PEOPLES BANCORP INC

Cash and Cash Equivalents

At September 30, 2024, Peoples' interest-bearing deposits in other banks had decreased $170.6 million from December 31, 2023. The total cash and cash equivalents balance included $137.6 million of excess cash reserves being maintained at the FRB of Cleveland at September 30, 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 nine months of 2024, Peoples' total cash and cash equivalents decreased $143.0 million, which reflected cash outflows of $126.6 million for investing activities and $119.6 million for financing activities, partially offset by cash inflows of $103.2 million from operating activities. Peoples' use of cash in investing activities reflected a $108.1 million net increase in loans held for investment and a net cash outflow from held-to-maturity investment securities of $9.9 million. The cash provided by financing activities was largely driven by a $445.0 million net increase in interest-bearing deposits, mostly offset by a net decrease in short-term borrowings of $425.2 million and a net decrease in non-interest bearing deposits of $114.2 million.

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 $236 at September 30, 2024 and $238 at both June 30, 2024 and September 30, 2023.

For the third quarter of 2024, total investment securities decreased compared to prior periods due to maturities and calls on securities during the quarter. 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. The realized losses recognized due to the fourth quarter of 2023 sales 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 September 30, 2024 decreased $53.5 million, or 3% annualized, compared to at June 30, 2024. The decrease in the period-end loan and lease balance at September 30, 2024 compared to June 30, 2024 was primarily driven by decreases of (i) $20.5 million in construction loans, (ii) $15.5 million in other commercial real estate loans (iii) $11.8 million of residential real estate loans, (iv) and $7.9 million in commercial and industrial loans. The increase in the period-end loan and lease balances at September 30, 2024 compared to at September 30, 2023 was primarily driven by loan growth for commercial and industrial and premium finance loans.

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 at September 30, 2024. The following tables provide information regarding the largest concentrations of commercial construction loans and other commercial real estate loans within the loan portfolio at September 30, 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 September 30, 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 September 30, 2024 compared to June 30, 2024 was primarily due to an increase in reserves for individually analyzed loans and leases. The increase in the allowance balance at September 30, 2024 when compared to September 30, 2023 was driven by increase in reserves for individually analyzed loans and leases and loan growth.

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 third quarter of 2024 were $6.1 million, or 0.38% of average total loans on an annualized basis, compared to $4.2 million, or 0.27% of average total loans on an annualized basis, during the linked quarter and $2.3 million, or 0.15% of average total loans on an annualized basis, during the third quarter of 2023. The increase for the third quarter of 2024 when compared to the linked quarter was driven by an increase in net charge-offs on leases originated by our North Star Leasing division. The increase in net charge-offs during the third quarter of 2024 versus the prior year third quarter was primarily attributable to an increase in charge-offs on leases originated by our North Star Leasing division and indirect consumer loans.

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 June 30, 2024, Peoples' NPAs increased from 0.53% of total assets to 0.76% at September 30, 2024. Total loans 90+ days past due and accruing and nonaccrual loans in total increased at September 30, 2024 compared to at June 30, 2024 due primarily to increases in nonperforming leases. Total loans 90+ days past due increased from $7.6 million at June 30,2024 to $27.6 million at September 30, 2024, and were impacted by increases in leases, premium finance loans, and other commercial real estate loans. The increase in loans 90+ days past due is driven by higher administrative delinquencies on Vantage leases and premium finance loans. During the third quarter of 2024, criticized loans decreased $2.3 million, while classified loans increased $13.1 million when compared to at June 30, 2024. The decrease in the amounts of criticized loans compared to at June 30, 2024 was primarily driven by paydowns and upgrades of the risk rating. The increase in the amount of classified loans compared to at June 30, 2024 was primarily due to downgrades in the risk rating from newly reported loans. The increase in NPAs compared to at December 31, 2023, was primarily driven by increases of nonaccrual leases originated by our North Star Leasing division, commercial and industrial loans, and other commercial real estate loans. The increase in NPAs compared to at September 30, 2023, was impacted by the increase in nonaccrual leases originated by our North Star Leasing division and an increase in loans past due and accruing.

