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 months ended March 31, 2023 and March 31, 2022. This MD&A should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the Notes thereto. 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," "continue," "remain," 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 risks and uncertainties include, but are not limited to: (1) the magnitude and continued duration of the recovery from the COVID-19 pandemic and its ongoing impact on the global economy and financial market conditions and Peoples’ businesses, results of operations and financial conditions; (2) ongoing increasing interest rate policies, changes in the interest rate environment due to economic conditions and/or the fiscal and monetary policy measures undertaken by the U.S. government and the Federal Reserve Board, including changes in the Federal Funds Target Rate, 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 effects of inflationary pressures and the impact of rising interest rates on borrowers’ liquidity and ability to repay; (4) the success, impact, and timing of the implementation of Peoples' business strategies and Peoples' ability to manage strategic initiatives, including the ongoing increasing interest rate policies of the Federal Reserve Board, the completion and successful integration of planned acquisitions, including the recently-completed acquisition of Vantage and the pending Limestone Merger, and the expansion of commercial and consumer lending activities; (5) 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; (6) 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; (7) the effects of easing restrictions on participants in the financial services industry; (8) local, regional, national and international economic conditions (including the impact of persistent inflation, supply chain issues or labor shortages, ineffective management of the U.S. federal budget or debt, 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 U.S. global trading partners) and the impact these conditions may have on Peoples, Peoples' customers and Peoples' counterparties, and Peoples' assessment of the impact, which may be different than anticipated; (9) Peoples may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to Peoples' current shareholders; (10) 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 recent inflationary pressures and adversely impact the amount of interest income generated; (11) 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; (12) future credit quality and performance, including expectations regarding future credit losses and the allowance for credit losses; 39 Table of Contents (13) changes in accounting standards, policies, estimates or procedures may adversely affect Peoples' reported financial condition or results of operations; (14) the impact of assumptions, estimates and inputs used within models, which may vary materially from actual outcomes, including under the CECL model; (15) the replacement of the London Interbank Offered Rate ("LIBOR") with other reference rates which may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies; (16) adverse changes in the conditions and trends in the financial markets, including recent inflationary pressures, 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; (17) 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; (18) Peoples' ability to receive dividends from Peoples' subsidiaries; (19) Peoples' ability to maintain required capital levels and adequate sources of funding and liquidity; (20) the impact of larger or similar-sized financial institutions encountering problems, such as the recent closures of Silicon Valley Bank in California and Signature Bank in New York, which may adversely affect the banking industry and/or Peoples' business generation and retention, funding and liquidity, including potential increased regulatory requirements and costs, increased reputational risk and potential impacts to macroeconomic conditions; (21) 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; (22) 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; (23) 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 Peoples' subsidiaries are highly dependent; (24) 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, legislative or regulatory initiatives, or other factors, which may be different than anticipated; (25) 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; (26) the impact on Peoples' businesses, personnel, facilities, or systems, of losses related to acts of fraud, theft, misappropriation or violence; (27) the impact on Peoples' businesses, as well as on the risks described above, of various domestic or international widespread natural or other disasters, pandemics, cybersecurity attacks, system failures, civil unrest, military or terrorist activities or international conflicts; (28) the potential further deterioration of the U.S. economy due to financial, political or other shocks; (29) the potential influence on the U.S. financial markets and economy from the effects of climate change, including any enhanced regulatory, compliance, credit and reputational risks and costs; (30) 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; (31) risks and uncertainties associated with Peoples' entry into new geographic markets and risks resulting from Peoples' inexperience in these new geographic markets; (32) Peoples' ability to integrate the pending Limestone Merger, which may be unsuccessful, or may be more difficult, time-consuming or costly than expected; (33) the risk that expected revenue synergies and cost savings from the pending Limestone Merger, may not be fully realized or realized within the expected time frame; 40 Table of Contents (34) changes in laws or regulations imposed by Peoples' regulators impacting Peoples' capital actions, including dividend payments and share repurchases; (35) the effect of a fall in stock market prices on the asset and wealth management business; (36) Peoples' continued ability to grow deposits or maintain adequate deposit levels in light of the recent bank failures; and (37) 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' 2022 Form 10-K, and under the heading "ITEM 1A. RISK FACTORS" in Part II of this Form 10-Q. Peoples encourages readers of this Form 10-Q to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance. Peoples undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the filing of this Form 10-Q or to reflect the occurrence of unanticipated events, except as required by applicable legal requirements. Copies of documents filed with the SEC are available free of charge at the SEC's website at http://www.sec.gov and/or from Peoples' website – www.peoplesbancorp.com under the “Investor Relations” section. 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. This discussion and analysis should be read in conjunction with the Audited Consolidated Financial Statements, and Notes thereto, contained in Peoples’ 2022 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 complete line of banking, trust and investment, insurance, premium financing and equipment leasing solutions through its subsidiaries. Peoples provides services through traditional offices, ATMs, mobile banking and telephone and internet-based banking. Peoples offers a complete array of insurance products through Peoples Insurance, a subsidiary of Peoples Bank. Brokerage services are offered by Peoples exclusively through an unaffiliated registered broker-dealer located at Peoples Bank's offices. Peoples Bank offers insurance premium finance lending nationwide through its Peoples Premium Finance division. Peoples also offers lease financing through its North Star Leasing division and through Vantage, a subsidiary of Peoples Bank. As of March 31, 2023, Peoples had 130 locations, including 113 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 FRB of Cleveland and 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 accounting 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 March 31, 2023, which have been disclosed in Peoples' 2022 Form 10-K and updated in "Note 1 Summary of Significant Accounting Policies" in this Form 10-Q. This MD&A should be read in conjunction with the policies disclosed in Peoples’ 2022 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 October 25, 2022, Peoples announced the Limestone Merger, a transaction valued at approximately $208.2 million at the time of the announcement. The Limestone Merger closed on April 30, 2023. As of March 31, 2023, Peoples had recognized $1.0 million in acquisition-related expenses associated with this pending transaction. ◦ On April 1, 2022, Peoples Insurance acquired substantially all of the assets and rights of an insurance agency with five locations in eastern Kentucky and certain rights to related customer accounts, which were previously developed and 41 Table of Contents maintained by Elite, pursuant to an Asset Purchase Agreement between Peoples Insurance and Elite. Total consideration for this transaction was $4.4 million. Peoples recognized intangibles of $2.1 million, primarily comprised of a customer relationship intangible. ◦ On March 7, 2022, Peoples completed its acquisition of Vantage pursuant to an Equity Purchase Agreement, dated February 16, 2022, in which Peoples Bank purchased 100% of the equity of Vantage. Peoples Bank acquired assets comprising Vantage's lease business, including $154.9 million in leases and certain third-party debt in the amount of $106.9 million. Peoples paid total consideration of $82.9 million. Based in Excelsior, Minnesota, Vantage offers mid-ticket equipment leases primarily for business essential information technology equipment across a wide array of industries. Peoples recorded goodwill in the amount of $27.2 million and other intangible assets of $13.2 million, which included a customer relationship intangible, a trade-name intangible and non-compete agreements related to this transaction. ◦ During the first quarter of 2023, Peoples recorded a provision for credit losses of $1.9 million, compared to a provision for credit losses of $2.3 million in the linked quarter and a recovery of credit losses of $6.8 million in the first quarter of 2022. The provision for credit losses in the first quarter of 2023 was largely attributable to a deterioration of macro-economic conditions and an increase in charge-off activity, partially offset by a reduction in reserves for individually analyzed loans. For more information, please refer to the section titled "RESULTS OF OPERATIONS - Provision for (Recovery of) Credit Losses" found later in this discussion. ◦ During the first quarter of 2023, Peoples incurred $0.6 million of acquisition-related expenses, compared to $0.7 million in the fourth quarter of 2022 and $1.4 million in the first quarter of 2022. The acquisition-related expenses in 2023 were primarily related to the Limestone Merger, while the acquisition-related expenses in 2022 were primarily related to the Vantage acquisition. ◦ To combat the effects of ongoing inflationary pressures, the Federal Reserve Board increased the Federal Funds Target Rate range to 0.25% to 0.50% on March 16, 2022, to 0.75% to 1.00% on May 4, 2022, to 1.50% to 1.75% on June 15, 2022, to 2.25% to 2.50% on July 27, 2022, to 3.00% to 3.25% on September 21, 2022, to 3.75% to 4.00% on November 2, 2022, to 4.25% to 4.50% on December 14, 2022, to 4.50% to 4.75% on February 1, 2023, to 4.75% to 5.00% on March 23, 2023, 5.00% to 5.25% on May 3, 2023 and has stated it may continue to raise rates throughout 2023. The impact of these transactions and events, where material, is discussed in the applicable sections of this MD&A. EXECUTIVE SUMMARY Peoples reported net income of $26.6 million for the first quarter of 2023, representing earnings per diluted common share of $0.94. In comparison, Peoples reported earnings per diluted common share of $0.95 for the fourth quarter of 2022, and of $0.84 for the first quarter of 2022. Non-core items, and the related tax effect of each, in net income primarily included acquisition-related expenses. Non-core items negatively impacted earnings per diluted common share by $0.05 for the first quarter of 2023, $0.03 for the fourth quarter of 2022, and $0.04 for the first quarter of 2022. Net interest income was $72.9 million for the first quarter of 2023, an increase of $2.3 million, or 3%, compared to the linked quarter. Net interest margin was 4.53% for the first quarter of 2023, compared to 4.44% for the linked quarter. The increases in net interest income and net interest margin were driven by 50 basis points of improvement in loan yields due to recent increases in market interest rates and a shift in the composition of the loan portfolio into higher-yielding leases, and 41 basis points of improvement in investment yields when compared to the linked quarter due to purchases of investment securities with higher interest rates and sales of lower-yielding investment securities. Net interest income for the first quarter of 2023 increased $18.6 million, or 34%, compared to the first quarter of 2022. Net interest margin increased 112 basis points compared to 3.41% for the first quarter of 2022. The increase in net interest income compared to the first quarter of 2022 was driven by increases in market interest rates and a full quarter of income from the Vantage acquisition. Accretion income, net of amortization expense, from acquisitions was $2.0 million for the first quarter of 2023, $2.2 million for the fourth quarter of 2022 and $2.7 million for the first quarter of 2022, which added 13 basis points, 14 basis points and 17 basis points, respectively, to net interest margin. The decreases in accretion income for the first quarter of 2023 when compared to the linked quarter and the first quarter of 2022 were driven by less loan accretion due to lower pay-offs and less accretion from the merger with Premier Financial Bancorp, Inc. ("Premier") and the Vantage acquisition. 