PEOPLES BANCORP INC

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 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 fully tax-equivalent ("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 blended corporate income tax rate of 23.2% for the three months ended March 31, 2024, and 23.3% for the three months ended December 31, 2023 and March 31, 2023.

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

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

(a)Average balances are based on carrying value.

(b)Interest income and yields are presented on an FTE basis, using a 23.2% blended corporate income tax rate for the three months ended March 31, 2024, and 23.3% for the three months ended December 31, 2023 and March 31, 2023.

(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, as appropriate to the transaction, in interest expense on short-term FHLB advances and interest expense on brokered CDs for the periods presented in which FHLB advances and brokered CDs were being utilized.

(f)Included in other long-term borrowings are trust preferred securities held for investments and floating rate junior subordinated deferrable interest debentures.

Peoples' average balances compared to prior periods have been impacted by recent acquisitions, including the Limestone Merger as of the close of business on April 30, 2023, which added to average loan, deposit and borrowed funds balances. Peoples' cash balances have increased primarily due to an increase in interest-bearing deposits in other banks, mostly with the FRB. The increases in market interest rates have increased asset yields and deposit outflows (which have increased borrowings).

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

(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 an FTE basis, using a 23.2% blended corporate income tax rate for the three months ended March 31, 2024, and 23.3% for the three months ended December 31, 2023 and March 31, 2023.

Compared to the linked quarter, net interest income decreased $1.7 million, or 2.0%. Net interest margin was 4.27% for the first quarter of 2024, compared to 4.44% for the linked quarter. The decreases in net interest income and net interest margin were primarily due to a decrease in accretion income, net of amortization, from our acquisitions as well as excess cash on hand during the first quarter of 2024 for liquidity purposes.

Net interest income for the first quarter of 2024 grew 18.9% over the prior year quarter and net interest margin decreased by 26 basis points. The increase in net interest income compared to the first quarter of 2023 was driven by increases in market interest rates, the Limestone Merger, and organic growth. The decrease in net interest margin for the first quarter of 2024 compared to the first quarter of 2023, was driven primarily by an increase in interest expense on deposits.

Accretion income, net of amortization expense, from acquisitions was $6.6 million for the first quarter of 2024, $9.0 million for the linked quarter and $2.0 million for the first quarter of 2023, which added 32 basis points, 45 basis points and 13 basis points, respectively, to net interest margin. The decrease in accretion income for the first quarter of 2024, when compared to the linked quarter was driven by a fourth quarter 2023 true-up to the preliminary Limestone-related accretion. The increase in accretion income for the first quarter of 2024 compared to the first quarter of 2023 was a result of accretion from the Limestone Merger.

Additional information regarding changes in the Unaudited Consolidated Balance Sheets can be found under appropriate captions of the “FINANCIAL CONDITION” section of this MD&A. 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 MD&A under the caption "FINANCIAL CONDITION - Interest Rate Sensitivity and Liquidity."

Provision for Credit Losses

The following table details Peoples’ provision for credit losses:

The provision for credit losses recorded represents the amount needed to maintain the appropriate level of the allowance for credit losses based on management’s quarterly estimates. The provision for credit losses for the first quarter of 2024 was driven by (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 provision for credit losses for the first quarter of 2023 was largely attributable to a deterioration of macro-economic conditions and an increase in charge-off activity, partially offset by a reduction in reserves for individually analyzed loans.

Additional information regarding changes in the allowance for credit losses and loan credit quality can be found later in this MD&A under the caption “FINANCIAL CONDITION - Allowance for Credit Losses.”

Net Loss Included in Total Non-Interest Income

Net loss includes net losses on investment securities, asset disposals and other transactions, which are recognized in total non-interest income. The following table details Peoples’ net losses for the periods presented:

During the fourth quarter of 2023, Peoples executed the sale of $36.5 million of lower yielding available-for-sale investment securities. Proceeds from the sales were used to purchase higher yielding agency investment securities. During the first quarter of 2023, Peoples executed sales of $96.7 million of its lower yielding available-for-sale securities which were used to pay down overnight borrowings. The loss on the sales of the available-for-sale investment securities had a nominal impact on tangible book value as such loss was previously reflected in capital through accumulated other comprehensive loss.

The net loss on asset disposals and other transactions for the first quarter of 2024 and the linked quarter was due to $0.3 million of net losses on repossessed assets.

Total Non-Interest Income, Excluding Net Gains and Losses

Total non-interest income, excluding net gains and losses, comprised 23% of Peoples' total revenues (defined as net interest income plus total non-interest income excluding net gains and losses) for the first quarter of 2024, for the linked quarter, and the for first quarter of 2023.

For the first quarter of 2024, insurance income comprised the largest portion of Peoples' total non-interest income, excluding net gains and losses. The following table details Peoples' insurance income:

Peoples' insurance income for the first quarter of 2024 increased $2.2 million when compared to linked quarter. This increase in insurance income was due to seasonal performance-based commissions being paid, which are annual in nature and typically occur in the first quarter of each year. Insurance income for the first quarter of 2024 increased $1.1 million when compared to first quarter of 2023, primarily due to new business and market increases for premiums.

