2020 and first quarter of 2020, as there had been increased volume of transactions during 2020 as interest rates declined early in the year.

Bank owned life insurance income was relatively flat compared to the linked quarter, but was 23% lower than the first quarter of 2020. During the first quarter of 2020, bank owned life insurance was positively impacted due to a $109,000 tax-free death benefit recognized, which was not duplicated during the first quarter of 2021.

Other non-interest income declined compared to the linked quarter as Peoples recognized $680,000 of income during the fourth quarter of 2020 in connection with the sale of restricted Class B Visa stock. The growth in other non-interest income compared to the first quarter of 2020 was due to a $152,000 increase in SBA banking income.

Non-Interest Expense

Salaries and employee benefit costs remain Peoples' largest non-interest expense, accounting for over one-half of total non-interest expense. The following table details Peoples' salaries and employee benefit costs:


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 2020
(Dollars in thousands)
Base salaries and wages	$	12,765	$	13,527	$	12,696
Sales-based and incentive compensation	3,428		2,880		2,662
Employee benefits	2,898		2,039		2,544
Payroll taxes and other employment costs	1,493		786		1,383
Stock-based compensation	1,215		622		1,362
Deferred personnel costs	(1,040)		(806)		(729)
Salaries and employee benefit costs	$	20,759	$	19,048	$	19,918
Full-time equivalent employees:
Actual at end of period	887		894		898
Average during the period	891		895		898

Base salaries and wages decreased 6% compared to the linked quarter and increased 1% compared to the first quarter of 2020. The decrease for the first quarter of 2021 compared to linked quarter was primarily due to severance expense of $771,000 recognized in the fourth quarter of 2020. The key driver of the increase for the first quarter of 2021 compared to the first quarter of 2020 was the annual merit increases.

The increase in sales-based and incentive compensation for the first quarter of 2021 compared to the fourth quarter of 2020 was primarily due to overall company performance measures used in calculating incentive awards, partially offset by lower sales-based compensation related to mortgage banking reflecting the reduced volume of real estate loans sold in the secondary market.

The increase in employee benefits for the first quarter of 2021, compared to the linked quarter, was primarily due to annual contributions to employee health benefit accounts which resulted in expense of $538,000. These contributions occur primarily in the first quarter of each year.

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

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first quarter of 2021 increased $593,000 compared to the linked quarter, which included $376,000 of expense related to stock grants of retirement eligible individuals, and $210,000 of expense related to the annual vesting of prior stock grants.

The increase in payroll taxes and other employment costs, compared to linked quarter, included higher social security and unemployment taxes. Certain higher earners reached their individual taxable earnings limit for social security and unemployment taxes prior to or during the fourth quarter of 2020. Those limits reset at the beginning of the new calendar year, resulting in a higher expense during the first quarter of 2021 compared to the fourth 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. The increase in deferred personnel costs compared to prior periods was driven by the recognition of $328,000 in deferred personnel costs during the first quarter of 2021 related to the origination of PPP loans.

Peoples' net occupancy and equipment expense was comprised of the following:


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 2020
(Dollars in thousands)
Depreciation	$	1,371	$	1,436	$	1,455
Repairs and maintenance costs	943		763		757
Net rent expense	340		333		305
Property taxes, utilities and other costs	673		588		637
Net occupancy and equipment expense	$	3,327	$	3,120	$	3,154

Compared to the linked quarter and the first quarter of 2020, net occupancy and equipment expense was impacted by increased expenses for repairs and maintenance costs related to inclement weather.

The following table details the other items included in total non-interest expense:


	Three Months Ended
	March 31, 2021		December 31, 2020	March 31, 2020
(Dollars in thousands)
Professional fees	$	3,468	1,665	$	1,693
Data processing and software expense	2,454		2,097	1,752
E-banking expense	1,894		1,938	1,865
Marketing expense	911		540	473
Franchise tax expense	855		861	882
Amortization of other intangible assets	620		909	729
FDIC insurance premiums	463		585	(5)
Other loan expenses	462		329	578
Communication expense	282		277	280
Other non-interest expense	2,492		1,881	3,006

Professional fees increased $1.8 million from each of the fourth quarter of 2020 and the first quarter of 2020 primarily due to investment banking fees and other acquisition-related expenses totaling $1.9 million for the purchase of NSL and the merger with Premier. Professional fees included acquisition-related expenses of $63,000 for the fourth quarter of 2020 and $15,000 for the first quarter of 2020.

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.

E-banking expense was down slightly compared to the linked quarter, from a reduction in bankcard processing fees, which offset higher costs associated with increased usage by customers.

Marketing expense increased compared to the fourth quarter of 2020 and the first quarter of 2020 due to a one-time donation of $500,000 to Peoples Bank Foundation, Inc. in the first quarter of 2021.

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

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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, were flat in the first three months of 2021 compared to the fourth quarter of 2020 and the first quarter of 2020 due to equity remaining relatively flat at March 31, 2021 compared to December 31, 2020 and March 31, 2020.

Peoples' amortization of other intangible assets is driven by acquisition-related activity. Amortization of other intangible assets for the first quarter of 2021 was down compared to the fourth quarter of 2020 as a result of the annual reduction included in the amortization schedules for prior acquisitions, which reset at the beginning of each fiscal year. Compared to the first quarter of 2020, amortization of other intangible assets declined due to the reduced amortization from previous acquisitions.

Peoples FDIC insurance premiums declined compared to the linked quarter, as PPP loans, which are included in the leverage ratio calculation on which the FDIC insurance premiums are calculated, decreased compared to December 31, 2020. The FDIC insurance premiums during the first quarter of 2020 were impacted by credits used by Peoples to offset its FDIC insurance premium. The FDIC insurance credits were related to the level of the Federal Deposit Insurance Fund ("DIF") that had 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.

Other loan expenses increased slightly compared to the linked quarter due to higher expenses associated with business loans. Compared to the first quarter of 2020, other loan expenses declined mostly due to lower expenses associated with real estate loans and home equity lines of credit.

Other non-interest expense increased $611,000 compared to the linked quarter, and was mostly due to higher acquisition-related expenses offset by pension settlement charges that had been incurred in the fourth quarter of 2020. Peoples did not recognize pension settlement costs during the first quarter of 2021, however, Peoples did recognize $4,000 of pension settlement costs during the fourth quarter of 2020, and $368,000 for the first quarter of 2020.

Income Tax Expense

Peoples recorded income tax expense of $3.8 million for the first quarter of 2021, compared to income tax expense of $4.3 million for the linked quarter and an income tax benefit of $156,000 for the first quarter of 2020. The income tax expense during the first quarter of 2021 was driven by pre-tax income of $19.2 million, which was impacted by the $4.7 million recovery for credit losses recorded during the quarter. Income tax expense during the first quarter of 2021, the linked quarter and the first quarter of 2020 was heavily related to the amount of pre-tax income recognized during each 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' 2020 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 losses included in earnings.

