EDGAR 10-K Filing

Company CIK: 318300
Filing Year: 2022
Filename: 318300_10-K_2022_0000318300-22-000115.json

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ITEM 1. BUSINESS
ITEM 1 BUSINESS
The disclosures set forth in this Item are qualified by "ITEM 1A RISK FACTORS" and the section captioned "Forward-Looking Statements" in "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K and other cautionary statements set forth elsewhere in this Form 10-K.
Corporate Overview
Peoples Bancorp Inc. is a financial holding company, which was organized in 1980. Peoples operates principally through its wholly-owned subsidiary, Peoples Bank, an Ohio state-chartered bank that was first chartered in 1902. Peoples' other wholly-owned subsidiaries are Peoples Investment Company ("PIC"), Peoples Risk Management, Inc., a captive insurance subsidiary and Vantage Financial ("Vantage"). Peoples also holds all of the common securities of NB&T Statutory Trust III and FNB Capital Trust One. Peoples Bank's operating subsidiaries include Peoples Insurance Agency, LLC ("Peoples Insurance"), and an asset management company, Peoples Tax Credit Equity, LLC.
Business Overview
Peoples makes available a complete line of commercial and consumer banking, trust and investment, insurance, premium financing solutions, equipment leases and equipment financing agreements through its financial subsidiaries - Peoples Bank and Peoples Insurance. These products and services include the following:
◦various demand deposit accounts, savings accounts, money market accounts and certificates of deposit;
◦commercial loans, residential real estate loans, home equity lines of credit, consumer loans and Overdraft Privilege;
◦debit and automated teller machine ("ATM") cards;
◦credit cards for individuals and businesses;
◦merchant credit card transaction processing services;
◦person-to-person payment processing via Zelle®;
◦mobile banking features including check deposit, withdrawals with cardless cash, alert notifications, Apple Pay® and Samsung Pay®;
◦safe deposit rental facilities;
◦money orders and cashier's checks;
◦a full range of life, health, and property and casualty insurance products;
◦third-party insurance administration services;
◦insurance premium financing;
◦commercial equipment leasing;
◦technology equipment leasing;
◦brokerage services;
◦custom-tailored fiduciary and trust services;
◦asset management and administration services;
◦employee benefit, retirement, and health care plan administration services: and
◦underwriting, origination and servicing of equipment leases and equipment financing agreements.
Peoples' financial products and services are primarily offered through its financial service locations and ATMs in Ohio, West Virginia, Kentucky, Virginia, Washington, D.C. and Maryland, as well as through online resources that are web-based and mobile-based. Peoples' premium financing and equipment leasing services are offered nationwide. Brokerage services are offered exclusively through an unaffiliated registered broker-dealer located at Peoples Bank's offices. Indirect consumer lending activities are provided through approved dealerships. Peoples Bank's credit card and merchant processing services are provided through joint marketing arrangements with third parties.
Peoples' business activities are currently limited to one reporting unit and reportable operating segment, which is community banking. For a discussion of Peoples' financial performance for the fiscal year ended December 31, 2021, see Peoples' Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
Peoples has a history of expanding its business, including its customer base and primary market area, through a combination of internal growth and targeted acquisitions. The internal growth may include opening de novo banking and loan production offices located in or near Peoples' existing market area. Acquisitions have consisted of traditional banking offices and loan production offices, both individually and as part of entire financial institutions, insurance agencies, financial advisory books of business,
insurance premium financing and equipment leasing services. The primary objectives of Peoples' expansion efforts include: (1) providing opportunities to integrate non-traditional products and services, such as insurance, and investment administration and management, insurance premium financing and commercial leasing options, along with the traditional banking products offered to Peoples' clients; (2) increasing market share in existing markets; (3) expanding Peoples' core financial service businesses of banking, insurance, investment and investment management, insurance premium financing and equipment leasing services; and (4) improving operating efficiency by directing resources toward offices and markets with the greatest earnings opportunities.
Recent Corporate Developments
On March 7, 2022, Peoples wholly-owned subsidiary, Peoples Bank, closed on its acquisition of Vantage Financial, LLC ("Vantage"), a nationwide provider of equipment financing headquartered in Excelsior, Minnesota. Under the terms of the agreement, Peoples Bank purchased 100% of the equity of Vantage for total cash consideration of $54.0 million. Peoples Bank repaid approximately $28.9 million in recourse debt on behalf of Vantage. Vantage offers mid-ticket equipment leases, primarily for business essential information technology equipment across a wide array of industries. Upon completion of the transaction, Vantage became a subsidiary of Peoples Bank. As a subsidiary, Vantage will continue to operate under the name Vantage Financial, which will leverage Vantage's strong brand recognition within the equipment finance industry.
On September 17, 2021, Peoples' completed its merger with Premier Financial Bancorp, Inc. ("Premier"), in which Peoples acquired, in an all-stock merger, Premier, a bank holding company headquartered in Huntington, West Virginia, and the parent company of Premier Bank, Inc. ("Premier Bank") and Citizens Deposit Bank and Trust, Inc. ("Citizens"). Under the terms and subject to the conditions of the definitive Agreement and Plan of Merger dated March 26, 2021, Premier merged with and into Peoples (the "Merger"), and Premier Bank and Citizens subsequently merged with and into Peoples' wholly-owned subsidiary, Peoples Bank, in a transaction valued at $261.9 million. At the close of business on September 17, 2021, the financial services offices of Premier Bank and Citizens became branches of Peoples Bank. Peoples acquired $1.1 billion in loans and $1.8 billion in deposits. Peoples preliminarily recorded $68.2 million in goodwill and $4.2 million in other intangible assets in connection with the Merger. Refer to "Note 20 Acquisitions" of the Notes to the Consolidated Financial Statements for additional information.
On May 4, 2021, Peoples Insurance Agency, LLC ("Peoples Insurance") acquired substantially all of the assets and rights of an insurance agency located in Pikeville, Kentucky and certain rights to related customer accounts, which were previously developed and maintained by Justice & Stamper Insurance Agency, Inc., pursuant to an Asset Purchase Agreement between Peoples Insurance and Justice & Stamper Insurance Agency, Inc. Total consideration for this transaction was $325,000, with $162,500 paid at closing and the second installment in the amount of $162,500 to be paid on the first anniversary of the closing date, less any adjustments pursuant to adverse claims incurred or sustained by or imposed by Peoples Insurance. Peoples recorded customer relationship intangible assets of $230,000 and goodwill of $46,000, related to this transaction. Refer to "Note 20 Acquisitions" of the Notes to the Consolidated Financial Statements for additional information.
On March 31, 2021, Peoples completed its acquisition of NS Leasing, LLC ("NSL") pursuant to an Asset Purchase Agreement, dated March 24, 2021. Peoples Bank acquired the equipment finance and leasing business of NSL. The transaction closed after the end of business on March 31, 2021 and Peoples Bank began operating the acquired business as North Star Leasing, a division of Peoples Bank on April 1, 2021. Peoples Bank acquired assets comprising NSL's equipment finance business, including $83.3 million in leases and satisfied, on behalf of NSL, certain third-party debt of $69.1 million. Peoples Bank paid total consideration of $116.6 million, plus a potential earn-out payment to NSL of up to $3.1 million. Based in Burlington, Vermont, the North Star Leasing division underwrites, originates and services equipment leases and equipment financing agreements to businesses throughout the United States. Peoples recorded preliminary goodwill in the amount of $24.7 million and preliminary other intangibles of $14.0 million, which included a customer relationship intangible, trade name intangible and non-compete agreements related to this transaction. Peoples recorded an additional $0.6 million in non-interest expense during the last six months of 2021 related to an update to the estimated earn-out provision of $3.0 million. As of December 31, 2021, equipment leases had grown to $122.5 million. Refer to "Note 20 Acquisitions" of the Notes to the Consolidated Financial Statements for additional information.