42 Table of Contents The provision for credit losses was $1.9 million for the first quarter of 2023, compared to a provision for credit losses of $2.3 million for the linked quarter and a recovery of credit losses of $6.8 million for the first quarter of 2022. The provisions for credit losses in the first quarter of 2023 and the linked quarter were largely attributable to a deterioration of macro-economic conditions and an increase in charge-off activity, partially offset by a reduction in reserves for individually analyzed loans. The recovery of credit losses in the first quarter of 2022 was attributable to an improvement in economic factors and loss drivers within the current expected credit loss ("CECL") model. Net charge-offs for the first quarter of 2023 were $1.5 million, or 0.13% of average total loans annualized, compared to net charge-offs of $2.1 million, or 0.18% of average total loans annualized, for the linked quarter and net charge-offs of $1.9 million, or 0.17% of average total loans annualized, for the first quarter of 2022. For additional information on credit trends and the allowance for credit losses, see the "FINANCIAL CONDITION - Allowance for Credit Losses" section below. Net gains and losses include gains and losses on investment securities, asset disposals and other transactions, which are included in total non-interest income on the Consolidated Statements of Operations. The net loss realized during the first quarter of 2023 was $2.2 million, compared to a net loss of $0.5 million for the linked quarter, and a net gain of $3,000 for the first quarter of 2022. During the first quarter of 2023, Peoples executed the sale of $96.7 million of its lower yielding available-for-sale securities for a pre-tax net loss of $2.0 million. Proceeds from the sale were used to pay down overnight borrowings. The realized losses recognized due to these transactions are projected to be earned back within the 2023 fiscal year. The net loss for the linked quarter was primarily due to net losses on repossessed assets and net losses on sales of investment securities. Total non-interest income, excluding net gains and losses, for the first quarter of 2023 increased $1.7 million compared to the linked quarter. The increase in non-interest income, excluding net gains and losses, was due to a $1.7 million increase in insurance income due to seasonal performance-based commissions being earned in the first quarter of each year. Compared to the first quarter of 2022, non-interest income, excluding net gains and losses, increased $1.2 million, primarily due to a $0.7 million increase in insurance income which was attributable to an increase in property and casualty insurance commissions. Total non-interest expense increased $3.1 million, or 6%, for the three months ended March 31, 2023, compared to the linked quarter. The increase in total non-interest expense for the first quarter of 2023 was attributable to an increase in salaries and employee benefit costs. The increase in salaries and employee benefit costs was due to anticipated additional expenses typically recognized in the first quarter of each year. These expenses included annual merit increases, stock-based compensation expenses attributable to retirement-eligible employees, and employer health savings account ("HSA") contributions. Compared to the first quarter of 2022, total non-interest expense increased $4.9 million, or 9%, primarily due to increases in (i) salaries and employee benefit costs, (ii) data processing and software expense and (iii) other non-interest expense. The increases were due to growth, including through acquisitions. Partially offsetting these increases were decreases in electronic banking expense and professional fees. The efficiency ratio for the first quarter of 2023 was 57.8%, compared to 56.7% for the linked quarter, and 66.8% for the first quarter of 2022. The increase in the efficiency ratio compared to the linked quarter was primarily due to the increases in non-interest expenses, which were partially offset by higher net interest income due to increases in the market interest rates. The decrease in the efficiency ratio compared to the prior year quarter was primarily due to a decrease in acquisition-related expenses. The efficiency ratio, adjusted for non-core items, was 57.2% for the first quarter of 2023, compared to 55.9% for the linked quarter and 64.8% for the first quarter of 2022. The efficiency ratio is typically higher in the first quarter of the year driven by the aforementioned salaries and employee benefit costs, and specifically by higher payroll taxes, employer HSA contributions and stock-based compensation expenses for certain employees. Peoples continues to focus on controlling expenses, while recognizing some necessary costs in order to continue growing the business. Peoples recorded income tax expense of $7.0 million with an effective tax rate of 21.0% for the first quarter of 2023, compared to income tax expense of $7.1 million with an effective tax rate of 21.0% for the linked quarter, and income tax expense of $6.0 million with an effective tax rate of 20.2% for the first quarter of 2022. The increase in income tax expense for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, was driven by higher income before income taxes. At March 31, 2023, total assets were $7.31 billion, compared to $7.21 billion at December 31, 2022 and $7.24 billion at March 31, 2022. The $104.2 million increase in total assets compared to at December 31, 2022 was primarily due to increases in held-to-maturity investment securities and loans and leases, net of deferred fees and costs, partially offset by a decrease in available-for-sale investment securities. Management underwent an initiative during the first quarter of 2023 to sell lower yielding available-for-sale investment securities whose proceeds were used to pay down higher cost funding. Separately, the increase in the period-end loan and lease balances was primarily driven by increases of (i) $57.5 million in other commercial real estate loans, (ii) $17.8 million in indirect consumer loans and (iii) $9.5 million in leases, partially offset by a reductions of $14.6 million in construction loans and $10.8 million in residential real estate loans. The $72.3 million increase in total assets compared to at March 31, 2022 was largely attributable to increases in loans and leases as well as the aforementioned net increase in investment securities, partially offset by decreases in interest-bearing deposits at other banks. The increase in the period-end loan and lease balances when compared to at March 31, 2022 was primarily driven by increases of $122.4 million in indirect consumer loans and $87.6 million in leases, partially offset by a reduction of $43.8 million in residential real estate loans. Total liabilities were $6.49 billion at March 31, 2023, up from $6.42 billion at December 31, 2022 and $6.43 billion at March 31, 2022. The increase in total liabilities compared to at December 31, 2022 was attributable to an increase in total deposits and long-term 43 Table of Contents borrowings. The increase in total deposits when compared to at December 31, 2022 was primarily driven by an increase of $147.6 million in brokered certificates of deposits, which are primarily used as a source of funding. Excluding the increase in brokered certificates of deposits, total deposits at March 31, 2023 decreased $76.0 million when compared to at December 31, 2022, primarily due to reductions of (i) $75.0 million in interest-bearing deposit accounts (ii) $43.9 million in savings accounts, (iii) $37.9 million in money market deposit accounts, and (iv) $34.3 million in non-interest bearing deposit accounts, partially offset by an increase of $91.9 million in retail certificates of deposit. The increase in total liabilities compared to at March 31, 2022 was primarily due to an increase in short-term borrowings, partially offset decreases in total deposits and long-term borrowings. Deposits decreased primarily due to reductions in non-interest-bearing deposits, interest-bearing demand deposit accounts, governmental deposit accounts, and money market deposit accounts of $111.6 million, $94.0 million, $85.5 million and $77.2 million, respectively, partially offset by an increase of $185.8 million in brokered certificates of deposits. Total stockholders' equity at March 31, 2023 increased by $34.2 million compared to at December 31, 2022, which reflected net income for the quarter of $26.6 million and a decrease in accumulated other comprehensive loss of $16.2 million, partially offset by dividends paid of $10.7 million. The change in accumulated other comprehensive loss was the result of the changes in the market value of available-for-sale investment securities during the period. Accumulated unrealized losses related to the available-for-sale investment securities portfolio were $112.7 million and $129.9 million at March 31, 2023 and at December 31, 2022, respectively. Total stockholders' equity at March 31, 2023 increased by $11.2 million compared to at March 31, 2022, which was primarily due to net income of $104.3 million in the last twelve months partially offset by an increase in accumulated other comprehensive loss of $48.3 million. The increase in accumulated other comprehensive loss was the result of an increase of $51.5 million in unrealized losses related to the available-for-sale investment securities portfolio from March 31, 2022 to March 31, 2023. 