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 federal statutory corporate income tax rate of 21% for the three and nine months ended September 30, 2024, for the three months ended June 30, 2024 and for the three and nine months ended September 30, 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 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, 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 year 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' deposit balances have increased primarily due to an increase in retail certificates of deposits driven by special promotional rate offerings over the past year.

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 a fully tax-equivalent basis, using a 21% statutory federal corporate income tax rate.

Net interest income was $88.9 million for the third quarter of 2024 and increased $2.3 million when compared to the linked quarter. Net interest margin was 4.27% for the third quarter of 2024, compared to 4.18% for the linked quarter. The increase in net interest income and net interest margin was primarily driven by an increase in accretion income, net of amortization, from acquisitions and higher borrowing costs, which offset higher earning asset yields.

Net interest income for the third quarter of 2024 decreased 5% over the prior year quarter and net interest margin decreased by 43 basis points. The decrease in net interest income compared to the third quarter of 2023 was driven by higher funding costs. The decrease in net interest margin for the third quarter of 2024 compared to the third quarter of 2023, was driven primarily by an increase in interest rates on deposits.

For the first nine months of 2024, net interest income increased $11.2 million, or 4%, compared to the first nine months of 2023, while net interest margin decreased 36 basis points to 4.24%. The increase in net interest income was driven by increases in market interest rates and an additional four months of income from the Limestone Merger. The decrease in net interest margin for the first nine months of 2024 compared to the first nine months of 2023 was primarily driven by the full year impact of assets added in the Limestone Merger, which offset higher earning asset yields.

Accretion income, net of amortization expense, from acquisitions was $8.1 million for the third quarter of 2024, $5.8 million for the linked quarter and $9.5 million for the third quarter of 2023, which added 39 basis points, 28 basis points and 48 basis points, respectively, to net interest margin. The increase in accretion income for the third quarter of 2024, when compared to the linked quarter was driven by higher payoffs. The decrease in accretion income for the third quarter of 2024 compared to the third quarter of 2023 was a result of lower accretion from the Limestone Merger. For the first nine months of 2024, accretion income totaled $20.3 million and added 33 basis points to net interest margin compared to $15.8 million and 29 basis points for the first nine months of 2023. The increase in accretion income for the first nine months of 2024 compared to the same period in 2023 was due to more 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 third quarter of 2024 was mainly a result of net charge-offs. The provision for credit losses for the second quarter of 2024 was driven by (i) higher net charge-offs, (ii) an increase of reserves on individually analyzed loans and leases and (iii) loan growth. The provision for credit losses for the third quarter of 2023 was driven by (i) loan growth, (ii) an increase in net charge-offs, (iii) updates to our prepayment, curtailment, and funding rates, and (iv) a deterioration in macro-economic conditions used within the CECL model, partially offset by a release of reserves on individually analyzed loans.

For the first nine months of 2024, the provision for credit losses was mainly the result of (i) higher net charge-offs, (ii) an increase of reserves on individually analyzed loans and leases and (iii) economic forecast deterioration and (iv) loan growth. For the first nine months of 2023, the provision for credit losses was driven by (i) the addition of the provision for the non-purchased credit deteriorated loans acquired in the Limestone Merger, (ii) loan growth and (iii) economic forecast deterioration, partially offset by a reduction in the reserves for individually analyzed loans and leases and the use of updated loss drivers.

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:

The net loss on investment securities for the third quarter of 2024 was driven by the loss recorded on a contingent call of a security. 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 assets disposals and other transactions for the third quarter of 2024, the second quarter of 2024, and the third quarter of 2023 were driven primarily by net losses on repossessed assets of $0.5 million, $0.4 million and $0.3 million, respectively.

Total Non-Interest Income, Excluding Net Gains and Losses

Total non-interest income, excluding net gains and losses, comprised 22% of Peoples' total revenues (defined as net interest income plus total non-interest income excluding net gains and losses) for the third quarter of 2024, 22% for the linked quarter, and 20% for the third quarter of 2023. For the first nine months of 2024, total non-interest income, excluding net gains and losses, totaled 23% of total revenues compared to 21% for the first nine months of 2023.

For the third quarter of 2024, electronic banking income comprised the largest portion of Peoples' total non-interest income, excluding net gains and losses. Peoples' electronic banking ("e-banking") services include ATM and debit cards, direct deposit services, internet and mobile banking, and remote deposit capture, and serve as alternative delivery channels to traditional sales offices for providing services to 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 increased for the first nine months of 2024 compared to the first nine months of 2023 primarily driven by an increase in customer activity.