On January 28, 2021, Peoples' Board of Directors approved a share repurchase program authorizing Peoples to purchase up to an aggregate of $30 million of Peoples' outstanding common shares, replacing the share repurchase program which had authorized Peoples to purchase up to an aggregate of $40 million of Peoples' outstanding common shares. There were no common share repurchases during 2021, under the existing share repurchase program. On February 27, 2020, Peoples' Board of Directors approved a share repurchase program authorizing Peoples to purchase up to an aggregate of $40.0 million of Peoples' outstanding common shares. This program had replaced the share repurchase program authorizing Peoples to purchase up to an aggregate of $20.0 million of Peoples' outstanding common shares, which Peoples' Board of Directors had approved on November 3, 2015 and which was terminated on February 27, 2020. During 2020, Peoples repurchased 1,299,577 of Peoples' common shares through Peoples' then-effective common share repurchase program for a total of $29.3 million.
Primary Market Area and Customers
Peoples considers its primary market area to be those counties with a physical branch presence and their contiguous counties. This includes Ohio, West Virginia, Kentucky, Virginia, Washington, D.C. and Maryland. Peoples currently operates 66 offices in
Ohio, 34 offices in West Virginia, 26 offices in Kentucky, three offices in Virginia, three offices in Washington D.C., one office in Maryland, an insurance premium finance lending office in Missouri, an equipment leasing office in Vermont and a technology equipment leasing office in Minnesota. Peoples' market area consists of rural, small urban and metropolitan markets in which Peoples serves a diverse group of industries and employers. Principal industries served in Peoples' primary market area include manufacturing, distribution, commercial real estate, health care, education, municipal, agricultural, automotive, wholesale and retail trade, franchise, and service-related industries. This broad-based economic area provides diversity, which helps prevent Peoples' revenue and earnings from being largely dependent upon any single industry segment.
The COVID-19 pandemic has created disruptions throughout Peoples' primary market area. Governments, businesses, and the public have taken unprecedented actions to contain the spread of COVID-19, or variants thereof, and mitigate its effects. These steps have included vaccines, quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, government fiscal stimulus, payment programs, and legislation designed to deliver monetary aid as well as other actions taken by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") with respect to monetary policy. These actions had a negative impact on the customers of Peoples, including businesses and individuals. The availability, effectiveness and acceptance of vaccines for COVID-19, or variants thereof, to the general public could continue to impact Peoples' market area and customers.
Lending Activities
Peoples Bank originates various types of loans, including commercial loans (comprised of commercial and industrial loans, commercial real estate loans, and construction loans), premium finance loans, residential real estate loans, home equity lines of credit, consumer loans (comprised of both indirect and direct loans) and Overdraft Privilege. Peoples Bank's lending activities are focused principally on lending opportunities within its primary market areas, except for its premium finance lending and equipment leasing businesses. However, Peoples Bank may occasionally originate loans outside its primary market area. In general, Peoples Bank retains the majority of loans and leases it originates; however, certain longer-term fixed-rate mortgage loan originations, primarily one-to-four family residential mortgages, and portions of select commercial real estate loans and commercial and industrial loans are sold into the secondary market or to other financial institutions.
Peoples Bank's loans consist of credit extensions to borrowers spread over a broad range of industrial classifications. At December 31, 2021, Peoples Bank had no concentration of loans to borrowers engaged in the same or similar industries that exceeded 10% of total loans (also referred to as "loans, net of deferred fees and costs"), nor did Peoples Bank have any loans outstanding to non-United States ("U.S.") entities.
Commercial Lending
Commercial loans include commercial and industrial loans, commercial real estate loans, and construction loans. Commercial loans represented the largest portion of Peoples Bank's total loan portfolio, comprising approximately 59.3% and 59.0% of total loans at December 31, 2021 and December 31, 2020, respectively. Commercial lending inherently carries a significant risk of loss since commercial loan relationships generally involve larger loan balances than other loan classes.
Commercial loan terms include amortization schedules and interest rates commensurate with the purpose of each loan, the identified source of repayment, and the risk involved. The majority of Peoples Bank's commercial loans carry variable interest rates equal to an underlying index rate plus a margin. However, Peoples Bank also originates commercial loans with fixed interest rates for periods generally ranging from three to ten years. At December 31, 2021, the commercial loan portfolio consisted of 72.6% in variable interest rate loans and 27.4% in fixed interest rate loans. In determining whether to grant a commercial loan, Peoples Bank primarily reviews a schedule of cash flows to evaluate whether the borrower's anticipated future cash flows will be adequate to service both interest and principal due.
Peoples Bank also originates variable rate loans with interest rate swaps, where the customer enters into an interest rate swap with Peoples Bank on terms that match the terms of the loan. By entering into the interest rate swap with the customer, Peoples Bank effectively provides the customer with a fixed-rate loan while creating a variable rate asset for Peoples Bank. In addition, Peoples Bank offsets its exposure in each swap by entering into an offsetting interest rate swap with an unaffiliated financial institution. These interest rate swaps do not qualify as designated hedges; therefore, each swap is accounted for as a standalone derivative instrument.
Peoples Bank evaluates all commercial loan relationships whose aggregate credit exposure is greater than $1.0 million on an annual basis for possible credit deterioration. This loan review process provides Peoples Bank with opportunities to identify potential problem loans and take proactive actions to assure repayment of the loan or minimize Peoples Bank's risk of loss, such as reviewing the relationship more frequently based upon the loan quality rating and aggregate outstanding exposure. Upon detection of the reduced ability of a borrower to meet cash flow obligations, the loan is reviewed for possible downgrade in the loan quality rating or placement on nonaccrual status. Peoples Bank also completes evaluation procedures for a selection of larger loan relationships on a quarterly basis. Loan relationships whose aggregate credit exposure to Peoples Bank is equal to or less than $1.0 million are reviewed on an event-driven basis. Triggers for review include a borrower's request to renew a maturing loan or line of credit, actual knowledge of adverse events affecting the borrower's business, receipt of financial statements indicating deteriorating credit quality, or other similar events.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the "CARES Act"), was signed into law on March 27, 2020, to provide national emergency economic relief measures. The CARES Act amended the loan program of the Small Business Administration (the "SBA"), in which Peoples Bank participates, to create a guaranteed, unsecured loan program, the Paycheck Protection Program (the "PPP"), to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. These economic relief measures were extended through the enactment in December 2020 of the Consolidated Appropriations Act, 2021. The PPP loan program ended on May 31, 2021, meaning no new PPP loans have been originated since this date.
Commercial and Industrial Loans
Commercial and industrial loans are loans to operating companies for purposes of financing working capital needs, fixed asset acquisitions, acquisitions of other businesses, and other business activities. Typically, these loans are secured with business assets and, in some cases, owner-occupied real estate and are personally guaranteed by the owners of the operating companies. The primary source of repayment of this type of loan is generally cash flows generated from operations of the business, which can be susceptible to adverse changes in economic conditions of the general economy as a whole or within a specific industry. Also included in commercial and industrial loan balances are the PPP loans. At December 31, 2021, commercial and industrial loans comprised 19.9% of Peoples Bank's total loan portfolio compared to 28.6% at December 31, 2020.
Commercial Real Estate Loans
Peoples Bank's portfolio of commercial real estate loans comprised 34.7% of total loans at December 31, 2021, and 27.3% at December 31, 2020. Peoples Bank originates commercial real estate loans for both owner-occupied commercial real estate and non-owner-occupied investment commercial real estate. Generally, the real estate securing these loans is stabilized and typically the loans are personally guaranteed by the owners of the borrowing entities. Normally, owner-occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities, and other commercial and industrial properties occupied by operating companies. The source of repayment for this type of loan is typically cash flow from the operating company occupying the real estate. Investment commercial real estate generally includes office buildings and complexes, retail facilities, multifamily complexes, land under development, and industrial properties, as well as other commercial or industrial real estate. Typically, the primary source of repayment of this type of loan is rental income generated from leasing activities.