Deposits

The following table details Peoples’ deposit balances:

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

At September 30, 2024, period-end total deposits increased $185.4 million, or 3%, compared to at June 30, 2024, primarily driven by increases of (i) $83.3 million in brokered certificates of deposit, (ii) $71.3 million in retail certificates of deposit, and (iii) $57.8 million in governmental deposit accounts, partially offset by a decrease of $19.3 million in non-interest bearing deposits. The increase in retail certificates of deposits was due to current specials being offered, while the increase in governmental deposit accounts was due to the seasonality of those balances. The increase in brokered deposits was due to the lower-cost of funding available compared to Federal Home Loan Bank ("FHLB") advances.

At September 30, 2024, period-end total deposits increased $445.6 million, or 6%, compared to at September 30, 2023. The increase was primarily driven by increases of $685.4 million in retail certificates of deposit, $163.8 million in money market deposit accounts, and $62.5 million in governmental deposit accounts, offset by decreases of $122.2 million, $115.7 million, $115.2 million, and $113.0 million in savings accounts, non-interest bearing deposits, interest-bearing demand deposit accounts and brokered certificates of deposit, respectively. The increase in retail certificates of deposits was driven by current promotions being offered. Given the rate environment, there has been a mix shift in the deposit portfolio over the last twelve months.

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 September 30, 2024, Peoples had 9 effective interest rate swaps, with an aggregate notional value of $85.0 million, which were designated as cash flow hedges. 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 September 30, 2024 decreased compared to at June 30, 2024 and at September 30, 2023, primarily due to lower FHLB overnight borrowings.

Capital/Stockholders’ Equity

At September 30, 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 September 30, 2024, Peoples had a capital conservation buffer of 5.49%.

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

Peoples' risk-based capital ratios at September 30, 2024 increased when compared to June 30, 2024, due to net income during the quarter, partially offset by dividends paid. Compared to at September 30, 2023, the tier 1 risk-based capital and the total risk-based capital ratios improved due to higher net income, partially offset by dividends paid. The common equity tier 1 risk-based capital ratio at September 30, 2024 also increased compared to at September 30, 2023 due to higher net income.

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 $20.29 at September 30, 2024 compared to $18.91 at June 30, 2024. The change in tangible book value per common share was due to tangible equity increasing during the third quarter of 2024 primarily due to net income and a decrease in accumulated other comprehensive loss over the last three months. Tangible book value per common share at September 30, 2024 increased compared to at September 30, 2023 primarily due to net income over the last twelve months.

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 September 30, 2024, consideration of the bear steepener and bull steepener 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 September 30, 2024, the bear steepener scenario produced an increase in net interest income of 0.8% and an increase in the economic value of equity of 5.6%.

The bull steepener scenario highlights the risk to net interest income and the economic value of equity when short-term rates fall faster than long-term rates. In such a scenario, Peoples' deposit and short-term borrowing costs, which are correlated with short-term rates, decrease, while long-term asset yields and long-term borrowing costs, which are more correlated with long-term rates, remain constant. Decreased deposit and funding costs would be more than offset by increased variable rate asset yields over a longer horizon; resulting in an increased amount of net interest income and net interest margin over a 24-month period. At September 30, 2024, the bull steepener scenario produced a decline of 0.4% to net interest income, as the impact of recent term funding mitigates the impact of lower short-term rates over a 12-month horizon, and an increase in the economic value of equity of 2.8%. Over a 24-month horizon, the bull steepener scenario produced an increase of 1.0% to net interest income.

Peoples has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for Peoples making fixed payments. As of September 30, 2024, Peoples had entered into 9 interest rate swap contracts with an aggregate notional value of $85.0 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 September 30, 2024, Peoples' Unaudited Consolidated Balance Sheet was positioned to benefit from rising interest rates, while also mitigating the impact to net interest income decreasing rate scenarios. 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 September 30, 2024, Peoples Bank had liquid assets of $444.5 million, which represented 4.3% of total assets and unfunded loan commitments. Peoples also had an additional $167.0 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: