PEOPLES BANCORP INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis (“MD&A”) represents an overview of the results of operations and financial condition of Peoples for the three and nine months ended September 30, 2021 and September 30, 2020. This MD&A should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the Notes thereto. SELECTED FINANCIAL DATA The following data should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the MD&A that follows: At or For the Three Months Ended At or For the Nine Months Ended September 30, September 30, (Dollars in thousands, expect per share data) 2021 2020 2021 2020 Operating Data (a) Total interest income $ 45,467 $ 39,013 $ 127,226 $ 119,181 Total interest expense 2,889 3,894 9,410 14,566 Net interest income 42,578 35,119 117,816 104,615 Provision for credit losses 8,994 4,728 7,333 33,531 Net (loss) gain on investment securities (166) 2 (704) 383 Net loss on asset disposals and other transactions (308) (28) (459) (237) Total non-interest income excluding net gains and losses (b) 16,820 16,796 50,233 47,025 Total non-interest expense 57,860 34,315 135,746 100,445 Net (loss) income (c) (5,758) 10,210 19,808 14,194 Balance Sheet Data (a) Total investment securities $ 1,574,676 $ 928,560 $ 1,574,676 $ 928,560 Loans and leases, net of deferred fees and costs ("total loans") 4,491,028 3,472,085 4,491,028 3,472,085 Allowance for credit losses 77,382 58,128 77,382 58,128 Goodwill and other intangible assets 295,415 185,397 295,415 185,397 Total assets 7,059,752 4,911,807 7,059,752 4,911,807 Non-interest-bearing deposits 1,559,993 982,912 1,559,993 982,912 Brokered deposits 106,013 260,753 106,013 260,753 Other interest-bearing deposits 4,166,014 2,697,905 4,166,014 2,697,905 Short-term borrowings 184,693 182,063 184,693 182,063 Junior subordinated debentures held by subsidiary trust 12,928 7,571 12,928 7,571 Other long-term borrowings 86,483 103,815 86,483 103,815 Total stockholders' equity 831,882 566,856 831,882 566,856 Tangible assets (d) 6,764,337 4,726,410 6,764,337 4,726,410 Tangible equity (d) 536,467 381,459 536,467 381,459 Per Common Share Data (a) (Loss) earnings per common share – basic $ (0.28) $ 0.52 $ 0.99 $ 0.70 (Loss) earnings per common share – diluted (0.28) 0.51 0.99 0.70 Cash dividends declared per common share 0.36 0.34 1.07 1.02 Book value per common share (e) 29.43 28.74 29.43 28.74 Tangible book value per common share (d)(e) $ 18.98 $ 19.34 $ 18.98 $ 19.34 Weighted-average number of common shares outstanding – basic 20,640,519 19,504,503 19,751,853 19,862,409 Weighted-average number of common shares outstanding – diluted 20,789,271 19,637,689 19,890,672 19,998,353 Common shares outstanding at end of period (e) 28,265,791 19,721,783 28,265,791 19,721,783 Closing share price at end of period (e) $ 31.61 $ 19.09 $ 31.61 $ 19.09 43 Table of Contents At or For the Three Months Ended At or For the Nine Months Ended September 30, September 30, (Dollars in thousands, expect per share data) 2021 2020 2021 2020 Significant Ratios (a) Return on average stockholders' equity (f) (3.64) % 7.16 % 4.44 % 3.28 % Return on average tangible equity (f)(g) (4.76) % 11.36 % 7.82 % 5.38 % Return on average assets (f) (0.42) % 0.83 % 0.51 % 0.40 % Return on average assets adjusted for non-core items (f)(h) 0.66 % 0.91 % 1.02 % 0.47 % Average stockholders' equity to average assets 11.47 % 11.56 % 11.48 % 12.29 % Average total loans to average deposits 77.17 % 87.44 % 79.48 % 86.15 % Net interest margin (f)(i) 3.50 % 3.14 % 3.41 % 3.27 % Efficiency ratio (j) 94.70 % 64.12 % 78.38 % 64.37 % Efficiency ratio adjusted for non-core items (k) 63.93 % 61.81 % 64.32 % 62.44 % Pre-provision net revenue to total average assets (l) 0.11 % 1.43 % 0.83 % 1.45 % Dividend payout ratio (m)(n) NM 66.31 % NM 145.29 % Total loans to deposits (e) 77.05 % 88.04 % 77.05 % 88.04 % Total investment securities as percentage of total assets (e) 22.30 % 18.90 % 22.30 % 18.90 % Asset Quality Ratios (a) Nonperforming loans as a percent of total loans (e)(o) 0.92 % 0.84 % 0.92 % 0.84 % Nonperforming assets as a percent of total assets (e)(o) 0.75 % 0.60 % 0.75 % 0.60 % Nonperforming assets as a percent of total loans and OREO (e)(o) 1.17 % 0.85 % 1.17 % 0.85 % Criticized loans as a percent of total loans (e)(p) 5.23 % 3.55 % 5.23 % 3.55 % Classified loans as a percent of total loans (e)(q) 3.18 % 2.19 % 3.18 % 2.19 % Allowance for credit losses as a percent of total loans (e) 1.72 % 1.67 % 1.72 % 1.67 % Allowance for credit losses as a percent of nonperforming loans (e)(o) 186.93 % 198.72 % 186.93 % 198.72 % Provision for credit losses as a percent of average total loans 1.01 % 0.55 % 0.28 % 1.40 % Net charge-offs as a percentage of average total loans 0.18 % 0.08 % 0.13 % 0.04 % Capital Information (a)(e) Common equity tier 1 capital ratio (r) 12.30 % 12.83 % 12.30 % 12.83 % Tier 1 risk-based capital ratio 12.58 % 13.07 % 12.58 % 13.07 % Total risk-based capital ratio (tier 1 and tier 2) 13.83 % 14.33 % 13.83 % 14.33 % Tier 1 leverage ratio 11.20 % 8.62 % 11.20 % 8.62 % Common equity tier 1 capital $ 567,172 $ 398.553 $ 567,172 $ 398.553 Tier 1 capital 580,100 406,124 580,100 406,124 Total capital (tier 1 and tier 2) 637,802 445,101 637,802 445,101 Total risk-weighted assets $ 4,611,321 $ 3,106,817 $ 4,611,321 $ 3,106,817 Total stockholders' equity to total assets 11.78 % 11.54 % 11.78 % 11.54 % Tangible equity to tangible assets (d) 7.93 % 8.07 % 7.93 % 8.07 % (a) Reflects the impact of the acquisitions of Premium Finance on July 1, 2020, NSL beginning April 1, 2021, and of Premier beginning September 17, 2021. (b) Total non-interest income excluding net gains and losses, is a Non-US GAAP financial measure since it excludes all gains and/or losses included in earnings. Additional information regarding the calculation of total non-interest income excluding net gains and losses can be found under the caption "Efficiency Ratio (Non-US GAAP)." (c) Net loss for the for the third quarter of 2021 included non-core non-interest expense totaling $18.4 million. Net income for the first nine months of 2021 included non-core non-interest expense totaling $23.8 million. Net income for the third quarter of 2020 and for the first nine months of 2020, included non-core non-interest expenses of $1.2 million and $3.0 million, respectively. Additional information regarding the non-core non-interest expense can be found under the caption "Core Non-Interest Expense (Non-US GAAP)." (d) These amounts represent Non-US GAAP financial measures since they exclude the balance sheet impact of goodwill and other intangible assets acquired through acquisitions on total stockholders’ equity and total assets. Additional information regarding the calculation of these Non-US GAAP financial measures can be found under the caption “Capital/Stockholders’ Equity.” (e) Data presented as of the end of the period indicated. (f) Ratios are presented on an annualized basis. (g) Return on average tangible equity ratio represents a Non-US GAAP financial measure since it excludes the after-tax impact of amortization of other intangible assets from earnings and it excludes the balance sheet impact of goodwill and other intangible assets acquired through acquisitions on total stockholders’ equity. Additional information regarding the calculation of this Non-US GAAP financial measure can be found under the caption “Return on Average Tangible Equity Ratio (Non-US GAAP).” (h) Return on average assets adjusted for non-core items ratio represents a Non-US GAAP financial measure since it excludes the after-tax impact of all gains and losses, acquisition-related expenses, contract negotiation expenses, COVID-19-related expenses, a Peoples Bank Foundation, Inc. contribution, pension settlement 44 Table of Contents charges and severance expenses included in earnings. Additional information regarding the calculation of this Non-US GAAP financial measure can be found under the caption "Return on Average Assets Adjusted for Non-Core Items Ratio (Non-US GAAP)." (i) Information presented on a fully tax-equivalent basis, using a blended federal and state corporate income tax rate of 22.3% for 2021 and a statutory federal rate of 21% for 2020. (j) The efficiency ratio is defined as total non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus total non-interest income (excluding all gains and losses). This amount represents a Non-US GAAP financial measure since it excludes amortization of other intangible assets, and all gains and losses included in earnings, and uses fully tax-equivalent net interest income. Additional information regarding the calculation of this Non-US GAAP financial measure can be found under the caption “Efficiency Ratio (Non-US GAAP).” (k) The efficiency ratio adjusted for non-core items is defined as core non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus core non-interest income excluding all gains and losses. This amount represents a Non-US GAAP financial measure since it excludes the impact of all gains and losses, acquisition-related expenses, contract negotiation expenses, COVID-19-related expenses, a Peoples Bank Foundation, Inc. contribution, pension settlement charges and severance expenses included in earnings, and uses FTE net interest income. Additional information regarding the calculation of this Non-US GAAP financial measure can be found under the caption "Efficiency Ratio (Non-US GAAP).” (l) Pre-provision net revenue is defined as net interest income plus total non-interest income (excluding all gains and losses) minus total non-interest expense. This ratio represents a Non-US GAAP financial measure since it excludes the provision for (recovery of) credit losses and all gains and losses included in earnings. This measure is a key metric used by federal bank regulatory agencies in their evaluation of capital adequacy for financial institutions. Additional information regarding the calculation of this Non-US GAAP financial measure can be found under the caption “Pre-Provision Net Revenue (Non-US GAAP).” (m) The dividend payout ratio is calculated based on dividends declared during the period divided by net income, where applicable, for the period. (n) NM = not meaningful. (o) Nonperforming loans include loans 90+ days past due and accruing, renegotiated loans and nonaccrual loans. Nonperforming assets include nonperforming loans and other real estate owned. (p) Includes loans categorized as special mention, substandard and doubtful. (q) Includes loans categorized as substandard and doubtful. (r) Peoples' capital conservation buffer was 5.83% at September 30, 2021 and 6.33% at September 30, 2020, compared to 2.50% for the fully phased-in capital conservation buffer required at January 1, 2019. Forward-Looking Statements Certain statements in this Form 10-Q, which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by the fact they are not historical facts and include words such as "anticipate," "estimate," "may," "feel," "expect," "believe," "plan," "will," "will likely," "would," "should," "could," "project," "goal," "target," "potential," "seek," "intend," and similar expressions. These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of Peoples' business and operations. Additionally, Peoples' financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to: (1) the ever-changing effects of the COVID-19 pandemic - the duration, extent and severity of which are impossible to predict, including the possibility of further resurgence in the spread of COVID-19 or variants thereof - on economies (local, national and international), supply chains and markets, on the labor market, including the potential for a sustained reduction in labor force participation, and on our customers, counterparties, employees and third-party service providers, as well as the effects of various responses of governmental and nongovernmental authorities to the COVID-19 pandemic, including public health actions directed toward the containment of the COVID-19 pandemic (such as quarantines, shut downs and other restrictions on travel and commercial, social and other activities), the availability and effectiveness of vaccines, and the implementation of fiscal stimulus packages, which could adversely impact sales volumes, add volatility to the global stock markets, and increase loan delinquencies and defaults; (2) changes in the interest rate environment due to economic conditions related to the COVID-19 pandemic or other factors and/or the fiscal and monetary policy measures undertaken by the U.S. government and the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") in response to such economic conditions, which may adversely impact interest rates, the interest rate yield curve, interest margins, loan demand and interest rate sensitivity; (3) the success, impact, and timing of the implementation of Peoples' business strategies and Peoples' ability to manage strategic initiatives, including the completion and successful integration of planned acquisitions, including the recently-completed merger with Premier and the recently-completed acquisition of NSL, and the expansion of commercial and consumer lending activities, in light of the continuing impact of the COVID-19 pandemic on customers' operations and financial condition; (4) competitive pressures among financial institutions, or from non-financial institutions, which may increase significantly, including product and pricing pressures, which can in turn impact Peoples' credit spreads, changes to third-party relationships and revenues, changes in the manner of providing services, customer acquisition and retention pressures, and Peoples' ability to attract, develop and retain qualified professionals; (5) uncertainty regarding the nature, timing, cost, and effect of legislative or regulatory changes or actions, or deposit insurance premium levels, promulgated and to be promulgated by governmental and regulatory agencies in the State of Ohio, the Federal Deposit Insurance Corporation, the Federal Reserve Board and the Consumer Financial Protection Bureau, which may subject Peoples, its subsidiaries, or one or more acquired companies to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses, including in particular 45 Table of Contents the rules and regulations promulgated and to be promulgated under the CARES Act, and the follow-up legislation enacted as the Consolidated Appropriations Act, 2021, the American Rescue Plan Act of 2021, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Basel III regulatory capital reform; (6) the effects of easing restrictions on participants in the financial services industry; (7) local, regional, national and international economic conditions (including the impact of potential or imposed tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations, and changes in the relationship of the U.S. and its global trading partners) and the impact these conditions may have on Peoples, its customers and its counterparties, and Peoples' assessment of the impact, which may be different than anticipated; (8) Peoples may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to Peoples' current shareholders; (9) changes in prepayment speeds, loan originations, levels of nonperforming assets, delinquent loans, charge-offs, and customer and other counterparties' performance and creditworthiness generally, which may be less favorable than expected in light of the COVID-19 pandemic and adversely impact the amount of interest income generated; (10) Peoples may have more credit risk and higher credit losses to the extent there are loan concentrations by location or industry of borrowers or collateral; (11) changes in accounting standards, policies, estimates or procedures may adversely affect Peoples' reported financial condition or results of operations; (12) the impact of assumptions, estimates and inputs used within models, which may vary materially from actual outcomes, including under the CECL model; (13) the discontinuation of the LIBOR and other reference rates which may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies; (14) adverse changes in the conditions and trends in the financial markets, including the impacts of the COVID-19 pandemic and the related responses by governmental and nongovernmental authorities to the pandemic, which may adversely affect the fair value of securities within Peoples' investment portfolio, the interest rate sensitivity of Peoples' consolidated balance sheet, and the income generated by Peoples' trust and investment activities; (15) the volatility from quarter to quarter of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors; (16) Peoples' ability to receive dividends from its subsidiaries; (17) Peoples' ability to maintain required capital levels and adequate sources of funding and liquidity; (18) the impact of larger or similar-sized financial institutions encountering problems, which may adversely affect the banking industry and/or Peoples' business generation and retention, funding and liquidity; (19) Peoples' ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks, including those of Peoples' third-party vendors and other service providers, which may prove inadequate, and could adversely affect customer confidence in Peoples and/or result in Peoples incurring a financial loss; (20) Peoples' ability to anticipate and respond to technological changes, and Peoples' reliance on, and the potential failure of, a number of third-party vendors to perform as expected, including Peoples' primary core banking system provider, which can impact Peoples' ability to respond to customer needs and meet competitive demands; (21) operational issues stemming from and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems on which Peoples and its subsidiaries are highly dependent; (22) changes in consumer spending, borrowing and saving habits, whether due to changes in retail distribution strategies, consumer preferences and behavior, changes in business and economic conditions (including as a result of the COVID-19 pandemic), legislative or regulatory initiatives (including those in response to the COVID-19 pandemic), or other factors, which may be different than anticipated; (23) the adequacy of Peoples' internal controls and risk management program in the event of changes in strategic, reputational, market, economic, operational, cybersecurity, compliance, legal, asset/liability repricing, liquidity, credit and interest rate risks associated with Peoples' business; (24) the