Construction Loans
Peoples Bank originates construction loans to provide temporary financing during the construction phase for commercial and residential properties. Peoples Bank's construction lending is focused primarily on commercial and residential projects of select real estate developers. These projects include the construction of apartment, office, retail, industrial complexes, and other commercial and residential projects. The underwriting criteria for construction loans are generally the same as for non-construction loans. Construction loans comprised 4.7% of Peoples Bank's total loan portfolio at both December 31, 2021 and December 31, 2020.
Construction financing is generally considered to involve higher credit risk since Peoples Bank is dependent largely upon the accuracy of the initial estimate of the property's value at the completion of construction and the estimated cost (including interest) of construction. If the estimated construction cost proves to be inaccurate, Peoples Bank may be required to advance funds beyond the amount originally committed to enable completion of the project. If the estimate of property's value upon completion proves inaccurate, Peoples Bank may be confronted, at or prior to the maturity of the loan, with a property having a value insufficient to ensure full repayment, should the borrower default. In the event a default on a construction loan occurs and foreclosure follows, Peoples Bank must take control of the project and attempt to either arrange for completion of construction or sell the collateral of the unfinished project. In certain cases, such as real estate development projects, repayment of construction loans occurs as a result of subsequent sale of the developed real estate. Additional risk exists in these cases as the developer may lack funds to repay the loan if the property is not sold upon completion.
To mitigate the risk of construction lending, Peoples Bank requires periodic site inspections, typically completed by an independent third party, to ensure appropriate completion of the project prior to any disbursements. Construction loans are structured to provide sufficient time to complete construction, giving consideration to weather or other variables that influence completion time. Peoples Bank typically requires the term of its construction loans to be less than three years.
Insurance Premium Finance Loans
Peoples Bank's portfolio of insurance premium finance loans comprised 3.0% of total loans at December 31, 2021, with the portfolio having been acquired during 2020. The insurance premium finance loans are originated through independent insurance agency partners nationwide and provide funding for the purchase by borrowers of property and casualty insurance policies from the insurance agency partners. The loans are secured by the refundable, unearned premiums with respect to the underlying insurance policies. These loans require a 10%-20% down payment followed by no less than nine consecutive, equal monthly payments of principal plus interest. This type of lending is relatively low risk, as the loan amount is generally less than the refundable, unearned premiums of the underlying insurance policy. If the loan becomes delinquent, the underlying insurance policy is cancelled, and the unearned premiums are refunded directly to Peoples Bank.
Commercial Equipment Leases and Equipment Financing Agreements
Peoples Bank's portfolio of leases comprised 2.7% of total loans at December 31, 2021, with the portfolio having been acquired during 2021. Based in Burlington, Vermont, the North Star Leasing division underwrites, originates and services equipment leases and equipment financing agreements to businesses throughout the United States. These leases transfer substantially all of the benefits and risks of equipment ownership to the lessee. The present value of future lease payments and the estimated residual value are recorded as leases on Peoples' Consolidated Balance Sheet. Revenue is recognized as a constant percentage return on the lease's carrying value. Lease origination costs are deferred and amortized as an adjustment of the related lease's yield.
Residential Real Estate Loans
Peoples Bank's portfolio of residential real estate loans comprised 17.2% of total loans at December 31, 2021, and 16.9% at December 31, 2020. The residential real estate loans originated by Peoples Bank may either be retained in its loan portfolio, or sold into the secondary market with servicing either retained by Peoples Bank or sold with the loan. Peoples Bank also had $3.8 million of residential real estate loans held for sale and was servicing $430.6 million of loans, consisting primarily of one-to-four family residential mortgages, which had previously been sold into the secondary market, in each case, as of December 31, 2021. Peoples Bank also originates and retains jumbo residential mortgage loans for primary and secondary residences, which are nonconforming loans that have higher loan amounts than those acceptable for sale to the government-sponsored enterprises to which Peoples Bank typically sells residential mortgage loans.
Peoples Bank originates both fixed rate and variable rate residential real estate loans. From time to time, Peoples Bank sells its longer-term fixed rate real estate loans into the secondary market; however, Peoples Bank may retain certain fixed rate real estate loans.
Peoples Bank typically requires residential real estate loan amounts to be no more than 80% of the purchase price or the appraised value of the real estate securing the loan, whichever is lower, unless private mortgage insurance is obtained by the borrower for the percentage exceeding 80%. In limited circumstances, Peoples Bank may lend up to 100% of the appraised value of the real estate, although such lending currently is limited to loans that qualify under established federally-backed rural housing programs or through a designated low-to-moderate income loan program. Numerous risk factors attributable to real estate lending are considered during underwriting for the purposes of establishing an interest rate commensurate with the inherent risks of the loan.
Residential real estate loans are typically secured by first mortgages with evidence of title in favor of Peoples Bank in the form of an attorney's opinion of the title or a title insurance policy. Peoples Bank requires insurance, with Peoples Bank named as the mortgagee and loss payee. Peoples Bank requires evidence of insurance at the time of the loan closing. Additionally, Peoples Bank has a blanket insurance policy to cover loans secured by real estate with outstanding balances of less than $1 million that do not include an insurance escrow account. For loans secured by real estate with outstanding balances over $1 million or those that include an insurance escrow account, Peoples Bank force-places an insurance policy to cover the residential real estate loan when the borrower fails to maintain adequate insurance. Licensed appraisals are required for all residential real estate loans, and are completed by an independent third party. A compliance officer assigned to the line of business is responsible for working with the management team to identify, implement and test regulatory compliance controls.
Home Equity Lines of Credit
Peoples Bank originates home equity lines of credit that provide consumers with greater flexibility in financing personal expenditures. At December 31, 2021, outstanding home equity lines of credit comprised 3.7% of Peoples Bank's total loans, compared to 3.6% at December 31, 2020. Peoples Bank currently offers home equity lines of credit with a prime-based variable rate for the entire 10-year term of the loan and fixed rate installment loans with five-year to 20-year terms. At December 31, 2021, Peoples Bank's home equity loan portfolio consisted of 98.5% in variable interest rate loans and 1.5% in fixed interest rate loans. Peoples Bank also offers a home equity line of credit product whose terms include a fixed rate for the first five years, which converts to a variable interest rate for the remaining five years. At December 31, 2021, 17.6% of the total home equity loan portfolio was represented by convertible rate home equity lines of credit, with total outstanding principal balances and available credit amounts of $25.8 million and $49.9 million, respectively, and a weighted-average remaining maturity of 4.8 years. The average original loan amount under these convertible rate home equity lines of credit was $86,000 at December 31, 2021.
Home equity lines of credit are generally made as second mortgages by Peoples Bank. The maximum amount of a home equity line of credit is generally limited to 80% of the appraised value of the property less the balance of the first mortgage. Peoples Bank may lend up to 90% of the appraised value of the property (less the balance of the first mortgage) at higher interest rates that are commensurate with the additional risk being assumed in these situations. The home equity lines of credit are written with 10-year terms and are subject to a new underwriting review upon request for renewal.
Consumer Lending
Peoples Bank's consumer lending activities include consumer indirect loans and consumer direct loans, which primarily involve loans secured by automobiles, motorcycles, recreational vehicles and other personal property, as well as unsecured loans
and personal lines of credit. Consumer loans generally involve more risk as to collectability than real estate mortgage loans because of the type and nature of the collateral or, in certain instances, the absence of collateral. As a result, consumer lending collections are dependent upon the borrower's continued financial stability, and are at more risk from adverse changes in personal circumstances. In addition, application of various state and federal laws, including bankruptcy and insolvency laws, could limit the amount that may be recovered under these loans. Credit approval for consumer loans typically requires demonstration of sufficiency of income to repay principal and interest due, stability of employment, an established credit record and sufficient collateral for secured loans. It is the policy of Peoples Bank to review its consumer loan portfolio monthly and to charge-off loans that do not meet its ongoing standards, while strictly adhering to all laws and regulations governing consumer lending. A compliance officer assigned to the line of business is responsible for working with the management team to identify, implement and test regulatory compliance controls.