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The following table provides a reconciliation of this non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:


	Three Months Ended
	March 31, 2021			December 31, 2020			March 31, 2020
(Dollars in thousands)
Pre-provision net revenue:
Income (loss) before income taxes	$	19,243		$	24,836		(921)
Add: provision for credit losses	—			—			16,969

Add: loss on OREO	—			119			17
Add: loss on investment securities	336			751			—
Add: loss on other assets	27			—			70


Less: recovery of credit losses	4,749			7,277			—
Less: gain on investment securities	—			—			319

Less: gain on other assets	—			66			—
Pre-provision net revenue	$	14,857		$	18,363		$	15,816


Total average assets	$	4,912,076		$	4,837,978		$	4,381,627
Pre-provision net revenue to total average assets (annualized)	1.23		%	1.51		%	1.45		%

Weighted-average common shares outstanding - diluted	19,436,311			19,442,284			20,538,214
Pre-provision net revenue per common share - diluted	$	0.76		$	0.94		$	0.77

The decrease in PPNR compared to the linked quarter was mostly due to higher non-core expenses, coupled with increased expenses typically recognized during the first quarter of each year associated with stock-based compensation, contributions to employees' flexible spending and health savings accounts, and higher payroll taxes. The decline in PPNR compared to the first quarter of 2020 was related to increased non-core costs recognized during the first quarter of 2021.

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, COVID-19-related expenses and a Peoples Bank Foundation, Inc. contribution.

The following table provides a reconciliation of this non-US GAAP measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 2020
(Dollars in thousands)

Core non-interest expense:
Total non-interest expense	$	37,987	$	33,250	$	34,325

Less: acquisition-related expenses	1,911		77		31
Less: pension settlement charges	—		4		368
Less: severance expenses	49		771		13

Less: COVID-19-related expenses	292		126		140
Less: Peoples Bank Foundation, Inc. contribution	500		—		—
Core non-interest expense	$	35,235	$	32,272	$	33,773

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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 losses included in earnings, and uses fully tax-equivalent net interest income.

The following table provides a reconciliation of this non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:


	Three Months Ended
	March 31, 2021			December 31, 2020			March 31, 2020
(Dollars in thousands)

Efficiency ratio:
Total non-interest expense	$	37,987		$	33,250		$	34,325
Less: amortization of other intangible assets	620			909			729
Adjusted total non-interest expense	$	37,367		$	32,341		$	33,596

Total non-interest income	$	16,903		$	16,501		$	15,737
Less: net gain on investment securities	—			—			319
Add: net loss on investment securities	(336)			(751)			—
Add: net loss on asset disposals and other transactions	(27)			(53)			(87)
Total non-interest income excluding net gains and losses	$	17,266		$	17,305		$	15,505

Net interest income	$	35,578		$	34,308		$	34,636
Add: fully tax-equivalent adjustment (a)	257			251			272
Net interest income on a fully tax-equivalent basis	$	35,835		$	34,559		$	34,908

Adjusted revenue	$	53,101		$	51,864		$	50,413

Efficiency ratio	70.37		%	62.36		%	66.64		%

Efficiency ratio adjusted for non-core items:
Core non-interest expense	$	35,235		$	32,272		$	33,773
Less: amortization of other intangible assets	620			909			729
Adjusted core non-interest expense	$	34,615		$	31,363		$	33,044

Core non-interest income excluding net gains and losses	$	17,266		$	17,305		$	15,505
Net interest income on a fully tax-equivalent basis	35,835			34,559			34,908
Adjusted revenue	$	53,101		$	51,864		$	50,413

Efficiency ratio adjusted for non-core items	65.19		%	60.47		%	65.55		%

(a) Based on a 21% statutory federal corporate income tax rate.

The change in the efficiency ratio compared to the linked quarter was partially due to the increase in total non-core non-interest expense illustrated above, coupled with higher expenses typically incurred during the first quarter of each year.

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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, COVID-19-related expenses and a Peoples Bank Foundation, Inc. contribution.

The following table provides a reconciliation of this non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:


	Three Months Ended
	March 31, 2021			December 31, 2020			March 31, 2020
(Dollars in thousands)

Annualized net income adjusted for non-core items:
Net income (loss)	$	15,463		$	20,573		$	(765)

Add: net loss on investment securities	336			751			—
Less: tax effect of net loss on investment securities (a)	71			158			—
Less: net gain on investment securities	—			—			319
Add: tax effect of net gain on investment securities (a)	—			—			67
Add: net loss on asset disposals and other transactions	27			53			87
Less: tax effect of net loss on asset disposals and other transactions (a)	6			11			18



Add: acquisition-related expenses	1,911			77			31
Less: tax effect of acquisition-related expenses (a)	401			16			7
Add: pension settlement charges	—			4			368
Less: tax effect of pension settlement charges (a)	—			1			77
Add: severance expenses	49			771			13
Less: tax effect of severance expenses (a)	10			162			3
Add: COVID-19-related expenses	292			126			140
Less: tax effect of COVID-19-related expenses (a)	61			26			29
Add: Peoples Bank Foundation, Inc. contribution	500			—			—
Less: tax effect of Peoples Bank Foundation, Inc. contribution	105			—			—




Net income (loss) adjusted for non-core items (after tax)	$	17,924		$	21,981		$	(512)
Days in the period	90			92			91
Days in the year	365			366			366
Annualized net income (loss)	$	62,711		$	81,845		$	(3,077)
Annualized net income (loss) adjusted for non-core items (after tax)	$	72,692		$	87,446		$	(2,059)
Return on average assets:
Annualized net income (loss)	$	62,711		$	81,845		$	(3,077)
Total average assets	4,912,076			4,837,978			4,381,627
Return on average assets	1.28		%	1.69		%	(0.07)		%
Return on average assets adjusted for non-core items:
Annualized net income (loss) adjusted for non-core items (after tax)	$	72,692		$	87,446		$	(2,059)
Total average assets	4,912,076			4,837,978			4,381,627
Return on average assets adjusted for non-core items	1.48		%	1.81		%	(0.05)		%

(a) Based on a 21% statutory federal corporate income tax rate.

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The return on average assets and the return on average assets adjusted for non-core items both declined during the first quarter of 2021, compared to the linked quarter. The decreases were driven by the reduction in the amount of the recovery of credit losses and higher total non-interest expense recognized during the first quarter of 2021, compared to the fourth quarter of 2020. The return on average assets and the return on average assets adjusted for non-core items both grew compared to the first quarter of 2020, and was mostly due to the recovery of credit losses recorded during the first quarter of 2021, compared to a high provision for credit losses recorded during the first quarter of 2020. For additional information related to the changes in the (recovery of) provision for credit losses, refer to the sections in this discussion titled “(Recovery of) 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 income (less the after-tax impact of amortization of other intangible assets) divided by average tangible equity. This measure is non-US GAAP since it excludes amortization of other intangible assets from earnings and the impact of goodwill and other intangible assets acquired through acquisitions on total stockholders' equity.