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

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. E-banking income decreased for the first quarter of 2024 compared to the linked quarter primarily driven by a decrease in customer activity.

Peoples' fiduciary income and brokerage income 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 table details Peoples’ trust and investment income:

Fiduciary income and brokerage income increased in the first quarter of 2024 relative to the linked quarter due to market volatility. When compared to the first quarter of 2023, fiduciary income and brokerage income increased, which was driven by an increase in fiduciary income due to an increase in assets under administration and management.

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

The increases in assets under administration and management at March 31, 2024 compared to at December 31, 2023 were driven by market value fluctuations. The increases in assets under administration and management at March 31, 2024 when compared to at March 31, 2023 were primarily due to increases in brokerage income, as Peoples added new accounts and the underlying market values of assets under management grew.

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

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 decreased for the first quarter of 2024 compared to the linked quarter due to seasonality of customer activity. Deposit account service charges increased when comparing the first quarter of 2024 to the first quarter of 2023 due to the Limestone Merger and increased maintenance fee rates.

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

The decrease in other non-interest income when comparing the three months ended March 31, 2024 to the linked quarter was primarily due to an excess recovery of a previously charged-off loan. The increase in other non-interest income for the first quarter of 2024 when compared to the first quarter of 2023 was driven by increased operating lease income.

Bank owned life insurance income for the first quarter of 2024 increased compared to the linked quarter primarily due to a $0.5 million death benefit. Bank owned life insurance income for the first quarter of 2024 increased when compared to the first quarter of 2023, due to the additional insurance policies acquired in the Limestone Merger.

Lease income is primarily comprised of (i) gains on the early termination of leases, net of any associated purchase accounting adjustments, (ii) month-to-month lease payments in excess of net investment in the lease, net of any associated purchase accounting adjustment (iii) fees received for referrals, (iv) gains and losses recognized on the sales of residual assets and (v) syndication income. The first quarter of 2024 decrease in lease income when compared to the linked quarter was due to a large lease buyout in the fourth quarter of 2023.

Mortgage banking income is comprised mostly of net gains from the origination and sale of real estate loans in the secondary market, and, to a lesser extent, servicing income for loans sold with servicing retained. As a result, the amount of income recognized by Peoples is largely dependent on customer demand and long-term interest rates for residential real estate loans offered in the secondary market. Mortgage banking income for the first quarter of 2024 was relatively flat when compared to each of the prior periods.

In the first quarter of 2024, Peoples sold $0.2 million in loans into the secondary market with servicing retained and $6.9 million in loans with servicing released, compared to $26,000 and $7.9 million, respectively, in the fourth quarter of 2023, and $0.8 million and $7.4 million, respectively, in the first quarter of 2023.

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:

Base salaries and wages for the first quarter of 2024 increased compared to the linked quarter primarily due to annual merit increases. The current quarter increase compared to the first quarter of 2023 was primarily driven by the additional employees added in the Limestone Merger as well as annual merit increases.

The decrease in sales-based and incentive compensation for the first quarter of 2024 compared to the linked quarter was primarily due to $1.3 million of Vantage-related sales-based incentive compensation. Sales-based and incentive compensation increased in the first quarter of 2024 when compared to the prior year quarter due to overall company performance measures used in calculating incentive awards.

The decrease in employee benefits for the first quarter of 2024 compared to the linked quarter and the first quarter of 2023 was primarily due to decreased medical costs.

Payroll taxes and other employment costs for the first quarter of 2024 increased compared to the linked quarter and the first quarter of 2024 and were primarily related to higher base salaries and wages. Also impacting the increase in payroll taxes and other employment costs when compared to the first quarter of 2023 were the additional employees added in the Limestone Merger.

Stock-based compensation is generally recognized over the vesting period, which generally ranges from immediate vesting to vesting at the end of three years. An adjustment is made at the vesting date to reverse expense relating to forfeitures for performance awards, and at the date of forfeiture to reverse expense for non-vested restricted common share awards. 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 based upon Peoples achieving certain performance goals during the prior year, and are generally contingent on employment through the vesting period. Stock-based compensation for the first quarter of 2024 increased when compared to the fourth quarter of 2023 and the first three months of 2023 due to additional employees, including the ones added in the Limestone Merger.

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. Deferred personnel costs for the first quarter of 2024 remained relatively flat when compared to both the fourth quarter of 2023 and the first quarter of 2023.

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

The first quarter of 2024 net occupancy and equipment expense increased when compared to the linked quarter due to a prior period one time benefit to rent expense. The first quarter of 2024 net occupancy and equipment expense increased when compared to the first quarter of 2023 due to additional net occupancy and equipment expense from the Limestone Merger.

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

Data processing and software expenses for the first quarter 2024 decreased compared to the linked quarter due to $0.6 million of acquisition-related expense in the linked quarter. The increase for the first quarter 2024 when compared to the first quarter 2023 was driven by software upgrades and implementation of new systems, coupled with the increased size of Peoples' organization.