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 corporate income tax rate of 23.3% for each of the three months ended March 31, 2023 and December 31, 2022, and a 22.9% blended corporate income tax rate for the three months ended March 31, 2022. The following table details the calculation of FTE net interest income: Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Net interest income $ 72,878 $ 70,613 $ 54,310 Taxable equivalent adjustment 399 412 391 Fully tax-equivalent net interest income $ 73,277 $ 71,025 $ 54,701 44 Table of Contents The following tables detail Peoples’ average balance sheets for the periods presented: For the Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 ( Dollars in thousands) Average Balance Income/ Expense Yield/Cost Average Balance Income/ Expense Yield/Cost Average Balance Income/ Expense Yield/Cost Short-term investments $ 35,223 $ 388 4.47 % $ 44,421 $ 404 3.61 % $ 332,098 $ 160 0.20 % Investment securities (a)(b): Taxable 1,597,688 11,049 2.77 % 1,459,879 8,376 2.29 % 1,465,998 6,096 1.66 % Nontaxable 190,566 1,298 2.72 % 192,863 1,365 2.83 % 204,381 1,316 2.58 % Total investment securities 1,788,254 12,347 2.76 % 1,652,742 9,741 2.35 % 1,670,379 7,412 1.78 % Loans (b)(c): Construction 239,492 3,963 6.62 % 234,233 3,596 6.01 % 225,676 2,155 3.82 % Commercial real estate, other 1,333,062 19,794 5.94 % 1,293,500 18,431 5.58 % 1,362,434 14,782 4.34 % Commercial and industrial 877,391 14,610 6.66 % 885,111 13,455 5.95 % 888,598 8,023 3.61 % Premium finance 147,895 2,150 5.81 % 161,382 1,898 4.60 % 132,758 1,164 3.51 % Leases 342,583 9,643 11.26 % 325,113 8,448 10.17 % 162,277 6,102 15.04 % Residential real estate (d) 839,822 9,717 4.63 % 853,354 9,321 4.37 % 913,730 9,766 4.28 % Home equity lines of credit 176,327 2,966 6.82 % 177,778 2,723 6.08 % 163,339 1,612 4.00 % Consumer, indirect 640,359 7,231 4.58 % 612,696 6,834 4.43 % 523,770 5,045 3.91 % Consumer, direct 108,488 1,739 6.50 % 113,045 1,763 6.19 % 106,298 1,595 6.09 % Total loans 4,705,419 71,813 6.12 % 4,656,212 66,469 5.62 % 4,478,880 50,244 4.50 % Allowance for credit losses (52,669) (52,253) (61,947) Net loans 4,652,750 71,813 6.19 % 4,603,959 66,469 5.68 % 4,416,933 50,244 4.56 % Total earning assets 6,476,227 84,548 5.23 % 6,301,122 76,614 4.79 % 6,419,410 57,816 3.61 % Goodwill and other intangible assets 325,545 327,377 304,124 Other assets 420,692 438,694 344,282 Total assets $ 7,222,464 $ 7,067,193 $ 7,067,816 Interest-bearing deposits: Savings accounts $ 1,044,392 $ 136 0.05 % $ 1,069,646 $ 138 0.05 % $ 1,050,813 $ 34 0.01 % Governmental deposit accounts 637,959 1,066 0.68 % 688,815 710 0.41 % 670,419 447 0.27 % Interest-bearing demand accounts 1,103,966 180 0.07 % 1,152,709 186 0.06 % 1,171,266 92 0.03 % Money market accounts 583,574 825 0.57 % 615,460 522 0.34 % 650,272 97 0.06 % Retail certificates of deposit 576,645 1,750 1.23 % 534,145 717 0.53 % 626,978 871 0.56 % Brokered deposits (e) 224,325 1,704 3.08 % 87,934 515 2.32 % 91,531 512 2.27 % Total interest-bearing deposits 4,170,861 5,661 0.55 % 4,148,709 2,788 0.27 % 4,261,279 2,053 0.20 % Borrowed funds: Short-term FHLB advances (e) 377,578 4,314 4.63 % 181,946 1,570 3.42 % 55,000 313 2.31 % Repurchase agreements and other 93,848 143 0.61 % 96,242 99 0.41 % 99,346 25 0.10 % Total short-term borrowings 471,426 4,457 3.83 % 278,188 1,669 2.38 % 154,346 338 0.89 % Long-term FHLB advances 34,015 204 2.43 % 34,297 210 2.43 % 85,653 306 1.45 % Long-term notes payable 50,656 653 5.16 % 53,528 661 4.94 % 29,780 298 4.02 % Trust Preferred 13,806 296 8.58 % 13,771 261 7.42 % 13,665 120 3.51 % Total long-term borrowings 98,477 1,153 4.69 % 101,596 1,132 4.45 % 129,098 724 2.26 % Total borrowed funds 569,903 5,610 3.98 % 379,784 2,801 2.93 % 283,444 1,062 1.51 % Total interest-bearing liabilities 4,740,764 11,271 0.96 % 4,528,493 5,589 0.49 % 4,544,723 3,115 0.28 % Non-interest-bearing deposits 1,556,636 1,639,580 1,606,665 Other liabilities 123,599 130,470 81,676 Total liabilities 6,420,999 6,298,543 6,233,064 Total stockholders’ equity 801,465 768,650 834,752 Total liabilities and stockholders’ equity $ 7,222,464 $ 7,067,193 $ 7,067,816 Interest rate spread (b) $ 73,277 4.27 % $ 71,025 4.30 % $ 54,701 3.33 % Net interest margin (b) 4.53 % 4.44 % 3.41 % 45 Table of Contents (a) Average balances are based on carrying value. (b) Interest income and yields are presented on a fully tax-equivalent basis, using a 23.3% blended corporate income tax rate for each of the three months ended March 31, 2023 and December 31, 2022, and a 22.9% blended corporate income tax rate for the three months ended March 31, 2022. (c) Average balances include nonaccrual and impaired loans. Interest income includes interest earned and received on nonaccrual loans prior to the loans being placed on nonaccrual status. Loan fees included in interest income were immaterial for all periods presented. (d) Loans held for sale are included in the average loan balance listed. Related interest income on loans originated for sale prior to the loan being sold is included in loan interest income. (e) Interest related to interest rate swap transactions is included, as appropriate to the transaction, in interest expense on short-term FHLB advances and interest expense on brokered deposits for the periods presented in which FHLB advances and brokered deposits were being utilized. Peoples' average balances compared to prior periods have been impacted by recent acquisitions, including Vantage on March 7, 2022, which added to average lease and borrowed funds balances. Peoples has begun to reduce cash balances after previously maintaining high cash balances in recent prior periods due to an influx of deposits. The following table provides an analysis of the changes in FTE net interest income: Three Months Ended March 31, 2023 Compared to (Dollars in thousands) December 31, 2022 March 31, 2022 Increase (decrease) in: Rate Volume Total (a) Rate Volume Total (a) INTEREST INCOME: Short-term investments $ 350 $ (366) $ (16) $ 1,337 $ (1,109) $ 228 Investment Securities (b): Taxable 1,837 836 2,673 4,363 590 4,953 Nontaxable (42) (25) (67) 320 (338) (18) Total investment income 1,795 811 2,606 4,683 252 4,935 Loans (b) : Construction 300 67 367 1,669 139 1,808 Commercial real estate, other 927 436 1,363 7,144 (2,132) 5,012 Commercial and industrial 1,925 (770) 1,155 7,288 (701) 6,587 Premium finance 1,134 (882) 252 840 146 986 Leases 795 400 1,195 (9,374) 12,915 3,541 Residential real estate 1,245 (849) 396 3,167 (3,216) (49) Home equity lines of credit 393 (150) 243 1,217 137 1,354 Consumer, indirect 173 224 397 954 1,232 2,186 Consumer, direct 301 (325) (24) 111 33 144 Total loan income 7,193 (1,849) 5,344 13,016 8,553 21,569 Total interest income $ 9,338 $ (1,404) $ 7,934 $ 19,036 $ 7,696 $ 26,732 INTEREST EXPENSE: Deposits: Savings accounts $ 14 $ (16) $ (2) $ 104 $ (2) $ 102 Governmental deposit accounts 694 (338) 356 770 (151) 619 Interest-bearing demand accounts 24 (30) (6) 124 (36) 88 Money market accounts 482 (179) 303 798 (70) 728 Retail certificates of deposit 974 59 1,033 1,355 (476) 879 Brokered deposits 206 983 1,189 236 956 1,192 Total deposit cost 2,394 479 2,873 3,387 221 3,608 Borrowed funds: Short-term borrowings 738 2,050 2,788 715 3,404 4,119 Long-term borrowings 217 (196) 21 1,047 (618) 429 Total borrowed funds cost 955 1,854 2,809 1,762 2,786 4,548 Total interest expense 3,349 2,333 5,682 5,149 3,007 8,156 Fully tax-equivalent net interest income $ 5,989 $ (3,737) $ 2,252 $ 13,887 $ 4,689 $ 18,576 46 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 using a 23.3% blended corporate income tax rate for each of the three months ended March 31, 2023 and December 31, 2022, and a 22.9% blended corporate income tax rate for the three months ended March 31, 2022. Compared to the linked quarter, net interest income increased 3% and net interest margin expanded by 9 basis points. Both increases were primarily driven by 50 basis points of improvement in loan yields due to recent increases in market interest rates and a shift in the composition of the loan portfolio into higher-yielding leases, which resulted in 41 basis points of improvement in investment yields when compared to the linked quarter due to purchases of investment securities with higher interest rates and sales of lower-yielding investment securities. Borrowing costs increased 105 basis points as a result of increase in short-term borrowings due to utilizing overnight FHLB advances and brokered certificates of deposits in recent quarters. Net interest income grew 34% over the prior year quarter and net interest margin increased by 112 basis points. The increase in net interest income compared to the first quarter of 2022 was driven by increases in market interest rates and a full quarter of income from the Vantage acquisition. Compared to the prior year quarter, loan yields grew 162 basis points due to the rising interest rate environment and both acquisitive and organic growth, while borrowing costs increased 247 basis points as a result of increase in short-term borrowings due to the utilization of FHLB overnight advances mentioned above. Peoples recognized interest income on deferred loan fees/costs associated with PPP loans of $1.2 million during the first quarter of 2022 along with $154,000 of interest earned on PPP loans. The interest income recognized on PPP loans added 5 basis points to net interest margin for the first quarter of 2022. The deferred loan fees/costs associated with PPP loans and interest earned on PPP loans were minimal for the first quarter of 2023 and the linked quarter. Accretion income, net of amortization expense, from acquisitions was $2.0 million for the first quarter of 2023, $2.2 million for the linked quarter and $2.7 million for the first quarter of 2022, which added 13 basis points, 14 basis points and 17 basis points, respectively, to net interest margin. The decreases in accretion income for the first quarter of 2023 when compared to the linked quarter and the first quarter of 2022 were driven by less loan accretion due to lower pay-offs and less accretion from the merger with Premier and the Vantage acquisition. 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 (Recovery of) Credit Losses The following table details Peoples’ provision for (recovery of) credit losses: Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Provision for (recovery of) other credit losses $ 1,673 $ 2,023 $ (7,006) Provision for checking account overdraft credit losses 180 278 199 Provision for (recovery of) credit losses $ 1,853 $ 2,301 $ (6,807) As a percentage of average total loans (a) 0.16 % 0.20 % (0.62) % (a) Presented on an annualized basis. The provision for (recovery of) credit losses recorded represents the amount needed to maintain the appropriate level of the allowance for credit losses based on management’s quarterly estimates. The provisions for credit losses in the first quarter of 2023 and the linked quarter were largely attributable to a deterioration of macro-economic conditions and an increase in charge-off activity, partially offset by a reduction in reserves for individually analyzed loans. During the first quarter of 2022, Peoples recorded a recovery of credit losses of $6.8 million due to an improvement in the economic forecast, along with payoffs of several loans during the quarter, which were partially offset by $0.4 million for the establishment of an allowance for credit losses for the non-purchased credit deteriorated leases from the Vantage acquisition. 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.” 