The following table details Peoples' insurance income:

Peoples' insurance income for the third quarter of 2024 remained relatively flat when compared to the linked quarter and the prior year quarter. Insurance income in the first nine months of 2024 increased 9% when compared to the first nine months of 2023 due to higher commissions and additional customers.

Peoples' trust and investment income, which includes fiduciary income, brokerage income, and employee benefit fees, 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 decreased in the third quarter of 2024 relative to the linked quarter due to market performance. When compared to the third quarter of 2023, fiduciary income and brokerage income increased $0.5 million, which was driven by an increase in assets under administration and management. For the first nine months of 2024, trust and investment income increased when compared to the same period in 2023 due to higher fiduciary and brokerage income, primarily reflecting an increase in assets under management and market volatility.

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

The increases in assets under administration and management at September 30, 2024 compared to at June 30, 2024 were driven by market value fluctuations. The increases in assets under administration and management at September 30, 2024 when compared to at September 30, 2023 were primarily due to recent growth, through acquisitions, 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 increased for the third quarter of 2024 compared to the linked quarter due to seasonality of customer activity. Deposit account service charges were flat when comparing the third quarter of 2024 to the third quarter of 2023. Deposit account service charges also increased for the first nine months of 2024 compared to the same period of 2023 due to the Limestone Merger.

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

Other non-interest income was relatively flat for the three months ended September 30,2024 when compared to the linked quarter and the third quarter of 2023. The increase in other non-interest income for the first nine months of 2024 when compared to the same period of 2023 was driven by increased operating lease income.

Bank owned life insurance income for the third quarter of 2024 decreased compared to the linked quarter and the prior year quarter primarily due changes in the cash surrender values of the underlying policies. Bank owned life insurance income for the first nine months of 2024 remained relatively flat when compared to the first nine months of 2023.

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, net of any purchase accounting impact, and (v) syndication income. Lease income for the third quarter of 2024 increased compared to the linked quarter and the third quarter of 2023 due to an increase in gains on terminated leases. Lease income for the first nine months of 2024 compared to the first nine months of 2023 was primarily driven by an increase in gains on early terminations on leases that paid off.

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 third quarter of 2024 increased $0.8 million when compared to each of the prior periods and was primarily driven by higher production.

In the third quarter of 2024, Peoples sold $14.9 million in loans into the secondary market with servicing retained and $12.0 million in loans with servicing released, compared to $2.6 million and $11.8 million, respectively, in the second quarter of 2024, and $0.8 million and $9.4 million, respectively, in the third quarter of 2023. For the first nine months of 2024, Peoples sold $17.6 million in loans into the secondary market with servicing retained, and $30.8 million with servicing released, compared to $2.7 million and $22.8 million, respectively, for the first nine months 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 third quarter of 2024 remained relatively flat compared to the linked quarter and to the third quarter of 2023. Base salaries and wages for the first nine months of 2024 increased compared to the first nine months of 2023 due to the additional expense associated with employees added with the Limestone Merger coupled with annual merit increases.

Sales-based incentive compensation increased for the third quarter of 2024 compared to the linked quarter due to an increase of $0.4 million of Vantage-related incentive compensation. Sales-based incentive compensation for the first nine months of 2024 compared to the first nine months of 2023 increased primarily due to additional employees added with the Limestone Merger.

The decrease in employee benefits for the third quarter of 2024 compared to the linked quarter and the increase over the third quarter of 2023 was primarily due to medical costs. The increase for the first nine months of 2024 compared to the first nine months of 2023 was primarily due to higher medical costs reflecting a full nine months of expenses in 2024 for the additional employees added with the Limestone Merger.

Payroll taxes and other employment costs for the third quarter of 2024 increased compared to the linked quarter due to a refund received in the second quarter of 2024 due to change in tax rate in the first quarter of 2024. The increase for the first nine months of 2024 compared to the first nine months of 2023 was driven by the additional employees added in the Limestone Merger coupled with annual merit increases.

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 nine months of 2024 increased when compared to the first nine months of 2023 due to the additional employees 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 third quarter of 2024 remained flat when compared to both the second quarter of 2024 and the third quarter of 2023.

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

Net rent expense for the third quarter and first nine months of 2024 compared to the same periods of 2023 increased due to a prior period one time benefit to rent expense recognized in the third quarter of 2023. The third quarter and the first nine months of 2024 net occupancy and equipment expense increased when compared to the same periods 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 third quarter of 2024 decreased compared to the linked quarter due to lower costs associated with recent technology projects. The increase for the first nine months of 2024 when compared to the same period in 2023 was driven by software upgrades and implementation of new systems, coupled with the increased size of Peoples' organization as a result of the Limestone Merger.