	Three Months Ended
	March 31, 2021			December 31, 2020			March 31, 2020
(Dollars in thousands)
Annualized net income excluding amortization of other intangible assets:
Net income (loss)	$	15,463		$	20,573		$	(765)
Add: amortization of other intangible assets	620			909			729
Less: tax effect of amortization of other intangible assets (a)	130			191			153
Net income (loss) excluding amortization of other intangible assets	$	15,953		$	21,291		$	(189)
Days in the period	90			92			91
Days in the year	365			366			366
Annualized net income (loss)	$	62,711		$	81,845		$	(3,077)
Annualized net income (loss) excluding amortization of other intangible assets	$	64,698		$	84,701		$	(760)
Average tangible equity:
Total average stockholders' equity	$	577,588		$	566,292		$	596,246
Less: average goodwill and other intangible assets	184,253			185,093			177,984
Average tangible equity	$	393,335		$	381,199		$	418,262
Return on average stockholders' equity ratio:
Annualized net income (loss)	$	62,711		$	81,845		$	(3,077)
Average stockholders' equity	$	577,588		$	566,292		$	596,246
Return on average stockholders' equity	10.86		%	14.45		%	(0.52)		%
Return on average tangible equity ratio:
Annualized net income (loss) excluding amortization of other intangible assets	$	64,698		$	84,701		$	(760)
Average tangible equity	$	393,335		$	381,199		$	418,262
Return on average tangible equity	16.45		%	22.22		%	(0.18)		%

(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 the (recovery of) provision for credit losses during each of the respective periods.

For additional information related to changes in the (recovery of) provision for credit losses, refer to the sections in this discussion titled “(Recovery of) Provision for Credit Losses" and "Allowance for Credit Losses.”

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FINANCIAL CONDITION

Cash and Cash Equivalents

At March 31, 2021, Peoples' interest-bearing deposits in other banks increased $53.9 million from December 31, 2020. The total cash and cash equivalents balance included $120.0 million of excess cash reserves being maintained at the FRB of Cleveland at March 31, 2021, compared to $25.1 million at December 31, 2020. 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 needs due to the COVID-19 pandemic.

Through the first three months of 2021, Peoples' total cash and cash equivalents increased $48.3 million as Peoples' net cash used in investing activities of $350.3 million was less than the sum of net cash provided by financing and operating activities of $380.2 million and $18.3 million, respectively. Peoples' investing activities reflected a net increase of $7.7 million in loans and $329.3 million in purchases of available-for-sale and held-to-maturity investment securities, which were partially offset by $100.5 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 $393.4 million net increase in deposits offset partially by a decrease of $5.4 million in short-term borrowings, as well as no purchase of treasury stock under the share repurchase program and $7.1 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)	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Available-for-sale securities, at fair value:
Obligations of:

U.S. government sponsored agencies	$	18,471	$	5,363	$	5,383	$	5,396	$	6,361
States and political subdivisions	218,484		114,919		104,126		107,032		108,812
Residential mortgage-backed securities	596,181		623,218		726,992		748,867		823,893
Commercial mortgage-backed securities	27,481		4,783		10,568		12,157		17,061
Bank-issued trust preferred securities	4,730		4,730		4,633		4,399		4,708



Total fair value	$	865,347	$	753,013	$	851,702	$	877,851	$	960,835
Total amortized cost	$	859,120	$	734,544	$	829,899	$	853,072	$	932,179
Net unrealized gain	$	6,227	$	18,469	$	21,803	$	24,779	$	28,656
Held-to-maturity securities, at amortized cost:
Obligations of:
US government sponsored agencies	$	30,211	$	—	$	—	$	—	$	—
States and political subdivisions (a)	92,436		35,139		3,539		3,538		$	3,838
Residential mortgage-backed securities	24,878		25,890		26,926		28,075		29,070
Commercial mortgage-backed securities	18,705		5,429		5,678		5,754		5,830
Total amortized cost	$	166,230	$	66,458	$	36,143	$	37,367	$	38,738
Other investment securities	$	34,026	$	37,560	$	40,715	$	42,656	$	46,924
Total investment securities:
Amortized cost	$	1,059,376	$	838,562	$	906,757	$	933,095	$	1,017,841
Carrying value	$	1,065,603	$	857,031	$	928,560	$	957,874	$	1,046,497

(a) Amortized cost is presented net of the allowance for credit losses of $182,000 at March 31, 2021, $60,000 at December 31, 2020 and $6,000 at each of September 30, 2020, June 30, 2020 and March 31, 2020.

At March 31, 2021, the fair value of available-for-sale securities increased $112.3 million, or 15%, compared to December 31,
2020. The increase compared to the prior quarter-end was driven by an increase in available-for-sale commercial-mortgage backed securities that were purchased during the first quarter of 2021, coupled with purchases of available for sale and held-to-maturity obligations of state and political subdivisions. During the first quarter of 2021, Peoples increased the relative size of its investment portfolio as a percent of total assets as it experienced an influx in cash from higher deposit balances.

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Additional information regarding Peoples' investment portfolio can be found in "Note 3 Investment Securities" of the Notes to the Unaudited Consolidated Financial Statements.

Loans

The following table provides information regarding outstanding loan balances:


(Dollars in thousands)	March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020
Originated loans:
Construction	$	75,189		$	103,169		$	103,948		$	105,493		$	106,415
Commercial real estate, other	832,399			780,324			752,480			738,292			707,339
Commercial real estate	907,588			883,493			856,428			843,785			813,754
Commercial and industrial	935,150			943,024			1,029,613			1,032,970			611,791
Premium finance	109,129			100,571			60,908			—			—
Residential real estate	306,440			281,623			284,645			285,407			293,078
Home equity lines of credit	92,540			93,296			91,701			90,612			91,344
Consumer, indirect	519,749			503,526			491,663			450,296			418,022
Consumer, direct	75,998			75,591			75,106			74,614			71,230
Consumer	595,747			579,117			566,769			524,910			489,252
Deposit account overdrafts	298			351			519			592			610
Total originated loans	$	2,946,892		$	2,881,475		$	2,890,583		$	2,778,276		$	2,299,829
Acquired loans (a):
Construction	$	3,510		$	3,623		$	4,103		$	4,460		$	4,450
Commercial real estate, other	132,850			149,529			160,759			176,128			190,478
Commercial real estate	136,360			153,152			164,862			180,588			194,928
Commercial and industrial	29,611			30,621			34,396			37,356			42,739
Premium finance	1,461			14,187			43,217			—			—
Residential real estate	267,260			292,384			304,804			327,677			332,288
Home equity lines of credit	24,886			27,617			30,234			32,772			36,667
Consumer, indirect	—			1			36			38			44
Consumer, direct	3,206			3,503			3,953			4,312			4,942
Consumer	3,206			3,504			3,989			4,350			4,986
Total acquired loans	$	462,784		$	521,465		$	581,502		$	582,743		$	611,608
Total loans	$	3,409,676		$	3,402,940		$	3,472,085		$	3,361,019		$	2,911,437