47 Table of Contents Net (Loss) Gain Included in Total Non-Interest Income Net (loss) gain includes net losses and net gains on investment securities, asset disposals and other transactions, which are recognized in total non-interest income. The following table details Peoples’ net losses and net gains for the periods presented: Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Net (loss) gain on investment securities $ (1,935) $ (168) $ 130 Net loss on asset disposals and other transactions: Net loss on other assets $ (229) $ (278) $ (22) Net loss on OREO (10) — (1) Net loss on other transactions (7) (23) (104) Net loss on asset disposals and other transactions $ (246) $ (301) $ (127) The net loss on investment securities in the first quarter of 2023 due to a $2.0 million pre-tax net loss on the sale of the available-for-sale investment securities. During the first quarter of 2023, Peoples executed the sale of $96.7 million of its lower yielding available-for-sale securities which were used to pay down overnight borrowings. The loss on the sale of the securities had a nominal impact on tangible book value as such loss was previously reflected in capital through accumulated other comprehensive loss. The realized losses recognized due to these transactions are projected to be earned back within the 2023 fiscal year. The net loss on asset disposals and other transactions decreased slightly in the first quarter of 2023 when compared to the linked quarter and increased when compared to the prior year quarter. The net loss for the first quarter of 2023 was primarily due to net losses on furniture and fixture disposals. The net loss for the linked quarter was primarily due to net losses on other assets, which was mainly due to net losses on repossessed assets. During the first three months of 2022, Peoples sold several investment securities, resulting in a net gain on investment securities, which was offset by a net loss on other transactions primarily driven by an adjustment to the gain on sale of loans recognized in the fourth quarter of 2022, and was driven by changes to the acquisition-date fair value of loans acquired in the merger with Premier that were subsequently sold. Total Non-Interest Income, Excluding Net Gains and Losses Total non-interest income, excluding net gains and losses, comprised 23% of Peoples' total revenues (defined as net interest income plus total non-interest income excluding net gains and losses) for the first quarter of 2023, compared to 22% for the linked quarter and 27% for the prior year quarter. The increase in this ratio compared to the linked quarter was due to an increase in insurance income due to seasonal performance-based commissions being earned in the first quarter of each year. The decline in this ratio compared to the prior year quarter was primarily due to higher net interest income associated with a full quarter of income from the acquisition of Vantage coupled with the increases in the market interest rates. For the first quarter of 2023, electronic banking income comprised the largest portion of Peoples' total non-interest income, excluding net gains and losses. Peoples' electronic banking ("e-banking") services include ATM and debit cards, direct deposit services, internet and mobile banking, and remote deposit capture, and serve as alternative delivery channels to traditional sales offices for providing services to customers. The following table details Peoples' e-banking income: Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) E-banking income $ 5,443 $ 5,161 $ 5,253 Peoples' e-banking income is derived largely from ATM and debit cards, as other services are mainly provided at no charge to customers. The amount of e-banking income is largely dependent on the timing and volume of customer activity. E-banking income increased compared to each of the linked quarter and the prior year quarter primarily due to more customer activity. 48 Table of Contents The following table details Peoples' insurance income: Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Property and casualty insurance commissions $ 3,252 $ 3,127 $ 2,862 Performance-based commissions 1,527 4 1,346 Life and health insurance commissions 564 511 452 Other fees and charges 82 90 71 Insurance income $ 5,425 $ 3,732 $ 4,731 During the first quarter of 2023, Peoples' insurance income grew 45% when compared to the linked quarter. This increase in insurance income was due to seasonal performance-based commissions being earned, which are annual in nature and typically occur in the first quarter of each year. Compared to the first quarter of 2022, insurance income increased 15% and was driven by higher performance-based property and casualty insurance commissions. Peoples' fiduciary income and brokerage income continued to be based primarily upon the value of assets under administration and management, with additional income generated from transaction commissions, cross-selling of products and additional retirement plan services business. The following table details Peoples’ trust and investment income: Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Fiduciary income $ 1,805 $ 1,792 $ 1,965 Brokerage income 1,627 1,485 1,649 Employee benefit fees 652 638 662 Trust and investment income $ 4,084 $ 3,915 $ 4,276 Fiduciary income and brokerage income increased slightly in the current quarter relative to the linked quarter, due to an increase in assets under administration and management. When compared to the first quarter of 2022, trust and investment income declined due to less fiduciary income, primarily due to market volatility. The following table details Peoples' assets under administration and management: March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 (Dollars in thousands) Trust $ 1,803,887 $ 1,764,639 $ 1,682,334 $ 1,731,454 $ 1,927,828 Brokerage 1,318,300 1,211,868 1,127,831 1,068,261 1,152,530 Total $ 3,122,187 $ 2,976,507 $ 2,810,165 $ 2,799,715 $ 3,080,358 Quarterly average $ 3,076,285 $ 2,965,985 $ 2,844,181 $ 2,927,405 $ 3,106,021 The increases in assets under administration and management at March 31, 2023, compared to at December 31, 2022 and March 31, 2022 were driven by market value fluctuations and a $30 million increase in brokerage assets due to an acquisition of an independent financial advisor in January of 2023. 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 March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Overdraft and non-sufficient funds fees $ 1,842 $ 2,170 $ 1,902 Account maintenance fees 1,461 1,352 1,311 Other fees and charges 220 244 213 Deposit account service charges $ 3,523 $ 3,766 $ 3,426 The amount of deposit account service charges, particularly fees for overdrafts and non-sufficient funds, is largely dependent on the timing and volume of customer activity. Management periodically evaluates its cost recovery fees to ensure they are reasonable based on operational costs and similar to fees charged in Peoples' markets by competitors. Deposit account service charges decreased 49 Table of Contents for the current quarter compared to the linked quarter due to a decline in overdraft and non-sufficient funds fees. Deposit account service charges increased slightly for the current quarter compared to the prior year quarter due to increased maintenance fee rates. The following table details the other items included within Peoples' total non-interest income: Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Lease income 1,077 1,336 775 Bank owned life insurance income 707 702 431 Mortgage banking income 314 281 436 Other non-interest income 668 611 719 Lease income is primarily comprised of (i) gains on the early termination of leases, (ii) fees received for referrals, (iii) gains and losses recognized on the sales of residual assets and (iv) syndication income. The first quarter of 2023 decrease in lease income when compared to the linked quarter was due to seasonal fluctuations in syndication income, as the fourth quarter of each year typically has a higher volume of originations. The first quarter of 2023 increase in lease income when compared to the first quarter of 2022 was due to a full quarter of income from the Vantage acquisition in 2023 versus only a month of income in 2022. Bank owned life insurance income for the current quarter was relatively flat compared to the linked quarter and increased when compared to the same 2022 period. The first quarter of 2023 increase in bank owned life insurance income when compared to the first quarter of 2022 was due to an additional $30.0 million of investments in bank owned life insurance policies during the second quarter of 2022. Mortgage banking income is comprised mostly of net gains from the origination and sale of real estate loans in the secondary market, and, to a lesser extent, servicing income for loans sold with servicing retained. As a result, the amount of income recognized by Peoples is largely dependent on customer demand and long-term interest rates for residential real estate loans offered in the secondary market. Mortgage banking income for the current quarter was relatively flat when compared to the linked quarter. Mortgage banking income declined for the current year quarter compared to the prior year quarter due to the increased market interest rate environment in recent quarters and a lower volume of new loan originations. In the first quarter of 2023, Peoples sold $0.8 million in loans to the secondary market with servicing retained and $7.4 million in loans with servicing released, compared to $2.5 million and $9.5 million, respectively, in the fourth quarter of 2022, and $7.2 million and $7.9 million, respectively, in the first quarter of 2022. 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 March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Base salaries and wages $ 20,332 $ 19,747 $ 17,676 Employee benefits 4,115 3,372 3,621 Sales-based and incentive compensation 3,945 5,284 3,636 Payroll taxes and other employment costs 2,370 1,591 2,091 Stock-based compensation 2,189 832 1,605 Deferred personnel costs (923) (2,068) (900) Salaries and employee benefit costs $ 32,028 $ 28,758 $ 27,729 Full-time equivalent employees: Actual at end of period 1,286 1,267 1,245 Average during the period 1,283 1,261 1,215 Base salaries and wages for the current quarter increased compared to linked quarter primarily due to annual merit increases. The current quarter increase compared to the prior year quarter was primarily driven by a rise in annual merit increases as well as a full quarter of expenses related to the additional salaries associated with the acquisition of Vantage. The increases in employee benefits for the current quarter compared to the linked quarter, was primarily due to annual contributions to employee health savings accounts that occur primarily in the first quarter of each year. The increase in employee 50 Table of Contents benefits for the current quarter compared to the first quarter of 2022 was due to higher medical costs reflecting a full quarter of expenses in 2023 for the Vantage employees versus a month of expenses in the first quarter of 2022. The decrease in sales-based and incentive compensation for the current quarter compared to the linked quarter was primarily due to the overall company performance measures used in calculating retail incentive awards. Payroll taxes and other employment costs increased compared to the prior quarter and the first quarter of 2022 and were primarily related to higher base salaries and wages. Also impacting the increase in payroll taxes and other employment costs when compared to the linked quarter were seasonal expenses recognized in the first quarter of each year. Stock-based compensation is generally recognized over the vesting period, which generally ranges from immediate vesting to vesting at the end of three years. An adjustment is made at the vesting date to reverse expense relating to forfeitures for performance awards, and at the date of forfeiture to reverse expense for non-vested restricted awards. Stock grants to retirement eligible grantees are expensed either immediately or over a shorter period than three years. The majority of Peoples' stock-based compensation is attributable to annual equity-based incentive awards to employees, which are awarded in the first quarter of each year and are based upon Peoples achieving certain performance goals during the prior year and are generally contingent on employment through the vesting period. Stock-based compensation for the first three months of 2023 increased when compared to the first three months of 2022 due to additional employees, including the ones added in the acquisition of Vantage. 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 for the current quarter compared to the linked quarter was primarily due to a prior period adjustment of costs to originate leases. Peoples' net occupancy and equipment expense was comprised of the following: Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Depreciation $ 1,790 $ 1,700 $ 1,823 Repairs and maintenance costs 1,261 1,364 1,378 Property taxes, utilities and other costs 1,157 1,014 1,202 Net rent expense 747 769 685 Net occupancy and equipment expense $ 4,955 $ 4,847 $ 5,088 The first quarter of 2023 net occupancy and equipment expense increased slightly when compared to the linked quarter due to increases in depreciation and property taxes, utilities and other costs, partially offset by reductions in repairs and maintenance costs and net rent expense. When compared to the first quarter of 2022, net occupancy and equipment expense decreased due to less depreciation, repairs and maintenance costs and property taxes, utilities and other costs due to having less geographic locations as of the first quarter of 2023. The following table details the other items included in total non-interest expense: Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Data processing and software expense $ 4,562 $ 5,013 $ 2,916 Professional fees 2,881 3,310 3,672 Amortization of other intangible assets 1,871 1,998 1,708 E-banking expense 1,491 1,097 2,759 Franchise tax expense 1,034 546 764 Marketing expense 930 737 995 FDIC insurance premiums 801 781 1,194 Other loan expenses 739 947 832 Communication expense 613 611 625 Other non-interest expense 4,574 4,721 3,347 Data processing and software expense increased when compared to the first quarter of 2022, driven by software upgrades and implementation of new systems, coupled with the increased size of Peoples' organization. 