Professional fees for the third quarter of 2024 were flat when compared to the linked quarter. Professional fees for the third quarter and first nine months of 2024 compared to the same periods in 2023 decreased due to less acquisition-related expenses.

Amortization of other intangible assets for the third quarter of 2024 was flat compared to the linked quarter and decreased $0.6 million compared to the prior year quarter due to decreases in amortization on core deposits and customer relationship intangibles. Amortization of other intangible assets for the first nine months of 2024 increased when compared to the same period of 2023 due to amortization of intangible assets recognized in the Limestone Merger.

Peoples' e-banking expense is comprised of costs associated with debit and ATM cards. E-banking expense compared to the linked quarter and the third quarter of 2023 remained relatively flat. E-banking expense increased for the first nine months of 2024 when compared to the first nine months of 2023 due to additional customers brought in from the Limestone Merger.

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

Other loan expenses during the third quarter of 2024 were relatively flat when compared to the linked quarter. Other loan expenses increased for the third quarter and the first nine months of 2024 when compared to the same periods of 2023 primarily due to increases in miscellaneous loan and collection expenses as a result of increased insurance costs associated with consumer indirect loans.

Marketing expense for the third quarter of 2024 increased when compared to the linked quarter due to higher advertising expense and donations. Marketing expense for the third quarter and the first nine months of 2024 decreased when compared to the same periods of 2023 due to lower acquisition-related expenses.

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 increase in franchise tax expense for the third quarter of 2024 when compared to the third quarter of 2023 was due to higher equity driven by the Limestone Merger.

Other non-interest expense for the third quarter of 2024 decreased when compared to the linked quarter primarily due to a one-time prior period true-up of corporate expenses recognized in the second quarter of 2024. Other non-interest expense for the third quarter and first nine months of 2024 compared to the same periods of 2023 decreased due to a less acquisition-related expenses.

Income Tax Expense

Peoples recorded income tax expense of $9.2 million with an effective tax rate of 22.5% for the third quarter of 2024, compared to income tax expense of $6.9 million with an effective tax rate of 19.1% for the linked quarter and income tax expense of $8.8 million with an effective tax rate of 21.7% for the third quarter of 2023. The increase in income tax expense when compared to the linked quarter was driven by a $1.1 million one-time benefit recognized in the second quarter of 2024 related to a prior year amended return and higher pre-tax income. The increase in income tax expense when compared to the third quarter of 2023 was primarily due to higher pre-tax income. Peoples recorded income tax expense of $24.3 million with an effective tax rate of 21.2% in the first nine months of 2024 and $22.1 million with an effective tax rate of 21.7% in the first nine months of 2023. The increase was driven by higher 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 measure 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 increase in the PPNR for the third quarter of 2024 compared to the linked quarter was driven by increased non-interest income and higher accretion income. The increase in PPNR for the third quarter of 2024 when compared to the third quarter of 2023 was due to increased net interest income driven by higher rates. The increase in PPNR for the first nine months of 2024 compared to the first nine months of 2023 was driven by increased non-interest income and increased net interest income driven by higher rates.

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, and the COVID-19 employee retention credit.

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

The efficiency ratio and the adjusted for non-core items efficiency ratio improved compared to the linked quarter improved mainly as the result of a reduction in non-interest expense and increase in net interest income. The efficiency ratio improved compared to the prior year first nine months due to the decrease in acquisition-related expenses. The efficiency ratio, adjusted for non-core items, was 57.7% for the first nine months of 2024, compared to 54.2% for the first nine months of 2023. The increase in the efficiency ratio, adjusted for non-core items, for the first nine months of 2024 compared to the first nine months of 2023 was due to higher non-interest expense. 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 and the return on average assets adjusted for non-core items for the third quarter of 2024 increased when compared to the linked quarter, due to an increase in annualized net income resulting from higher non-interest income and a decrease in average assets. The decrease in the return on average assets adjusted for non-core items for the third quarter of 2024, compared to the third quarter of 2023, was attributable to the assets acquired in the Limestone Merger. The decrease in return on average assets adjusted for non-core items for the first nine months of 2024 when compared to the first nine months of 2023, was primarily driven by the assets acquired in the Limestone Merger.

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 increased when compared to the linked quarter due to an increase in annualized net income mainly attributable to an increase in net interest income. The decreases in the return on total average stockholders' equity and average tangible equity ratios for the third quarter and first nine months of 2024 compared to the same periods of 2023 were driven by higher average stockholders' equity.