Percent of loans to total loans:
Construction	2.3		%	3.1		%	3.1		%	3.3		%	3.8		%
Commercial real estate, other	28.3		%	27.3		%	26.3		%	27.2		%	30.8		%
Commercial real estate	30.6		%	30.4		%	29.4		%	30.5		%	34.6		%
Commercial and industrial	28.3		%	28.6		%	30.6		%	31.9		%	22.5		%
Premium finance	3.2		%	3.4		%	3.0		%	—		%	—		%
Residential real estate	16.8		%	16.9		%	17.0		%	18.2		%	21.5		%
Home equity lines of credit	3.5		%	3.6		%	3.5		%	3.7		%	4.4		%
Consumer, indirect	15.3		%	14.8		%	14.2		%	13.4		%	14.4		%
Consumer, direct	2.3		%	2.3		%	2.3		%	2.3		%	2.6		%
Consumer	17.6		%	17.1		%	16.5		%	15.7		%	17.0		%

Total percentage	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%
Residential real estate loans being serviced for others	$	469,788		$	485,972		$	490,170		$	491,545		$	503,158

(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 March 31, 2021 increased $6.7 million compared to December 31, 2020. The increase compared to December 31, 2020 was mostly driven by increases in commercial real estate balances of $35.4 million, commercial and industrial loan balances of $8.1 million, excluding PPP loans, and consumer indirect loan balances of $16.0 million. These increases were partially offset by a decline in construction loan balance of $28.0 million, due to construction projects being completed and construction loans then converting to permanent financing. PPP loans decreased $17.0 million, due to the amount of loans forgiven exceeding new loan originations during the first quarter of 2021. Excluding the PPP loan balances, Peoples' originated loans grew by 3% annualized compared to December 31, 2020.

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Loan growth in recent quarters has been negatively impacted by lower than usual line of credit utilization rates, both for commercial and consumer lines of credit. Compared to December 31, 2020, the declining utilization rate on line of credits resulted in a $28.8 million decrease in aggregate outstanding balances of lines of credit.

The increase compared to March 31, 2020 was largely due to the increases in PPP loans and premium finance loans, and growth in consumer indirect loans. These increases were partially offset by decreases in residential real estate loans, construction loans and lines of credit. Residential real estate loans declined due to refinance activity driven by the low-rate environment. Acquired loan balances decreased due to loans being paid off or re-underwritten, at which point Peoples no longer considers the loans acquired.

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 tables provide information regarding the largest concentrations of commercial construction loans and commercial real estate loans within the loan portfolio at March 31, 2021:


(Dollars in thousands)	Outstanding Balance		Loan Commitments		Total Exposure		% of Total



































Construction:
Apartment complexes	$	45,392	$	120,670	$	166,062	63.0	%
Assisted living facilities and nursing homes	11,457		19,006		30,463		11.6	%
Land only	13,146		14,797		27,943		10.5	%
Lodging and lodging related	1,875		8,966		10,841		4.1	%
Mixed-use facilities	1,933		7,915		9,848		3.7	%
Storage facility	205		5,804		6,009		2.3	%




















Other (a)	4,691		7,853		12,544		4.8	%
Total construction	$	78,699	$	185,011	$	263,710	100.0	%

(a) All other outstanding balances are less than 2% of the total loan portfolio.

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(Dollars in thousands)	Outstanding Balance		Loan Commitments		Total Exposure		% of Total
Commercial real estate, other:
Office buildings and complexes:
Owner occupied	$	73,312	$	1,720	$	75,032	7.5	%
Non-owner occupied	66,595		3,918		70,513		7.1	%
Total office buildings and complexes	139,907		5,638		145,545		14.6	%
Retail facilities:
Owner occupied	38,945		399		39,344		4.0	%
Non-owner occupied	57,920		250		58,170		5.9	%
Total retail facilities	96,865		649		97,514		9.9	%
Apartment complexes	91,523		2,140		93,663		9.4	%
Mixed-use facilities:
Owner occupied	54,807		1,593		56,400		5.7	%
Non-owner occupied	35,789		786		36,575		3.7	%
Total mixed-use facilities	90,596		2,379		92,975		9.4	%
Light industrial facilities:
Owner occupied	56,619		1,319		57,938		5.8	%
Non-owner occupied	21,406		1,088		22,494		2.3	%
Total light industrial facilities	78,025		2,407		80,432		8.1	%
Assisted living facilities and nursing homes	74,693		1,011		75,704		7.6	%
Warehouse facilities:
Owner occupied	37,391		1,400		38,791		3.9	%
Non-owner occupied	27,457		12		27,469		2.8	%
Total warehouse facilities	64,848		1,412		66,260		6.7	%
Lodging and lodging related:
Owner occupied	12,295		—		12,295		1.2	%
Non-owner occupied	39,960		—		39,960		4.0	%
Total lodging and lodging related	52,255		—		52,255		5.2	%
Education services:
Owner occupied	15,477		98		15,575		1.6	%
Non-owner occupied	26,093		4,000		30,093		3.0	%
Total education services	41,570		4,098		45,668		4.6	%
Gas station facilities:
Owner occupied	18,878		22		18,900		1.9	%
Non-owner occupied	5,005		—		5,005		0.5	%
Total gas station facilities	23,883		22		23,905		2.4	%











Other (a)	211,084		9,028		220,112		22.1	%
Total commercial real estate, other	$	965,249	$	28,784	$	994,033	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 March 31, 2021 or December 31, 2020.

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 specified 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 and/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 as of March 31, 2021, Peoples had aggregate outstanding principal balances of PPP loans of $349.9 million included in commercial and industrial loans. Peoples also recorded deferred loan origination fees related

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to the PPP loans, net of deferred loan origination costs, which totaled $9.3 million at March 31, 2021. For the first quarter of 2021, Peoples recorded amortization of net deferred loan origination fees of $4.7 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.

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. 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. In addition, for commercial borrowers who meet certain criteria, Peoples is providing interest-only payment options, principal and interest deferrals, and increased financing. Peoples continues to prudently work with borrowers and review any additional requests for deferment more closely. These requests are maintained within the CARES Act guidance and have not exceeded twelve consecutive months of deferred payment.

