PEOPLES BANCORP INC

Cash and Cash Equivalents

At March 31, 2024, Peoples' interest-bearing deposits in other banks had increased $10.9 million from December 31, 2023. The total cash and cash equivalents balance included $318.5 million of excess cash reserves being maintained at the FRB of Cleveland at March 31, 2024, compared to $309.8 million at December 31, 2023. The amount of excess cash reserves maintained is dependent upon Peoples' daily liquidity position, which is driven primarily by changes in deposit and loan balances.

Through the first three months of 2024, Peoples' total cash and cash equivalents increased $3.0 million, which reflected cash inflows of $37.0 million of cash provided by operating activities and $89.1 million of cash provided by financing activities, mostly offset by cash outflows of $123.1 million of cash used in investing activities. The cash provided by financing activities was largely driven by a $273.6 million net increase in interest-bearing deposits and $26.8 million of proceeds from long-term borrowings, partially offset by a net decrease in non-interest bearing deposits of $99.3 million and a net decrease in short-term borrowings of $87.6 million. Peoples' use of cash in investing activities reflected a net cash outflow from available-for-sale investment securities of $78.7 million and a $43.3 million net increase in loans held for investment.

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:

(a)Amortized cost is presented net of the allowance for credit losses of $238 at March 31, 2024 and at December 31, 2023, and $241 at March 31, 2023.

For the first quarter of 2024, total investment securities increased compared to the linked quarter, largely due to purchases of higher yielding government sponsored agency securities which were used to collateralize certain government deposits. During the fourth quarter of 2023, Peoples executed the sales of $36.5 million of lower yielding available-for-sale investment securities for an after-tax loss of $1.3 million. Proceeds from the sales were used to purchase higher yielding agency investment securities. During the first quarter of 2023, Peoples executed the sales of $96.7 million of its lower yielding available-for-sale securities for an after-tax loss of $1.6 million. Proceeds from the sales were used to pay down overnight borrowings. The realized losses recognized due to the first quarter of 2023 transactions were earned back within the 2023 fiscal year, and the realized losses recognized due to the fourth quarter of 2023 transactions are expected to be earned back within 14 months of the transaction dates.

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

Loans and Leases

The following table provides information regarding outstanding loan balances:

(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).

The period-end total loan and lease balances at March 31, 2024 increased $43.6 million, or 3% annualized, compared to at December 31, 2023. The increase in the period-end loan and lease balance at March 31, 2024 compared to December 31, 2023 was primarily driven by increases of (i) $46.8 million in other commercial real estate loans, (ii) $35.8 million in premium finance loans and

(iii) $29.6 million in commercial and industrial loans, partially offset by decreases of (a) $49.3 million in construction loans, (b) $16.2 million in indirect consumer loans and (c) $15.2 million in direct consumer loans. The increase in the period-end loan and lease balances at March 31, 2024 compared to at March 31, 2023 was primarily driven by loans acquired in the Limestone Merger totaling $1.1 billion. Excluding the loans acquired in the Limestone Merger, the period-end loan and lease balance increased $499.3 million, or 10%, driven by increases of $198.1 million, $100.6 million, $80.7 million, $68.1 million, $37.3 million, and $23.5 million in other commercial real estate loans, commercial and industrial loans, premium finance loans, leases, construction loans, and home equity lines of credit, respectively.

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, 2024:

(a) All other total exposures by industry are less than 2% of the Total Exposure.

(a) All other total exposures by industry are less than 2% of the Total Exposure.

Peoples' commercial lending activities continue to focus on lending opportunities within Ohio, Kentucky, West Virginia, Virginia, Washington, D.C. and Maryland. For all other states, the aggregate outstanding balances of commercial loans in each state were less than 3% of total loans at both March 31, 2024 and December 31, 2023. The repayment of premium finance loans is secured by the underlying insurance policy prepaid premium, and therefore, has no geographical impact from a repayment perspective. The repayment of leases is secured by the underlying equipment collateral and not real estate, which mitigates geographic risk.

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:

The increase in the allowance for credit losses at March 31, 2024 compared to December 31, 2023 was largely attributable to (i) a deterioration in macro-economic conditions used within the CECL model, (ii) an increase of reserves on individually analyzed loans and (iii) loan growth. The increase in the allowance for credit losses at September 30, 2023 and at June 30, 2023, when compared to the prior periods presented was driven by the establishment of an allowance for credit losses for loans acquired in the Limestone Merger.

Additional information regarding Peoples' allowance for credit losses can be found in "Note 1 Summary of Significant Accounting Policies" in Peoples' 2023 Form 10-K and "Note 4 Loans and Leases" of the Notes to the Unaudited Condensed Consolidated Financial Statements in this Form 10-Q.

The following table summarizes Peoples’ net charge-offs and recoveries:

Each with "--%" not meaningful.