51 Table of Contents Professional fees decreased for the current quarter compared to the comparative periods due to less acquisition-related expenses being reported when compared to those periods. Amortization of other intangible assets for the current quarter decreased when compared to the linked quarter due to decreased amortization of intangible assets recognized as a result of recent acquisitions. Amortization of other intangible assets for the current quarter increased when compared to the first quarter of 2022 due to amortization of intangible assets recognized in the Vantage acquisition. Peoples' e-banking expense is comprised of costs associated with debit and ATM cards, as well as Internet and mobile banking costs. E-banking expense increased during the current quarter compared to the linked quarter, and is correlated to e-banking income, which also increased from the linked quarter primarily due to more customer activity. E-banking expense decreased for the first quarter of 2023 when compared to the first quarter of 2022 due to a decline in customer activity compared to last year. Peoples is subject to state franchise taxes, which are based largely on Peoples' equity, in the states where Peoples has a physical presence. Franchise tax expense also includes the Ohio Financial Institution Tax ("FIT"), which is a business privilege tax that is imposed on financial institutions organized for profit and doing business in Ohio. The Ohio FIT is based on the total equity capital in proportion to the taxpayer's gross receipts in Ohio as of the most recent year-end. The increase versus the linked quarter was driven by a refund received in the linked quarter. The increase from the first quarter of 2022 was driven by recent growth through acquisitions and organic means. Marketing expense increased for the first quarter of 2023 when compared to the linked quarter primarily due to higher media advertising expenses and donations compared to the prior period. Peoples' FDIC insurance premiums decreased for the current quarter compared to the first quarter of 2022 due to an adjustment in the first quarter of 2022 relating to prior acquisitions. Other loan expenses during the first three months of 2023 decreased when compared to the linked quarter primarily due to lower indirect lending volume and decreased collection expense. Other non-interest expense increased during the current quarter when compared to the first quarter of 2022 due to an increase in acquisition-related expenses related to the Limestone Merger. Income Tax Expense Peoples recorded income tax expense of $7.0 million with an effective tax rate of 21.0% for the first quarter of 2023, compared to income tax expense of $7.1 million with an effective tax rate of 21.0% for the linked quarter and income tax expense of $6.0 million with an effective tax rate of 20.2% for the first quarter of 2022. Income tax expense for the first quarter of 2023, compared to the linked quarter, was relatively flat due to similar income before income taxes. The increase in income tax expense for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, was driven by a higher income before income taxes. Additional information regarding income taxes can be found in "Note 13. Income Taxes" of the Notes to the Consolidated Financial Statements included in Peoples' 2022 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. 52 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 March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Pre-provision net revenue: Income before income taxes $ 33,606 $ 33,980 $ 29,538 Add: provision for credit losses 1,853 2,301 — Add: loss on OREO 10 — 1 Add: loss on investment securities 1,935 168 — Add: loss on other assets 229 278 22 Add: loss on other transactions 7 23 104 Less: recovery of credit losses — — 6,807 Less: gain on investment securities — — 130 Pre-provision net revenue $ 37,640 $ 36,750 $ 22,728 Total average assets $7,222,464 $7,067,193 $7,067,816 Pre-provision net revenue to total average assets (annualized) 2.11 % 2.06 % 1.30 % Weighted-average common shares outstanding - diluted 28,021,879 27,981,656 28,129,131 Pre-provision net revenue per common share - diluted $ 1.34 $ 1.31 $ 0.81 The increase in the PPNR for the first quarter of 2023 compared to the first quarter of 2022 was driven by increased net interest income reflecting the positive impact of recent increases in market interest rates as well as a provision for credit losses in the first quarter of 2023 compared to the recovery of credit losses in the first quarter of 2022. Core Non-Interest Expense (Non-US GAAP) Core non-interest expense is a financial measure used to evaluate Peoples' recurring expense stream. This measure is Non-US GAAP since it excludes the impact of all acquisition-related expenses, pension settlement charges and COVID-19-related expenses. The following table provides a reconciliation of this Non-US GAAP measure to the amounts reported in Peoples' Unaudited Condensed Consolidated Financial Statements for the periods presented: Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Core non-interest expense: Total non-interest expense $ 56,479 $ 53,366 $ 51,629 Less: acquisition-related expenses 551 702 1,373 Less: pension settlement charges — 46 — Less: COVID-19-related expenses — 2 94 Core non-interest expense $ 55,928 $ 52,616 $ 50,162 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. 53 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 March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Efficiency ratio: Total non-interest expense $ 56,479 $ 53,366 $ 51,629 Less: amortization of other intangible assets 1,871 1,998 1,708 Adjusted total non-interest expense 54,608 51,368 49,921 Total non-interest income 19,060 19,034 20,050 Less: net (loss) gain on investment securities (1,935) (168) 130 Less: net loss on asset disposals and other transactions (246) (302) (127) Total non-interest income excluding net gains and losses 21,241 19,504 20,047 Net interest income 72,878 70,613 54,310 Add: fully tax-equivalent adjustment (a) 399 412 391 Net interest income on a fully tax-equivalent basis 73,277 71,025 54,701 Adjusted revenue $ 94,518 $ 90,529 $ 74,748 Efficiency ratio 57.78 % 56.74 % 66.79 % Efficiency ratio adjusted for non-core items: Core non-interest expense $ 55,928 $ 52,616 $ 50,162 Less: amortization of other intangible assets 1,871 1,998 1,708 Adjusted core non-interest expense 54,057 50,618 48,454 Non-interest income excluding net gains and losses 21,241 19,504 20,047 Net interest income on a fully tax-equivalent basis 73,277 71,025 54,701 Adjusted revenue $ 94,518 $ 90,529 $ 74,748 Efficiency ratio adjusted for non-core items 57.19 % 55.91 % 64.82 % (a) Tax effect is calculated using a 23.3% blended corporate income tax rate for each of the three months ended March 31, 2023 and December 31, 2022, and a 22.9% blended corporate income tax rate for the three months ended March 31, 2022. The efficiency ratio and the efficiency ratio adjusted for non-core items for the first quarter of 2023 increased when compared to the linked quarter, primarily due to the increases in non-interest expenses due to seasonal first quarter expenses partially offset by higher net interest income driven by increases in the market interest rates. The improvements in the efficiency ratio and the efficiency ratio adjusted for non-core items compared to the prior year quarter were driven by higher net interest income due to increases in market interest rates over the last twelve months. 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, pension settlement charges and COVID-19-related expenses. 54 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 March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Annualized net income adjusted for non-core items: Net income $ 26,560 $ 26,849 $ 23,577 Add: net loss on investment securities 1,935 168 — Less: tax effect of net loss on investment securities (a) 406 35 — Less: net gain on investment securities — — 130 Add: tax effect of net gain on investment securities (a) — — 27 Add: net loss on asset disposals and other transactions 246 302 127 Less: tax effect of net loss on asset disposals and other transactions (a) 52 63 27 Add: acquisition-related expenses 551 702 1,373 Less: tax effect of acquisition-related expenses (a) 116 147 288 Add: pension settlement charges — 46 — Less: tax effect of pension settlement charges (a) — 10 — Add: COVID-19-related expenses — 2 94 Less: tax effect of COVID-19-related expenses (a) — — 20 Net income adjusted for non-core items (after tax) $ 28,718 27,814 24,733 Days in the period 90 92 90 Days in the year 365 365 365 Annualized net income $ 107,716 $ 106,520 $ 95,618 Annualized net income adjusted for non-core items (after tax) $ 116,467 $ 110,349 $ 100,306 Return on average assets: Annualized net income $ 107,716 $ 106,520 $ 95,618 Total average assets 7,222,464 7,067,193 7,067,816 Return on average assets 1.49 % 1.51 % 1.35 % Return on average assets adjusted for non-core items: Annualized net income adjusted for non-core items (after tax) $ 116,467 $ 110,349 $ 100,306 Total average assets 7,222,464 7,067,193 7,067,816 Return on average assets adjusted for non-core items (after tax) 1.61 % 1.56 % 1.42 % (a) Based on a 21% statutory federal corporate income tax rate. The return on average assets for the current quarter decreased slightly when compared to the linked quarter, due to an increase in average assets. The increase in the return on average assets for the first quarter of 2023, compared to the first quarter of 2022, was attributable to higher net interest income and non-interest income, which were driven by the increases in market interest rates. 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 55 Table of Contents 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 March 31, 2023 December 31, 2022 March 31, 2022 (Dollars in thousands) Annualized net income excluding amortization of other intangible assets: Net income $ 26,560 $ 26,849 $ 23,577 Add: amortization of other intangible assets 1,871 1,998 1,708 Less: tax effect of amortization of other intangible assets (a) 393 420 359 Net income excluding amortization of other intangible assets $ 28,038 $ 28,427 $ 24,926 Days in the period 90 92 90 Days in the year 365 365 365 Annualized net income $ 107,716 $ 106,520 $ 95,618 Annualized net income excluding amortization of other intangible assets $ 113,710 $ 112,781 $ 101,089 Average tangible equity: Total average stockholders' equity $ 801,465 $ 768,650 $ 834,752 Less: average goodwill and other intangible assets 325,545 327,377 304,124 Average tangible equity $ 475,920 $ 441,273 $ 530,628 Return on total average stockholders' equity ratio: Annualized net income $ 107,716 $ 106,520 $ 95,618 Total average stockholders' equity $ 801,465 $ 768,650 $ 834,752 Return on total average stockholders' equity 13.44 % 13.86 % 11.45 % Return on average tangible equity ratio: Annualized net income excluding amortization of other intangible assets $ 113,710 $ 112,781 $ 101,089 Average tangible equity $ 475,920 $ 441,273 $ 530,628 Return on average tangible equity 23.89 % 25.56 % 19.05 % (a) Based on a 21% statutory federal corporate income tax rate. The return on total average stockholders' equity and average tangible equity ratios were lower in the current quarter relative to the linked quarter, due to issuance of treasury stock for employee stock awards in the first quarter as well as decreases in accumulated other comprehensive losses on available-for-sale investment securities, partially offset by an increase in total net interest income driven by the recent increases in market interest rates. The return on total average stockholders' equity and average tangible equity ratios were higher in the current quarter when compared to the same 2022 period due to greater accumulated other comprehensive losses on available-for-sale investment securities in 2023, which reduced average tangible equity. 