impact on Peoples' businesses, personnel, facilities, or systems, of losses related to acts of fraud, theft, misappropriation or violence; (25) the impact on Peoples' businesses, as well as on the risks described above, of various domestic or international widespread natural or other disasters, pandemics (including COVID-19), cybersecurity attacks, system failures, civil unrest, military or terrorist activities or international conflicts; (26) the impact on Peoples' businesses and operating results of any costs associated with obtaining rights in intellectual property claimed by others and adequately protecting Peoples' intellectual property; (27) risks and uncertainties associated with Peoples' entry into new geographic markets and risks resulting from Peoples' inexperience in these new geographic markets; (28) Peoples' ability to integrate the NSL acquisition and the merger of Premier into Peoples, which may be unsuccessful, or may be more difficult, time-consuming or costly than expected; 46 Table of Contents (29) the risk that expected revenue synergies and cost savings from the merger of Peoples and Premier may not be fully realized or realized within the expected time frame; (30) Peoples' continued ability to grow deposits; (31) the impact of future governmental and regulatory actions upon Peoples' participation in and execution of government programs related to the COVID-19 pandemic; (32) uncertainty regarding the impact of changes to the U.S. presidential administration and Congress on the regulatory landscape, capital markets, elevated government debt, potential changes in tax legislation that may increase tax rates and the response to and management of the COVID-19 pandemic, infrastructure spending and social programs; and, (33) other risk factors relating to the banking industry or Peoples as detailed from time to time in Peoples' reports filed with the Securities and Exchange Commission (the "SEC"), including those risk factors included in the disclosures under the heading "ITEM 1A. RISK FACTORS" of Peoples' Annual Report on Form 10-K for the fiscal year ended December 31, 2020. All forward-looking statements speak only as of the filing date of this Form 10-Q and are expressly qualified in their entirety by the cautionary statements. Although management believes the expectations in these forward-looking statements are based on reasonable assumptions within the bounds of management’s knowledge of Peoples’ business and operations, it is possible that actual results may differ materially from these projections. Additionally, Peoples undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the filing date of this Form 10-Q or to reflect the occurrence of unanticipated events except as may be required by applicable legal requirements. Copies of documents filed with the SEC are available free of charge at the SEC’s website at www.sec.gov and/or from Peoples' website – www.peoplesbancorp.com under the “Investor Relations” section. This discussion and analysis should be read in conjunction with the Audited Consolidated Financial Statements, and Notes thereto, contained in Peoples’ 2020 Form 10-K, as well as the Unaudited Condensed Consolidated Financial Statements, Notes to the Unaudited Condensed Consolidated Financial Statements, ratios, statistics and discussions contained elsewhere in this Form 10-Q. Business Overview The following discussion and analysis of Peoples’ Unaudited Condensed Consolidated Financial Statements is presented to provide insight into management’s assessment of the financial condition and results of operations. Peoples is a diversified financial services holding company that makes available a banking products, such as deposit accounts, lending products and trust services. Peoples provides services through traditional offices, ATMs, mobile banking and telephone and internet-based banking. Peoples also offers a complete array of insurance products, commercial leasing and premium financing solutions, and makes available custom-tailored fiduciary, employee benefit plan and asset management services. Brokerage services are offered by Peoples exclusively through an unaffiliated registered broker-dealer located at Peoples Bank's offices. Peoples Bank also offers insurance premium finance lending nationwide through its Peoples Premium Finance division and, since April 1, 2021, offers lease financing through its North Star Leasing division. As of September 30, 2021, Peoples has 135 locations, including 119 full-service bank branches in Ohio, West Virginia, Kentucky, Virginia, Washington D.C. and Maryland. Peoples Bank is subject to regulation and examination primarily by the Ohio Division of Financial Institutions (the "ODFI"), the Federal Reserve Bank ("FRB") of Cleveland and the Federal Deposit Insurance Corporation (the "FDIC"). Peoples Bank must also follow the regulations promulgated by the Consumer Financial Protection Bureau (the "CFPB") which regulates consumer financial products and services and certain financial services providers. Peoples Insurance is subject to regulation by the Ohio Department of Insurance and the state insurance regulatory agencies of those states in which Peoples Insurance may do business. Critical Accounting Policies The accounting and reporting policies of Peoples conform to US GAAP. The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Note 1 of the Notes to the Unaudited Condensed Consolidated Financial Statements describes Peoples' significant account policies. Management has identified the accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to understanding Peoples’ Unaudited Condensed Consolidated Financial Statements, and MD&A at September 30, 2021, which are discussed in Peoples’ 2020 Form 10-K. Summary of Recent Transactions and Events The following is a summary of recent transactions and events that have impacted or are expected to impact Peoples’ results of operations or financial condition: ◦ On September 17, 2021, Peoples completed its merger with Premier Financial Bancorp, Inc. (“Premier”), in which Peoples acquired, in an all-stock merger, Premier, a bank holding company headquartered in Huntington, West Virginia, and the parent company of Premier Bank, Inc. (“Premier Bank”) and Citizens Deposit Bank and Trust, Inc. (“Citizens”). Under the terms and subject to the conditions of the definitive Agreement and Plan of Merger dated March 26, 2021 ("Merger Agreement"), Premier merged with and into Peoples (the “Merger”), and Premier Bank and Citizens subsequently merged with and into Peoples’ wholly-owned subsidiary, Peoples Bank, in a transaction valued at $261.9 million. At the close of business on September 17, 2021, the financial services offices of each of Premier Bank and Citizens became branches of 47 Table of Contents Peoples Bank. Peoples acquired $1.1 billion in loans and $1.8 billion in deposits. Peoples preliminarily recorded $71.0 million in goodwill and $4.2 million in other intangible assets in connection with the Merger. ◦ On May 4, 2021, Peoples Insurance Agency, LLC ("Peoples Insurance") acquired substantially all of the assets and rights of an insurance agency located in Pikeville, Kentucky and certain rights to related customer accounts, which were previously developed and maintained by Justice & Stamper Insurance Agency, Inc., pursuant to an Asset Purchase Agreement between Peoples Insurance and Justice & Stamper Insurance Agency, Inc. Total consideration for this transaction was $325,000, with $162,500 paid at closing and the second installment in the amount of $162,500 to be paid on the first anniversary of the closing date, less any adjustments pursuant to adverse claims incurred or sustained by or imposed by Peoples Insurance. Peoples recorded preliminary customer relationship intangible assets of $230,000 and preliminary goodwill of $46,000, related to this transaction. ◦ On March 31, 2021, Peoples completed its acquisition of NS Leasing, LLC ("NSL") pursuant to an Asset Purchase Agreement, dated March 24, 2021 in which Peoples Bank acquired the equipment finance and leasing business of NSL. The transaction closed after the end of business on March 31, 2021 and Peoples Bank began operating the acquired business as North Star Leasing, a division of Peoples Bank on April 1, 2021. Peoples Bank acquired assets comprising NSL's equipment finance business, including $83.3 million in leases and satisfied, on behalf of NSL, certain third-party debt in the amount of $69.1 million. Peoples Bank paid total consideration of $116.6 million, plus a potential earn-out payment to NSL of up to $3.1 million. Based in Burlington, Vermont, the North Star Leasing division underwrites, originates and services equipment leases and equipment financing agreements to businesses throughout the United States. Peoples recorded preliminary goodwill in the amount of $24.7 million and preliminary other intangibles of $14.0 million, which included customer relationship intangible, trade-name intangible and non-compete agreements related to this transaction. Peoples recorded an additional $0.4 million in non-interest expense during the third quarter of 2021 related to an update to the estimated earn-out provision of $2.7 million. As of September 30, 2021, equipment leases had grown to $111.4 million. ◦ Peoples began originating loans during the second quarter of 2020 under the loan guarantee program created under the CARES Act, called the Paycheck Protection Program ("PPP"). These loans were targeted to provide small businesses with financial support to cover payroll and certain other specified types of expenses for a specified period of time. Loans made under the PPP are fully guaranteed by the Small Business Administration ("SBA"). Additional information can be found later in this discussion under the caption “FINANCIAL CONDITION - COVID-19 Loan Impacts." As of September 30, 2021, Peoples had $135.8 million aggregate principal amount in PPP loans outstanding (including $28.2 million acquired in the merger with Premier), which were included in commercial and industrial loan balances, compared to $187.6 million at June 30, 2021 and $366.9 million at December 31, 2020. Peoples recognized interest income of $3.1 million for deferred loan fees/cost accretion and $0.4 million of interest income on PPP loans during the third quarter of 2021, compared to $3.4 million and $0.7 million, respectively, for the second quarter of 2021 and $1.9 million and $1.2 million, respectively, for the third quarter of 2020. During the first nine months of 2021, Peoples recognized interest income of $11.2 million for deferred loan fees/cost accretion and $2.0 million of interest income on PPP loans compared to $3.8 million for deferred loan fees/costs accretion and $2.1 million of interest income during the first nine months of 2020. ◦ Peoples provided relief solutions to consumer and commercial borrowers, including forbearance and modifications, during the COVID-19 pandemic. Additional information can be found later in this discussion under the caption “FINANCIAL CONDITION - COVID-19 Loan Impacts." ◦ On January 29, 2021, Peoples announced that on January 28, 2021, Peoples' Board of Directors authorized a share repurchase program authorizing Peoples to purchase up to an aggregate of $30 million of Peoples' outstanding common shares. This program replaced the share repurchase program authorizing Peoples to purchase up to an aggregate of $40 million of Peoples' outstanding common shares, which Peoples' Board of Directors had authorized on February 27, 2020 and which was terminated on January 28, 2021. There were no common share repurchases during the first nine months of 2021, under the existing share repurchase program. On February 27, 2020, Peoples' Board of Directors approved a share repurchase program authorizing Peoples to purchase up to an aggregate of $40.0 million of Peoples' outstanding common shares. This program had replaced the share repurchase program authorizing Peoples to purchase up to an aggregate of $20.0 million of Peoples' outstanding common shares, which Peoples' Board of Directors had approved on November 3, 2015 and which was terminated on February 27, 2020. During the third quarter of 2020, Peoples repurchased 235,684 of Peoples' common shares through Peoples' then-effective common share repurchase program for a total of $5.0 million. For the first nine months of 2020, Peoples repurchased 1,119,752 in common shares for a total of $25.0 million. ◦ During the third quarter of 2021, Peoples recorded a provision for credit losses of $9.0 million, compared to a provision for credit losses of $3.1 million in the linked quarter and a provision for credit losses of $4.7 million in the third quarter of 2020. During the third quarter of 2021, Peoples recorded a provision for credit losses of $11.0 million in order to establish an allowance for credit losses for non-purchase credit deteriorated loans of $10.6 million, and a liability for unfunded commitments of $0.4 million, both relating to the acquisition of Premier. Peoples also recorded a $22.3 million increase in the allowance for credit losses during the third quarter of 2021 related to the purchase credit deteriorated loans acquired from Premier. The change in the amount of the provision for credit losses compared to the third quarter of 2020 was primarily due to the impact of economic assumptions used in the CECL model and Peoples' own credit portfolio developments related to 48 Table of Contents COVID-19, coupled with the day-one allowances for credit losses required in connection with the acquisitions of loans from Premier in the third quarter of 2021. ◦ For the third quarter of 2021, Peoples recorded $181,000 of expenses related to the COVID-19 pandemic, compared to $210,000 for the second quarter of 2021 and $148,000 for the third quarter of 2020. These expenses were primarily related to providing Peoples' employees meals in support of local businesses and assisting employees with childcare and elder care needs, as well as taking extra precautions in cleaning facilities. ◦ During the third quarter of 2021, Peoples incurred $16.2 million of acquisition-related expenses, compared to $2.4 million in the second quarter of 2021 and $335,000 in the third quarter of 2020. Acquisition-related expenses for the nine months ended September 30, 2021 were $20.5 million, compared to $412,000 for the same period last year. The acquisition-related expenses in 2021 were primarily related to the NSL acquisition and the Premier acquisition. The acquisition-related expenses in 2020 were primarily related to the Triumph Premium Finance acquisition. ◦ Peoples incurred $0.1 million in pension settlement charges for the third quarter of 2021 compared to $0.5 million for the third quarter of 2020, due to the aggregate amount of lump-sum distributions to participants in Peoples' defined benefit pension plan exceeding the threshold for recognizing such charges during the relevant period. Peoples recorded $0.1 million of pension settlement charges for the nine months ended September 30, 2021 and $1.1 million for the nine months ended September 30, 2020. ◦ Effective July 1, 2020, Peoples completed the business combination under which Peoples Bank acquired the operations and assets of Triumph Premium Finance (referred to as "Premium Finance acquisition"), a division of TBK Bank, SSB. Based in Kansas City, Missouri, the division operating as Peoples Premium Finance continues to provide insurance premium financing loans for commercial customers to purchase property and casualty insurance products through its growing network of independent insurance agency partners nationwide. Peoples Bank acquired $84.7 million in loans, at the acquisition date, after fair value adjustments. Peoples also recorded $4.3 million of other intangible assets and $5.5 million of goodwill related to the acquisition. As of September 30, 2021, Peoples premium finance loans had grown to $134.8 million. ◦ In an effort to stimulate an economy that was being adversely impacted by the impacts of the COVID-19 pandemic, the Federal Reserve first lowered the benchmark Federal Funds Target Rate by 50 basis points on March 3, 2020, then lowered the target rate another 100 basis points at the next FOMC meeting on March 15, 2020. The Federal Funds Target Rate range was 0% - 0.25% as of March 31, 2020 and maintained this rate as of September 30, 2021. The impact of these transactions and events, where material, is discussed in the applicable sections of this MD&A. EXECUTIVE SUMMARY Peoples recorded a net loss of $5.8 million for the third quarter of 2021, or $0.28 per diluted common share, compared to net income of $10.1 million, or $0.51 per diluted common share, for the second quarter of 2021, and net income of $10.2 million, or $0.51 per diluted share, for the third quarter of 2020. Non-core items, and the related tax effect of each, in net (loss) income included acquisition-related expenses, contract negotiation expenses, COVID-19-related expenses, a contribution to Peoples Bank Foundation, Inc., pension settlement charges, severance expenses, and gains and losses on investment securities, asset disposals and other transactions. Non-core items negatively impacted earnings per diluted common share by $0.71 for the third quarter of 2021, $0.10 for the second quarter of 2021, and by $0.05 for the third quarter of 2020. Net income in the third quarter of 2021 was largely affected by the acquisition of Premier. For the first nine months of 2021, net income was $19.8 million, or $0.99 per diluted common share, compared to net income of $14.2 million, or $0.70 per diluted common share, for the nine months ended September 30, 2020. The increase in earnings was impacted primarily by the change in provision for credit losses in 2021 as compared to 2020. Non-core items negatively impacted earnings per diluted common share by $0.98 and $0.12 for the nine months ended September 30, 2021 and 2020, respectively. Net interest income was $42.6 million for the third quarter of 2021, up 7% compared to $39.7 million for the second quarter of 2021, and an increase of 21% compared to $35.1 million for the third quarter of 2020. Net interest margin was 3.50% for the third quarter of 2021, compared to 3.45% for the second quarter of 2021, and 3.14% for the third quarter of 2020. Compared to the linked quarter and third quarter of 2020, net interest income and margin were improved due to the growth in leases and premium finance loans, coupled with the partial period impact of the Premier acquisition and lower cost of funds. Net interest income and margin both have been negatively impacted by the excess liquidity environment present in the financial services sector since the beginning of the COVID-19 pandemic by way of increased low yielding cash reserves. Net interest income and net interest margin continue to be impacted by the low interest rate environment caused by COVID-19 that continued throughout the third quarter of 2021. For the first nine months of 2021, net interest income increased $13.2 million, or 13%, compared to the first nine months of 2020, while net interest margin increased 14 basis points to 3.41%. The change in net interest income was the result of lower funding costs due to a shift from higher cost overnight FHLB advances to lower cost brokered deposits, as well as a higher volume of loans and leases due to the Premier, NSL and Premium Finance acquisitions. 