Consumer Indirect Loans
Peoples Bank originates consumer indirect loans through select dealerships, which generally include loans secured by automobiles, motorcycles and recreational vehicles. At December 31, 2021, consumer indirect loans comprised 11.8% of Peoples Bank's total loan portfolio, compared to 14.8% at December 31, 2020.
Consumer indirect loans are originated at the point of sale, or dealership, and are subject to the same pricing structure and underwriting process as consumer loans originated through the retail branch channel. Consumer indirect lending offers Peoples Bank the opportunity to access additional customers outside of its primary office locations. Peoples Bank offers consumer indirect lending for new and pre-owned vehicles through approved franchise or independent dealerships. These dealerships undergo an approval process whereby Peoples Bank reviews the dealership licensing and industry experience, evaluates customer experience with the dealership and completes an inspection of the inventory, showroom, and general facilities. On an ongoing basis, the dealerships are monitored based on production volume, application approval rates, portfolio default rates, and adherence to loan pricing guidelines.
Consumer Direct Loans
Peoples Bank originates consumer direct loans primarily through its office locations. Consumer direct loans generally include loans secured by automobiles, motorcycles, recreational vehicles and other personal property; unsecured loans; and personal lines of credit. Consumer direct loans differ from consumer indirect loans as they include expanded products, such as unsecured loans, or loans secured by stock or deposits. Consumer direct loans comprised 2.3% of Peoples Bank's total loan portfolio at each of December 31, 2021 and December 31, 2020.
Overdraft Privilege
Peoples Bank grants Overdraft Privilege to qualified customers. Overdraft Privilege is a service that provides overdraft protection to deposit customers, both individual and business, by establishing an Overdraft Privilege amount. After a 60-day waiting period to verify account activity, each new checking account usually receives an Overdraft Privilege amount of $400, $700 or $1,000 based on the type of account and other parameters, such as previous charge-off history or credit loss. Customers also have the ability to opt out of Overdraft Privilege offered by Peoples. Once established, customers are permitted to overdraw their checking account at Peoples Bank's discretion, up to their Overdraft Privilege limit, with each item being charged Peoples Bank's regular overdraft fee, with a maximum of seven charges per day when the customer's account is overdrawn more than $5. Customers repay the overdraft with their next deposit. Overdraft Privilege is designed to allow Peoples Bank to fill the void between traditional overdraft protection, such as a line of credit, and "check cashing stores." Under federal banking regulations, Peoples Bank is required to obtain the consent of its customers in order to apply Overdraft Privilege to ATM and one-time debit card transactions. While Overdraft Privilege generates fee income, these fees may be offset by additions to the provision for credit losses necessary to ensure the maintenance of an appropriate allowance for credit losses against overdrafts deemed uncollectable. This allowance, along with net charge-offs, was included in determining Peoples Bank's allowance for credit losses. At December 31, 2021, the unfunded commitment related to Overdraft Privilege was $74.0 million.
Investment Activities
At December 31, 2021, investment securities comprised 23.8% of Peoples' total assets, compared to 18.0% at December 31, 2020. The majority of Peoples' investment activities are conducted through Peoples Bank, although Peoples and its non-banking subsidiary, PIC, also may engage in investment activities from time to time. Investment activity by Peoples Bank is subject to certain regulatory guidelines and limitations on the types of securities eligible for purchase. As a result, the investment securities owned by Peoples Bank at December 31, 2021 included agencies and corporations of the U.S. government, including mortgage-backed securities, bank eligible obligations of any state or political subdivision in the U.S. and bank eligible corporate obligations, including private-label mortgage-backed securities. Peoples Bank also invests in tax credit funds. The investments owned by PIC consist of tax credit funds, municipal obligations, privately issued mortgage-backed securities, and subordinated debt issued by a non-related banking entity.
Peoples Bank's investment activities are governed internally by a policy approved by the Board of Directors of Peoples Bank, which is administered by Peoples Bank's Asset-Liability Management Committee ("ALCO"). The primary purpose of Peoples Bank's investment portfolio is to: (1) employ excess funds not needed to support loan demand; (2) provide a source of liquid
assets to accommodate unanticipated deposit and loan fluctuations, and overall liquidity needs; (3) provide eligible securities to secure public and trust funds; and (4) earn the maximum overall return commensurate with Peoples Bank's risk appetite and liquidity needs. Investment strategies to achieve these objectives are reviewed and approved by the ALCO. In its evaluation of investment strategies, the ALCO considers various factors, including the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and Peoples Bank's overall interest rate sensitivity. The ALCO also has much broader responsibilities, which are discussed in the "Interest Rate Sensitivity and Liquidity" section of "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K.
Funding Sources
Peoples' primary sources of funds for lending and investing activities are interest-bearing and non-interest-bearing deposits. Cash flows from both the loan and investment portfolios, which include scheduled payments, as well as prepayments, calls and maturities, also provide a relatively stable source of funds. Peoples also utilizes a variety of short-term and long-term borrowings to fund asset growth and satisfy liquidity needs. Peoples' funding sources are managed through Peoples' asset-liability management process and monitored by the ALCO, which is discussed further in the "Interest Rate Sensitivity and Liquidity" section of "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K.
The following is a brief description of the various sources of funds utilized by Peoples:
Deposits
Peoples Bank obtains deposits principally from individuals and businesses within its primary market area by offering a broad selection of deposit products to clients. Deposit products for individuals have account terms that vary with respect to the minimum balance required, the time the funds must remain on deposit, and service charge schedules. Interest rates paid on specific deposit types are determined based on (1) the interest rates offered by competitors, (2) the anticipated amount and timing of funding needs, (3) the availability and cost of alternative sources of funding, and (4) the anticipated future economic conditions and interest rates. Business deposits, which include deposits from traditional commercial businesses as well as governmental entities, are obtained through an offering of multiple deposit account types as well as cash management solutions. Depending on the need of the entity, these deposits could be either interest-bearing or non-interest-bearing. The ability of Peoples Bank to offer competitive cash management solutions to its customers, enables it to obtain valuable operating account funds as well as non-operating account funds. Retail and business deposits are attractive sources of funding because of their stability and cost, relative to wholesale funding alternatives, in addition to providing opportunities for Peoples to build long-term client relationships through the cross-selling of its other products and services.
Peoples Bank also offers its customers the ability to receive multi-million dollar federal deposit insurance coverage for certificates of deposit ("CDs") through the Certificate of Deposit Account Registry Service ("CDARS") program and money market deposit accounts through the Insured Cash Sweep Services ("ICS") network. Under these programs, funds from large customer deposits are placed into accounts issued by other members of the CDARS program or ICS network in increments below the federal deposit insurance limits to ensure both principal and interest remain eligible for insurance. Peoples Bank also purchases certain "one-way buy" CDARS deposits, and overnight ICS network deposits which are utilized as a wholesale funding source, and these deposits are classified as brokered CDs in "Note 8 Deposits" of the Notes to the Consolidated Financial Statements.
Peoples Bank occasionally obtains deposits from clients outside its primary market area, generally in the form of CDs, and has the ability, if determined to be appropriate, to obtain deposits from deposit brokers. These deposits are used to supplement Peoples Bank's deposits to fund loans originated to customers located outside its primary market area, as well as provide diversity in funding sources. While these deposits may carry slightly higher interest costs than other wholesale funds, they do not require Peoples Bank to secure the funds with collateral, unlike most other borrowed funds. Additionally, in recent years, Peoples has issued brokered CDs to fund fixed-rate interest rate swaps.