56 Table of Contents FINANCIAL CONDITION Cash and Cash Equivalents At March 31, 2023, Peoples' interest-bearing deposits in other banks had increased $0.7 million from December 31, 2022. The total cash and cash equivalents balance included $53.7 million of excess cash reserves being maintained at the FRB of Cleveland at March 31, 2023, compared to $33.1 million at December 31, 2022. The amount of excess cash reserves maintained is dependent upon Peoples' daily liquidity position, which is driven primarily by changes in deposit and loan balances. Through the first three months of 2023, Peoples' total cash and cash equivalents increased $3.1 million as Peoples had $48.0 million of cash provided by operating activities and $45.1 million of cash provided by financing activities, substantially offset by $90.0 million of cash used in investing activities. Peoples' cash used in investing activities reflected net cash outflows from held-to-maturity investment securities of $133.8 million and cash outflows from a $52.4 million net increase in loans held for investment, partially offset by net cash inflows from available-for-sale investment securities of $100.4 million. The cash provided by financing activities was largely driven by a $106.0 million net increase in interest-bearing deposits, partially offset by net cash outflows of $34.3 million, $11.0 million and $9.5 million from a net decrease in non-interest-bearing deposits, cash dividends paid, and payments on long-term borrowings, respectively. Peoples paid $82.9 million in cash for the Vantage acquisition during the first quarter of 2022. 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) Weighted Average Yield March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Available-for-sale securities, at fair value: Obligations of: U.S. Treasury and government agencies 1.54 % $ 58,438 $ 152,422 $ 172,055 $ 175,255 $ 167,406 U.S. government sponsored agencies 2.10 % 98,311 88,115 80,915 82,465 80,654 States and political subdivisions 2.19 % 224,996 225,882 230,022 249,402 231,644 Residential mortgage-backed securities 1.83 % 605,270 604,653 624,061 691,735 753,353 Commercial mortgage-backed securities 1.58 % 52,153 50,049 52,504 58,301 58,112 Bank-issued trust preferred securities 5.38 % 10,329 10,278 10,287 10,440 10,670 Total fair value $ 1,049,497 $ 1,131,399 $ 1,169,844 $ 1,267,598 $ 1,301,839 Total amortized cost $ 1,196,521 $ 1,300,719 $ 1,349,800 $ 1,389,621 $ 1,381,259 Net unrealized loss $ (147,024) $ (169,320) $ (179,956) $ (122,023) $ (79,420) Held-to-maturity securities, at amortized cost: Obligations of: U.S. government sponsored agencies 4.61 % $ 194,184 $ 132,366 $ 59,871 $ 50,990 $ 38,486 States and political subdivisions (a) 2.23 % 144,844 $ 145,022 145,252 151,034 151,217 Residential mortgage-backed securities 3.83 % 245,294 176,215 111,707 112,095 115,613 Commercial mortgage-backed securities 2.49 % 109,750 106,609 90,971 86,601 79,340 Total amortized cost $ 694,072 $ 560,212 $ 407,801 $ 400,720 $ 384,656 Other investment securities $ 52,763 $ 51,609 $ 39,039 $ 41,655 $ 41,840 Total investment securities: Amortized cost $ 1,943,356 $ 1,912,540 $ 1,796,640 $ 1,831,996 $ 1,807,755 Carrying value $ 1,796,332 $ 1,743,220 $ 1,616,684 $ 1,709,973 $ 1,728,335 (a) Amortized cost is presented net of the allowance for credit losses of $241 at March 31, 2023, $241 at December 31, 2022 and $286 at March 31, 2022. For the first quarter of 2023, total investment securities increased compared to the prior quarter, largely due to investments made in held-to-maturity residential mortgage-backed securities and obligations of U.S. government sponsored agencies, in an effort to improve investment yields and reduce risk, partially offset by the reduction in available-for-sale securities. During the first quarter of 2023, Peoples executed the sale of $96.7 million of its lower yielding available-for-sale securities for an after-tax loss of $1.6 million. Proceeds from the sale were used to pay down overnight borrowings. The realized losses recognized due to these transactions are projected to be earned back within the 2023 fiscal year. 57 Table of Contents 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) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Originated loans: Construction $ 222,915 $ 212,869 $ 175,388 $ 144,062 $ 171,934 Commercial real estate, other 995,176 919,531 891,576 899,774 854,721 Commercial real estate 1,218,091 1,132,400 1,066,964 1,043,836 1,026,655 Commercial and industrial 840,194 835,178 814,593 777,050 791,307 Premium finance 158,263 159,197 167,682 152,237 145,813 Leases 251,711 226,438 178,083 149,894 97,168 Residential real estate 386,964 384,262 381,104 373,010 364,989 Home equity lines of credit 132,531 132,093 124,524 115,935 107,414 Consumer, indirect 647,177 629,426 592,309 563,088 524,778 Consumer, direct 99,299 98,706 99,282 95,371 87,994 Consumer 746,476 728,132 691,591 658,459 612,772 Deposit account overdrafts 749 722 597 851 699 Total originated loans $ 3,734,979 $ 3,598,422 $ 3,425,138 $ 3,271,272 $ 3,146,817 Acquired loans (a): Construction $ 9,381 $ 34,072 $ 40,233 $ 58,526 $ 66,371 Commercial real estate, other 485,886 503,987 531,903 560,249 602,511 Commercial real estate 495,267 538,059 572,136 618,775 668,882 Commercial and industrial 50,945 57,456 62,879 81,402 95,844 Premium finance — — — — — Leases 102,930 118,693 134,764 164,628 169,900 Residential real estate 325,638 339,098 352,257 369,995 391,440 Home equity lines of credit 41,852 45,765 50,001 53,400 54,874 Consumer, indirect — — — — — Consumer, direct 8,107 9,657 14,032 16,433 19,396 Consumer 8,107 9,657 14,032 16,433 19,396 Total acquired loans $ 1,024,739 $ 1,108,728 $ 1,186,069 $ 1,304,633 $ 1,400,336 Total loans $ 4,759,718 $ 4,707,150 $ 4,611,207 $ 4,575,905 $ 4,547,153 Percent of loans to total loans: Construction 4.9 % 5.2 % 4.7 % 4.4 % 5.2 % Commercial real estate, other 31.1 % 30.2 % 30.9 % 32.0 % 32.1 % Commercial real estate 36.0 % 35.4 % 35.6 % 36.4 % 37.3 % Commercial and industrial 18.7 % 19.0 % 19.0 % 18.8 % 19.5 % Premium finance 3.3 % 3.4 % 3.6 % 3.3 % 3.2 % Leases 7.4 % 7.3 % 6.8 % 6.9 % 5.9 % Residential real estate 15.0 % 15.4 % 15.9 % 16.2 % 16.6 % Home equity lines of credit 3.7 % 3.8 % 3.8 % 3.7 % 3.6 % Consumer, indirect 13.6 % 13.4 % 12.8 % 12.3 % 11.5 % Consumer, direct 2.3 % 2.3 % 2.5 % 2.4 % 2.4 % Consumer 15.9 % 15.7 % 15.3 % 14.7 % 13.9 % Total percentage 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Residential real estate loans being serviced for others $ 384,005 $ 392,364 $ 400,736 $ 410,007 $ 420,024 (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). Period-end total loan balances at March 31, 2023 increased $52.6 million, or 4% annualized, compared to at December 31, 2022. The increase in the period-end loan and lease balances was primarily driven by increases of (i) $57.5 million in other commercial real estate loans, (ii) $17.8 million in indirect consumer loans and (iii) $9.5 million in leases, partially offset by a reductions of $14.6 million in construction loans and $10.8 million in residential real estate loans. The increase of $212.6 million in the period-end loan 58 Table of Contents and lease balances when compared to March 31, 2022 was primarily driven by increases of $122.4 million in indirect consumer loans and $87.6 million in leases, partially offset by a reduction of $43.8 million in residential real estate loans. The increases in the period-end loan and lease balances when compared to the prior periods was due to growth. The reduction in the period-end residential real estate loans balance when compared to all comparative prior periods was due to a lower inventory of homes for sale. Loan Concentration Peoples categorizes its commercial loans according to standard industry classifications and monitors for concentrations in a single industry or multiple industries that could be impacted by changes in economic conditions in a similar manner. Peoples' commercial lending activities continue to be spread over a diverse range of businesses from all sectors of the economy, with no single industry comprising over 10% of Peoples' total loan portfolio. Loans secured by commercial real estate, including commercial construction loans, continued to comprise the largest portion of Peoples' loan portfolio. The following tables provide information regarding the largest concentrations of commercial construction loans and commercial real estate loans within the loan portfolio at March 31, 2023: (Dollars in thousands) Outstanding Balance Loan Commitments Total Exposure % of Total Construction: Apartment complexes $ 120,995 $ 179,179 $ 300,174 64.1 % Mixed-use facilities 19,478 4,787 24,265 5.2 % Assisted living facilities and nursing homes 16,385 5,226 21,611 4.6 % Land only 21,690 8,081 29,771 6.4 % Office buildings and complexes 12,301 4,158 16,459 3.5 % Industrial 6,734 4,047 10,781 2.3 % Other (a) 34,713 30,391 65,104 13.9 % Total construction $ 232,296 $ 235,869 $ 468,165 100.0 % (a) All other total exposures by industry are less than 2% of the Total Exposure. 59 Table of Contents (Dollars in thousands) Outstanding Balance Loan Commitments Total Exposure % of Total Commercial real estate, other: Office buildings and complexes: Owner occupied $ 61,296 $ 1,943 $ 63,239 4.0 % Non-owner occupied 90,954 3,846 94,800 6.1 % Total office buildings and complexes 152,250 5,789 158,039 10.1 % Retail facilities: Owner occupied 39,551 1,480 41,031 2.6 % Non-owner occupied 144,979 4,008 148,987 9.5 % Total retail facilities 184,530 5,488 190,018 12.1 % Mixed-use facilities: Owner occupied 44,518 550 45,068 2.9 % Non-owner occupied 60,932 1,323 62,255 4.0 % Total mixed-use facilities 105,450 1,873 107,323 6.9 % Apartment complexes 112,419 37,757 150,176 9.6 % Light industrial facilities: Owner occupied 92,338 2,726 95,064 6.1 % Non-owner occupied 47,983 3,055 51,038 3.2 % Total light industrial facilities 140,321 5,781 146,102 9.3 % Assisted living facilities and nursing homes 62,701 5,151 67,852 4.3 % Warehouse facilities: Owner occupied 36,307 1,285 37,592 2.3 % Non-owner occupied 27,590 241 27,831 1.8 % Total warehouse facilities 63,897 1,526 65,423 4.1 % Lodging and lodging related: Owner occupied 28,859 661 29,520 1.9 % Non-owner occupied 79,821 1 79,822 5.1 % Total lodging and lodging related 108,680 662 109,342 7.0 % Education services: Owner occupied 18,148 — 18,148 1.2 % Non-owner occupied 31,734 5,523 37,257 2.4 % Total education services 49,882 5,523 55,405 3.6 % Healthcare facilities: Owner occupied 21,855 300 22,155 1.4 % Non-owner occupied 9,518 — 9,518 0.6 % Total healthcare facilities 31,373 300 31,673 2.0 % Restaurant/bar facilities: Owner occupied 28,715 9 28,724 1.8 % Non-owner occupied 10,464 248 10,712 0.7 % Total restaurant/bar facilities 39,179 257 39,436 2.5 % Land only Owner occupied 6,143 339 6,482 0.4 % Non-owner occupied 32,257 — 32,257 2.1 % Total land only 38,400 339 38,739 2.5 % Other (a) 430,380 15,645 446,025 28.5 % Total commercial real estate, other $ 1,481,062 $ 85,752 $ 1,566,814 100.0 % (a) All other total exposures by industry are less than 2% of the Total Exposure. Peoples' commercial lending activities continue to focus on lending opportunities within Ohio, Kentucky, West Virginia, Virginia, Washington, D.C. and Maryland. In all other states, the aggregate outstanding balances of commercial loans in each state were less than 4% of total loans at both March 31, 2023 and December 31, 2022. The repayment of premium finance loans is secured by the underlying insurance policy prepaid premium, and therefore, has no geographical impact from a repayment perspective. The repayment of leases is secured by the underlying equipment collateral and not real estate, which mitigates geographic risk. 60 Table of Contents Small Business Administration Paycheck Protection Program ("PPP") In March 2020, the Coronavirus Aid, Relief, and Economic Security ("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 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 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 table details Peoples' PPP