At March 31, 2021, Peoples had approximately $13.0 million of deferments outstanding. Of this total, commercial loan deferments comprised approximately $12.0 million, while consumer loans totaled approximately $1.0 million. Subsequent to March 31, 2021, one larger hotel operator requested additional payment relief beyond the original three months previously provided. Peoples granted an additional three months of interest-only payments to the borrower, which increased Peoples' total deferments to $31.0 million as of March 31, 2021.

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)	March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020
Commercial real estate	$	18,663		$	19,423		$	21,549		$	21,810		$	13,884
Commercial and industrial	10,108			12,763			13,099			10,106			8,743
Total commercial	28,771			32,186			34,648			31,916			22,627
Premium finance	1,160			1,095			986			—			—
Residential real estate	4,935			6,044			5,988			6,380			5,744
Home equity lines of credit	1,494			1,860			1,797			1,755			1,695
Consumer, indirect	7,522			8,030			12,772			12,293			10,878
Consumer, direct	970			1,081			1,861			1,941			1,803
Consumer	8,492			9,111			14,633			14,234			12,681
Deposit account overdrafts	45			63			76			77			86
Allowance for credit losses	$	44,897		$	50,359		$	58,128		$	54,362		$	42,833
As a percent of total loans	1.32		%	1.48		%	1.67		%	1.62		%	1.47		%

During the first quarter of 2021, Peoples decreased its allowance for credit losses due to the recent developments related to COVID-19 and the resulting impact on the economic assumptions used in estimating the allowance for credit losses under the CECL model, offset by an increase in specific reserves of $3.5 million related to five commercial relationships compared to December 31 2020.

During much of 2020, Peoples increased its allowance for credit losses based on CECL model results, which incorporated economic forecasts that included the impact of COVID-19 on certain economic factors. 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 prior periods. During the third quarter of 2020, Peoples also recorded allowance for credit losses associated with the loans acquired from Triumph Premium Finance on July 1, 2020, which included $84.7 million in loans at the acquisition date.

The allowance for credit losses as a percent of total loans was negatively impacted by PPP loans, for which there is an SBA guarantee and no related allowance for credit losses is recorded. At March 31, 2021, PPP loans negatively impacted the allowance for credit losses as a percent of total loans by 15 basis points, compared to 18 basis points at December 31, 2020, 26 basis points at September 30, 2020 and 23 basis points at June 30, 2020.

Additional information regarding Peoples' allowance for credit losses can be found in "Note 1 Summary of Significant Accounting Policies" in Peoples' 2020 Form 10-K 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)	March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020
Gross charge-offs:

Commercial real estate, other	$	96		$	274		$	109		$	135		$	10

Commercial and industrial	293			465			146			15			937
Premium finance	16			1			2			—			—
Residential real estate	133			98			121			16			118
Home equity lines of credit	12			80			—			9			14
Consumer, indirect	505			498			370			336			721
Consumer, direct	36			59			15			51			62
Consumer	541			557			385			387			783
Deposit account overdrafts	103			139			202			119			213
Total gross charge-offs	$	1,194		$	1,614		$	965		$	681		$	2,075
Recoveries:

Commercial real estate, other	$	(61)		$	74		$	4		$	6		$	116

Commercial and industrial	—			512			—			805			1,204
Premium finance	—			—			—			—			—
Residential real estate	15			45			100			100			57
Home equity lines of credit	4			1			2			8			1
Consumer, indirect	105			41			64			72			125
Consumer, direct	26			12			13			10			14
Consumer	131			53			77			82			139
Deposit account overdrafts	54			30			47			49			60
Total recoveries	$	143		$	715		$	230		$	1,050		$	1,577
Net charge-offs (recoveries):

Commercial real estate, other	$	157		$	200		$	105		$	129		$	(106)

Commercial and industrial	293			(47)			146			(790)			(267)
Premium finance	16			1			2			—			—
Residential real estate	118			53			21			(84)			61
Home equity lines of credit	8			79			(2)			1			13
Consumer, indirect	400			457			306			264			596
Consumer, direct	10			47			2			41			48
Consumer	410			504			308			305			644
Deposit account overdrafts	49			109			155			70			153
Total net charge-offs (recoveries)	$	1,051		$	899		$	735		$	(369)		$	498
Ratio of net charge-offs (recoveries) to average total loans (annualized):

Commercial real estate, other	0.02		%	0.02		%	0.01		%	0.02		%	(0.01)		%

Commercial and industrial	0.04		%	(0.01)		%	0.02		%	(0.11)		%	(0.04)		%
Premium finance	—		%	—		%	—		%	—		%	—		%
Residential real estate	0.01		%	0.01		%	—		%	(0.01)		%	0.01		%

Consumer, indirect	0.05		%	0.05		%	0.03		%	0.03		%	0.08		%
Consumer, direct	—		%	0.01		%	—		%	0.01		%	0.01		%
Consumer	0.05		%	0.06		%	0.03		%	0.04		%	0.09		%
Deposit account overdrafts	0.01		%	0.02		%	0.02		%	0.01		%	0.02		%
Total	0.13		%	0.10		%	0.08		%	(0.05)		%	0.07		%

Each with "--%" not meaningful.

Net charge-offs during the first quarter of 2021 were 0.13% of average total loans on an annualized basis. The higher net charge-offs during the first quarter of 2021, compared to the linked quarter and the first quarter of 2020, were related to recoveries of $508,000 for the fourth quarter of 2020 and of $1.2 million for the first quarter of 2020, on a single commercial loan relationship that had been previously charged-off.

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The following table details Peoples’ nonperforming assets:


(Dollars in thousands)	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Loans 90+ days past due and accruing:

Commercial real estate, other	$	55	$	—	$	80	$	130	$	—

Commercial and industrial	—		50		74		—		806
Premium finance	109		205		—		—		—
Residential real estate	662		1,975		2,548		1,618		557
Home equity lines of credit	180		82		27		46		143
Consumer, indirect	24		39		86		57		—
Consumer, direct	14		17		—		29		37
Consumer	38		56		86		86		37
Total loans 90+ days past due and accruing	$	1,044	$	2,368	$	2,815	$	1,880	$	1,543
Nonaccrual loans:
Construction	$	4	$	4	$	4	$	4	$	99
Commercial real estate, other	8,084		8,744		8,762		9,413		9,167
Commercial real estate	8,088		8,748		8,766		9,417		9,266
Commercial and industrial	4,067		4,017		4,067		4,745		4,408
Residential real estate	6,182		6,080		6,027		8,867		6,156
Home equity lines of credit	624		708		754		687		978
Consumer, indirect	825		883		801		802		637
Consumer, direct	146		160		148		208		122
Consumer	971		1,043		949		1,010		759
Total nonaccrual loans	$	19,932	$	20,596	$	20,563	$	24,726	$	21,567
Nonaccrual troubled debt restructurings ("TDRs"):