Additional information regarding the amounts and composition of Peoples Bank's deposits can be found in the "Deposits" section of "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K and in "Note 8 Deposits" of the Notes to the Consolidated Financial Statements.
Borrowed Funds
Peoples obtains funds through a variety of short-term and long-term borrowings, which typically include advances from the Federal Home Loan Bank of Cincinnati (the "FHLB") and repurchase agreements. Peoples also has the ability to obtain funds, if determined to be appropriate, through federal funds purchased and advances from the Federal Reserve Discount Window. In addition, Peoples has the ability to obtain funds from unrelated financial institutions in the form of term loans or revolving lines of credit. Short-term borrowings are used generally to manage Peoples' daily liquidity needs since they typically may be repaid, in whole or part, at any time without a penalty. In recent years, Peoples has utilized interest rate swaps to obtain short-term borrowings at long-term fixed rates, effectively replacing maturing long-term borrowings. Long-term borrowings provide cost-
effective options for funding asset growth and satisfying capital needs, due to the variety of pricing and maturity options available.
Additional information regarding the amounts and composition of Peoples' borrowed funds can be found in the "Borrowed Funds" section of "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K and in "Note 9 Short-Term Borrowings" and "Note 10 Long-Term Borrowings" of the Notes to the Consolidated Financial Statements.
Competition
Peoples experiences intense competition within its primary market area due to the presence of several national, regional and local financial institutions and other service providers, including finance companies, financial technology companies, insurance agencies and mutual fund providers. Competition within the financial services and insurance industries continues to increase as a result of mergers between, and expansion of, financial services and insurance providers within and outside of Peoples' primary market areas. In addition, the deregulation of the financial services industry (see the discussion of the Gramm-Leach-Bliley Act of 1999 in the section of this item captioned "Supervision and Regulation - Bank Holding Company Regulation") has allowed securities firms and insurance companies that have elected to become financial holding companies to acquire commercial banks and other financial institutions, which can create additional competitive pressure. In addition, financial technology companies, or "fintechs" are also providing nontraditional, but increasingly strong, competition for our borrowers, depositors, and other customers.
Peoples primarily competes based on client service, convenience and responsiveness to customer needs, product characteristics, interest rates on loans, insurance premium financing, leases and deposits, and the availability and pricing of fiduciary, employee benefit plan, brokerage and insurance services. However, some competitors may have greater resources, including additional technology offerings and higher lending limits than Peoples, which may adversely affect Peoples' ability to compete. Peoples' business strategy includes the use of a "needs-based" sales and service approach to serve customers and is intended to promote customers' continued use of multiple financial products and services. Peoples continues to emphasize the integration of traditional commercial banking products with non-traditional financial products, such as insurance and investment products. In addition, Peoples continuously works to improve its online and mobile capabilities to ensure customers are able to use its products and services utilizing many channels.
Historically, Peoples has focused on providing its full range of products and services in smaller metropolitan markets and certain major metropolitan areas. Management believes Peoples has developed a level of expertise in serving the financial service needs of all communities. Peoples' primary market area has expanded into larger metropolitan areas, such as central, southwestern and northeastern Ohio along with eastern Virginia, southern Maryland, Minnesota and Washington, D.C. Peoples also competes nationally when providing insurance premium financing and commercial equipment leases and equipment financing arrangements. These larger areas typically contain entrenched service providers with existing customer bases much larger than Peoples' current position. As a result, Peoples may be forced to compete more aggressively in order to grow its market share in these areas, which could reduce current and future profit potential derived from such markets.
Human Capital Resources
At December 31, 2021, Peoples had 1,188 full-time equivalent employees, compared to 894 at December 31, 2020. Peoples makes it a priority to provide a first class workplace for its employees, focusing on providing quality benefits, recognizing and rewarding performance, cultivating diversity, promoting a culture of learning and coaching in every direction. Peoples offers paid time off, medical, dental and vision insurance, along with wellness programs, a 401(k) program, an employee stock purchase program, programs to assist with education-related costs, reward and recognition programs, as well as other various programs and benefits. Peoples has also implemented a $15 minimum wage throughout the organization and is moving to have all associates at or above this threshold by January 2023.
Peoples strives to be an inclusive and diverse workplace, free of harassment, and encourages employees to voice their opinions. Peoples works to attract and retain top quality talent, and in doing so, promotes a learning environment where positive constructive feedback can be given at any level of the organization. Employees are encouraged to communicate their thoughts, whether it is with a co-worker, management or the Human Resources Department. Peoples also provides many reward programs for employees and management to recognize contributions by individuals and teams within the organization. Peoples provides internal training throughout the organization, as well as opportunities to attend external and online training events. Managers complete quarterly performance reviews with employees, and semi-annual employee satisfaction pulse surveys are completed. Peoples tracks and monitors employee turnover and executes exit interviews to better understand why employees choose to leave the organization.
Peoples maintains a high level of commitment to its communities, which is shown both through employees volunteering and with donations made to many organizations within the Peoples footprint.
The safety of Peoples' employees is of utmost priority, and during 2021, the COVID-19 pandemic caused several changes. A portion of Peoples' workforce continued working remotely, to facilitate a smaller number of employees in the same location if not necessary. Peoples has also expanded the cleaning and sanitization of office locations, along with providing employees with appropriate protection equipment. Peoples has supported its employees during the pandemic, and provided time off with pay for those
who were fully vaccinated and have either tested positive, or those caring for a family member who has tested positive, without requiring the employee to use paid time off that has been accrued. In addition, Peoples is conducting scheduled calls to speak to employees about the changes and ask for feedback about plans regarding COVID-19, and encouraging employees who are sick to stay home.
Intellectual Property and Proprietary Rights
Peoples has registered the service marks "Peoples Bank (with logo)," "Peoples Bancorp," "Peoples Bank," Peoples in motion logo consisting of three arched ribbons, "Working Together. Building Success.", "Peoples Insurance (with logo)", "Peoples Investment Services", “Peoples Premium Finance”, “North Star Leasing” and "peoplesbancorp.com" with the U.S. Patent and Trademark Office (the "USPTO"). These service marks currently have expiration dates ranging from 2022 to 2031.
Peoples may renew the registrations of service marks with the USPTO generally for additional five-year to 10-year periods indefinitely, provided it continues to use the service marks and files appropriate maintenance and renewal documentation with the USPTO at the times required by the federal trademark laws and regulations. Peoples intends to continue to use its registered service marks and to timely renew the registration of each of them.
Peoples has proprietary interests in the Internet domain names "peoplespf.com," "pebo.com" and "peoplesbancorp.com." Internet domain names in the U.S. and in foreign countries are regulated, but the laws and regulations governing the Internet are continually evolving.
Supervision and Regulation
Peoples and its subsidiaries are subject to extensive supervision and regulation by federal and state agencies. The regulation of financial holding companies and their subsidiaries is intended primarily for the protection of consumers, depositors, borrowers, the Deposit Insurance Fund and the banking system as a whole, and not for the protection of shareholders. Applicable laws and regulations restrict permissible activities and investments, and require actions to protect loan, deposit, brokerage, fiduciary and other customers, as well as the Deposit Insurance Fund. Such laws and regulations may also restrict Peoples' ability to repurchase its common shares or to receive dividends from Peoples Bank, and impose capital adequacy and liquidity requirements. The following is a summary of the regulatory agencies, statutes and related regulations that have, or could have, a material impact on Peoples' business. This discussion is qualified in its entirety by reference to such regulations and statutes.
Financial Holding Company
Peoples is a legal entity separate and distinct from its subsidiaries and affiliated companies. As a financial holding company, Peoples is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and to inspection, examination and supervision by the Federal Reserve Board.
The Federal Reserve Board has extensive enforcement authority over financial holding companies. In general, the Federal Reserve Board may initiate enforcement actions for violations of laws and regulations and unsafe or unsound practices. The Federal Reserve Board may assess civil money penalties, issue cease and desist or removal orders, and require that a financial holding company divest subsidiaries, including subsidiary banks. Peoples is routinely required to file reports and other information with the Federal Reserve Board regarding Peoples' business operations and those of its subsidiaries.