49 Table of Contents Accretion income, net of amortization expense, from acquisitions was $1.0 million for the third quarter of 2021, $0.8 million for the second quarter of 2021, and $0.5 million for the third quarter of 2020, which added 8 basis points, 7 basis points, and 5 basis points, respectively, to net interest margin. Accretion income, net of amortization expense, from acquisitions was $2.2 million for the nine months ended September 30, 2021, compared to $2.6 million for the nine months ended September 30, 2020, which added 6 and 8 basis points, respectively, to net interest margin. During the third quarter of 2021, Peoples recorded a provision for credit losses of $9.0 million, compared to a provision for credit losses of $3.1 million for the second quarter of 2021 and a provision for credit losses of $4.7 million for the third quarter of 2020. Net charge-offs for the third quarter of 2021 were $1.6 million, or 0.18% of average total loans annualized, compared to net charge-offs of $0.8 million, or 0.09% of average total loans annualized, for the linked quarter and net charge-offs of $0.7 million, or 0.08% of average total loans annualized, for the third quarter of 2020. Net charge-offs for the third quarter of 2021 included one commercial and industrial loan aggregating $0.5 million. Net charge-offs for the second quarter of 2021 included $0.4 million in leases. During the third quarter of 2021, Peoples recorded a provision for credit losses of $11.0 million in order to establish an allowance for credit losses for non-purchase credit deteriorated loans of $10.6 million, and a liability for unfunded commitments of $0.4 million, both relating to the acquisition of Premier. Peoples also recorded a $22.3 million increase in the allowance for credit losses during the third quarter of 2021 related to the purchase credit deteriorated loans acquired from Premier. Compared to the third quarter of 2020, the change in the provision for credit losses was primarily due to the impact of economic assumptions used in the CECL model and Peoples' own credit portfolio developments related to COVID-19, offset by the day-one allowances for credit losses required in connection with the acquisitions of Premier in the third quarter of 2021 and NSL in the second quarter of 2021. The provision for credit losses during the first nine months of 2021 was $7.3 million, compared to a provision for credit losses of $33.5 million for the first nine months of 2020. Net charge-offs for the first nine months of 2021 were $3.4 million, or 0.13% of average total loans annualized, compared to net charge-offs of $0.9 million, or 0.04% annualized, for the first nine months of 2020. The change in the provision for credit losses compared to the first nine months of 2020 was primarily due to improved economic factors and updated loss drivers and their impact on assumptions used in the CECL model throughout the first nine months of 2021. For the third quarter of 2021, total non-interest income increased $0.5 million, or 3%, compared to the second quarter of 2021 and decreased $0.4 million, or 3%, from the third quarter of 2020. The rise in non-interest income compared to the linked quarter was the result of an increase in overdraft fees included in deposit account service charges of $0.5 million and a $0.2 million increase in income recognized on leases related to the early termination of leases and other fees, offset partially by declines in trust and investment income, electronic banking income and mortgage banking income. Net losses of $0.5 million realized during the third quarter of 2021 were driven primarily by losses on the disposal of fixed assets acquired from Premier and the sales of securities during the third quarter of 2021, compared to net losses of $0.3 million for the linked quarter, and net gains of $26,000 for the third quarter of 2020. For the nine months ended September 30, 2021, total non-interest income increased $1.9 million compared to the nine months ended September 30, 2020. The increase was driven by higher trust and investment income, associated with new accounts and increased market values of assets under administration and management, coupled with higher electronic banking income and $716,000 of non-interest income contributed by the leasing business. Total non-interest expense increased $18.0 million, or 45%, for the third quarter of 2021 compared to the second quarter of 2021, and $23.5 million, or 69%, compared to the third quarter of 2020. The increase in total non-interest expense for the third quarter of 2021 compared to the linked quarter was primarily due to the recognition of $16.5 million of acquisition-related expenses due to the closing of the Premier acquisition during the quarter. Total non-interest expense in the third quarter of 2021 also contained other non-core expenses such as a one-time expense related to contract renewal negotiations of Peoples Bank's core banking systems of $1.9 million, and $0.2 million in COVID-19-related expenses. During the second quarter of 2021, non-core expenses included acquisition-related expenses of $2.4 million and $0.2 million in COVID-19-related expenses. For the third quarter of 2020, non-core expenses included $531,000 of pension settlement charges, $335,000 of acquisition-related expenses, $192,000 of severance expenses and $148,000 of COVID-19-related expenses. Compared to the third quarter of 2020, the increase in total non-interest expense was primarily due to an increase in acquisition-related expenses of $16.2 million, an increase in salaries and employee benefit costs of $6.2 million and an increase in amortization of intangible assets of $0.4 million. The increases in salaries and employee benefit costs and amortization of intangible assets were primarily the result of the acquisitions of Premier and NSL. For the first nine months of 2021, total non-interest expense increased $35.3 million compared to the same period last year. The variance was driven primarily by increases of $20.5 million in acquisition-related expenses. The remainder of the increase was largely due to a $7.2 million rise in salaries and employee benefit costs, which was driven by the added ongoing costs of the recent acquisitions, along with higher sales and incentive compensation from increased production, growth in medical insurance and 401(k) costs, while data processing and software costs also increased $2.1 million. These changes were partially offset by decreases in pension settlement charges and COVID-19-related expenses. Similar to the quarterly comparisons, the acquisitions of Premier, NSL and Premium Finance increased salaries and employee benefit costs, as well as amortization of intangible assets. Peoples' efficiency ratio, calculated as total non-interest expense less amortization of other intangible assets divided by fully tax-equivalent ("FTE") net interest income, plus total non-interest income, excluding all gains and losses, for the third quarter of 2021 was 94.7%, compared to 68.6% for the second quarter of 2021, and 64.1% for the third quarter of 2020. The change in the efficiency ratio compared to the linked quarter was primarily due to the acquisition-related expenses mentioned above. The efficiency ratio, when adjusted for non-core items, was 63.9% for the third quarter of 2021, compared to 64.0% for the second quarter of 2021 and 61.8% for the third quarter of 2020. The efficiency ratio for the nine months ended September 30, 2021 was 78.4% compared to 64.4% for the nine months ended September 30, 2020. When adjusted for non-core items, the efficiency ratio was 64.3% for the first nine months of 50 Table of Contents 2021 compared to 62.4% for the first nine months of 2020. Peoples continues to focus on controlling expenses, while recognizing some necessary costs in order to continue growing the business. Peoples recorded an income tax benefit of $2.2 million for the third quarter of 2021, compared to income tax expense of $2.4 million for the linked quarter and $2.6 million for the third quarter of 2020. The income tax benefit for the third quarter of 2021, compared to the income tax expense for the linked quarter, was due to the net loss recognized in the third quarter of 2021. The increase in income tax expense for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, was due to higher pre-tax income. At September 30, 2021, total assets were $7.06 billion, compared to $5.07 billion at June 30, 2021 and $4.76 billion at December 31, 2020. Total assets grew 39% compared to June 30, 2021, and was largely attributable to the Premier acquisition, which added $1.1 billion in loans, $563.3 million in investment securities, and the recognition of goodwill on the transaction of $71.0 million. The 48% increase compared to December 31, 2020 was also driven by the Premier acquisition, along with the $83.3 million of leases acquired from NSL, subsequent growth in leases of $28.1 million, and organic loan growth of $88.2 million, offset partially by $474.2 million in forgiveness received on PPP loans during the nine months ended September 30, 2021. The allowance for credit losses at September 30, 2021 increased to $77.4 million, or 1.72% of total loans, compared to $50.4 million and 1.48%, respectively, at December 31, 2020. Total assets increased $2.0 billion, or 39%, compared to the linked quarter. The increase was a result of the Premier acquisition. Total liabilities were $6.23 billion at September 30, 2021, up from $4.48 billion at June 30, 2021 and $4.19 billion at December 31, 2020. The increase in total liabilities compared to June 30, 2021 was primarily due to deposits acquired from Premier of $1.8 billion, as well as retail repurchase agreements of $63.8 million. Also contributing to the increase compared to December 31, 2020 was higher total deposits associated with customers maintaining higher balances due primarily to economic stimulus payments provided by the government, as well as changes in customer buying habits. At September 30, 2021, total stockholders' equity was $831.9 million, an increase of $256.2 million compared to December 31, 2020. The increase in total stockholders' equity was driven by common shares issued for the acquisition of Premier and net income for the first nine months of 2021, offset by $21.0 million in dividends paid to shareholders and the change in accumulated other comprehensive income to an accumulated other comprehensive loss of $7.2 million. 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 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 federal and state corporate income tax rate of 22.3% for 2021 and a statutory federal corporate income tax rate of 21% for 2020. The following table details the calculation of FTE net interest income: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Net interest income $ 42,578 $ 39,660 $ 35,119 $ 117,816 $ 104,615 Taxable equivalent adjustment 351 324 262 970 803 Fully tax-equivalent net interest income $ 42,929 $ 39,984 $ 35,381 $ 118,786 $ 105,418 51 Table of Contents The following tables detail Peoples’ average balance sheets for the periods presented: For the Three Months Ended September 30, 2021 June 30, 2021 September 30, 2020 ( Dollars in thousands) Average Balance Income/ Expense Yield/Cost Average Balance Income/ Expense Yield/Cost Average Balance Income/ Expense Yield/Cost Short-term investments $ 199,007 $ 82 0.16 % $ 180,730 $ 53 0.12 % $ 97,430 $ 33 0.13 % Investment securities (a)(b): Taxable 979,278 3,799 1.55 % 883,948 3,217 1.45 % 851,092 2,832 1.33 % Nontaxable 173,459 1,136 2.62 % 168,015 1,095 2.61 % 101,403 778 3.07 % Total investment securities 1,152,737 4,935 1.71 % 1,051,963 4,312 1.64 % 952,495 3,610 1.52 % Loans (b)(c): Construction 125,178 1,196 3.74 % 87,075 979 4.45 % 105,488 1,179 4.37 % Commercial real estate, other 993,259 9,507 3.75 % 916,604 8,829 3.81 % 857,830 8,854 4.04 % Commercial and industrial 789,555 8,933 4.43 % 887,756 9,241 4.12 % 1,047,105 8,145 3.04 % Premium finance 122,828 1,542 4.91 % 108,387 1,298 4.74 % 92,533 1,871 7.91 % Leases 97,068 4,810 19.39 % 86,519 4,215 19.27 % — — — % Residential real estate (d) 652,184 6,648 4.08 % 607,691 6,429 4.23 % 661,694 7,870 4.76 % Home equity lines of credit 126,888 1,271 3.97 % 119,354 1,180 3.97 % 125,351 1,278 4.06 % Consumer, indirect 541,329 5,509 4.04 % 529,180 5,313 4.03 % 477,962 5,103 4.25 % Consumer, direct 86,935 1,385 6.32 % 80,409 1,272 6.35 % 82,139 1,332 6.45 % Total loans 3,535,224 40,801 4.55 % 3,422,975 38,756 4.50 % 3,450,102 35,632 4.08 % Allowance for credit losses (51,610) (46,967) (56,519) Net loans 3,483,614 40,801 4.61 % 3,376,008 38,756 4.56 % 3,393,583 35,632 4.14 % Total earning assets 4,835,358 45,818 3.74 % 4,608,701 43,121 3.72 % 4,443,508 39,275 3.49 % Goodwill and other intangible assets 232,361 222,553 185,816 Other assets 407,428 351,892 277,290 Total assets $ 5,475,147 $ 5,183,146 $ 4,906,614 Interest-bearing deposits: Savings accounts $ 737,771 $ 23 0.01 % $ 680,825 $ 21 0.01 % $ 589,100 $ 34 0.02 % Governmental deposit accounts 542,855 458 0.33 % 496,906 551 0.44 % 398,653 511 0.51 % Interest-bearing demand accounts 795,565 74 0.04 % 733,913 66 0.04 % 671,987 66 0.04 % Money market accounts 533,497 67 0.05 % 564,593 94 0.07 % 589,078 216 0.15 % Retail certificates of deposit (e) 457,073 951 0.83 % 424,279 980 0.93 % 467,431 1,524 1.30 % Brokered deposits (e) 155,779 826 2.10 % 167,109 865 2.08 % 258,875 318 0.49 % Total interest-bearing deposits 3,222,540 2,399 0.30 % 3,067,625 2,577 0.34 % 2,975,124 2,669 0.36 % Borrowed funds: Short-term FHLB advances 17,174 78 1.80 % 19,176 81 1.69 % 137,174 732 2.12 % Repurchase agreements and other 63,226 13 0.08 % 50,852 11 0.09 % 43,184 10 0.09 % Total short-term borrowings 80,400 91 0.45 % 70,028 92 0.53 % 180,358 742 1.64 % Long-term FHLB advances 86,561 316 1.45 % 101,161 392 1.55 % 103,906 402 1.54 % Other borrowings 8,470 83 3.92 % 7,669 76 3.96 % 7,551 81 4.29 % Total long-term borrowings 95,031 399 1.67 % 108,830 468 1.72 % 111,457 483 1.73 % Total borrowed funds 175,431 490 1.11 % 178,858 560 1.26 % 291,815 1,225 1.67 % Total interest-bearing liabilities 3,397,971 2,889 0.34 % 3,246,483 3,137 0.39 % 3,266,939 3,894 0.47 % Non-interest-bearing deposits 1,358,652 1,272,623 970,353 Other liabilities 90,741 82,209 102,267 Total liabilities 4,847,364 4,601,315 4,339,559 Total stockholders’ equity 627,783 581,831 567,055 Total liabilities and stockholders’ equity $ 5,475,147 $ 5,183,146 $ 4,906,614 Interest rate spread (b) $ 42,929 3.40 % $ 39,984 3.33 % $ 35,381 3.02 % Net interest margin (b) 3.50 % 3.45 % 3.14 % 52 Table of Contents For the Nine Months Ended September 30, 2021 September 30, 2020 ( Dollars in thousands) Average Balance Income/ Expense Yield/Cost Average Balance Income/ Expense Yield/Cost Short-term investments $ 175,755 $ 175 0.13 % $ 111,852 $ 317 0.38 % Investment securities (a)(b): Taxable 899,531 9,636 1.43 % 894,008 12,448 1.86 % Nontaxable 149,636 3,035 2.70 % 103,827 2,409 3.09 % Total investment securities 1,049,167 12,671 1.61 % 997,835 14,857 1.99 % Loans (b)(c): Construction 108,859 3,169 3.84 % 108,426 3,656 4.43 % Commercial real estate, other 930,150 26,938 3.82 % 848,202 27,784 4.30 % Commercial and industrial 872,421 28,773 4.35 % 892,483 24,411 3.59 % Premium finance 112,925 4,137 4.83 % 31,069 1,871 7.91 % Leases 61,551 9,025 19.34 % — — — % Residential real estate (d) 624,993 19,749 4.21 % 669,852 24,498 4.88 % Home equity lines of credit 122,720 3,638 3.96 % 128,540 4,546 4.72 % Consumer, indirect 526,900 16,025 4.07 % 438,784 14,066 4.28 % Consumer, direct 82,151 3,896 6.34 % 78,904 3,978 6.73 % Total loans 3,442,670 115,350 4.44 % 3,196,260 104,810 4.34 % Allowance for credit losses (49,483) (44,323) Net loans 3,393,187 115,350 4.50 % 3,151,937 104,810 4.40 % Total earning assets 4,618,109 128,196 3.68 % 4,261,624 119,984 3.73 % Goodwill and other intangible assets 213,232 180,291 Other assets 360,842 264,238 Total assets $ 5,192,183 $ 4,706,153 Interest-bearing deposits: Savings accounts $ 688,782 $ 79 0.02 % $ 558,514 $ 140 0.03 % Governmental deposit accounts 490,170 1,602 0.44 % 366,139 1,671 0.61 % Interest-bearing demand accounts 743,562 205 0.04 % 652,198 385 0.08 % Money market accounts 554,194 294 0.07 % 547,291 1,271 0.31 % Retail certificates of deposit (e) 440,454 3,054 0.93 % 479,185 5,453 1.52 % Brokered deposits (e) 166,000 2,559 2.06 % 214,516 1,662 1.03 % Total interest-bearing deposits 3,083,162 7,793 0.34 % 2,817,843 10,582 0.50 % Borrowed funds: Short-term FHLB advances 18,773 246 1.75 % 160,287 2,285 1.90 % Repurchase agreements and other 55,100 37 0.09 % 45,613 70 0.26 % Total short-term borrowings 73,873 283 0.51 % 205,900 2,355 1.54 % Long-term FHLB advances 96,765 1,099 1.52 % 109,536 1,341 1.64 % Repurchase agreement and other borrowings 7,926 235 3.95 % 9,148 288 5.40 % Total long-term borrowings 104,691 1,334 1.70 % 118,684 1,629 1.93 % Total borrowed funds 178,564 1,617 1.21 % 324,584 3,984 1.64 % Total interest-bearing liabilities 3,261,726 9,410 0.39 % 3,142,427 14,566 0.62 % Non-interest-bearing deposits 1,248,330 892,301 Other liabilities 86,209 92,986 Total liabilities 4,596,265 4,127,714 Stockholders’ equity 595,918 578,439 Total liabilities and stockholders’ equity $ 5,192,183 $ 4,706,153 Interest rate spread (b) $ 118,786 3.29 % $ 105,418 3.11 % Net interest margin (b) 3.41 % 3.27 % (a) Average balances are based on carrying value. (b) Interest income and yields are presented on a fully tax-equivalent basis, a blended federal and state corporate income tax rate of 22.3% for 2021 and a statutory federal corporate income tax rate of 21% for 2020. (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. 