loan balances and related income: (Dollars in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 PPP aggregate outstanding principal balances $ 2,184 $ 2,458 $ 3,789 $ 15,582 $ 42,871 PPP net deferred loan origination fees 25 27 61 421 995 Accretion of net deferred loan origination fees 2 34 360 574 1,215 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) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Construction $ 1,273 $ 1,250 $ 1,464 $ 1,531 $ 2,731 Commercial real estate, other 16,474 17,710 17,695 18,708 21,055 Commercial and industrial 8,307 8,229 8,611 8,572 10,114 Premium finance 433 344 553 311 345 Leases 9,109 8,495 7,890 7,585 5,875 Residential real estate 6,504 6,357 6,464 6,332 6,495 Home equity lines of credit 1,717 1,693 1,644 1,699 1,894 Consumer, indirect 7,781 7,448 6,912 6,234 5,172 Consumer, direct 1,619 1,575 1,592 1,321 1,036 Deposit account overdrafts 86 61 41 53 51 Allowance for credit losses $ 53,303 $ 53,162 $ 52,866 $ 52,346 $ 54,768 As a percent of total loans 1.12 % 1.13 % 1.15 % 1.14 % 1.20 % The reduction in the allowance for credit losses at March 31, 2023 compared to March 31, 2022 was driven by decreases in the allowances for individually analyzed loans, offset by loan growth and deterioration in the economic forecast. Additional information regarding Peoples' allowance for credit losses can be found in "Note 1 Summary of Significant Accounting Policies" in Peoples' 2022 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) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Gross charge-offs: Construction $ 9 $ 16 $ — $ — $ — Commercial real estate, other $ 33 132 57 22 278 Commercial and industrial 1 24 36 420 463 Premium finance 23 42 38 30 14 61 Table of Contents Three Months Ended (Dollars in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Leases 469 888 731 493 473 Residential real estate 41 144 168 47 309 Home equity lines of credit 19 42 5 25 16 Consumer, indirect 929 799 600 449 385 Consumer, direct 104 86 81 60 136 Consumer 1,033 885 681 509 521 Deposit account overdrafts 227 308 274 405 259 Total gross charge-offs $ 1,855 $ 2,481 $ 1,990 $ 1,951 $ 2,333 Recoveries: Commercial real estate, other $ 27 33 $ 39 $ 176 $ 49 Commercial and industrial — 40 3 2 4 Premium finance 9 4 1 8 — Leases 80 81 99 64 176 Residential real estate 29 20 36 14 14 Home equity lines of credit — 16 — — 29 Consumer, indirect 79 88 71 83 86 Consumer, direct 15 16 9 11 11 Consumer 94 104 80 94 97 Deposit account overdrafts 72 50 44 52 54 Total recoveries $ 311 $ 348 $ 302 $ 410 $ 423 Net charge-offs (recoveries): Construction $ 9 $ 16 $ — $ — $ — Commercial real estate, other 6 99 18 (154) 229 Commercial and industrial 1 (16) 33 418 459 Premium finance 14 38 37 22 14 Leases 389 807 632 429 297 Residential real estate 12 124 132 33 295 Home equity lines of credit 19 26 5 25 (13) Consumer, indirect 850 711 529 366 299 Consumer, direct 89 70 72 49 125 Consumer 939 781 601 415 424 Deposit account overdrafts 155 258 230 353 205 Total net charge-offs $ 1,544 $ 2,133 $ 1,688 $ 1,541 $ 1,910 Ratio of net charge-offs to average total loans (annualized): Construction — % — % — % — % — % Commercial real estate, other — % 0.01 % — % (0.01) % 0.02 % Commercial and industrial — % — % — % 0.04 % 0.03 % Premium finance — % — % — % — % — % Leases 0.04 % 0.07 % 0.06 % 0.04 % 0.03 % Residential real estate — % 0.01 % 0.01 % — % 0.03 % Home equity lines of credit — % — % — % — % — % Consumer, indirect 0.07 % 0.06 % 0.05 % 0.03 % 0.03 % Consumer, direct 0.01 % 0.01 % 0.01 % 0.01 % 0.01 % Consumer 0.08 % 0.07 % 0.06 % 0.04 % 0.04 % Deposit account overdrafts 0.01 % 0.02 % 0.02 % 0.03 % 0.02 % Total 0.13 % 0.18 % 0.15 % 0.14 % 0.17 % Each with "--%" not meaningful. Net charge-offs during the first quarter of 2023 were 0.13% of average total loans on an annualized basis. The decrease for the current quarter when compared to the linked quarter was driven by a decrease in charge-offs on leases, residential real estate loans and deposit account overdrafts, partially offset by an increase in charge-offs on indirect consumer loans. The decrease in net charge-offs during the current quarter versus the prior year quarter was primarily attributable to decreases in net charge-offs in (i) commercial and 62 Table of Contents industrial loans, (ii) residential real estate loans, and (iii) other commercial real estate loans, partially offset by an increase in net charge-offs in indirect consumer loans. The following table details Peoples’ nonperforming assets: (Dollars in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Loans 90+ days past due and accruing: Commercial real estate, other 150 167 1,472 330 603 Commercial and industrial 228 130 266 89 53 Premium finance 764 504 308 304 613 Leases 2,491 3,041 4,654 5,722 3,921 Residential real estate 238 917 1,499 1,687 677 Home equity lines of credit 127 58 23 89 75 Consumer, indirect 13 — 195 15 17 Consumer, direct 3 25 7 — — Consumer 16 25 202 15 17 Total loans 90+ days past due and accruing $ 4,014 $ 4,842 $ 8,424 $ 8,236 $ 5,959 Nonaccrual loans: Construction $ 1 $ 12 $ 2 $ 5 $ 6 Commercial real estate, other 11,345 12,121 11,916 14,253 14,942 Commercial and industrial 3,064 3,462 2,385 1,849 3,393 Leases 3,884 3,178 2,094 1,573 1,731 Residential real estate 8,641 9,496 8,728 9,194 9,135 Home equity lines of credit 793 820 921 890 937 Consumer, indirect 2,147 2,176 1,627 1,558 1,628 Consumer, direct 105 208 158 166 231 Consumer 2,252 2,384 1,785 1,724 1,859 Total nonaccrual loans $ 29,980 $ 31,473 $ 27,831 $ 29,488 $ 32,003 Total nonperforming loans ("NPLs") $ 33,994 $ 36,315 $ 36,255 $ 37,724 $ 37,962 OREO: Commercial $ 8,730 $ 8,730 $ 8,730 $ 9,065 $ 9,106 Residential 48 165 110 145 301 Total OREO $ 8,778 $ 8,895 $ 8,840 $ 9,210 $ 9,407 Total nonperforming assets ("NPAs") $ 42,772 $ 45,210 $ 45,095 $ 46,934 $ 47,369 Criticized loans (a) $ 198,812 $ 191,355 $ 164,775 $ 181,395 $ 190,315 Classified loans (b) 93,168 89,604 94,848 115,483 109,530 Asset Quality Ratios (c): Nonaccrual loans as a percent of total loans (d) 0.63 % 0.67 % 0.60 % 0.64 % 0.70 % NPLs as a percent of total loans (d) 0.71 % 0.77 % 0.79 % 0.82 % 0.83 % NPAs as a percent of total assets (d) 0.58 % 0.63 % 0.64 % 0.64 % 0.65 % NPAs as a percent of total loans and OREO (d) 0.90 % 0.96 % 0.98 % 1.02 % 1.04 % Allowance for credit losses as a percent of nonaccrual loans 177.80 % 168.91 % 189.95 % 177.52 % 171.13 % Allowance for credit losses as a percent of NPLs (d) 156.80 % 146.39 % 145.82 % 138.76 % 144.27 % Criticized loans as a percent of total loans (a) 4.18 % 4.07 % 3.57 % 3.96 % 4.19 % Classified loans as a percent of total loans (b) 1.96 % 1.90 % 2.06 % 2.52 % 2.41 % (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. 63 Table of Contents (d) NPLs include loans 90+ days past due and accruing and nonaccrual loans. NPLs in periods prior to March 31, 2023 also include TDRs. NPAs include nonperforming loans and OREO. Compared to December 31, 2022, Peoples' NPAs decreased from 0.63% to 0.58% of total assets. Loans 90+ days past due and accruing decreased compared to at December 31, 2022, mostly due to declines in residential real estate loans and leases that were 90+ days past due, partially offset by an increase in premium finance loans that that were 90+ days past due. During the first quarter of 2023, criticized loans increased $7.5 million, while classified loans increased $3.6 million when compared to at December 31, 2022. The increase in the amount of criticized loans compared to at December 31, 2022 was primarily related to downgrades of three commercial and industrial relationships. The increase in classified loans compared to the linked quarter was driven by the downgrade of one commercial and industrial relationship. Deposits The following table details Peoples’ deposit balances: (Dollars in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Non-interest-bearing deposits (a) $ 1,555,064 $ 1,589,402 $ 1,635,953 $ 1,661,865 $ 1,666,668 Interest-bearing deposits: Interest-bearing demand accounts (a) 1,085,169 1,160,182 1,162,012 1,143,010 1,179,199 Savings accounts 1,024,638 1,068,547 1,077,383 1,080,053 1,065,678 Retail certificates of deposit ("CDs") 622,091 530,236 544,741 584,259 612,936 Money market deposit accounts 579,106 617,029 624,708 645,242 656,266 Governmental deposit accounts 649,303 625,965 734,734 728,057 734,784 Brokered CDs 273,156 125,580 86,089 86,739 87,395 Total interest-bearing deposits 4,233,463 4,127,539 4,229,667 4,267,360 4,336,258 Total deposits $ 5,788,527 $ 5,716,941 $ 5,865,620 $ 5,929,225 $ 6,002,926 Demand deposits as a percent of total deposits 46 % 48 % 48 % 47 % 47 % (a) The sum of amounts presented is considered total demand deposits. At March 31, 2023, period-end deposits increased $71.6 million, or 1%, compared to at December 31, 2022. The increase when compared to at December 31, 2022 was primarily driven by an increase of $147.6 million in brokered certificates of deposits, which are primarily used as a source of funding. Excluding the increase in brokered certificates of deposits, total deposits at March 31, 2023 decreased $76.0 million, or 1%, when compared to at December 31, 2022 due to reductions of (i) $75.0 million in interest-bearing deposit accounts, (ii) $43.9 million in savings accounts, (iii) $37.9 million in money market deposit accounts, and (iv) $34.3 million in non-interest bearing deposit accounts, partially offset by an increase of $91.9 million in retail certificates of deposit. Period-end deposit balances decreased $214.4 million, or 4%, compared to at March 31, 2022. Deposits decreased primarily due to reductions in non-interest-bearing deposits, interest-bearing deposit accounts, governmental deposit accounts, and money market deposit accounts of $111.6 million, $94.0 million, $85.5 million and $77.2 million, respectively, partially offset by an increase of $185.8 million in brokered certificates of deposits. As part of its funding strategy, Peoples hedges 90-day brokered CDs with interest rate swaps. The swaps pay a fixed rate of interest while receiving three-month LIBOR, which offsets the rate on the brokered CDs. As of March 31, 2023, Peoples had thirteen effective interest rate swaps, with an aggregate notional value of $125.0 million, which were designated as cash flow hedges of overnight brokered CDs and are expected to be extended every 90 days through the maturity dates of the swaps. Peoples continually evaluates the overall balance sheet position given the interest rate environment. 64 Table of Contents Borrowed Funds The following table details Peoples’ short-term and long-term borrowings: (Dollars in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Short-term borrowings: Overnight borrowings $ 390,000 $ 400,000 $ (5,000) $ — $ — FHLB 90-day advances — — 40,000 40,000 40,000 Current portion of long-term FHLB advances — — — — 15,000 Retail repurchase agreements 100,670 100,138 98,611 286,442 89,275 Total short-term borrowings $ 490,670 $ 500,138 $ 133,611 $ 326,442 $ 144,275 Long-term borrowings: FHLB advances $ 33,941 $ 34,158 $ 34,662 $ 35,348 $ 85,564 Vantage non-recourse debt 47,864 53,147 55,781 74,622 102,364 Junior subordinated debt securities 13,824 13,788 13,753 13,717 13,682 Total long-term borrowings $ 95,629 $ 101,093 $ 104,196 $ 123,687 $ 201,610 Total borrowed funds $ 586,299 $ 601,231 $ 237,807 $ 450,129 $ 345,885 Borrowed funds, in total, which include overnight borrowings, are mainly a function of loan growth and changes in total deposit balances. Total borrowed funds decreased compared to at December 31, 2022, due to lower overnight borrowings. Total short-term borrowings at March 31, 2023 increased when compared to at March 31, 2022 due to outstanding FHLB overnight borrowings of $390.0 million at March 31, 2023, while there were no FHLB overnight borrowings at March 31, 2022. Capital/Stockholders’ Equity At March 31, 2023, capital levels for both Peoples and Peoples Bank remained substantially higher than the minimum amounts needed to be considered "well capitalized" institutions under applicable banking regulations. These higher capital levels reflect Peoples' desire to maintain a strong capital position. In order to avoid limitations on dividends, equity repurchases and compensation, Peoples must exceed the three minimum required ratios by at least the capital conservation buffer of 2.50%, which applies to the common equity tier 1 ("CET1") ratio, the tier 1 capital ratio and the total risk-based capital ratio. At March 31, 2023, Peoples had a capital conservation buffer of 5.35%. The following table details Peoples' risk-based capital levels and corresponding ratios: (Dollars in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Capital Amounts: Common Equity Tier 1 $ 624,292 $ 604,566 $ 584,880 $ 564,708 $ 547,215 Tier 1 638,116 618,354 598,633 578,425 560,897 Total (Tier 1 and Tier 2) 682,477 662,421 643,189 622,516 607,493 Net risk-weighted assets $ 5,110.318 $ 5,071,240 $ 4,955,627 $ 4,857,818 $ 4,752,428 Capital Ratios: Common Equity Tier 1 12.22 % 11.92 % 11.80 % 11.62 % 11.51 % Tier 1 12.49 % 12.19 % 12.08 % 11.91 % 11.80 % Total (Tier 1 and Tier 2) 13.35 % 13.06 % 12.98 % 12.81 % 12.78 % Tier 1 leverage ratio 9.02 % 8.92 % 8.64 % 8.38 % 8.29 % Peoples' regulatory capital and related ratio levels improved during the first quarter of 2023 when compared to at December 31, 2022 and at March 31, 2022 due to net income during the first quarter of 2023, partially offset by dividends paid. The ratios were negatively impacted at March 31, 2022 by the cash acquisition of Vantage, in connection with which Peoples recorded goodwill and intangible assets. The impact of the Vantage acquisition on Peoples' regularity capital and related ratios levels at March 31, 2022, was partially offset by net income exceeding dividends declared during the period ended March 31, 2022. 