Professional fees for the first quarter of 2024 decreased when compared to the linked quarter due to less acquisition-related expenses. Professional fees for the first quarter of 2024 was relatively flat when compared to the first quarter of 2023.

Amortization of other intangible assets for the first quarter of 2024 decreased when compared to the linked quarter due to additional expenses attributable to the Limestone Merger during the fourth quarter of 2023. Amortization of other intangible assets for the current quarter increased when compared to the first quarter of 2023 due to amortization of intangible assets recognized in the Limestone Merger during the first quarter of 2023.

Peoples' e-banking expense is comprised of costs associated with debit and ATM cards. The decrease in electronic banking income compared to the linked quarter was due to a decline in customer activity. E-banking expense increased for the first quarter of 2024 when compared to the first quarter of 2023 due to additional customers brought in from the Limestone Merger.

Peoples' FDIC insurance premiums for the first quarter of 2024 were relatively flat when compared to the linked quarter. FDIC insurance premiums for the first quarter of 2024 increased when compared to the first quarter of 2023 due to organic and acquisitive growth and an increase in rates assessed by the FDIC.

Other loan expenses during the first quarter of 2024 increased when compared to the respective prior comparative periods primarily due to increases in miscellaneous loan and collection expenses.

Marketing expense for the first quarter of 2024 decreased when compared to the linked quarter due to lower advertising expense. Marketing expense for the first quarter of 2024 increased when compared to the first quarter of 2023 due to higher donations.

Peoples is subject to state franchise taxes, which are based largely on Peoples' equity, in the states where Peoples has a physical presence. Franchise tax expense also includes the Ohio Financial Institution Tax ("FIT"), which is a business privilege tax that is imposed on financial institutions organized for profit and doing business in Ohio. The Ohio FIT is based on the total equity capital in proportion to the taxpayer's gross receipts in Ohio as of the most recent year-end. The decrease in franchise tax expense for the first quarter of 2024 when compared to the first quarter of 2023 was driven by a lower apportionment in Ohio.

Other non-interest expense for the first quarter of 2024 decreased when compared to the linked quarter due to a decrease in postage expense. The increase for the first quarter of 2024 when compared to the first quarter of 2023 was driven by the increase in depreciation expense for operating leases.

Income Tax Expense

Peoples recorded income tax expense of $8.3 million with an effective tax rate of 21.8% for the first quarter of 2024, compared to income tax expense of $9.7 million with an effective tax rate of 22.3% for the linked quarter and income tax expense of $7.0 million with an effective tax rate of 21.0% for the first quarter of 2023. The decrease in income tax expense when compared to the fourth quarter of 2023 was primarily due to lower pre-tax income.

Additional information regarding income taxes can be found in "Note 13. Income Taxes" of the Notes to the Consolidated Financial Statements included in Peoples' 2023 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 (recovery of) credit losses and all gains and losses included in earnings.

The decrease in the PPNR for the first quarter of 2024 compared to the fourth quarter of 2023 was driven by decreased net interest income and lower accretion income. The increase in PPNR for the first quarter of 2024 when compared to the first quarter of 2023 was due to increased net interest income reflecting the positive impact of the additional net interest income from Limestone customers after the Limestone Merger.

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.

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

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 FTE 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 FTE net interest income.

(a) Tax effect is calculated using a 23.2% blended corporate income tax rate for the three months ended March 31, 2024, and a 23.3% blended corporate income tax rate for the three months ended December 31, 2023 and March 31, 2023.

The efficiency ratio increased compared to the linked quarter mainly as the result of an increase of interest expense on deposits. The efficiency ratio compared to the prior year quarter was relatively flat. The efficiency ratio, adjusted for non-core items, was 58.1% for the first quarter of 2024, compared to 54.9% for the linked quarter, and 57.2% for the first quarter of 2023. Peoples continues to focus on controlling expenses, while recognizing necessary costs in order to continue growing the business.

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 and acquisition-related expenses..

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

The return on average assets adjusted for non-core items for the first quarter of 2024 decreased when compared to the linked quarter, due to a decrease in annualized net income resulting from lower net interest income, partially offset by an increase in average assets resulting from the excess cash held on balance sheet as well as increases in non-interest expenses. The decrease in the return on average assets adjusted for non-core items for the first quarter of 2024, compared to the first quarter of 2023, was attributable to an increase in annualized net income primarily due to an increase in net interest income, partially offset by the assets acquired in the Limestone Merger and an increase in expenses.

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.

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

The return on total average stockholders' equity and average tangible equity ratios decreased when compared to the linked quarter due to a decrease in annualized net income mainly attributable to a decrease in net interest income and an increase in non-interest expense. The decreases in the return on total average stockholders' equity and average tangible equity ratios in the first quarter of 2024 when compared to the same period of 2023 were due to the issuance of 6.8 million common shares as consideration in the Limestone Merger, an increase in acquisition-related expenses, partially offset by an increase in total net interest income driven by the 2023 increases in market interest rates and additional net interest income from Limestone following the Limestone Merger.