Subsidiary Bank
Peoples Bank is subject to regulation and examination primarily by the Ohio Division of Financial Institutions ("ODFI") and the Federal Reserve Bank of Cleveland ("FRB"). 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.
Various requirements and restrictions under the laws of the U.S, and the states of Ohio, Kentucky, West Virginia, Virginia, Washington, D.C., Maryland and Minnesota affect the operations of Peoples Bank, including requirements to maintain reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon, restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks, limitations on activities based on capital and surplus, limitations on transactions between Peoples Bank and Peoples, limitations on the payment of dividends, and limitations on branching. Consumer laws and regulations that are designed to prevent unfair, deceptive and abusive acts and practices and that ensure that consumers have access to fair, transparent and competitive markets for consumer financial products and services also affect the services provided by Peoples Bank.
Non-Banking Subsidiaries
Peoples' non-banking subsidiaries are also subject to regulation by the Federal Reserve Board and other applicable federal and state agencies. Peoples Insurance, as a licensed insurance agency, is subject to regulation by the Ohio Department of Insurance and the state insurance regulatory agencies of those states where it conducts business. Peoples Risk Management, Inc., a Nevada-chartered captive insurance company, is subject to the laws and regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance.
Other Regulatory Agencies
Securities and Exchange Commission ("SEC") and the Nasdaq Global Select Market® ("Nasdaq")
Peoples is also under the jurisdiction of the SEC and certain state securities commissions for matters relating to the offering and sale of its securities. Peoples is subject to the registration, disclosure, reporting and regulatory requirements of the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the regulations promulgated under each of the Securities Act and the Exchange Act, as administered by the SEC. Peoples' common shares are listed with Nasdaq under the symbol "PEBO" and Peoples is subject to the rules for Nasdaq listed companies.
Federal Home Loan Bank
Peoples Bank is a member of the FHLB, which provides credit to its members in the form of advances. As a member of the FHLB, Peoples Bank must maintain an investment in the capital stock of the FHLB in a specified amount. Upon the origination or renewal of an advance, the FHLB is required by law to obtain and maintain a security interest in certain types of collateral. The FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLB. The standards take into account a member's performance under the Community Reinvestment Act of 1977, as amended (the "CRA"), and the member's record of lending to first-time homebuyers.
Federal Deposit Insurance Corporation ("FDIC")
The FDIC is an independent federal agency which insures the deposits, up to prescribed statutory limits, of federally-insured banks and savings associations, and safeguards the safety and soundness of the financial institution industry. Peoples Bank's deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC and Peoples Bank is subject to deposit insurance assessments to maintain the Deposit Insurance Fund. The general insurance limit is $250,000 per separately insured depositor. This insurance is backed by the full faith and credit of the U.S. government.
As insurer, the FDIC is authorized to conduct examinations of and to require routine reporting by insured institutions, including Peoples Bank, to prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to pose a threat to the Deposit Insurance Fund, and to take enforcement actions against insured institutions. The FDIC may terminate insurance of deposits of any insured institution if the FDIC finds that the insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or any other regulatory agency.
Insured depository institutions are required to remit quarterly deposit insurance premiums to the FDIC, which are used to fund the Deposit Insurance Fund. Insurance premiums for each insured depository institution are determined based upon the institution's capital level and supervisory rating provided to the FDIC by the institution's primary federal regulator and other information the FDIC determines to be relevant to the risk posed to the Deposit Insurance Fund by the insured depository institution. The assessment rate determined by considering such information is then applied to the amount of the insured depository institution's average assets minus average tangible equity to determine the insured depository institution's insurance premium. An increase in the assessment rate could have a material adverse effect on the earnings of the affected insured depository institution, depending on the amount of the increase.
The FDIC assesses a quarterly deposit insurance premium on each insured depository institution based on risk characteristics of the institution and may also impose special assessments in emergency situations. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as amended (the "Dodd-Frank Act"), the FDIC has established 2.0% as the designated reserve ratio ("DRR"), which is the amount in the Deposit Insurance Fund as a percentage of all Deposit Insurance Fund insured deposits. In March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. At September 30, 2018, the DRR met the statutory minimum of 1.35%. As a result, the previous surcharge imposed on banks with assets of $10 billion or more was lifted. In addition, preliminary assessment credits were determined by the FDIC for banks with assets of less than $10 billion, which had previously contributed to the increase of the DRR to 1.35%. On June 30, 2019, the DRR reached 1.40%, and the FDIC applied credits for banks with assets of less than $10 billion. On June 30, 2020, the DRR fell below the statutory minimum to 1.30%. This resulted in the FDIC adopting a restoration plan designed to restore the DRR to 1.35% within eight years, by September 30, 2028. As part of this restoration plan, all scheduled assessment rates for all insured institutions were maintained. On September 30, 2021, the DRR was 1.27%
Bank Holding Company Regulation
In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks, and other activities that the Federal Reserve Board determines to be so closely related to banking as to be a proper incident thereto. As a result of the Gramm-Leach-Bliley Act of 1999 - also known as the Financial Services Modernization Act of 1999 - which amended the BHC Act, bank holding companies that are financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (1) financial in nature or incidental to such financial activity (as determined by the Federal Reserve Board in consultation with the Secretary of the Treasury), or (2) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial
system generally. Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments. In 2002, Peoples elected, and received approval from the Federal Reserve Board, to become a financial holding company.
In order for a financial holding company to commence any new activity permitted by the BHC Act, or to acquire a company engaged in any new activity permitted by the BHC Act, the financial holding company must be "well managed" and "well capitalized," and each insured depository institution subsidiary of the financial holding company must be well capitalized under the prompt corrective action provisions, be well managed and have received a rating of at least "satisfactory" in its most recent examination under the CRA. The CRA is more fully discussed in the section captioned "Community Reinvestment Act" included later in this Item. In addition, financial holding companies, such as Peoples, are permitted to acquire companies engaged in activities that are financial in nature and in activities that are incidental and complementary to financial activities without prior Federal Reserve Board approval.
The BHC Act and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition of more than 5% of the voting shares of a commercial bank or its parent holding company. Under the federal Bank Merger Act, as amended, the prior approval of the Federal Reserve Board is required for a state-chartered, Federal Reserve Bank member bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing an application seeking approval of a merger or acquisition transaction, the bank regulatory authorities consider, among other factors, the competitive effect and public benefits of the transaction, the capital position of the combined organization, the applicant's performance record under the CRA and fair housing laws, and the effectiveness of the subject organizations in combating money laundering activities.
A financial holding company is required by law and Federal Reserve Board policy to act as a source of financial strength to each subsidiary bank and to commit resources to support each subsidiary bank. The Federal Reserve Board may require a financial holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to shareholders if the Federal Reserve Board believes the payment of such dividends would be an unsafe or unsound practice.
Transactions with Affiliates, Directors, Executive Officers and Shareholders
Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Board Regulation W generally:
•limit the extent to which a bank or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10.0% of the bank's capital stock and surplus;
•limit the extent to which a bank or its subsidiaries may engage in "covered transactions" with all affiliates to an amount equal to 20.0% of the bank's capital stock and surplus; and
•require that all such transactions be on terms substantially the same, or at least as favorable to the bank or subsidiary, as those provided to a non-affiliate.
An affiliate of a bank is any company or entity that controls, is controlled by, or is under common control with the bank. The term "covered transaction" includes the making of loans to the affiliate, the purchase of assets from the affiliate, the issuance of a guarantee on behalf of the affiliate, the purchase of securities issued by the affiliate and other similar types of transactions.