Commercial real estate, other	$	337	367		$	772	$	265	$	410
Commercial and industrial	2,034		2,175		2,250		—		602
Residential real estate	2,064		2,295		2,481		38		2,484
Home equity lines of credit	156		159		165		—		174
Consumer, indirect	206		190		160		—		197
Consumer, direct	15		11		45		—		48
Consumer	221		201		205		—		245
Total nonaccrual TDRs	$	4,812	$	5,197	$	5,873	$	303	$	3,915
Total nonperforming loans ("NPLs")	$	25,788	$	28,161	$	29,251	$	26,909	$	27,025
OREO:
Commercial	$	—	$	—	$	145	$	145	$	145
Residential	$	134	$	134	$	148	$	91	$	81
Total OREO	$	134	$	134	$	293	$	236	$	226
Total nonperforming assets ("NPAs")	$	25,922	$	28,295	$	29,544	$	27,145	$	27,251

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(Dollars in thousands)	March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020
Criticized loans (a)	$	116,424		$	126,619		$	123,219		$	105,499		$	90,881
Classified loans (b)	76,095			72,518			76,009			66,567			68,787
Asset Quality Ratios:
NPLs as a percent of total loans (c)(d)	0.76		%	0.82		%	0.84		%	0.80		%	0.93		%
NPAs as a percent of total assets (c)(d)	0.50		%	0.59		%	0.60		%	0.54		%	0.61		%
NPAs as a percent of total loans and OREO (c)(d)	0.76		%	0.84		%	0.85		%	0.80		%	0.94		%
Allowance for credit losses as a percent of NPLs (c)(d)	174.10		%	180.14		%	198.72		%	202.02		%	158.49		%
Criticized loans as a percent of total loans (a)(c)	3.41		%	3.72		%	3.55		%	3.14		%	3.12		%
Classified loans as a percent of total loans (b)(c)	2.23		%	2.13		%	2.19		%	1.98		%	2.36		%

(a) Includes loans categorized as special mention, substandard or doubtful.

(b) Includes loans categorized as substandard or doubtful.

(d) Nonperforming loans include loans 90+ days past due and accruing, TDRs and nonaccrual loans. Nonperforming assets include nonperforming loans and OREO.

During the first quarter of 2021, nonperforming assets decreased $2.3 million compared to December 31, 2020. This decline was mostly due to several small relationships in both loans 90+ days past due and accruing and nonaccrual loans. The nonperforming loans as a percent of total loans and nonperforming assets as a percent of total assets ratios both decreased compared to December 31, 2020, due to the lower amount of nonperforming loans at the end of the first quarter of 2021.

Criticized loans, which are those categorized as special mention, substandard or doubtful, decreased $10.2 million, or 8%, compared to December 31, 2020 and increased $25.5 million, or 28%, compared to March 31, 2020. The decrease in the amount of criticized loans compared to December 31, 2020 was primarily due to the upgrade of four commercial relationships, totaling $3.9 million, paydowns of $5.6 million, and $1.8 million of normal amortization. Compared to March 31, 2020, the increase in the amount of criticized loans was largely due to the downgrades of a few commercial relationships based on updated information on the borrowers that became available. Classified loans, which are those categorized as substandard or doubtful, grew $3.6 million, or 5%, compared to December 31, 2020, and were up $7.3 million, or 11%, compared to March 31, 2020.

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 to be current are those that were 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 TDRs within the scope of ASC 310-40.

On August 3, 2020, federal and state banking regulators issued a joint statement, encouraging financial institutions to consider prudent accommodation options to mitigate losses for the borrower and financial institution beyond the initial accommodation period. In this guidance, institutions should also provide consumers with available options for repaying missed payments at the end of their accommodation to avoid delinquencies, as well as options for changes to terms to support sustainable and affordable payments for the long term. These considerations should also include prudent risk management practices at the financial institution based on the credit risk of the borrower. Peoples is actively working with its customers to address any further accommodation needs while carefully evaluating the associated credit risk of the borrowers.

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Deposits

The following table details Peoples’ deposit balances:


(Dollars in thousands)	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Non-interest-bearing deposits (a)	$	1,206,034	$	997,323	$	982,912	$	1,005,732	$	727,266
Interest-bearing deposits:
Interest-bearing demand accounts (a)	722,470		692,113		666,134		666,181		637,011
Savings accounts	676,345		628,190		589,625		580,703		527,295
Retail certificates of deposit ("CDs")	433,214		445,930		461,216		474,593		487,153
Money market deposit accounts	586,099		591,373		581,398		598,641		485,999
Governmental deposit accounts	511,937		385,384		409,967		377,787		400,184
Brokered deposits	168,130		170,146		260,753		321,247		133,522
Total interest-bearing deposits	3,098,195		2,913,136		2,969,093		3,019,152		2,671,164
Total deposits	$	4,304,229	$	3,910,459	$	3,952,005	$	4,024,884	$	3,398,430

(a)The sum of amounts presented is considered total demand deposits.

At March 31, 2021, period-end deposits increased $393.8 million, or 10%, compared to December 31, 2020, and increased $905.8 million, or 27%, compared to March 31, 2020. The increases in total deposits compared to December 31, 2020 and March 31, 2020, were related to increases in non-interest bearing deposits due to customers maintaining higher balances, as a result of PPP loan proceeds, fiscal stimulus payments and changes in customer spending habits in light of the COVID-19 pandemic. In prior quarterly periods in the table above, Peoples experienced increases in most low-cost deposit categories.

In the prior third and fourth quarters of 2020 noted in the table above, Peoples had reduced its reliance on higher-rate brokered deposits, which included one-way buy Certificate of Deposit Account Registry Services. The change in brokered deposits was partially offset by the issuance of 90-day brokered deposits to fund interest rate swaps. The swaps will pay a fixed rate of interest while receiving three-month LIBOR, which offsets the rate on the brokered deposits. As of March 31, 2021, Peoples had seventeen effective interest rate swaps, with an aggregate notional value of $160.0 million, of which $110.0 million were designated as cash flow hedges of overnight brokered deposits, 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 hedged 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.

Total demand deposit accounts comprised 45% of total deposits at March 31, 2021, compared to 43% at December 31, 2020, and 40% at March 31, 2020. 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.