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, 65 Table of Contents intangible assets generally are difficult to convert into cash, especially during a financial crisis, and could decrease substantially in value should there be deterioration in the overall franchise value. As a result, tangible equity represents a conservative measure of the capacity for Peoples to incur losses but remain solvent. The following table reconciles the calculation of these Non-US GAAP financial measures to amounts reported in Peoples' Unaudited Condensed Consolidated Financial Statements: (Dollars in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Tangible equity: Total stockholders' equity $ 819,543 $ 785,328 $ 760,511 $ 786,824 $ 808,340 Less: goodwill and other intangible assets 324,562 326,329 328,428 328,132 341,865 Tangible equity $ 494,981 $ 458,999 $ 432,083 $ 458,692 $ 466,475 Tangible assets: Total assets $ 7,311,520 $ 7,207,304 $ 7,005,854 $ 7,278,292 $ 7,239,261 Less: goodwill and other intangible assets 324,562 326,329 328,428 328,132 341,865 Tangible assets $ 6,986,958 $ 6,880,975 $ 6,677,426 $ 6,950,160 $ 6,897,396 Tangible book value per common share: Tangible equity $ 494,981 $ 458,999 $ 432,083 $ 458,692 $ 466,475 Common shares outstanding 28,488,158 28,287,837 28,278,078 28,290,115 28,453,175 Tangible book value per common share $ 17.37 $ 16.23 $ 15.28 $ 16.21 $ 16.39 Tangible equity to tangible assets ratio: Tangible equity $ 494,981 $ 458,999 $ 432,083 $ 458,692 $ 466,475 Tangible assets $ 6,986,958 $ 6,880,975 $ 6,677,426 $ 6,950,160 $ 6,897,396 Tangible equity to tangible assets 7.08 % 6.67 % 6.47 % 6.60 % 6.76 % Tangible book value per common share increased to $17.37 at March 31, 2023, compared to $16.23 at December 31, 2022. The change in tangible book value per common share was due to tangible equity increasing during the first quarter of 2023 as a result of a decrease in other comprehensive losses recognized on available-for-sale investment securities, which the decrease was driven by sales during the quarter. Tangible book value per common share increased compared to at March 31, 2022 primarily due to net income over the last twelve months, partially offset by an increase in accumulated other comprehensive loss. 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' 2022 Form 10-K. 66 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 Decrease in Economic Value of Equity (in Basis Points) March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 300 $ 10,891 3.7 % $ 13,000 4.4 % $ (110,529) (7.5) % $ (82,959) (5.4) % 200 7,534 2.6 % 8,716 3.0 % (72,312) (4.9) % (55,809) (3.6) % 100 4,161 1.4 % 4,380 1.5 % (35,824) (2.4) % (28,157) (1.8) % (100) (8,608) (2.9) % (11,404) (3.9) % 6,268 0.4 % (21,124) (1.4) % (200) (23,095) (7.8) % (27,659) (9.4) % (35,500) (2.4) % (80,484) (5.2) % (300) (38,575) (13.1) % (43,728) (14.8) % (105,742) (7.1) % (152,152) (9.8) % This table uses a standard, parallel shock analysis for assessing the IRR to net interest income and the economic value of equity. A parallel shock assumes all points on the yield curve (one year, two year, three year, etc.) are directionally changed by the same degree. Management regularly assesses the impact of both increasing and decreasing interest rates. The table above shows the impact of upward and downward parallel shocks of 100, 200 and 300 basis points. Estimated changes in net interest income and the economic value of equity are partially driven by assumptions regarding the rate at which non-maturity deposits will reprice given a move in short-term interest rates, as well as assumptions regarding prepayment speeds on mortgage-backed securities. These and other modeling assumptions are monitored closely by Peoples on an ongoing basis. While parallel interest rate shock scenarios are useful in assessing the level of IRR inherent in the balance sheet, interest rates typically move in a nonparallel manner with differences in the timing, direction and magnitude of changes in short-term and long-term interest rates. Thus, any impact that might occur as a result of the Federal Reserve Board increasing short-term interest rates in the future could be offset by an inverse movement in long-term interest rates, and vice versa. For this reason, Peoples considers other interest rate scenarios in addition to analyzing the impact of parallel yield curve shifts. These include various flattening and steepening scenarios in which short-term and long-term interest rates move in different directions with varying magnitude. Peoples believes these scenarios to be more reflective of how interest rates change versus the severe parallel rate shocks described above. Given the shape of market yield curves at March 31, 2023, consideration of the bear steepener and bear flattener scenarios provide insights which were not captured by parallel shifts. The bear steepener scenario highlights the risk to net interest income and economic value of equity when short-term interest rates remain constant while long-term interest rates rise. In such a scenario, Peoples' deposit and borrowing costs, which are generally correlated with short-term interest rates, remain constant, while asset yields, which are correlated with long-term interest rates, rise. At March 31, 2023, the bear steepener scenario produced an increase in net interest income of 0.1% and a decline in the economic value of equity of 1.4%. The bear flattener scenario highlights the risk to net interest income and the economic value of equity when short-term rates rise while long-term rates remain constant. In such a scenario, Peoples' variable rate asset yields along with deposit and short-term borrowing costs, which are correlated with short-term rates, increase, while long-term asset yields and long-term borrowing costs, which are more correlated with long-term rates, remain constant. Increased deposit and funding costs would be more than offset by increased variable rate asset yields; resulting in an increased amount of net interest income and a higher net interest margin. At March 31, 2023, the bear flattener scenario produced no change to net interest income and a decline in the economic value of equity of 0.8%. As of March 31, 2023, the yield curve was inverted. A notable non-parallel shift scenario would be a continued increase in short-term interest rates relative to long-term interest rates in which the yield curve would further invert. As of March 31, 2023, this inversion scenario would have resulted in no change to net interest income and a decrease in the economic value of equity of (0.8)%. Peoples was within its policy limitations for this alternative scenario as of March 31, 2023, which set the maximum allowable downside exposure as 5.0% of net interest income and 10.0% of the 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 March 31, 2023, Peoples had entered into thirteen interest rate swap contracts with an aggregate notional value of $125.0 million. Additional information regarding Peoples’ interest rate swaps can be found in “Note 10 Derivative Financial Instruments” of the Notes to the Unaudited Condensed Consolidated Financial Statements. At March 31, 2023, Peoples' Unaudited Consolidated Balance Sheet was positioned to benefit from rising interest rates in terms of the potential impact on net interest income. The table above illustrates this point as changes to net interest income 67 Table of Contents increase in the rising interest 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, 2022 was largely attributable to increased effective duration within the investment securities portfolio. 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' 2022 Form 10-K. At March 31, 2023, Peoples Bank had liquid assets of $318.0 million, which represented 3.9% of total assets and unfunded loan commitments. Peoples also had an additional $231.4 million of unpledged investment securities not included in the measurement of liquid assets. Management believes the current mix of short-term liquidity sources, loan and security portfolio cash flows, and availability of other funding sources will allow Peoples to meet anticipated cash obligations, as well as special needs and off-balance sheet commitments. Off-Balance Sheet Activities and Contractual Obligations In the normal course of business, Peoples is a party to financial instruments with off-balance sheet risk necessary to meet the financing needs of Peoples' customers. These financial instruments include commitments to extend credit and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Unaudited Consolidated Balance Sheets. The contract amounts of these instruments express the extent of involvement Peoples has in these financial instruments. Loan Commitments and Standby Letters of Credit Loan commitments are made to accommodate the financial needs of Peoples' customers. Standby letters of credit are instruments issued by Peoples Bank guaranteeing the beneficiary payment by Peoples Bank in the event of default by Peoples Bank's customer in the performance of an obligation or service. Historically, most loan commitments and standby letters of credit expire unused. Peoples Bank's exposure to credit loss in the event of nonperformance by the counter-party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. Peoples Bank uses the same underwriting standards in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties. Peoples Bank routinely engages in activities that involve, to varying degrees, elements of risk that are not reflected in whole or in part in the Unaudited Condensed Consolidated Financial Statements. These activities are part of Peoples Bank's normal course of business and include traditional off-balance sheet credit-related financial instruments, interest rate contracts and commitments to make additional capital contributions in low-income housing tax credit investments. Traditional off-balance sheet credit-related financial instruments continue to represent the most significant off-balance sheet exposure. The following table details the total contractual amount of loan commitments and standby letters of credit: (Dollars in thousands) March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Home equity lines of credit $ 201,692 $ 197,995 $ 194,685 $ 188,803 $ 184,616 Unadvanced construction loans 241,225 270,229 320,825 237,129 203,719 Other loan commitments 717,149 730,015 653,384 566,624 616,696 Loan commitments $ 1,160,066 $ 1,198,239 $ 1,168,894 $ 992,556 $ 1,005,031 Standby letters of credit $ 15,046 $ 15,451 $ 15,096 $ 15,977 $ 12,729 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 Form 10-Q, and is incorporated herein by reference. 68 Table of Contents