A bank's authority to extend credit to executive officers, directors and greater than 10.0% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated under the Federal Reserve Act by the Federal Reserve Board. Among other things, these loans must be made on terms (including interest rates charged and collateral required) substantially similar to those offered to unaffiliated individuals, or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these persons is based, in part, on the bank's capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.
The Coronavirus Aid, Relief, and Economic Security Act of 2020 and Initiatives Related to COVID-19
In response to the novel COVID-19 pandemic (“COVID-19”), the CARES Act was signed into law on March 27, 2020, to provide national emergency economic relief measures. Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, such as Peoples and Peoples Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve Board and other federal banking agencies, including those with direct supervisory jurisdiction over Peoples and Peoples Bank. Furthermore, as COVID-19 is ongoing and continues to evolve, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that the U.S. Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act.
Section 1102 of the CARES Act amended the loan program of the SBA, in which Peoples Bank participates, to create a guaranteed, unsecured loan program, the PPP, to fund operational costs of eligible businesses, organizations and self-employed
persons during COVID-19. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. In June 2020, the Paycheck Protection Program Flexibility Act was enacted, which, among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. After previously being extended by Congress, the application deadline for PPP loans expired on May 31, 2021. No collateral or personal guarantees were required for PPP loans. In addition, neither the government nor lenders have been permitted to charge the recipients of PPP loans any fees. On December 27, 2020, the President signed into law omnibus federal spending and economic stimulus legislation titled the "Consolidated Appropriations Act, 2021" that included the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the "HHSB Act"). Among other things, the HHSB Act renewed the PPP, allocating $284.5 billion for both new first-time PPP loans under the existing PPP and the expansion of existing PPP loans for certain qualified, existing PPP borrowers. The PPP program ended May 31, 2021 and no new loans can be originated under that program.
On September 29, 2020, the federal bank regulatory agencies issued a final rule that neutralizes the regulatory capital and liquidity coverage ratio effects of participating in certain COVID-19 liquidity facilities due to the fact there is no credit or market risk in association with exposures pledged to such facilities. As a result, the final rule supports the flow of credit to households and businesses affected by COVID-19.
On December 2, 2020, the federal bank regulatory agencies issued an interim final rule that provides temporary relief for specified community banking organizations related to certain regulations and reporting requirements as a result, in large part, of their growth in size from the response to COVID-19. Community banking organizations are subject to different rules and requirements based on their risk profile and asset size. Due to their involvement in federal COVID-19 response programs (such as the PPP) and other lending that supported the U.S. economy, many community banking organizations experienced rapid and unexpected increases in their sizes, which were generally expected to be temporary. The temporary increase in size could have subjected community banking organizations to new regulations or reporting requirements. However community banking organizations with assets approaching the $10.0 billion threshold and that would otherwise have become subject to additional regulatory requirements upon crossing such threshold, including requirements related to capital adequacy standards, debit card interchange fees and routing, and management official interlocks, had until January 1, 2022 to either reduce their size or to prepare for new regulatory and reporting standards.
Capital Adequacy and Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991, as amended ("FDICIA"), identifies five capital categories for insured depository institutions and requires the applicable regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements within such categories. The regulatory agencies, including the Federal Reserve Board, the FDIC, the ODFI, and the Office of Comptroller of the Currency (the "OCC"), have adopted substantially similar regulatory capital guidelines and regulations consistent with the requirements of FDICIA, and have established a system of prompt corrective action to resolve certain problems of undercapitalized institutions. This system is based on five capital level categories for insured depository institutions: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized."
The regulatory agencies may (or in some cases must) take certain supervisory actions depending upon a bank's capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90 days after the bank becomes "critically undercapitalized" unless the bank's primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise may be significantly affected depending on a bank's capital category. For example, a bank that is not "well capitalized" generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized bank must guarantee, in part, specific aspects of the bank's capital plan for the plan to be acceptable.
The Federal Reserve Board has adopted risk-based capital guidelines for financial holding companies and other bank holding companies, as well as state member banks. The guidelines provide a systematic analytical framework which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Capital levels, as measured by these standards, are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.
In July 2013, the U.S. banking regulators issued capital rules (the "Basel III Capital Rules") applicable to smaller banking organizations which also implement certain provisions of the Dodd-Frank Act. Community banking organizations, including Peoples and Peoples Bank, began transitioning to the rules on January 1, 2015. The minimum capital requirements became effective on January 1, 2015; whereas, the capital conservation buffer and deductions from common equity capital phased in from January 1, 2016 through January 1, 2019, and most deductions from common equity tier 1 capital phased in from January 1, 2015 through January 1, 2019. As of January 1, 2019, Peoples had fully phased in the Basel III Capital Rules.
The Basel III Capital Rules include: (a) a minimum common equity tier 1 capital ratio of 4.5%; (b) a minimum tier 1 risk-based capital ratio of 6.0%; (c) a minimum total risk-based capital ratio of 8.0%; and (d) a minimum tier 1 leverage ratio of 4.0%.
Common equity for the common equity tier 1 capital ratio generally consists of common stock (plus related surplus), retained earnings, accumulated other comprehensive income ("AOCI") (unless an institution elects to exclude such income from regulatory capital), and limited amounts of minority interests in the form of common stock, subject to applicable regulatory adjustments and deductions.
Tier 1 capital generally consists of common equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus, trust preferred securities that have been grandfathered (but which are not otherwise permitted), and limited amounts of minority interests in the form of additional tier 1 capital instruments, less certain deductions.
Tier 2 capital, which can be included in the total capital ratio, generally consists of other preferred stock and subordinated debt meeting certain conditions plus limited amounts of the allowance for credit losses, subject to specified eligibility criteria, less applicable deductions.
The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels).
Under the guidelines, capital is compared to the relative risk included in the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Basel III Capital Rules also place restrictions on the payment of capital distributions, including dividends and share repurchases, and certain discretionary bonus payments to executive officers if the banking organization does not hold a capital conservation buffer of greater than 2.5% composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter.
In September 2019, the Federal Reserve Board, along with the other federal banking regulatory agencies, issued a final rule, effective January 1, 2020, that gave community banks, including Peoples Bank, the option to calculate a simple leverage ratio to measure capital adequacy if the community banks met certain requirements. Under the rule, a community bank was eligible to elect the Community Bank Leverage Ratio ("CBLR") framework if the community bank had less than $10 billion in total consolidated assets, limited amounts of certain trading assets and liabilities and of off-balance sheet exposures, and a leverage ratio greater than 9.0%. Qualifying institutions that elected to use the CBLR framework and that maintained a leverage ratio of greater than 9.0% were be considered to have satisfied the risk-based and leverage capital requirements in the regulatory agencies' generally applicable capital rules and to have met the well-capitalized ratio requirements. Peoples has opted out of the simplified framework and continues to follow existing capital rules.
In October 2021, effective in November 2021, the FDIC issued a final rule to incorporate the CBLR rule into the Real Estate Lending Standards. This rule calculates the ratio of loans in excess of the supervisory loan-to-value limits ("LTV Limits") using Tier 1 capital plus the appropriate allowance for credit losses in the denominator. This rule was adopted to allow a consistent approach for calculating the ratio of loans in excess of the supervisory LTV Limits at all FDIC supervised institutions, and to avoid any regulatory burden that could arise if an FDIC supervised institution subsequently decides to switch between different capital frameworks.
In December 2018, the federal banking agencies issued a final rule to address regulatory capital treatment of credit loss allowances under the current expected credit loss (“CECL”) model (accounting standard). The rule revises the federal banking agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model. During 2020, regulatory agencies issued guidance allowing additional phase-in periods for the impact of the CECL model for regulatory capital purposes. This additional phase-in period includes a 25% deferment of the impact on regulatory capital of the estimated increase in the allowance for credit losses related to the CECL model, which is applied during the first two years of application. For the first two years of the phase-in period, 100% of the transition adjustment due to the implementation of the CECL model is excluded for regulatory capital purposes, along with 25% of the increase in the allowance for credit losses compared to the January 1, 2020 allowance for credit losses. In year three of the phase-in, 75% of the transition adjustment, and the cumulative 25% increase in the allowance for credit losses compared to January 1, 2020, are excluded from regulatory capital, while 50% and 25% of these amounts are excluded in years four and five, respectively, under this phase-in period. Additional information on the impact of Peoples' adoption of the CECL methodology can be found under the "FINANCIAL CONDITION - Allowance for Credit Losses" section of "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K.