53 Table of Contents (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 deposits for the periods presented in which FHLB advances and brokered deposits were being utilized. Peoples completed the acquisition of Premier on September 17, 2021, which impacted average total loan and deposit balances for the partial period in which the balances were included for the third quarter of 2021. Compared to the third quarter of 2020, average total loans grew mostly due to the leases acquired. Compared to the third quarter of 2020, average total deposit balances grew significantly due to the influx of funds from the PPP loan proceeds, changed customer spending habits and federal stimulus provided to customers. In addition, average total loan balances for the first nine months of 2021 were higher than the prior year period due to the lease, Premium Finance and Premier balances acquired, coupled with the PPP loans originated since the start of the pandemic and loan growth. The average total deposit balances compared to 2020 grew considerably due to the influx of funds from the PPP loan proceeds, changed customer spending habits and federal stimulus provided to customers, while the Premier acquired balances had a minimal impact on the period. The following table provides an analysis of the changes in FTE net interest income: Three Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2021 Compared to (Dollars in thousands) June 30, 2021 September 30, 2020 September 30, 2020 Increase (decrease) in: Rate Volume Total (a) Rate Volume Total (a) Rate Volume Total (a) INTEREST INCOME: Short-term investments $ 22 $ 7 $ 29 $ 9 $ 41 $ 50 $ (314) $ 172 $ (142) Investment Securities (b): Taxable 224 358 582 506 461 967 (2,939) 127 (2,812) Nontaxable 4 37 41 (695) 1,053 358 (489) 1,115 626 Total investment income 228 395 623 (189) 1,514 1,325 (3,428) 1,242 (2,186) Loans (b) : Construction (848) 1,065 217 (746) 763 17 (510) 23 (487) Commercial real estate, other (883) 1,561 678 (3,242) 3,895 653 (4,252) 3,406 (846) Commercial and industrial 3,146 (3,454) (308) 10,684 (9,896) 788 5,242 (880) 4,362 Premium finance 52 192 244 (2,749) 2,420 (329) (1,379) 3,645 2,266 Leases 28 567 595 — 4,810 4,810 — 9,025 9,025 Residential real estate (1,179) 1,398 219 (1,110) (112) (1,222) (3,182) (1,567) (4,749) Home equity lines of credit 3 88 91 (84) 77 (7) (709) (199) (908) Consumer, indirect 20 176 196 (1,347) 1,753 406 (1,121) 3,080 1,959 Consumer, direct (33) 146 113 (176) 229 53 (320) 238 (82) Total loan income 306 1,739 2,045 1,230 3,939 5,169 (6,231) 16,771 10,540 Total interest income $ 556 $ 2,141 $ 2,697 $ 1,050 $ 5,494 $ 6,544 $ (9,973) $ 18,185 $ 8,212 INTEREST EXPENSE: Deposits: Savings accounts $ — $ 2 $ 2 $ (51) $ 40 $ (11) $ (104) $ 43 $ (61) Governmental deposit accounts (365) 272 (93) (742) 689 (53) (720) 651 (69) Interest-bearing demand accounts 2 6 8 (21) 29 8 (257) 77 (180) Money market accounts (22) (5) (27) (131) (17) (148) (1,002) 48 (954) Retail certificates of deposit (372) 343 (29) (540) (33) (573) (1,987) (412) (2,399) Brokered deposits 71 (110) (39) 1,351 (844) 507 1,548 (674) 874 Total deposit cost (686) 508 (178) (134) (136) (270) (2,522) (267) (2,789) Borrowed funds: Short-term borrowings 22 (23) (1) (102) (549) (651) (221) (1,851) (2,072) Long-term borrowings (30) (39) (69) (55) (29) (84) (109) (186) (295) Total borrowed funds cost (8) (62) (70) (157) (578) (735) (330) (2,037) (2,367) Total interest expense (694) 446 (248) (291) (714) (1,005) (2,852) (2,304) (5,156) Fully tax-equivalent net interest income $ 1,250 $ 1,695 $ 2,945 $ 1,341 $ 6,208 $ 7,549 $ (7,121) $ 20,489 $ 13,368 54 Table of Contents (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 a blended federal and state corporate income tax rate of 22.3% for 2021 and a statutory federal corporate income tax rate of 21% for 2020. Net interest income grew 7% compared to the linked quarter, benefiting from the Premier acquisition, growth in leases and Premium Finance balances, and the overall growth in interest-earning assets, coupled with lower deposit costs. Net interest income and net interest margin both have been negatively impacted by the excess liquidity environment present in the financial services sector since the beginning of the COVID-19 pandemic by way of increased low yielding cash reserves. Peoples recognized interest income on deferred loan fees/costs of $3.1 million and $3.4 million during the third and second quarters of 2021, respectively, along with $0.4 million and $0.7 million of interest earned on PPP loans during the third and second quarters of 2021, respectively. Net interest margin grew five basis points to 3.50% for the third quarter of 2021 compared to 3.45% for the linked quarter. The increase in net interest margin was driven by the PPP income, which benefited net interest margin by 18 basis points for the third quarter of 2021 compared to 15 basis points for the second quarter of 2021, while excess liquidity resulted in inflated cash balances which reduced net interest margin by 13 basis points compared to 12 basis points for the linked quarter. Compared to the third quarter of 2020, net interest income increased 21%, which was due to the acquired leases, premium finance loans and additional PPP income from the deferred loan fees recognized, as well as controlled funding costs. Net interest margin expanded 36 basis points compared to 3.14% for the third quarter of 2020. The lease portfolio added $4.8 million to net interest income, and 28 basis points to net interest margin, for the third quarter of 2021. In late March of 2020, the Federal Reserve lowered the Federal Funds effective target range 150 basis points to 0.00% to 0.25%. The majority of Peoples' variable rate loan portfolio is tied to LIBOR or a prime rate, which continued to be lower than historical levels. For the first nine months of 2021, net interest income grew 13%, and was driven by the addition of the lease and premium finance portfolios, along with PPP income, coupled with lower funding costs. Compared to the first nine months of 2020, net interest margin grew by 14 basis points and was driven by the 20 basis point addition of the leasing portfolio, while the PPP income contributed 20 basis points during 2021 compared to 6 basis points for 2020. Accretion income, net of amortization expense, from acquisitions was $1.0 million for the third quarter of 2021, $0.8 million for the linked quarter and $0.5 million for the third quarter of 2020, which added 8 basis points, 7 basis points and 5 basis points, respectively, to net interest margin. For the first nine months of 2021, accretion income, net of amortization expense, from acquisitions totaled $2.2 million, and added 6 basis points to net interest margin, compared to $2.6 million, and 8 basis points for 2020. 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: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Provision for other credit losses $ 8,870 $ 3,035 $ 4,574 $ 7,125 $ 33,171 Provision for checking account overdraft credit losses 124 53 154 208 360 Provision for credit losses $ 8,994 $ 3,088 $ 4,728 $ 7,333 $ 33,531 As a percentage of average total loans (a) 1.01 % 0.36 % 0.55 % 0.28 % 1.40 % (a) Presented on an annualized basis. 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. During the third quarter of 2021, Peoples recorded a provision for credit losses of $11.0 million in order to establish an allowance for credit losses for non-purchase credit deteriorated loans of $10.6 million, and a liability for unfunded commitments of $0.4 million, both relating to the acquisition of Premier. Peoples also recorded a $22.3 million increase in the allowance for credit losses during the third quarter of 2021 related to the purchase credit deteriorated loans acquired from Premier. Excluding the day-one allowance for credit losses related to loans acquired from Premier, the release of allowance for credit losses was based on changes in economic factors and loss drivers used in the CECL model. Compared to the third quarter of 2020, the change in the provision for credit losses was primarily due to the impact of economic assumptions used in the CECL model and Peoples' own credit portfolio developments related to COVID-19, coupled with the day-one allowance for credit losses required in connection with the acquisitions of Premier in the third quarter of 2021 and NSL in the second quarter of 2021. 55 Table of Contents Compared to the first nine months of 2020, the provision for credit losses declined significantly, as the economic forecasts utilized within the CECL model experienced notable recovery compared to those utilized during 2020, which had been impacted by the onset of the COVID-19 pandemic. 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) Gain Included in Total Non-Interest Income Net (loss) gain include gains and losses on investment securities, asset disposals and other transactions, which are recognized in total non-interest income. The following table details Peoples’ net losses for the periods presented: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Net (loss) gain on investment securities $ (166) $ (202) $ 2 $ (704) $ 383 Net (loss) gain on asset disposals and other transactions: Net loss on other assets $ (270) $ (132) $ (43) $ (429) $ (258) Net (loss) gain on OREO (32) 8 15 (24) (1) Net (loss) gain on other transactions (6) — — (6) 22 Net loss on asset disposals and other transactions $ (308) $ (124) $ (28) $ (459) $ (237) Net losses for the third quarter of 2021 were driven primarily by losses on the disposal of fixed assets acquired from Premier and the sale of investment securities during the third quarter of 2021. During the third quarter of 2021, Peoples sold a portion of its available-for-sale investment securities and reinvested the proceeds into higher-yielding investments. For the first nine months of 2021, a net loss on investment securities was recorded due to the sale of investment securities in order to reinvest proceeds into higher-yielding investment securities. During the second quarter of 2021, net loss on other assets was due to a market value write-down of $208,000 related to a closed office that was held for sale. The first nine months of 2021 included a net loss on other assets related to the write-down of a closed office in the second quarter of 2021 and the disposal of fixed assets acquired from Premier. The first nine months of 2020 included a net gain on investment securities that was recorded in connection with sales of investment securities. For the first nine months of 2020, net loss on other assets was driven by losses on repossessed assets. Total Non-Interest Income, Excluding Net Gains and Losses Total non-interest income, excluding net gains and losses, accounted for 28% of Peoples' total revenues (defined as net interest income plus total non-interest income excluding net gains and losses) for the three months ended September 30, 2021 compared to 29% for the linked quarter and 32% for the third quarter of 2020. The recent decline in this ratio was driven by an increase in net interest income due to the acquisition of leases acquired from NSL. For the third quarter of 2021, 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 clients. The following table details Peoples' e-banking income: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 E-banking income $ 4,326 $ 4,418 $ 3,765 $ 12,655 $ 10,568 Peoples' e-banking income is derived largely from ATM and debit cards, as other services are mainly provided at no charge to customers. The amount of e-banking income is largely dependent on the timing and volume of customer activity. The decreases in e-banking income compared to each of the linked quarter and the prior year quarter were driven by the increased usage of debit cards by customers, resulting from the COVID-19 pandemic. The increased usage has continued through the first nine months of 2021, resulting in higher e-banking income compared to the same period in 2020. 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 56 Table of Contents plan services business. The following tables detail Peoples’ trust and investment income and related assets under administration and management: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Fiduciary income $ 1,944 $ 2,095 $ 1,710 $ 5,941 $ 5,112 Brokerage income 1,577 1,494 1,165 4,408 3,324 Employee benefit fees 637 631 560 1,874 1,577 Trust and investment income $ 4,158 $ 4,220 $ 3,435 $ 12,223 $ 10,013 Fiduciary income and brokerage income are mostly driven by the values of assets under administration and management, which have increased in recent periods as the market values of existing accounts have been positively impacted and grown, coupled with new accounts added compared to prior periods. Employee benefit fees continue to increase compared to prior periods as Peoples focuses on growing the number of employee benefit plans it manages. The following table details Peoples' assets under administration and management: September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 (Dollars in thousands) Trust $ 1,937,123 $ 1,963,884 $ 1,916,892 $ 1,885,324 $ 1,609,270 Brokerage 1,133,668 1,119,247 1,071,126 1,009,521 921,688 Total $ 3,070,791 $ 3,083,131 $ 2,988,018 $ 2,894,845 $ 2,530,958 Quarterly average $ 3,105,476 $ 3,051,027 $ 2,927,458 $ 2,663.485 $ 2,510,978 The slight decline in assets under administration and management at September 30, 2021, compared to each prior period end, was largely driven by the decrease in market values late in the third quarter of 2021, while the quarterly average increased compared to prior quarters. The following table details Peoples' insurance income: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Property and casualty insurance commissions $ 2,836 $ 2,765 $ 2,528 $ 8,356 $ 7,624 Life and health insurance commissions 396 430 965 1,248 1,494 Performance-based commissions 59 35 8 2,044 1,437 Other fees and charges 76 105 107 275 374 Insurance income $ 3,367 $ 3,335 $ 3,608 $ 11,923 $ 10,929 For the third quarter of 2021, insurance income was relatively flat compared to the linked quarter. Compared to the third quarter of 2020, insurance income declined 7%, driven by decreases in life and health insurance commissions, offset partially by an increase in property and casualty insurance commissions. For the first nine months of 2021, insurance income increased $1.0 million, or 9%. This increase was driven by higher property and casualty, and performance-based commissions. Annually Peoples receives performance-based income commissions that are related to how much loss is incurred by underlying policies and the overall performance of the insurance carriers. The insurance income compared to prior periods was positively impacted by the addition of new customers. 57 Table of Contents Deposit account service charges are based on the recovery of costs associated with services provided. The following table details Peoples' deposit account service charges: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Overdraft and non-sufficient funds fees $ 1,420 $ 1,012 $ 1,216 $ 3,429 $ 3,741 Account maintenance fees 934 854 848 2,598 2,677 Other fees and charges 195 178 202 551 577 Deposit account service charges $ 2,549 $ 2,044 $ 2,266 $ 6,578 $ 6,995 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 for the third quarter of 2021 grew compared to the linked quarter and the third quarter of 2020 due largely to an increase in volume of overdraft and non-sufficient fees charged due to customer activity. Deposit account service charges were negatively impacted during the second quarter of 2021 and the third quarter of 2020, mostly due to fiscal stimulus payments and PPP loan proceeds provided to customers, along with changed customer spending habits due to the COVID-19 pandemic. For the first nine months of 2021, compared to the same period of 2020, deposit account service charges declined and were impacted by the COVID-19 pandemic items already mentioned. The following table details the other items included within Peoples' total non-interest income: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Mortgage banking income 766 820 2,658 2,726 4,346 Bank owned life insurance income 437 446 462 1,329 1,514 Commercial loan swap fees 73 61 68 194 1,267 Other non-interest income 1,144 803 534 2,605 1,393 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 declined during the third quarter of 2021, compared to the linked quarter and the prior year quarter as refinancing activity slowed and a lower volume of new loan originations due to the lack of inventory of homes for sale. Compared to the first nine months of 2020, mortgage banking income declined 37%, because of lower origination volume caused by a lower inventory of homes for sale and less refinancing activity because of an increase in interest rates above historically low levels experienced as a result of the COVID-19 pandemic. In the third quarter of 2021, Peoples recognized a gain of $0.4 million on the sale of $11.0 million in loans to the secondary market with servicing retained and $0.2 million on the sale of $10.3 million in loans with servicing released. In the second quarter of 2021, Peoples recognized a gain of $0.6 million on the sale of $15.8 million in loans with servicing retained and $185,000 on the sale of $7.8 million in loans with servicing released. In the third quarter of 2020 Peoples recognized a gain of $1.6 million on the sale of $35.2 million in loans sold servicing retained and a gain of $1.0 million on $68.2 million in loans sold servicing released. For the first nine months of 2021, Peoples recognized a gain of $1.8 million on the sale of $44.0 million in loans to the secondary market with servicing retained and a gain of $0.6 million on the sale of $27.7 million in loans with servicing released. For the first nine months of 2020, Peoples recognized a gain of $2.5 million on the sale of $78.6 million in loans sold servicing retained and a gain of $1.8 million on the sale of $124.2 million in loans sold servicing released. The volume of sales has a direct impact on the amount of mortgage banking income. Bank owned life insurance income was down compared to the linked quarter and the third quarter of 2020. For the first nine months of 2021, bank