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Borrowed Funds

The following table details Peoples’ short-term and long-term borrowings:


(Dollars in thousands)	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Short-term borrowings:
Overnight borrowings	$	—	$	—	$	—	$	—	$	64,000
FHLB 90-day advances	—		—		110,000		110,000		110,000
Current portion of long-term FHLB advances	20,000		20,000		25,000		25,000		45,000
Retail repurchase agreements	47,868		53,261		47,063		42,912		40,661

Total short-term borrowings	$	67,868	$	73,261	$	182,063	$	177,912	$	259,661
Long-term borrowings:
FHLB advances	$	102,645	102,957		$	103,815	$	105,005	$	125,300



Junior subordinated debt securities	7,650		7,611		7,571		7,531		7,491
Total long-term borrowings	$	110,295	$	110,568	$	111,386	$	112,536	$	132,791
Total borrowed funds	$	178,163	$	183,829	$	293,449	$	290,448	$	392,452

Borrowed funds, in total, which include overnight borrowings, are mainly a function of loan growth and changes in total deposit balances. Total borrowed funds declined 3% compared to December 31, 2020, as Peoples utilized cash and cash equivalents, coupled with paydowns and proceeds from maturities from its investment securities portfolio to satisfy most of its liquidity needs. The decline in borrowed funds at March 31, 2021, compared to March 31, 2020 was mostly due to the reduced need of overnight borrowings to fund liquidity needs as Peoples experienced an influx in deposit balances during the period, which was mostly related to PPP proceeds and government fiscal stimulus payments.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities decreased $9.0 million, or 10%, compared to December 31, 2020 and $12.8 million compared to March 31, 2020. The decreases were due to changes related to the fair value of swap derivatives as of March 31, 2021. These decreases were partially offset by increases in accrued interest payable and other liabilities. Additional information regarding Peoples' interest rate swaps can be found in "Note 8 Derivative Financial Instruments" of the Notes to the Unaudited Consolidated Financial Statements.

Capital/Stockholders’ Equity

At March 31, 2021, 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 March 31, 2021, Peoples had a capital conservation buffer of 5.78%. As such, Peoples exceeded the minimum ratios including the capital conservation buffer at March 31, 2021.

The following table details Peoples' risk-based capital levels and corresponding ratios:


(Dollars in thousands)	March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020
Capital Amounts:
Common Equity Tier 1	$	418,089		$	409,400		$	398,553		$	408,619		$	415,768
Tier 1	425,739			417,011			406,124			416,150			423,259
Total (Tier 1 and Tier 2)	463,872			456,384			445,101			454,641			459,727
Net risk-weighted assets	$	3,365,637		$	3,146,767		$	3,106,817		$	3,072,178		$	2,988,263
Capital Ratios:
Common Equity Tier 1	12.42		%	13.01		%	12.83		%	13.30		%	13.91		%
Tier 1	12.65		%	13.25		%	13.07		%	13.55		%	14.16		%
Total (Tier 1 and Tier 2)	13.78		%	14.50		%	14.33		%	14.80		%	15.38		%
Tier 1 leverage ratio	9.00		%	8.97		%	8.62		%	8.97		%	10.06		%

During the first quarter of 2021, Peoples' net income of $15.5 million exceeded dividends declared of $6.8 million, which increased Peoples' capital levels. Net risk-weighted assets also grew compared to December 31, 2020, due to loan and investment

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growth. The NSL acquisition negatively impacted the regulatory capital ratios at March 31, 2021, as the purchase price was included in net risk-weighted assets and there was no capital issued in connection with the acquisition.

During 2020, Peoples repurchased common shares during each quarter of the year, which reduced regulatory capital levels. Peoples also completed the premium finance company acquisition on July 1, 2020, which impacted regulatory capital levels due to the recognition of goodwill and intangibles associated with the acquisition. Peoples did not purchase any common shares in the first quarter of 2021.

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.

The following table reconciles the calculation of these non-US GAAP financial measures to amounts reported in Peoples' Unaudited Consolidated Financial Statements:


(Dollars in thousands)	March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020
Tangible equity:
Total stockholders' equity	$	578,893		$	575,673		$	566,856		$	569,177		$	583,721
Less: goodwill and other intangible assets	184,007			184,597			185,397			176,625			177,447
Tangible equity	$	394,886		$	391,076		$	381,459		$	392,552		$	406,274






Tangible assets:
Total assets	$	5,143,052		$	4,760,764		$	4,911,807		$	4,985,819		$	4,469,120
Less: goodwill and other intangible assets	184,007			184,597			185,397			176,625			177,447
Tangible assets	$	4,959,045		$	4,576,167		$	4,726,410		$	4,809,194		$	4,291,673

Tangible book value per common share:
Tangible equity	$	394,886		$	391,076		$	381,459		$	392,552		$	406,274
Common shares outstanding	19,629,633			19,563,979			19,721,783			19,925,083			20,346,843

Tangible book value per common share	$	20.12		$	19.99		$	19.34		$	19.70		$	19.97

Tangible equity to tangible assets ratio:
Tangible equity	$	394,886		$	391,076		$	381,459		$	392,552		$	406,274
Tangible assets	$	4,959,045		$	4,576,167		$	4,726,410		$	4,809,194		$	4,291,673

Tangible equity to tangible assets	7.96		%	8.55		%	8.07		%	8.16		%	9.47		%

Tangible book value per common share grew to $20.12 at March 31, 2021, compared to $19.99 at December 31, 2020. The improvement in tangible book value per common share was mostly due to higher capital levels as net income exceeded dividends declared, which was net of changes in accumulated other comprehensive loss caused by the change in fair value of investment securities, during the first quarter of 2021.

The tangible equity to tangible assets ratio declined at March 31, 2021 compared to December 31, 2020. This decline was driven by higher tangible assets related to increases in investment securities, cash and cash equivalents, and other assets. The increase in other assets was driven by the NSL acquisition, for which the purchase price was paid and recorded on March 31, 2021. The declines in the tangible equity to tangible assets ratio during much of 2020 was due to reduced equity as Peoples recorded higher provision for credit losses during the second and third quarters of 2020, while it recorded a recovery of credit losses during the fourth quarter of 2020. Peoples also repurchased common shares in each quarter of 2020, contributing to the decline in the tangible equity to tangible assets ratio during those periods and did not repurchase any common shares during the first quarter of 2021.

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

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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 the ALCO to assess IRR remain largely unchanged from those disclosed in Peoples' 2020 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):


Increase (Decrease) in Interest Rate	Estimated Increase (Decrease) in Net Interest Income								Estimated Increase (Decrease) in Economic Value of Equity
(in Basis Points)	March 31, 2021				December 31, 2020				March 31, 2021				December 31, 2020
300	$	20,996	15.8	%	$	22,034	17.3	%	$	58,993	6.8	%	$	117,235	15.7	%
200	14,620		11.0	%	15,899		12.5	%	49,661		5.7	%	95,189		12.7	%
100	8,008		6.0	%	8,981		7.1	%	35,670		4.1	%	60,384		8.1	%
(100)	(9,098)		(6.8)	%	(7,030)		(5.5)	%	(107,184)		(12.4)	%	(116,205)		(15.5)	%

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 will 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 lesser or greater impact on net interest income.

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 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 March 31, 2021, 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 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 March 31, 2021, the bear steepener scenario resulted in an increase in both net interest income and economic value of equity of 1.7% and 7.0%, 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 would not be offset by reductions in deposit or funding costs; resulting in a

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decreased amount of net interest income and lower net interest margin. At March 31, 2021, the bull flattener scenario resulted in a decrease in both net interest income and economic value of equity of 1.2% and 2.7%, respectively. Peoples was within the policy limitations for this alternative scenario as of March 31, 2021, 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 March 31, 2021, Peoples had 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 8 Derivative Financial Instruments” of the Notes to the Unaudited Consolidated Financial Statements.