Total net charge-offs during the first quarter of 2024 were $3.3 million, or 0.22% of average total loans on an annualized basis, compared to $3.5 million, or 0.23% of average total loans on an annualized basis, during the fourth quarter of 2023 and $1.5 million, or 0.13% of average total loans on an annualized basis, during the first quarter of 2023. The decrease for the first quarter of 2024 when compared to the linked quarter was driven by a decrease in net charge-offs on leases and commercial and industrial loans during the first quarter of 2024. The increase in net charge-offs during the first quarter of 2024 versus the prior year first quarter was primarily attributable to an increase in charge-offs on (i) leases, (ii) indirect consumer loans, (iii) commercial industrial loans, and (iv) other commercial real estate loans, partially offset by an increase in recoveries on leases during the first quarter of 2024.

The following table details Peoples’ nonperforming assets:

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

(b) Includes loans categorized as substandard or doubtful.

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

(d) NPLs include loans 90+ days past due and accruing and nonaccrual loans. NPAs include nonperforming loans and OREO.

Compared to at December 31, 2023, Peoples' NPAs increased from 0.43% of total assets to 0.50% at March 31, 2024. Total loans 90+ days past due and accruing increased at March 31, 2024 compared to at December 31, 2023, mostly due to increases in nonperforming premium finance loans. Total nonaccrual loans increased at March 31, 2024 compared to at December 31, 2023, mostly due to increases in nonaccrual commercial and industrial loans and leases. During the first quarter of 2024, criticized loans increased $21.3 million, while classified loans increased $27.5 million when compared to at December 31, 2023. The increase in the amounts of criticized loans compared to at December 31, 2023 was primarily driven by loan downgrades, partially offset by loan upgrades and criticized loan pay-offs. The increase in the amount of classified loans compared to at December 31, 2023 was primarily driven by loan downgrades, partially offset by loan upgrades and classified loan pay-offs.

Deposits

The following table details Peoples’ deposit balances:

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

At March 31, 2024, period-end total deposits increased $174.3 million, or 2%, compared to at December 31, 2023, primarily driven by increases of (i) $237.0 million in retail CDs, (ii) $98.5 million in governmental deposits, partially offset by decreases of (a) $99.3 million in non-interest-bearing demand deposit accounts, (b) $92.0 million in brokered CDs, (c) $36.6 million in interest-bearing demand deposit accounts, and (d) $17.8 million in savings accounts. The increase in governmental deposit accounts was due to the seasonality of those balances, which are typically higher in the first quarter and third quarter of each year.

At March 31, 2024, period-end total deposits increased $1.5 billion, or 27%, compared to at March 31, 2023, primarily driven by deposits acquired in the Limestone Merger. Excluding Limestone deposit balances, total deposits at March 31, 2024 increased $784.8 million, or 14%, compared to at March 31,2023, primarily due to increases of $956.9 million in retail CDs, $210.3 million in brokered CDs, and $191.2 million in money market deposit accounts, partially offset by decreases of $270.9 million, $191.8 million, and $158.4 million in non-interest bearing deposits, savings accounts, and interest-bearing demand deposit accounts, respectively.

As part of its funding strategy, Peoples hedges 90-day brokered CDs with interest rate swaps. The interest rate swaps pay a fixed rate of interest while receiving a floating rate component of interest tied to term SOFR, which offsets the rate on the brokered CDs. As of March 31, 2024, Peoples had 11 effective interest rate swaps, with an aggregate notional value of $105.0 million, which were designated as cash flow hedges of overnight brokered CDs and are expected to be extended every 90 days through the maturity dates of the interest rate swaps. Peoples continually evaluates the overall balance sheet position given the interest rate environment.

Borrowed Funds

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

Total borrowed funds, which include overnight borrowings, are mainly a function of loan growth and changes in total deposit balances. Other long-term borrowings include trust preferred securities held for investments and floating rate junior subordinated deferrable interest debentures. Total borrowed funds at March 31, 2024 decreased compared to at December 31, 2023, primarily due to lower overnight borrowings. Total long-term borrowings at March 31, 2024 increased when compared to at March 31, 2023 due to an increase in FHLB advances and other long-term borrowings assumed in the Limestone Merger as well as additional borrowings under the BTFP.

Capital/Stockholders’ Equity

At March 31, 2024, 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, 2024, Peoples had a capital conservation buffer of 5.60%.

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

Peoples' risk-risk based capital ratios at March 31, 2024 decreased slightly when compared to December 31, 2023, due to lower net income, partially offset by an increase in expenses from the Limestone Merger. Compared to at March 31, 2023, the tier 1 risk-based capital and the total risk-based capital ratios improved due to higher net income, partially offset by the impact of the Limestone Merger and dividends paid. The common equity tier 1 risk-based capital ratio at March 31, 2024 decreased compared to at March 31, 2023 due to the common shares issued in the Limestone Merger.