owned life insurance declined 12%, primarily due to a $109,000 tax-free death benefit recognized during the first quarter of 2020. Commercial loan swap fees are largely dependent on timing, interest rates, and the volume of customer activity. Commercial loan swap fees were up slightly compared to the linked quarter and the third quarter of 2020. Compared to the first nine months of 2020, commercial loan swap fees declined due to a lower volume of transactions during 2021 compared to the high volume of transactions entered into during the first nine months of 2020. Other non-interest income increased compared to the linked quarter and the third quarter of 2020 and was driven by other fee income of $0.5 million recognized on leases related to the early termination of leases and other fees in the third quarter of 2021 58 Table of Contents compared to $0.2 million recognized in the second quarter of 2021. There was no income related to the early termination of leases in the third quarter of 2020, as NSL was not acquired until the second quarter of 2021. For the nine months ended September 30, 2021, other non-interest income was higher due to the recognition of $0.6 million related to fees received for the early termination of leases and lease syndications. Non-Interest Expense Salaries and employee benefit costs remain Peoples' largest non-interest expense, accounting for over one-half of total non-interest expense. The following table details Peoples' salaries and employee benefit costs: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Base salaries and wages $ 17,493 $ 13,488 $ 13,019 $ 43,746 $ 38,489 Sales-based and incentive compensation 4,013 4,593 3,493 12,034 9,320 Employee benefits 2,619 2,821 1,930 8,338 6,471 Payroll taxes and other employment costs 1,635 1,343 1,148 4,471 3,584 Stock-based compensation 618 604 632 2,437 2,985 Deferred personnel costs (789) (921) (812) (2,750) (3,536) Salaries and employee benefit costs $ 25,589 $ 21,928 $ 19,410 $ 68,276 $ 57,313 Full-time equivalent employees: Actual at end of period 1,181 925 886 1,181 886 Average during the period 990 914 890 942 893 Base salaries and wages increased 30% compared to the linked quarter and increased 34% compared to the third quarter of 2020. The increase for the third quarter of 2021 compared to prior periods was primarily due to the acquisition of Premier, which included $3.4 million in acquisition-related severance expense. For the first nine months of 2021, base salaries and wages increased 14% compared to the first nine months of 2020 as a result of the acquisition-related severance expense for Premier and additional salaries associated with NSL and a full nine months of Premium Finance. The decrease in sales-based and incentive compensation for the third quarter of 2021 compared to the linked quarter was primarily due to lower incentive compensation related to insurance and mortgage banking. For the first nine months of 2021 compared to the same period in 2020, the increase was driven by the overall company performance relative to measures used in calculating incentive awards and higher sales-based compensation from insurance and trust and investments. The increase in employee benefits for first nine months of 2021, compared to first nine months of 2020, was due to an increase to the employer 401(k) match made during 2021, as well as higher medical costs with the addition of the Premier and NSL employees. During the second quarter of 2021, Peoples increased the matching contribution to participant's 401(k) accounts, retroactive to January 1, 2021. This true-up was completed in the second quarter of 2021 and drove the increase in employee benefits for the third quarter of 2021 compared to the third quarter of 2020. The increase in payroll taxes and other employment costs, compared to linked quarter, was primarily due to the taxes associated with the acquisition-related severance expense recognized in the third quarter of 2021. The increase in payroll taxes and other employment costs for the three and nine months ended September 30, 2021, compared to the same periods in 2020, was primarily related to higher base salaries and wages, coupled with the additional associates of Premier and NSL. Stock-based compensation is generally recognized over the vesting period, which generally ranges from immediate vesting to vesting at the end of three years, adjusted for an estimate of the portion of awards that will be forfeited. At the vesting date, an adjustment is made to increase or reverse expense for the amount of actual forfeitures compared to the estimate. Stock grants to retirement eligible grantees are expensed either immediately or over a shorter period than three years. The majority of Peoples' stock-based compensation is attributable to annual equity-based incentive awards to employees, which are awarded in the first quarter of each year and are based upon Peoples achieving certain performance goals during the prior year. Stock-based compensation for the first nine months of 2021 decreased compared to the first nine months of 2020 due to an additional $396,000 of unrestricted grants of common share awards to associates at the level of Assistant Vice President or below granted in the second quarter of 2020. Deferred personnel costs represent the portion of current period salaries and employee benefit costs considered to be direct loan origination costs. These costs are capitalized and recognized over the life of the loan as a yield adjustment in interest income. As a result, the amount of deferred personnel costs for each period corresponds directly with the volume of loan originations, coupled with the average deferred costs per loan that are updated annually at the beginning of each year. The decrease in deferred personnel costs compared to the linked quarter was due to a reduction loan origination volume. The decrease in deferred personnel costs in the first 59 Table of Contents nine months of 2021 compared to first nine months of 2020 was driven by the recognition of $921,000 in deferred personnel costs during the second quarter of 2020 related to the origination of PPP loans. Peoples' net occupancy and equipment expense was comprised of the following: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Depreciation $ 1,365 $ 1,398 $ 1,507 $ 4,134 $ 4,519 Repairs and maintenance costs 1,017 903 767 2,863 2,225 Net rent expense 371 382 340 1,093 960 Property taxes, utilities and other costs 798 606 769 2,077 1,984 Net occupancy and equipment expense $ 3,551 $ 3,289 $ 3,383 $ 10,167 $ 9,688 Depreciation on capitalized assets has declined during the second and third quarters of 2021, compared to both the third quarter of 2020, and the first nine months of 2020 as a result of certain capitalized assets and improvements reaching the end of their depreciable lives. In addition, Peoples recognized higher building maintenance costs during the first nine months of 2021, compared to 2020 due to various projects including painting, window replacements, drive-thru enhancements and parking lot sealing. Property taxes, utilities and other costs also increased during the nine months ended September 30, 2021, compared to the first nine months of 2020 as a result of an increase in other costs, primarily driven by low-cost furniture and fixtures not capitalized, offset by a reduction in utilities and property taxes. Net occupancy and equipment expense increased 5% compared to the first nine months of 2020 mainly due to increased expenses associated with maintaining the Premium Finance location for a full period, the acquisition from NSL in second quarter of 2021 and the partial period impact of the merger with Premier in the third quarter of 2021. The following table details the other items included in total non-interest expense: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Professional fees $ 6,426 $ 3,565 $ 1,720 $ 13,459 $ 5,247 Data processing and software expense 2,529 2,411 1,838 7,394 5,344 E-banking expense 2,037 2,075 2,095 6,006 5,839 Amortization of other intangible assets 1,279 1,368 857 3,267 2,314 Marketing expense 1,223 676 456 2,810 1,561 Franchise tax expense 810 822 882 2,487 2,645 FDIC insurance premiums 807 326 570 1,596 717 Other loan expenses 487 494 342 1,443 1,255 Communication expense 411 386 283 1,079 857 Other non-interest expense 12,711 2,559 2,479 17,762 7,665 Professional fees increased $2.9 million from the linked quarter and $4.7 million from the third quarter of 2020 primarily due to investment banking fees and other acquisition-related expenses, which were related to the purchase of NSL and the merger with Premier. Professional fees included acquisition-related expenses of $2.4 million for the third quarter of 2021, $1.8 million for the second quarter of 2021, and $319,000 for the third quarter of 2020. For the first nine months of 2021, professional fees nearly doubled compared to the prior year, and included $6.2 million of acquisition-related expenses for 2021, compared to $363,000 for 2020. The change in data processing and software expense compared to prior periods was driven by systems and software upgrades, annual contractual increases and overall growth, which included: the implementation of enhanced functionalities for Peoples' core banking system, including making certain mobile banking tools available to customers; software upgrades; and additional network capacity and security features in the latter part of 2020 and first quarter of 2021. E-banking expense was down slightly compared to the linked quarter, and is directly correlated to e-banking income, with the decrease due to lower costs associated with ATM processing expenses. Peoples' amortization of other intangible assets is driven by acquisition-related activity. Amortization of other intangible assets for the third quarter of 2021 was down $89,000 compared to the second quarter of 2021 due to adjustments to the fair value of intangible assets acquired from NSL, and the related changes to intangible amortization post-acquisition. Amortization of other intangible assets increased $422,000 compared to the third quarter of 2020 as a result of the NSL acquisition effective after the close of business on March 31, 2021. 60 Table of Contents Marketing expense increased compared to the second quarter of 2021 due primarily to additional advertising campaigns relating to the addition of Premier locations. Additionally, in giving back to the community, Peoples' contributions increased during the third quarter of 2021 and included a donation to each of Marietta College and the Ohio Valley Museum of Discovery. 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. Peoples' FDIC insurance premiums increased compared to the linked quarter, due to a decline in the leverage ratio which was impacted by the NSL acquisition in the second quarter, and decreased compared to December 31, 2020. Compared to the first nine months of 2020, the FDIC insurance premiums grew as a result of credits used by Peoples during the first two quarters of 2020 to offset its FDIC insurance premium. The FDIC insurance credits were related to the level of the Federal Deposit Insurance Fund ("DIF") that had continued to be above the target threshold for banks with total consolidated assets of less than $10 billion to recognize credits. Peoples utilized the remaining credits that had been issued to it in the second quarter of 2020. Other loan expenses decreased slightly compared to the linked quarter due to lower expenses associated with business loans. Compared to the third quarter of 2020, other loan expenses increased mostly due to higher expenses associated with real estate loans and home equity lines of credit. Other loan expenses for the nine months ended September 30, 2021 increased $188,000 compared to the nine months ended September 30, 2020 due to increased loan origination activity. Compared to the linked quarter, third quarter of 2020, and first nine months of 2020, communications expense grew as a result of upgraded networking to certain branches (including new branches acquired from Premier coupled with the addition of the NSL and Premium Finance locations acquired) and increased costs compared to the prior periods among certain vendors that provide communication services. Other non-interest expense increased $10.2 million compared to the third quarter of 2020, and was mostly due to $9.6 million in acquisition-related expenses recognized during the third quarter of 2021. Income Tax Expense Peoples recorded an income tax benefit of $2.2 million for the third quarter of 2021, compared to income tax expense of $2.4 million for the linked quarter and income tax expense of $2.6 million for the third quarter of 2020. The income tax benefit during the third quarter of 2021, and the income tax expense recognized during the linked quarter and the third quarter of 2020 was heavily related to the amount of pre-tax income recognized during each period. Pretax income was impacted by acquisition-related expenses associated with the Premier acquisition during the third quarter of 2021. Peoples recorded income tax expense of $4.0 million for the nine months ended September 30, 2021, compared to $3.6 million for the nine months ended September 30, 2020. Pretax income for the nine months ended September 30, 2021 was largely impacted by acquisition-related expenses, contract negotiation expenses and other non-core expenses. Additional information regarding income taxes can be found in "Note 12 Income Taxes" of the Notes to the Condensed Consolidated Financial Statements included in Peoples' 2020 Form 10-K. Pre-Provision Net Revenue (Non-US GAAP) Pre-provision net revenue ("PPNR") has become a key financial measure used by state and federal bank regulatory agencies when assessing the capital adequacy of financial institutions. PPNR is defined as net interest income plus total non-interest income, excluding all gains and losses, minus total non-interest expense. As a result, PPNR represents the earnings capacity that can be either retained in order to build capital or used to absorb unexpected losses and preserve existing capital. This ratio represents a Non-US GAAP financial measure since it excludes the provision for (recovery of) credit losses and all gains and losses included in earnings. 61 Table of Contents The following table provides a reconciliation of this Non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Condensed Consolidated Financial Statements for the periods presented: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Pre-provision net revenue: (Loss) income before income taxes $ (7,930) $ 12,494 $ 12,846 $ 23,807 $ 17,810 Add: provision for credit losses 8,994 3,088 4,728 7,333 33,531 Add: loss on OREO 32 — — 32 17 Add: loss on investment securities 316 499 — 1,490 2 Add: loss on other assets 363 238 115 687 258 Add: loss on other transactions 6 — — 6 — Less: gain on OREO — 8 15 8 16 Less: gain on investment securities 150 297 2 786 385 Less: gain on other assets 93 106 72 258 22 Pre-provision net revenue $ 1,538 $ 15,908 $ 17,600 $ 32,303 $ 51,195 Total average assets $5,475,147 $5,183,146 $4,906,614 $5,192,183 $ 4,706,153 Pre-provision net revenue to total average assets (annualized) 0.11 % 1.23 % 1.43 % 0.83 % 1.45 % Weighted-average common shares outstanding - diluted 20,789,271 19,461,934 19,637,689 19,890,672 19,998,353 Pre-provision net revenue per common share - diluted $ 0.07 $ 0.81 $ 0.90 $ 1.61 $ 2.55 The decrease in PPNR compared to the linked quarter and the third quarter of 2020 was mostly due to higher non-core acquisition-related expenses recognized during the third quarter of 2021. Core Non-Interest Expense (Non-US GAAP) Core non-interest expense is a financial measure used to evaluate Peoples' recurring expense stream. This measure is Non-US GAAP since it excludes the impact of all acquisition-related expenses, contract negotiation expenses, pension settlement charges, severance expenses, COVID-19-related expenses and a Peoples Bank Foundation, Inc. contribution. The following table provides a reconciliation of this Non-US GAAP measure to the amounts reported in Peoples' Unaudited Condensed Consolidated Financial Statements for the periods presented: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Core non-interest expense: Total non-interest expense $ 57,860 $ 39,899 $ 34,315 $ 135,746 100,445 Less: acquisition-related expenses 16,209 2,400 335 20,520 412 Less: pension settlement charges 143 — 531 143 1,050 Less: severance expenses — 14 192 63 284 Less: COVID-19-related expenses 181 210 148 683 1,206 Less: Peoples Bank Foundation, Inc. contribution — — — 500 — Less: contract negotiation expenses 1,851 — — 1,851 — Core non-interest expense $ 39,476 $ 37,275 $ 33,109 $ 111,986 $ 97,493 Efficiency Ratio (Non-US GAAP) The efficiency ratio is a key financial measure used to monitor performance. The efficiency ratio is calculated as total non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus total non-interest income excluding net gains and losses. This measure is Non-US GAAP since it excludes amortization of other intangible assets and all gains and losses included in earnings, and uses fully tax-equivalent net interest income. 