At March 31, 2021, Peoples' Unaudited Consolidated Balance Sheet was positioned to benefit from rising interest rates in terms of the 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 decrease in economic value of equity asset sensitivity, as measured, from December 31, 2020 was largely attributable to increased effective duration in the investment securities portfolio.

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' 2020 Form 10-K.

At March 31, 2021, Peoples Bank had liquid assets of $179.6 million, which represented 3.1% of total assets and unfunded loan commitments. Peoples also had an additional $207.5 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.

Peoples is authorized to utilize the Federal Reserve's Paycheck Protection Program Liquidity Facility ("PPPLF") to fund originations under the PPP; however, Peoples did not use this borrowing line during the first quarter of 2021 and had no outstanding balance at March 31, 2021.

Since March 31, 2020, there has been an increase in deposit balances due to the influx of funds from the government fiscal 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

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capital contributions in low-income housing tax credit investments. Traditional off-balance sheet credit-related financial instruments continue to represent the most significant off-balance sheet exposure.

The following table details the total contractual amount of loan commitments and standby letters of credit:


(Dollars in thousands)	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Home equity lines of credit	$	124,027	$	117,792	$	113,185	$	116,634	$	113,605
Unadvanced construction loans	190,715		141,009		123,338		113,119		97,153
Other loan commitments	555,102		535,250		498,472		426,776		413,515
Loan commitments	$	869,844	$	794,051	$	734,995	$	656,529	$	624,273
Standby letters of credit	$	10,295	$	14,342	$	13,177	$	12,280	$	12,883

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 March 31, 2021. 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 March 31, 2021, 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.

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ITEM 1A RISK FACTORS

The disclosure below supplements the risk factors previously disclosed under “ITEM 1A. RISK FACTORS” of Part I of Peoples’ 2020 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.

Changes in the federal, state, or local tax laws may negatively impact our financial performance. On March 31, 2021, President Biden unveiled his infrastructure plan, which includes a proposal to increase the federal corporate tax rate from 21% to 28% as part of a package of tax reforms to help fund the spending proposals in the plan. The Biden plan is in the early stages of the legislative process, which is expected to proceed this year due to the Democratic Party's majority in both houses of Congress. If adopted as proposed, the increase of the corporate tax rate would adversely affect our results of operations in future periods.

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 March 31, 2021:


Period	Total Number of Common Shares Purchased		Average Price Paid per Common Share			Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Number ( or Approximate Dollar Value) of Common Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 1 – 31, 2021	—		$	—		—	$	11,431,179
February 1 – 28, 2021	26,426	(2)	$	31.34	(2)	—	$	11,431,179
March 1 – 31, 2021	1,010	(2)(3)	$	31.81	(2)(3)	—	$	11,431,179
Total	27,436		$	31.36		—	$	11,431,179

(1)On January 29, 2021, Peoples announced that on January 28, 2021, Peoples' Board of Directors authorized a share repurchase program authorizing Peoples to purchase up to an aggregate of $30 million of its outstanding common shares. This program replaced the share repurchase program authorizing Peoples to purchase up to an aggregate of $40 million of its outstanding common shares, which Peoples' Board of Directors had authorized on February 27, 2020 and which was terminated on January 28, 2021. There were no shares repurchased under either plan during the three months ended March 31, 2021.

(2)Information reported includes: an aggregate of 26,426 common shares and 380 common shares withheld to satisfy income taxes associated with restricted common shares which were granted under the Peoples Bancorp Inc. Third Amended and Restated 2006 Equity Plan and vested during February and March, respectively.

(3)Information reported includes 660 common shares purchased in open market transactions during March by Peoples Bank under the Rabbi Trust Agreement. The Rabbi Trust Agreement establishes a rabbi trust that holds assets to provide funds for the payment of the benefits under the Peoples Bancorp Inc. Third Amended and Restated Deferred Compensation Plan for Directors of Peoples Bancorp Inc. and Subsidiaries.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 OTHER INFORMATION

None

Table of Contents

ITEM 6 EXHIBITS

Exhibit
Number

Description

Exhibit Location

2.1

Agreement and Plan of Merger, dated as of March 26, 2021, by and between Peoples Bancorp Inc. and Premier Financial Bancorp, Inc.+

Incorporated herein by reference to Exhibit 2.1 to the Current Report of Peoples Bancorp Inc. ("Peoples") on Form 8-K dated and filed on March 31, 2021 (File No. 0-16772)

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)

3.1(b)

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")

3.1(c)

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

3.1(d)

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”)

3.1(e)

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)

3.1(f)

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)

3.1(g)

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)

3.2(b)

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

3.2(c)

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(a)(5) of SEC Regulation S-K. 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

3.2(d)

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)

3.2(e)

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)

3.2(f)

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, 2018

Incorporated herein by reference to Exhibit 3.1 to Peoples' Current Report on Form 8-K dated and filed on June 28, 2018 (File No. 0-16772) ("Peoples' June 28, 2018 Form 8-K")

3.2(g)

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

4.1

Notice of Removal of Administrator and Appointment and Replacement, dated February 11, 2021, delivered to Wilmington Trust Company by the Continuing Administrators and the Successor Administrator named therein and Peoples Bancorp Inc.

Incorporated herein by reference to Exhibit 4.3(c) to Peoples' Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (File No. 0-16772) ("Peoples' 2020 Form 10-K")

10.1

Summary of Peoples Bancorp Inc. Annual Incentive Program for Executive Officers and Other Employees of Peoples Bancorp Inc [Effective beginning with the fiscal year beginning January 1, 2021]

Incorporated herein by reference to Exhibit 10.4 to Peoples' 2020 Form 10-K

10.2

Summary of Perquisites for Executive Officers of Peoples Bancorp Inc.

Incorporated herein by reference to Exhibit 10.5 to Peoples' 2020 Form 10-K

10.3

Summary of Base Salaries for Executive Officers of Peoples Bancorp Inc.

Incorporated herein by reference to Exhibit 10.6 to Peoples' 2020 Form 10-K

10.4

Summary of Compensation for Directors of Peoples Bancorp Inc.

Incorporated herein by reference to Exhibit 10.7 to Peoples' 2020 Form 10-K

31.1

Rule 13a-14(a)/15d-14(a) Certifications [President and Chief Executive Officer]

Filed herewith

31.2

Rule 13a-14(a)/15d-14(a) Certifications [Executive Vice President, Chief Financial Officer and Treasurer]

Filed herewith

Section 1350 Certifications

Furnished herewith

101.INS

Inline XBRL Instance Document ##