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 Condensed Consolidated Financial Statements:

Tangible book value per common share increased to $18.39 at March 31, 2024 compared to $18.16 at December 31, 2023. The change in tangible book value per common share was due to tangible equity increasing during the first quarter of 2024 primarily due to net income over the last three months, which was partially offset by an increase in other comprehensive losses recognized on available-for-sale securities. Tangible book value per common share at March 31, 2024 increased compared to at March 31, 2023 primarily due to net income over the last twelve months, which was partially offset by an increase in accumulated other comprehensive loss as well as the impact of the common shares issued in the Limestone Merger.

Interest Rate Sensitivity and Liquidity

While Peoples is exposed to various business risks, the risks relating to interest rate sensitivity and liquidity are major risks that can materially impact future results of operations and financial condition due to their complexity and dynamic nature. The objective of Peoples' asset-liability management function is to measure and manage these risks in order to optimize net interest income within the constraints of prudent capital adequacy, liquidity and safety. This objective requires Peoples to focus on interest rate risk exposure and adequate liquidity through its management of the mix of assets and liabilities, their related cash flows and the rates earned and paid on those assets and liabilities. Ultimately, the asset-liability management function is intended to guide management in the acquisition and disposition of earning assets and selection of appropriate funding sources.

Interest Rate Risk

Interest rate risk ("IRR") is one of the most significant risks arising in the normal course of business of financial services companies like Peoples. IRR is the potential for economic loss due to future interest rate changes that can impact the earnings stream, as well as market values, of financial assets and financial 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 impact interest costs or 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, including the review of assumptions used in modeling IRR.

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):

This table uses a standard, parallel shock analysis for assessing the IRR to net interest income and the economic value of equity. A parallel shock assumes all points on the yield curve (one year, two year, three year, etc.) are directionally changed by the same degree. Management regularly assesses the impact of both increasing and decreasing interest rates. The table above shows the impact of upward and downward parallel shocks of 100, 200 and 300 basis points.

Estimated changes in net interest income and the 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.

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 impact that might occur as a result of the Federal Reserve Board increasing short-term interest rates in the future could be offset by an inverse movement in long-term interest 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 interest 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, 2024, consideration of the bear steepener and bear flattener scenarios provide insights which were not captured by parallel shifts.

The bear steepener scenario highlights the risk to net interest income and economic value of equity when short-term interest rates remain constant while long-term interest rates rise. In such a scenario, Peoples' deposit and borrowing costs, which are generally correlated with short-term interest rates, remain constant, while asset yields, which are correlated with long-term interest rates, rise. At March 31, 2024, the bear steepener scenario produced an increase in net interest income of 0.7% and a decline in the economic value of equity of 0.7%.

The bear flattener scenario highlights the risk to net interest income and the economic value of equity when short-term rates rise while long-term rates remain constant. In such a scenario, Peoples' variable rate asset yields along with deposit and short-term borrowing costs, which are correlated with short-term rates, increase, while long-term asset yields and long-term borrowing costs, which are more correlated with long-term rates, remain constant. Increased deposit and funding costs would be more than offset by increased variable rate asset yields; resulting in an increased amount of net interest income and a higher net interest margin. At March 31, 2024, the bear flattener scenario produced an increase of 3.0% to net interest income and a decline in the economic value of equity of 1.0%.

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, 2024, Peoples had entered into 11 interest rate swap contracts with an aggregate notional value of $105.0 million. Additional information regarding Peoples’ interest rate swaps can be found in “Note 10 Derivative Financial Instruments” of the Notes to the Unaudited Condensed Consolidated Financial Statements.

At March 31, 2024, Peoples' Unaudited Consolidated Balance Sheet was positioned to benefit from rising interest rates in terms of the potential impact on net interest income. The table above illustrates this point as changes to net interest income increase in the rising interest rate scenarios.

Liquidity

In addition to IRR management, another major objective of the ALCO is to maintain a sufficient level of liquidity. In light of the bank failures in 2023, Peoples revisited the model assumptions, and determined the methods used by the ALCO to monitor and evaluate the adequacy of Peoples Bank's liquidity position remain appropriate and are largely unchanged from those disclosed in Peoples' 2023 Form 10-K.

At March 31, 2024, Peoples Bank had liquid assets of $565.4 million, which represented 5.4% of total assets and unfunded loan commitments. Peoples also had an additional $158.7 million of unpledged investment securities not included in the measurement of liquid assets.

Management believes the current mix of short-term liquidity sources, loan and security portfolio cash flows, and availability of other funding sources will allow Peoples to meet anticipated cash obligations, as well as special needs and off-balance sheet commitments.

Off-Balance Sheet Activities and Contractual Obligations

In the normal course of business, Peoples is a party to financial instruments with off-balance sheet risk necessary to meet the financing needs of Peoples' customers. These financial instruments include commitments to extend credit and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Unaudited 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 Condensed Consolidated Financial Statements. These activities are part of Peoples Bank's normal course of business and include traditional off-balance sheet credit-related financial instruments, interest rate contracts and commitments to make additional capital contributions in low-income housing tax credit investments. Traditional off-balance sheet credit-related financial instruments continue to represent the most significant off-balance sheet exposure.

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