62 Table of Contents The following table provides a reconciliation of this Non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Condensed Consolidated Financial Statements for the periods presented: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Efficiency ratio: Total non-interest expense $ 57,860 $ 39,899 $ 34,315 $ 135,746 $ 100,445 Less: amortization of other intangible assets 1,279 1,368 857 3,267 2,314 Adjusted total non-interest expense $ 56,581 $ 38,531 $ 33,458 $ 132,479 $ 98,131 Total non-interest income $ 16,346 $ 15,821 $ 16,770 $ 49,070 $ 47,171 Less: net gain on investment securities — — 2 — 383 Add: net loss on investment securities (166) (202) — (704) — Add: net loss on asset disposals and other transactions (308) (124) (28) (459) (237) Total non-interest income excluding net gains and losses $ 16,820 $ 16,147 $ 16,796 $ 50,233 $ 47,025 Net interest income $ 42,578 $ 39,660 $ 35,119 $ 117,816 $ 104,615 Add: fully tax-equivalent adjustment (a) 351 324 262 970 803 Net interest income on a fully tax-equivalent basis $ 42,929 $ 39,984 $ 35,381 $ 118,786 $ 105,418 Adjusted revenue $ 59,749 $ 56,131 $ 52,177 $ 169,019 $ 152,443 Efficiency ratio 94.70 % 68.64 % 64.12 % 78.38 % 64.37 % Efficiency ratio adjusted for non-core items: Core non-interest expense $ 39,476 $ 37,275 $ 33,109 $ 111,986 $ 97,493 Less: amortization of other intangible assets 1,279 1,368 857 3,267 2,314 Adjusted core non-interest expense $ 38,197 $ 35,907 $ 32,252 $ 108,719 $ 95,179 Core non-interest income excluding net gains and losses $ 16,820 $ 16,147 $ 16,796 $ 50,233 $ 47,025 Net interest income on a fully tax-equivalent basis 42,929 39,984 35,381 118,786 105,418 Adjusted revenue $ 59,749 $ 56,131 $ 52,177 $ 169,019 $ 152,443 Efficiency ratio adjusted for non-core items 63.93 % 63.97 % 61.81 % 64.32 % 62.44 % (a) Based on a 21% statutory federal corporate income tax rate. The efficiency ratio for the third quarter of 2021 was 94.7%, compared to 68.6% for the linked quarter, and 64.1% for the third quarter of 2020. The change in the efficiency ratio compared to the linked quarter was primarily due to the acquisition-related expenses. The efficiency ratio, adjusted for non-core items, was 63.9% for the third quarter of 2021, compared to 64.0% for the linked quarter and 61.8% for the third quarter of 2020. Impacting the adjusted ratios were higher salaries and employee benefits due to the Premier and NSL acquisitions along with higher advertising expenses and increased repair and maintenance expenses. For the first nine months of 2021, the efficiency ratio grew due to higher total non-interest expense associated with the acquisition-related expenses mentioned above, operating expenses associated with the NSL and Premium Finance acquired divisions, a reduction in deferred loan costs from the PPP loans, and increased sales and incentive-based compensation from higher production. Return on Average Assets Adjusted for Non-Core Items Ratio (Non-US GAAP) In addition to return on average assets, management uses return on average assets adjusted for non-core items to monitor performance. The return on average assets adjusted for non-core items ratio represents a Non-US GAAP financial measure since it excludes the after-tax impact of all gains and losses, acquisition-related expenses, contract negotiation expenses, pension settlement charges, severance expenses, COVID-19-related expenses and a Peoples Bank Foundation, Inc. contribution. 63 Table of Contents The following table provides a reconciliation of this Non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Condensed Consolidated Financial Statements for the periods presented: Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Annualized net (loss) income adjusted for non-core items: Net (loss) income $ (5,758) $ 10,103 $ 10,210 $ 19,808 $ 14,194 Add: net loss on investment securities 166 202 — 704 — Less: tax effect of net loss on investment securities (a) 35 42 — 148 — Less: net gain on investment securities — — 2 — 383 Add: tax effect of net gain on investment securities (a) — — — — 80 Add: net loss on asset disposals and other transactions 308 124 28 459 237 Less: tax effect of net loss on asset disposals and other transactions (a) 65 26 6 96 50 Add: acquisition-related expenses 16,209 2,400 335 20,520 412 Less: tax effect of acquisition-related expenses (a) 3,404 504 70 4,309 87 Add: pension settlement charges 143 — 531 143 1,050 Less: tax effect of pension settlement charges (a) 30 — 112 30 221 Add: severance expenses — 14 192 63 284 Less: tax effect of severance expenses (a) — 3 40 13 60 Add: COVID-19-related expenses 181 210 148 683 1,206 Less: tax effect of COVID-19-related expenses (a) 38 44 31 143 253 Add: Peoples Bank Foundation, Inc. contribution — — — 500 — Less: tax effect of Peoples Bank Foundation, Inc. contribution (a) — — — 105 — Add: contract negotiation fees 1,851 — — 1,851 — Less: tax effect of contract negotiation fees 389 — — 389 — Net income adjusted for non-core items (after tax) $ 9,139 $ 12,434 $ 11,183 $ 39,498 $ 16,409 Days in the period 92 91 92 273 274 Days in the year 365 365 366 365 366 Annualized net (loss) income $ (22,844) $ 40,523 $ 40,618 $ 26,483 $ 18,960 Annualized net income adjusted for non-core items (after tax) $ 36,258 $ 49,873 $ 44,489 $ 52,809 $ 21,919 Return on average assets: Annualized net (loss) income $ (22,844) $ 40,523 $ 40,618 $ 26,483 $ 18,960 Total average assets 5,475,147 5,183,146 4,906,614 5,192,183 4,706,153 Return on average assets (0.42) % 0.78 % 0.83 % 0.51 % 0.40 % Return on average assets adjusted for non-core items: Annualized net income adjusted for non-core items (after tax) $ 36,258 $ 49,873 $ 44,489 $ 52,809 $ 21,919 Total average assets 5,475,147 5,183,146 4,906,614 5,192,183 4,706,153 Return on average assets adjusted for non-core items 0.66 % 0.96 % 0.91 % 1.02 % 0.47 % (a) Based on a 21% statutory federal corporate income tax rate. The return on average assets declined during the third quarter of 2021, compared to the linked quarter and the third quarter of 2020. The decrease was driven by the provision for credit losses recognized in the third quarter due to the Premier acquisition and higher total non-interest expense recognized during the third quarter of 2021, which was mostly due to acquisition-related expenses. The return on average assets adjusted for non-core items declined compared to the linked quarter due to the higher salaries and 64 Table of Contents incentive compensation. The return on average assets and the return on average assets adjusted for non-core items both grew compared to the first nine months of 2020. The increases were mostly due to the previously mentioned higher provision for credit losses recorded during the first nine months of 2020. For additional information related to the changes in the provision for (recovery of) credit losses, refer to the sections in this discussion titled “Provision for (Recovery of) Credit Losses" and "Allowance for Credit Losses.” Return on Average Tangible Equity Ratio (Non-US GAAP) The return on average tangible equity ratio is a key financial measure used to monitor performance. This ratio is calculated as annualized net income (less the after-tax impact of amortization of other intangible assets) divided by average tangible equity. This measure is Non-US GAAP since it excludes amortization of other intangible assets from earnings and the impact of goodwill and other intangible assets acquired through acquisitions on total stockholders' equity. Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in thousands) 2021 2020 Annualized net income excluding amortization of other intangible assets: Net (loss) income $ (5,758) $ 10,103 $ 10,210 $ 19,808 $ 14,194 Add: amortization of other intangible assets 1,279 1,368 857 3,267 2,314 Less: tax effect of amortization of other intangible assets (a) 269 287 180 686 486 Net income excluding amortization of other intangible assets $ (4,748) $ 11,184 $ 10,887 $ 22,389 $ 16,022 Days in the period 92 91 92 273 274 Days in the year 365 365 366 365 366 Annualized net (loss) income $ (22,844) $ 40,523 $ 40,618 $ 26,483 $ 18,960 Annualized net (loss) income excluding amortization of other intangible assets $ (18,837) $ 44,859 $ 43,311 $ 29,934 $ 21,402 Average tangible equity: Total average stockholders' equity $ 627,783 $ 581,831 $ 567,055 $ 595,918 $ 578,439 Less: average goodwill and other intangible assets 232,361 222,553 185,816 213,232 180,291 Average tangible equity $ 395,422 $ 359,278 $ 381,239 $ 382,686 $ 398,148 Return on average stockholders' equity ratio: Annualized net income $ (22,844) $ 40,523 $ 40,618 $ 26,483 $ 18,960 Average stockholders' equity $ 627,783 $ 581,831 $ 567,055 $ 595,918 $ 578,439 Return on average stockholders' equity (3.64) % 6.96 % 7.16 % 4.44 % 3.28 % Return on average tangible equity ratio: Annualized net income excluding amortization of other intangible assets $ (18,837) $ 44,859 $ 43,311 $ 29,934 $ 21,402 Average tangible equity $ 395,422 $ 359,278 $ 381,239 $ 382,686 $ 398,148 Return on average tangible equity (4.76) % 12.49 % 11.36 % 7.82 % 5.38 % (a) Based on a 21% statutory federal corporate income tax rate. The return on average stockholders' equity and average tangible equity ratios were impacted by the provision for (recovery of) credit losses during each of the respective periods, as well as non-core items recognized during the periods. Intangible assets grew at September 30, 2021, compared to June 30, 2021, as Peoples recorded the intangibles and goodwill associated with the Premier acquisition, which increased average tangible equity. Additionally, during the first nine months of 2020, Peoples recorded high amounts of provision for credit losses, which negatively impacted net income, as a result of the COVID-19 pandemic. For additional information related to changes in the provision for (recovery of) credit losses, refer to the sections in this discussion titled “Provision for (Recovery of) Credit Losses" and "Allowance for Credit Losses.” 65 Table of Contents FINANCIAL CONDITION Cash and Cash Equivalents At September 30, 2021, Peoples' interest-bearing deposits in other banks had increased $278.6 million from December 31, 2020. The total cash and cash equivalents balance included $321.0 million of excess cash reserves being maintained at the FRB of Cleveland at September 30, 2021, compared to $25.1 million at December 31, 2020. Peoples also acquired $252.8 million in cash and cash equivalents from Premier. The amount of excess cash reserves maintained is dependent upon Peoples' daily liquidity position, which is driven primarily by changes in deposit and loan balances, coupled with increased liquidity needs due to the COVID-19 pandemic. Through the first nine months of 2021, Peoples' total cash and cash equivalents increased $347.6 million as Peoples had net cash provided by investing activities of $106.3 million, financing activities of $174.6 million and operating activities of $66.7 million. Peoples' investing activities reflected a net decrease of $156.6 million in loans and an aggregate of $896.6 million in purchases of available-for-sale and held-to-maturity investment securities, which were partially offset by an aggregate of $711.5 million in net proceeds from sales, principal payments, calls and prepayments on available-for-sale and held-to-maturity investment securities. Financing activities included a $165.4 million net increase in deposits and an increase of $32.6 million in short-term borrowings, as well as no purchases of treasury stock under the share repurchase program and $20.9 million of cash dividends paid. Further information regarding the management of Peoples' liquidity position can be found later in this discussion under “Interest Rate Sensitivity and Liquidity.” Investment Securities The following table provides information regarding Peoples’ investment portfolio: (Dollars in thousands) September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Available-for-sale securities, at fair value: Obligations of: U.S. government sponsored agencies $ 78,481 $ 14,235 $ 18,471 $ 5,363 $ 5,383 States and political subdivisions 252,919 223,853 218,484 114,919 104,126 Residential mortgage-backed securities 898,459 579,152 596,181 623,218 726,992 Commercial mortgage-backed securities 62,552 27,631 27,481 4,783 10,568 Bank-issued trust preferred securities 4,679 4,766 4,730 4,730 4,633 Total fair value $ 1,297,090 $ 849,637 $ 865,347 $ 753,013 $ 851,702 Total amortized cost $ 1,294,654 $ 839,682 $ 859,120 $ 734,544 $ 829,899 Net unrealized gain $ 2,436 $ 9,955 $ 6,227 $ 18,469 $ 21,803 Held-to-maturity securities, at amortized cost: Obligations of: U.S. government sponsored agencies $ 29,995 $ 30,103 $ 30,211 $ — $ — States and political subdivisions (a) 124,181 102,224 92,436 35,139 3,539 Residential mortgage-backed securities 41,035 24,067 24,878 25,890 26,926 Commercial mortgage-backed securities 47,889 23,830 18,705 5,429 5,678 Total amortized cost $ 243,100 $ 180,224 $ 166,230 $ 66,458 $ 36,143 Other investment securities $ 34,486 $ 32,584 $ 34,026 $ 37,560 $ 40,715 Total investment securities: Amortized cost $ 1,572,240 $ 1,052,490 $ 1,059,376 $ 838,562 $ 906,757 Carrying value $ 1,574,676 $ 1,062,445 $ 1,065,603 $ 857,031 $ 928,560 (a) Amortized cost is presented net of the allowance for credit losses of $236 at September 30, 2021; $201 at June 30, 2021; $182 at March 31, 2021; $60 at December 31, 2020 and $6 at September 30, 2020. During the third quarter of 2021, Peoples acquired, in the Premier acquisition, investment securities totaling $563.3 million. Peoples sold $400.6 million of available-for-sale investment securities and reinvested $358.7 million of the proceeds into higher-yielding investments. The increase compared to December 31, 2020 was driven by the Premier acquisition and an increase in available-for-sale commercial-mortgage backed securities that were purchased during the first nine months of 2021, coupled with purchases of available for sale and held-to-maturity obligations of state and political subdivisions, which were purchased in an effort to reduce the impact of premium amortization on the securities that were sold. At December 31, 2020, the investment security portfolio decreased compared to prior periods, as Peoples had worked to execute the strategy to sell securities that had high premium 66 Table of Contents amortization, and reinvest into investment securities; however, not all proceeds from those sales had been reinvested by December 31, 2020. 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 The following table provides information regarding outstanding loan balances: (Dollars in thousands) September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Originated loans: Construction $ 108,334 $ 97,424 $ 75,189 $ 103,169 $ 103,948 Commercial real estate, other 838,333 836,613 832,399 780,324 752,480 Commercial real estate 946,667 934,037 907,588 883,493 856,428 Commercial and industrial 715,169 778,122 935,150 943,024 1,029,613 Premium finance 134,755 117,039 109,129 100,571 60,908 Leases 49,464 24,217 — — — Residential real estate 334,838 324,321 306,440 281,623 284,645 Home equity lines of credit 98,806 95,376 92,540 93,296 91,701 Consumer, indirect 543,243 537,926 519,749 503,526 491,663 Consumer, direct 80,746 78,736 75,998 75,591 75,106 Consumer 623,989 616,662 595,747 579,117 566,769 Deposit account overdrafts 927 498 298 351 519 Total originated loans $ 2,904,615 $ 2,890,272 $ 2,946,892 $ 2,881,475 $ 2,890,583 Acquired loans (a): Construction $ 66,450 $ 3,175 $ 3,510 $ 3,623 $ 4,103 Commercial real estate, other 790,783 111,647 132,850 149,529 160,759 Commercial real estate 857,233 114,822 136,360 153,152 164,862 Commercial and industrial 143,369 27,629 29,611 30,621 34,396 Premium finance — 49 1,461 14,187 43,217 Leases 61,982 71,426 — — — Residential real estate 433,296 242,276 267,260 292,384 304,804 Home equity lines of credit 62,564 23,025 24,886 27,617 30,234 Consumer, indirect 13 — — 1 36 Consumer, direct 27,956 2,700 3,206 3,503 3,953 Consumer 27,969 2,700 3,206 3,504 3,989 Total acquired loans $ 1,586,413 $ 481,927 $ 462,784 $ 521,465 $ 581,502 Total loans $ 4,491,028 $ 3,372,199 $ 3,409,676 $ 3,402,940 $ 3,472,085 Percent of loans to total loans: Construction 3.9 % 3.0 % 2.3 % 3.1 % 3.1 % Commercial real estate, other 36.3 % 28.1 % 28.3 % 27.3 % 26.3 % Commercial real estate 40.2 % 31.1 % 30.6 % 30.4 % 29.4 % Commercial and industrial 19.1 % 23.9 % 28.3 % 28.6 % 30.6 % Premium finance 3.0 % 3.5 % 3.2 % 3.4 % 3.0 % Leases 2.5 % 2.8 % — % — % — % Residential real estate 17.1 % 16.8 % 16.8 % 16.9 % 17.0 % Home equity lines of credit 3.6 % 3.5 % 3.5 % 3.6 % 3.5 % Consumer, indirect 12.1 % 16.0 % 15.3 % 14.8 % 14.2 % Consumer, direct 2.4 % 2.4 % 2.3 % 2.3 % 2.3 % Consumer 14.5 % 18.4 % 17.6 % 17.1 % 16.5 % Total percentage 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Residential real estate loans being serviced for others $ 441,085 $ 454,399 $ 469,788 $ 485,972 $ 490,170 (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). 67 Table of Contents Period-end total loan balances at September 30, 2021 increased $1.1 billion compared to June 30, 2021. The increase compared to June 30, 2021 was mostly driven by $1.1 billion in loans acquired from Premier, coupled with organic growth in premium finance loans of $17.7 million, growth in leases of $15.8 million, and organic loan growth of $14.3 million, offset partially by $132.2 million in forgiveness received on PPP loans during the quarter. Excluding the PPP loan balances, Peoples' total originated loans grew by 6% annualized compared to June 30, 2021. The decrease in commercial and industrial loan balances at June 30, 2021 compared to March 31, 2021 was mostly driven by $186.4 million in forgiveness proceeds received on PPP loans during the second quarter. This decrease was partially offset by $95.6 million in leases acquired from NSL, coupled with growth in in commercial real estate and consumer indirect loans. The decline in construction loan balances of $28.0 million at March 31, 2021, compared to December 31, 2020, was mainly due to construction projects being completed and construction loans then converting to permanent financing. 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 September 30, 2021: (Dollars in thousands) Outstanding Balance Loan Commitments Total Exposure % of Total Construction: Apartment complexes $ 76,292 $ 135,048 $ 211,340 47.7 % Mixed-use facilities 14,641 43,992 58,633 13.2 % Assisted living facilities and nursing homes 15,804 30,708 46,512 10.5 % Land only 25,959 12,968 38,927 8.8 % Office buildings and complexes 3,523 15,969 19,492 4.4 % Storage facility 8,966 5,291 14,257 3.2 % Lodging and lodging related 7,784 6,091 13,875 3.1 % Retail 5,408 6,470 11,878 2.7 % Residential property 4,529 4,932 9,461 2.1 % Other (a) 11,878 7,118 18,996 4.3 % Total construction $ 174,784 $ 268,587 $ 443,371 100.0 % (a) All other outstanding balances are less than 2% of the total loan portfolio. 68 Table of Contents (Dollars in thousands) Outstanding Balance Loan Commitments Total Exposure % of Total Commercial real estate, other: Office buildings and complexes: Owner occupied $ 78,614 $ 3,199 $ 81,813 4.9 % Non-owner occupied 93,863 3,795 97,658 5.8 % Total office buildings and complexes 172,477 6,994 179,471 10.7 % Retail facilities: Owner occupied 55,417 1,752 57,169 3.4 % Non-owner occupied 128,759 471 129,230 7.7 % Total retail facilities 184,176 2,223 186,399 11.1 % Mixed-use facilities: Owner occupied 55,549 1,582 57,131 3.4 % Non-owner occupied 63,214 458 63,672 3.8 % Total mixed-use facilities 118,763 2,040 120,803 7.2 % Apartment complexes 98,159 1,468 99,627 5.9 % Light industrial facilities: Owner occupied 79,414 1,531 80,945 4.8 % Non-owner occupied 34,473 757 35,230 2.1 % Total light industrial facilities 113,887 2,288 116,175 6.9 % Assisted living facilities and nursing homes 81,539 750 82,289 4.9 % Warehouse facilities: Owner occupied 38,685 1,400 40,085 2.4 % Non-owner occupied 38,614 27 38,641 2.3 % Total warehouse facilities 77,299 1,427 78,726 4.7 % Lodging and lodging related: Owner occupied 15,131 210 15,341 0.9 % Non-owner occupied 119,043 150 119,193 7.1 % Total lodging and lodging related 134,174 360 134,534 8.0 % Education services: Owner occupied 15,615 98 15,713 0.9 % Non-owner occupied 22,460 4,000 26,460 1.6 % Total education services 38,075 4,098 42,173 2.5 % Restaurant/bar facilities: Owner occupied 22,361 — 22,361 1.3 % Non-owner occupied 14,644 — 14,644 0.9 % Total restaurant/bar facilities 37,005 — 37,005 2.2 % Agriculture 32,865 1,976 34,841 2.1 % Other (a) 540,697 26,225 566,922 33.8 % Total commercial real estate, other $ 1,629,116 $ 49,849 $ 1,678,965 100.0 % (a) All other outstanding balances are less than 2% of the total loan portfolio. Peoples' commercial lending activities continue to focus on lending opportunities inside its primary and secondary market areas within Ohio, Kentucky, West Virginia, Virginia, Washington, D.C. and Maryland. In all other states, the aggregate outstanding balances of commercial loans in each state were less than 4% of total loans at either September 30, 2021 or December 31, 2020. The repayment of premium finance loans are secured by the underlying insurance policy, and therefore, have no geographical impact from a repayment perspective. The repayment of leases are secured by the underlying equipment collateral and not real estate, which mitigates geographic risk. COVID-19 Loan Impacts Small Business Administration Paycheck Protection Program In March 2020, the CARES Act created the PPP targeted to provide small businesses with support to cover payroll and certain other specified expenses. Loans made under the PPP are fully guaranteed by the SBA. The PPP loans also afford borrowers forgiveness up to the principal amount of the PPP covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll and/or to make certain mortgage interest, lease and utility payments, and certain other criteria 69 Table of Contents are satisfied. The SBA will reimburse PPP lenders for any amount of a PPP covered loan that is forgiven, and PPP lenders will not be held liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness. Peoples is a PPP participating lender, and the PPP loans originated (including $28.2 million acquired in the merger with Premier) are included in commercial and industrial loans. Peoples also recorded deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, which will be amortized over the life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income. The following tables detail Peoples' PPP loans and related income: (Dollars in millions) September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 PPP aggregate outstanding principal balances $ 139.8 $ 194.7 $ 349.9 $ 374.8 $ 472.0 PPP net deferred loan origination fees 4.0 7.1 9.3 7.9 11.6 Three Months Ended Nine Months Ended September 30, 2021 June 30, 2021 September 30, 2020 September 30, (Dollars in millions) 2021 2020 Amortization of net deferred loan origination fees $ 3.1 $ 3.4 $ 1.9 $ 11.2 $ 3.8 Allowance for Credit Losses The amount of the allowance for credit losses at the end of each period represents management's estimate of expected losses from existing loans based upon its quarterly analysis of the loan portfolio. While this process involves allocations being made to specific loans and pools of loans, the entire allowance is available for all losses expected within the loan portfolio. The following details management's allocation of the allowance for credit losses: (Dollars in thousands) September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Commercial real estate $ 39,252 $ 18,147 $ 18,663 $ 19,423 $ 21,549 Commercial and industrial 13,378 8,686 10,108 12,763 13,099 Premium finance 1,137 998 1,160 1,095 986 Leases 4,505 3,715 — — — Total commercial 58,272 31,546 29,931 33,281 35,634 Residential real estate 9,568 4,837 4,935 6,044 5,988 Home equity lines of credit 2,224 1,504 1,494 1,860 1,797 Consumer, indirect 6,160 8,841 7,522 8,030 12,772 Consumer, direct 1,079 1,161 970 1,081 1,861 Consumer 7,239 10,002 8,492 9,111 14,633 Deposit account overdrafts 79 53 45 63 76 Allowance for credit losses $ 77,382 $ 47,942 $ 44,897 $ 50,359 $ 58,128 As a percent of total loans 1.72 % 1.42 % 1.32 % 1.48 % 1.67 % During the third quarter of 2021, Peoples recorded a provision for credit losses of $11.0 million in order to establish an allowance for credit losses for non-purchase credit deteriorated loans of $10.6 million, and a liability for unfunded commitments of $0.4 million, both relating to the acquisition of Premier. Peoples also recorded a $22.3 million increase in the allowance for credit losses during the third quarter of 2021 related to the purchase credit deteriorated loans acquired from Premier. The increases at September 30, 2021 compared to prior periods are due to the Premier and NSL acquisitions. During the second quarter, Peoples increased its allowance for credit losses due to the establishment of an allowance for credit losses on the leases acquired from NSL. Peoples recorded $3.3 million in provision for credit losses during the second quarter of 2021 in order to establish the allowance for credit losses for the acquired leases and $493,000 to establish the allowance for credit losses on leases identified as purchase credit deteriorated at the acquisition date and added an additional $427,000 in allowance for credit losses on growth in leases during the second quarter of 2021. The decreases in the allowance for credit losses for March 31, 2021 compared to December 31, 2020, and from December 31, 2020 compared to September 30, 2020, were due to developments related to COVID-19 and the resulting positive impact on the economic assumptions used in estimating the allowance for credit losses under the CECL model. During much of 2020, Peoples increased its allowance for credit losses based on CECL model results, which incorporated economic forecasts that included the impact of COVID-19 on certain economic factors. These forecasts included higher unemployment rates nationally and in Ohio, and lower Ohio Gross Domestic Product, which are the key assumptions within the CECL 70 Table of Contents model, compared to prior periods. During the third quarter of 2020, Peoples also recorded allowance for credit losses associated with the loans acquired from Triumph Premium Finance on July 1, 2020, which had included $84.7 million in loans at the acquisition date. Additional information regarding Peoples' allowance for credit losses can be found in "Note 1 Summary of Significant Accounting Policies" in Peoples' 2020 Form 10-K and "Note 4 Loans and Leases" of the Notes to the Unaudited Condensed Consolidated Financial Statements. The following table summarizes Peoples’ net charge-offs and recoveries: Three Months Ended (Dollars in thousands) September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Gross charge-offs: Commercial real estate, other $ — $ 4 $ 157 $ 274 $ 109 Commercial and industrial 654 5 293 465 146 Premium finance 7 7 16 1 2 Leases 431 525 — — — Residential real estate 44 136 133 98 121 Home equity lines of credit 180 4 12 80 — Consumer, indirect 416 269 505 498 370 Consumer, direct 29 31 36 59 15 Consumer 445 300 541 557 385 Deposit account overdrafts 135 89 103 139 202 Total gross charge-offs $ 1,896 $ 1,070 $ 1,255 $ 1,614 $ 965 Recoveries: Commercial real estate, other $ 4 $ 4 $ — $ 74 $ 4 Commercial and industrial 4 18 — 512 — Premium finance — — — — — Leases 120 110 — — — Residential real estate 48 40 15 45 100 Home equity lines of credit 37 — 4 1 2 Consumer, indirect 43 63 105 41 64 Consumer, direct 17 11 26 12 13 Consumer 60 74 131 53 77 Deposit account overdrafts 37 44 54 30 47 Total recoveries $ 310 $ 290 $ 204 $ 715 $ 230 Net charge-offs (recoveries): Commercial real estate, other $ (4) $ — $ 157 $ 200 $ 105 Commercial and industrial 650 (13) 293 (47) 146 Premium finance 7 7 16 1 2 Leases 311 415 — — — Residential real estate (4) 96 118 53 21 Home equity lines of credit 143 4 8 79 (2) Consumer, indirect 373 206 400 457 306 Consumer, direct 12 20 10 47 2 Consumer 385 226 410 504 308 Deposit account overdrafts 98 45 49 109 155 Total net charge-offs $ 1,586 $ 780 $ 1,051 $ 899 $ 735 71 Table of Contents Three Months Ended (Dollars in thousands) September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Ratio of net charge-offs to average total loans (annualized): Commercial real estate, other — % — % 0.02 % 0.02 % 0.01 % Commercial and industrial 0.08 % — % 0.04 % (0.01) % 0.02 % Leases 0.03 % 0.05 % — % — % — % Residential real estate — % 0.01 % 0.01 % 0.01 % — % Home equity lines of credit 0.02 % — % — % — % — % Consumer, indirect 0.04 % 0.02 % 0.05 % 0.05 % 0.03 % Consumer, direct — % — % — % 0.01 % — % Consumer 0.04 % 0.02 % 0.05 % 0.06 % 0.03 % Deposit account overdrafts 0.01 % 0.01 % 0.01 % 0.02 % 0.02 % Total 0.18 % 0.09 % 0.13 % 0.10 % 0.08 % Each with "--%" not meaningful. Net charge-offs during the third quarter of 2021 were 0.18% of average total loans on an annualized basis. Although, gross charge-offs in many loan categories declined compared to the linked quarter, the primary factor in the increase of total gross charge-offs was one commercial and industrial loan charge-off of $500,000 during the quarter. Peoples recognized a $450,000 charge-off on a commercial and industrial loan relationship, while also recording a $508,000 recovery on a previously charged-off commercial and industrial loan relationship during the fourth quarter of 2020. During the second quarter of 2020, Peoples recorded a $750,000 recovery on a commercial loan relationship that had been previously charged-off. The following table details Peoples’ nonperforming assets: (Dollars in thousands) September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Loans 90+ days past due and accruing: Commercial real estate, other $ 1,912 $ 1,361 $ 55 $ — $ 80 Commercial and industrial 98 161 — 50 74 Premium finance 368 216 109 205 — Leases 1,736 1,522 — — — Residential real estate 1,156 342 662 1,975 2,548 Home equity lines of credit 61 60 180 82 27 Consumer, indirect — 39 24 39 86 Consumer, direct 32 40 14 17 — Consumer 32 79 38 56 86 Total loans 90+ days past due and accruing $ 5,363 $ 3,741 $ 1,044 $ 2,368 $ 2,815 Nonaccrual loans: Construction $ — $ 4 $ 4 $ 4 $ 4 Commercial real estate, other 17,207 7,965 8,084 8,744 8,762 Commercial real estate 17,207 7,969 8,088 8,748 8,766 Commercial and industrial 4,133 3,938 4,067 4,017 4,067 Leases 1,411 — — — — Residential real estate 8,046 5,811 6,182 6,080 6,027 Home equity lines of credit 661 572 624 708 754 Consumer, indirect 850 704 825 883 801 Consumer, direct 177 100 146 160 148 Consumer 1,027 804 971 1,043 949 Total nonaccrual loans $ 32,485 $ 19,094 $ 19,932 $ 20,596 $ 20,563 Nonaccrual troubled debt restructurings ("TDRs"): Commercial real estate, other $ 94 $ 99 $ 337 367 $ 772 72 Table of Contents (Dollars in thousands) September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Commercial and industrial 1,223 1,774 2,034 2,175 2,250 Residential real estate 1,689 1,784 2,064 2,295 2,481 Home equity lines of credit 315 129 156 159 165 Consumer, indirect 219 193 206 190 160 Consumer, direct 9 6 15 11 45 Consumer 228 199 221 201 205 Total nonaccrual TDRs $ 3,549 $ 3,985 $ 4,812 $ 5,197 $ 5,873 Total nonperforming loans ("NPLs") $ 41,397 $ 26,820 $ 25,788 $ 28,161 $ 29,251 OREO: Commercial $ 10,804 $ — $ — $ — $ 145 Residential $ 464 $ 239 $ 134 $ 134 $ 148 Total OREO $ 11,268 $ 239 $ 134 $ 134 $ 293 Total nonperforming assets ("NPAs") $ 52,665 $ 27,059 $ 25,922 $ 28,295 $ 29,544 Criticized loans (a) $ 234,845 $ 113,802 $ 116,424 $ 126,619 $ 123,219 Classified loans (b) 142,628 69,166 76,095 72,518 76,009 Asset Quality Ratios (c): NPLs as a percent of total loans (d) 0.92 % 0.79 % 0.76 % 0.82 % 0.84 % NPAs as a percent of total assets (d) 0.75 % 0.53 % 0.50 % 0.59 % 0.60 % NPAs as a percent of total loans and OREO(d) 1.17 % 0.80 % 0.76 % 0.84 % 0.85 % Allowance for credit losses as a percent of NPLs (d) 186.93 % 178.75 % 174.10 % 180.14 % 198.72 % Criticized loans as a percent of total loans (a) 5.23 % 3.37 % 3.41 % 3.72 % 3.55 % Classified loans as a percent of total loans (b) 3.18 % 2.05 % 2.23 % 2.13 % 2.19 % (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) Nonperforming loans include loans 90+ days past due and accruing, TDRs and nonaccrual loans. Nonperforming assets include nonperforming loans and OREO. 73 Table of Contents During the third quarter of 2021, nonperforming assets increased $25.6 million, or 95%, compared to June 30, 2021. The increase in nonperforming assets compared to the prior quarter was primarily attributable to nonperforming loans and other real estate owned acquired from Premier. The nonperforming loans as a percent of total loans and nonperforming assets as a percent of total assets ratios both increased compared to June 30, 2021, due to the acquired nonperforming loans. The increase in nonperforming assets of $1.1 million at June 30, 2021, compared to March 31, 2021, was primarily due to acquisition of NSL. Nonperforming assets declined $2.3 million at March 31, 2021, compared to December 31, 2020, and was mostly due to several small relationships in both loans 90+ days past due and accruing and nonaccrual loans. Criticized loans, which are those categorized as special mention, substandard or doubtful, increased $121.0 million, or 106%, compared to June 30, 2021 and increased $111.6 million, or 91%, compared to September 30, 2020. The increase in the amount of criticized loans compared to June 30, 2021 was the result of criticized loans acquired from Premier, offset by the pay-off of six commercial and industrial loans with an aggregate principal balance of $12.3 million and several smaller loans. Criticized loans declined $2.6 million at June 30, 2021, which was primarily due to the payoff of several smaller commercial loans. Classified loans, which are those categorized as substandard or doubtful, increased by $73.5 million, or 106%, compared to June 30, 2021, and were up $66.6 million, or 88%, compared to September 30, 2020. The increase was driven by loans acquired from Premier. On March 22, 2020, federal and state government banking regulators issued a joint statement, with which the FASB concurred as to the approach, regarding accounting for loan modifications for borrowers affected by COVID-19. In this guidance, short-term modifications, made on a good faith basis in response to COVID-19, to borrowers who were current prior to any relief, are not considered TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment which are insignificant. Under the guidance, borrowers that are considered to be current are those that were less than 30 days past due on their contractual payments at the time a modification program is implemented. In addition, modification or deferral programs mandated by the U.S. federal government or any state government related to COVID-19 are not TDRs within the scope of ASC 310-40. On August 3, 2020, federal and state banking regulators issued a joint statement, encouraging financial institutions to consider prudent accommodation options to mitigate losses for the borrower and financial institution beyond the initial accommodation period. In this guidance, institutions should also provide consumers with available options for repaying missed payments at the end of their accommodation to avoid delinquencies, as well as options for changes to terms to support sustainable and affordable payments for the long term. These considerations should also include prudent risk management practices at the financial institution based on the credit risk of the borrower. Peoples is actively working with its customers to address any further accommodation needs while carefully evaluating the associated credit risk of the borrowers. 74 Table of Contents Deposits The following table details Peoples’ deposit balances: (Dollars in thousands) September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Non-interest-bearing deposits (a) $ 1,559,993 $ 1,181,045 $ 1,206,034 $ 997,323 $ 982,912 Interest-bearing deposits: Interest-bearing demand accounts (a) 1,140,639 732,478 722,470 692,113 666,134 Savings accounts 1,016,755 689,086 676,345 628,190 589,625 Retail certificates of deposit ("CDs") 691,680 417,466 433,214 445,930 461,216 Money market deposit accounts 637,635 547,412 586,099 591,373 581,398 Governmental deposit accounts 679,305 498,390 511,937 385,384 409,967 Brokered deposits 106,013 166,746 168,130 170,146 260,753 Total interest-bearing deposits 4,272,027 3,051,578 3,098,195 2,913,136 2,969,093 Total deposits $ 5,832,020 $ 4,232,623 $ 4,304,229 $ 3,910,459 $ 3,952,005 Demand deposits as a percent of total deposits 46 % 45 % 45 % 43 % 42 % (a) The sum of amounts presented is considered total demand deposits. At September 30, 2021, period-end deposits increased $1.6 billion, or 38%, compared to June 30, 2021, and increased $1.9 billion, or 48%, compared to September 30, 2020. The increase in total deposits compared to June 30, 2021 was driven primarily by $1.8 billion in deposits acquired in the merger with Premier including $392.2 million in non-interest bearing deposits, $652.9 million in interest-bearing demand accounts, $327.0 million in savings accounts, $285.4 million in retail CDs, $155.6 million in money market accounts and $11.1 million in brokered deposits. The decrease in total deposits at June 30, 2021 compared to March 31, 2021 was related to declines in money market deposits, non-interest bearing deposits, and retail CDs. At March 31, 2021, compared to December 31, 2020, Peoples experienced a significant increase in governmental deposit accounts, which was mostly due to seasonal fluctuation within these accounts. Total deposits in all periods presented were higher due to customers maintaining larger balances, as a result of PPP loan proceeds, fiscal stimulus payments and changes in customer spending habits in light of the COVID-19 pandemic. In prior quarterly periods in the table above, Peoples experienced increases in most low-cost deposit categories. Peoples reduced its reliance on brokered deposits in each quarterly period, beginning after June 30, 2020. This decline was largely due to the increase in deposit balances from customers, which allowed Peoples to reduce its position in the higher-cost brokered CDs during each period. As part of its funding strategy, Peoples hedges 90-day brokered deposits with interest rate swaps. The swaps pay a fixed rate of interest while receiving three-month LIBOR, which offsets the rate on the brokered deposits. As of September 30, 2021, Peoples had sixteen effective interest rate swaps, with an aggregate notional value of $ 150.0 million, of which $ 100.0 million were designated as cash flow hedges of overnight brokered deposits, which are expected to be extended every 90 days through the maturity dates of the swaps. The remaining $ 50.0 million of interest rate swaps hedged 90-day FHLB advances, which are also expected to be extended every 90 days through the maturity dates of the swaps. Peoples continually evaluates the overall balance sheet position given the interest rate environment. Borrowed Funds The following table details Peoples’ short-term and long-term borrowings: (Dollars in thousands) September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Short-term borrowings: FHLB 90-day advances $ 50,000 $ — $ — $ — $ 110,000 Current portion of long-term FHLB advances 15,000 15,000 20,000 20,000 25,000 Retail repurchase agreements 119,693 51,496 47,868 53,261 47,063 Total short-term borrowings $ 184,693 $ 66,496 $ 67,868 $ 73,261 $ 182,063 Long-term borrowings: FHLB advances $ 86,483 $ 87,393 $ 102,645 $ 102,957 $ 103,815 Junior subordinated debt securities 12,928 7,688 7,650 7,611 7,571 Total long-term borrowings $ 99,411 $ 95,081 $ 110,295 $ 110,568 $ 111,386 Total borrowed funds $ 284,104 $ 161,577 $ 178,163 $ 183,829 $ 293,449 Borrowed funds, in total, which include overnight borrowings, are mainly a function of loan growth and changes in total deposit balances. Total borrowed funds increased 76% compared to June 30, 2021, primarily due to the addition of $63.8 million retail 75 Table of Contents repurchase agreements from Premier. The decline in borrowed funds at September 30, 2021, compared to September 30, 2020 was mostly due to swap funding being moved to brokered deposits rather than the use of rolling 90-day advances to fund liquidity needs, which was partially offset by the acquired retail repurchase agreements from Premier during the third quarter of 2021. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities increased $23.8 million, or 27%, compared to June 30, 2021 and increased $12.2 million compared to September 30, 2020. The increase compared to the end of the second quarter of 2021 was the result of an increase in interest payable and other liabilities offset by with changes related to the fair value of swap derivatives at September 30, 2021. The increase compared to the end of the third quarter of 2020 was also the result of an increase in accrued interest payable offset by a decrease in the fair value of swap derivatives . 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. Capital/Stockholders’ Equity At September 30, 2021, capital levels for both Peoples and Peoples Bank remained substantially higher than the minimum amounts needed to be considered "well capitalized" institutions under applicable banking regulations. These higher capital levels reflect Peoples' desire to maintain a strong capital position. In order to avoid limitations on dividends, equity repurchases and compensation, Peoples must exceed the three minimum required ratios by at least the capital conservation buffer of 2.50%, which applies to the common equity tier 1 ("CET1") ratio, the tier 1 capital ratio and the total risk-based capital ratio. At September 30, 2021, Peoples had a capital conservation buffer of 5.83%. The following table details Peoples' risk-based capital levels and corresponding ratios: (Dollars in thousands) September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Capital Amounts: Common Equity Tier 1 $ 567,172 $ 383,502 $ 418,089 $ 409,400 $ 398,553 Tier 1 580,100 391,190 425,739 417,011 406,124 Total (Tier 1 and Tier 2) 637,802 431,424 463,872 456,384 445,101 Net risk-weighted assets $ 4,611,321 $ 3,382,736 $ 3,365,637 $ 3,146,767 $ 3,106,817 Capital Ratios: Common Equity Tier 1 12.30 % 11.34 % 12.42 % 13.01 % 12.83 % Tier 1 12.58 % 11.56 % 12.65 % 13.25 % 13.07 % Total (Tier 1 and Tier 2) 13.83 % 12.75 % 13.78 % 14.50 % 14.33 % Tier 1 leverage ratio 11.20 % 7.87 % 9.00 % 8.97 % 8.62 % During the third quarter of 2021, Peoples' reported a net loss of $5.8 million and declared dividends of $7.1 million. However, regulatory capital levels increased due to the merger with Premier. Net risk-weighted assets grew compared to June 30, 2021 mostly due to the merger with Premier, along with growth in premium finance loans and growth in leases during the quarter. The NSL acquisition negatively impacted the regulatory capital ratios at March 31, 2021, as the purchase price was included in net risk-weighted assets and there was no capital issued in connection with the NSL acquisition. In 2020, Peoples repurchased common shares during each quarter of the year, which reduced regulatory capital levels. Peoples also completed the Premium Finance acquisition on July 1, 2020, which impacted regulatory capital levels due to the recognition of goodwill and intangibles associated with the acquisition. Peoples did not repurchase any common shares in the first nine months of 2021. In addition to traditional capital measurements, management uses tangible capital measures to evaluate the adequacy of Peoples' stockholders' equity. Such ratios represent Non-US GAAP financial measures since their calculation removes the impact of goodwill and other intangible assets acquired through acquisitions on amounts reported in the Unaudited Consolidated Balance Sheets. Management believes this information is useful to investors since it facilitates the comparison of Peoples' operating performance, financial condition and trends to peers, especially those without a similar level of intangible assets to that of Peoples. Further, intangible assets generally are difficult to convert into cash, especially during a financial crisis, and could decrease substantially in value should there be deterioration in the overall franchise value. As a result, tangible equity represents a conservative measure of the capacity for Peoples to incur losses but remain solvent. 76 Table of Contents The following table reconciles the calculation of these Non-US GAAP financial measures to amounts reported in Peoples' Unaudited Condensed Consolidated Financial Statements: (Dollars in thousands) September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Tangible equity: Total stockholders' equity $ 831,882 $ 585,505 $ 578,893 $ 575,673 $ 566,856 Less: goodwill and other intangible assets 295,415 221,576 184,007 184,597 185,397 Tangible equity $ 536,467 $ 363,929 $ 394,886 $ 391,076 $ 381,459 Tangible assets: Total assets $ 7,059,752 $ 5,067,634 $ 5,143,052 $ 4,760,764 $ 4,911,807 Less: goodwill and other intangible assets 295,415 221,576 184,007 184,597 185,397 Tangible assets $ 6,764,337 $ 4,846,058 $ 4,959,045 $ 4,576,167 $ 4,726,410 Tangible book value per common share: Tangible equity $ 536,467 $ 363,929 $ 394,886 $ 391,076 $ 381,459 Common shares outstanding 28,265,791 19,660,877 19,629,633 19,563,979 19,721,783 Tangible book value per common share $ 18.98 $ 18.51 $ 20.12 $ 19.99 $ 19.34 Tangible equity to tangible assets ratio: Tangible equity $ 536,467 $ 363,929 $ 394,886 $ 391,076 $ 381,459 Tangible assets $ 6,764,337 $ 4,846,058 $ 4,959,045 $ 4,576,167 $ 4,726,410 Tangible equity to tangible assets 7.93 % 7.51 % 7.96 % 8.55 % 8.07 % Tangible book value per common share increased to $18.98 at September 30, 2021, compared to $18.51 at June 30, 2021. The change in tangible book value per common share was due to tangible equity increasing at a higher rate than shares outstanding during the third quarter of 2021. The increase in tangible book value per common share at December 31, 2020, compared to September 30, 2020, was the result of higher stockholders' equity as net income exceeded dividends declared during the period, as well as a reduction in common shares outstanding as Peoples actively repurchased common shares. The tangible equity to tangible assets ratio increased at September 30, 2021 compared to June 30, 2021. This increase was driven by higher tangible assets related to the merger with Premier which provided for increases in loans, investment securities, cash and cash equivalents, and other assets, coupled with the intangible assets recorded during the third quarter of 2021 associated with the merger with Premier and the NSL acquisition. The decline in the tangible equity to tangible assets ratio at March 31, 2021 compared to December 31, 2020, was largely due to an increase in other assets that was driven by the NSL acquisition, for which the purchase price was paid and recorded on March 31, 2021. The higher tangible equity to tangible assets ratio at December 31, 2020, compared to September 30, 2020, was attributable to higher tangible equity, while tangible assets declined due to reductions in investment securities and total loans. 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 liabilities. Peoples' exposure to IRR is due primarily to differences in the maturity or repricing of earning assets and interest-bearing liabilities. In addition, other factors, such as prepayments of loans and investment securities, or early withdrawal of deposits, can affect Peoples' exposure to IRR and increase interest costs or reduce revenue streams. Peoples has assigned overall management of IRR to its Asset-Liability Committee (the “ALCO”), which has established an IRR management policy that sets minimum requirements and guidelines for monitoring and managing the level of IRR. The methods used by the ALCO to assess IRR remain largely unchanged from those disclosed in Peoples' 2020 Form 10-K. 77 Table of Contents The following table shows the estimated changes in net interest income and the economic value of equity based upon a standard, parallel shock analysis with balances held constant (dollars in thousands): Increase (Decrease) in Interest Rate Estimated Increase (Decrease) in Net Interest Income Estimated Increase (Decrease) in Economic Value of Equity (in Basis Points) September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 300 $ 26,191 12.5 % $ 22,034 17.3 % $ 12,475 1.0 % $ 117,235 15.7 % 200 17,360 8.3 % 15,899 12.5 % 11,544 0.9 % 95,189 12.7 % 100 8,646 4.1 % 8,981 7.1 % 10,550 0.8 % 60,384 8.1 % (100) (9,792) (4.7) % (7,030) (5.5) % (120,471) (9.6) % (116,205) (15.5) % 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. With respect to investment prepayment speeds, the assumptions used are the results of a third-party prepayment model which projects the rate at which the underlying mortgages will prepay. These prepayment speeds affect the amount forecasted for cash flow reinvestment, premium amortization, and discount accretion assumed in interest rate risk modeling results. This prepayment activity is generally the result of refinancing activity and tends to increase as longer term interest rates decline, much like the current environment. The assumptions in the interest rate risk model could be incorrect, leading to either a lesser or greater impact on net interest income or asset duration. While parallel interest rate shock scenarios are useful in assessing the level of IRR inherent in the balance sheet, interest rates typically move in a nonparallel manner with differences in the timing, direction and magnitude of changes in short-term and long-term interest rates. Thus, any benefit that might occur as a result of the Federal Reserve increasing short-term interest rates in the future could be offset by an inverse movement in long-term rates, and vice versa. For this reason, Peoples considers other interest rate scenarios in addition to analyzing the impact of parallel yield curve shifts. These include various flattening and steepening scenarios in which short-term and long-term rates move in different directions with varying magnitude. Peoples believes these scenarios to be more reflective of how interest rates change versus the severe parallel rate shocks described above. Given the shape of market yield curves at September 30, 2021, consideration of the bear steepener and bull flattener scenarios provides insights which were not captured by parallel shifts. These scenarios were evaluated as the current environment suggests these may be possible outcomes for the trajectory of interest rates. The bear steepener scenario highlights the risk to net interest income and the economic value of equity when short-term rates remain constant while long-term rates rise. In such a scenario, Peoples' deposit and borrowing costs, which are correlated with short-term rates, remain constant, while asset yields, which are correlated with long-term rates, rise. Increased asset yields would not be offset by increases in deposit or funding costs; resulting in an increased amount of net interest income and higher net interest margin. At September 30, 2021, the bear steepener scenario resulted in an increase in both net interest income and the economic value of equity of 0.8% and 5.5%, respectively. The bull flattener scenario highlights the risk to net interest income and the economic value of equity when short-term rates remain constant while long-term rates fall. In such a scenario, Peoples’ deposit and borrowing costs, which are correlated with short-term rates, remain constant while asset yields, which are correlated with long-term rates, fall. Asset yields driven lower by increased investment securities premium amortization would not be offset by reductions in deposit or funding costs; resulting in a decreased amount of net interest income and lower net interest margin. At September 30, 2021, the bull flattener scenario resulted in a decrease in both net interest income and the economic value of equity of -0.5% and -0.9%, respectively. Peoples was within the policy limitations for this alternative scenario as of September 30, 2021, which sets the maximum allowable downside exposure as 5.0% of net interest income and 10.0% of economic value of equity. Peoples has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for Peoples making fixed payments. As of September 30, 2021, Peoples had entered into sixteen interest rate swap contracts with an aggregate notional value of $150.0 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, 2021, Peoples' Unaudited Consolidated Balance Sheet was positioned to benefit from rising interest rates in terms of the potential impact on net interest income and the economic value of equity. The table above illustrates this point as changes to net interest income increase in the rising rate scenarios. While the heavy concentration of floating rate loans remains the largest contributor to the level of asset sensitivity, the decrease in economic value of equity asset sensitivity, as measured, from December 31, 2020 was largely attributable to increased effective duration in the investment securities portfolio. 78 Table of Contents Liquidity In addition to IRR management, another major objective of the ALCO is to maintain a sufficient level of liquidity. The methods used by the ALCO to monitor and evaluate the adequacy of Peoples Bank's liquidity position remain unchanged from those disclosed in Peoples' 2020 Form 10-K. At September 30, 2021, Peoples Bank had liquid assets of $607.8 million, which represented 7.7% of total assets and unfunded loan commitments. Peoples also had an additional $246.5 million of unpledged investment securities not included in the measurement of liquid assets. Management believes the current balance of cash and cash equivalents, anticipated investment portfolio cash flows and the availability of other funding sources, will allow Peoples to meet anticipated cash obligations, as well as special needs and off-balance sheet commitments. Since March 31, 2020, there has been an increase in deposit balances due to the influx of funds from the government fiscal stimulus, the PPP and other government actions. Peoples anticipates that these deposit balances will decline over time as the funds are used for intended business purposes; however, this deposit outflow should be partially offset as the associated PPP loans are forgiven and loan reimbursement funds are received. At the same time, we have experienced a decrease in the utilization rate for commercial lines of credit. This decrease is related to the receipt of PPP loan proceeds and other increased cash flows to certain companies. Peoples expects the commercial line of credit utilization percentage to revert back to more historical averages as time progresses. The utilization percentage for consumer line of credit products has been relatively steady. Off-Balance Sheet Activities and Contractual Obligations In the normal course of business, Peoples is a party to financial instruments with off-balance sheet risk necessary to meet the financing needs of Peoples' customers. These financial instruments include commitments to extend credit and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the 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: (Dollars in thousands) September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Home equity lines of credit $ 177,963 $ 134,516 $ 124,027 $ 117,792 $ 113,185 Unadvanced construction loans 271,483 207,403 190,715 141,009 123,338 Other loan commitments 646,374 542,429 555,102 535,250 498,472 Loan commitments $ 1,095,820 $ 884,348 $ 869,844 $ 794,051 $ 734,995 Standby letters of credit $ 12,358 $ 10,252 $ 10,295 $ 14,342 $ 13,177 The increase in loan commitments at September 30, 2021 was primarily the result of the Premier acquisition. Management does not anticipate that Peoples Bank’s current off-balance sheet activities will have a material impact on its future results of operations and financial condition based on historical experience and recent trends. 79 Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information called for by this Item 3 is provided under the caption “Interest Rate Sensitivity and Liquidity” under “ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” in this Quarterly Report on Form 10-Q, and is incorporated herein by reference.