In order to be "well capitalized," a bank must have a common equity tier 1 capital ratio of at least 6.5%, a tier 1 risk-based capital ratio of at least 8.0%, a total risk-based capital of at least 10.0%, and a tier 1 leverage ratio of at least 5.0%, and the bank
must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measures. Peoples' management believes that Peoples Bank meets the ratio requirements to be deemed "well capitalized" according to the guidelines described above. Additional information regarding Peoples' regulatory matters can be found in "Note 17 Regulatory Matters" of the Notes to the Consolidated Financial Statements.
Safety and Soundness Regulations
In accordance with the Federal Deposit Insurance Act (the "FDIA"), the federal bank regulatory agencies adopted safety and soundness guidelines establishing general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify, monitor, and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, regulations adopted by the federal bank regulatory agencies authorize the agencies to require that an institution that has been given notice that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, the institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the agency must issue an order directing corrective actions and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the "prompt corrective action" provisions of FDIA. If the institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Community Reinvestment Act
The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit or other financial assistance to low-income and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. The most recent performance evaluation by the Federal Reserve Board (which was Peoples Bank's primary federal banking regulator at the time of the examination) of Peoples Bank was conducted in 2020 and resulted in an overall rating of "Outstanding."
Dividend Restrictions
Current banking regulations impose restrictions on Peoples Bank's ability to pay dividends to Peoples. These restrictions include a limit on the amount of dividends that may be paid in a given year without prior approval of the Federal Reserve Board and a prohibition on paying dividends that would cause Peoples Bank's total capital to be less than the required minimum levels under the capital requirements imposed by the Federal Reserve Board and the amount of the capital conservation buffer. Ohio law also limits the amount of dividends that may be paid in any given year without prior approval of the Ohio Superintendent of Financial Institutions. Peoples Bank may not declare or pay a dividend if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of Peoples Bank's net income during the current calendar year and the retained net income of the prior two calendar years, unless the dividend has been approved by the ODFI and the Federal Reserve Board. Peoples Bank's regulators may prohibit the payment of dividends at any time if the regulators determine the dividends represent unsafe and/or unsound banking practices, or reduce Peoples Bank's total capital below adequate levels. For further discussion regarding regulatory restrictions on dividends, refer to "Note 17 Regulatory Matters" of the Notes to the Consolidated Financial Statements.
Peoples' ability to pay dividends to its shareholders may also be restricted. Current Federal Reserve Board policy requires a financial holding company to act as a source of financial strength to each of its banking subsidiaries. Under this policy, the Federal Reserve Board may require Peoples to commit resources or contribute additional capital to Peoples Bank, which could restrict the amount of cash available for dividends.
The Federal Reserve Board has also issued a policy statement with regard to the payment of cash dividends by financial holding companies and other bank holding companies. The policy statement provides that, as a matter of prudent banking, a financial holding company or bank holding company should not maintain a rate of cash dividends unless its net income available to common shareholders over the current year has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears to be consistent with the financial holding company's or bank holding company's capital needs, asset quality and overall financial condition. Accordingly, a financial holding company or bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the financial holding company's or bank holding company's financial health, such as by borrowing.
Peoples also has entered into certain agreements that place restrictions on dividends. Specifically, Peoples Bank is prohibited from paying dividends in an amount greater than permitted by law without requiring prior Federal Reserve Board or other regulatory approval. In addition, if Peoples were to elect to defer payments of interest on the junior subordinated debt securities held by the NB&T Statutory Trust III or FNB Capital Trust One, or an event of default were to occur under the indenture governing those junior subordinated debt securities, Peoples will be prohibited from declaring or paying any dividends on Peoples' common shares. Even where the declaration or payment of a dividend would not otherwise be restricted under applicable laws, Peoples or Peoples Bank may decide to limit the payment of dividends in order to retain earnings for corporate use.
Customer Privacy and Other Consumer Protections
Peoples Bank is subject to regulations limiting the ability of financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated party. Peoples Bank is also subject to numerous federal and state laws aimed at protecting consumers, including the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Fair Housing Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Bank Secrecy Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Fair Credit Reporting Act and the authority granted to banking regulators under the Federal Trade Commission Act with respect to unfair or deceptive acts or practices ("UDAP").
The CFPB issued its final small dollar loan rule related to payday, vehicle title and certain high cost installment loans (the “Final Small Dollar Rule”) on July 22, 2020, which became fully effective on October 20, 2020. The Final Small Dollar Rule rescinds the Mandatory Underwriting Provisions of the 2017 Payday Rule after re-evaluating the legal and evidentiary bases for these provisions and finding them to be insufficient. The Final Small Dollar Rule does not rescind or alter the Payments Provisions of the 2017 Payday Rule. Specifically, in the Final Small Dollar Rule, the CFPB revoked provisions that: (i) provide that it is an unfair and abusive practice for a lender to make a covered short-term or longer term balloon-payment loan, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms; (ii) prescribe mandatory underwriting requirements for making the ability-to-repay determination; (iii) exempt certain loans from the mandatory underwriting requirements; and (iv) establish related definitions, reporting, and recordkeeping requirements. In August 2021, the court overseeing the litigation challenging the Final Small Dollar Rule found in the CFPB's favor, and ordered the compliance date to be 286 days after the final judgment. Lenders are required to comply by June 13, 2022.
The federal bank regulatory agencies also issued interagency guidance on May 20, 2020, to encourage banks, savings associations, and credit unions to offer responsible small-dollar loans to customers for consumer and small business purposes.
Office of Foreign Assets Control Regulation
The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. Peoples is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.
Anti-Money Laundering Act
The Anti-Money Laundering Act of 2020 (the "AMLA"), which amends the Bank Secrecy Act of 1970 (the "BSA"), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; and expands enforcement-related and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower initiatives and protections.
USA Patriot Act
The Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended (the "USA Patriot Act"), and related regulations, among other things, require financial institutions to establish programs specifying procedures for obtaining identifying information from customers seeking to establish new accounts and establishing enhanced due diligence policies, procedures and controls designed to detect and report suspicious activity. Peoples Bank has established policies and procedures that Peoples believes comply with the requirements of the USA Patriot Act.
Monetary Policy
The Federal Reserve Board regulates money, credit conditions and interest rates in order to influence general economic conditions primarily through open market operations in U.S. government securities, changes in the discount rate on bank borrowings, and changes in the reserve requirements against deposits of depository institutions. These policies and regulations significantly affect the overall growth and distribution of loans, investments and deposits, as well as interest rates charged on loans and paid on deposits.
The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to have significant effects in the future. In light of the changing conditions in the U.S. economy, including changes brought about by COVID-19, the money markets and the activities of monetary and fiscal authorities, Peoples can make no definitive predictions as to future changes in interest rates, credit availability or deposit levels.
Executive and Incentive Compensation
The Dodd-Frank Act requires that the federal banking agencies, including the Federal Reserve Board, issue a rule related to incentive-based compensation. No final rule implementing this provision of the Dodd-Frank Act has, as of the date of the filing of this Form 10-K, been adopted, but a proposed rule was published in 2016 that expanded upon a prior proposed rule published in 2011. The proposed rule is intended to: (i) prohibit incentive-based payment arrangements that the banking agencies determine could encourage certain financial institutions to take inappropriate risks by providing excessive compensation or that could lead to material financial loss; (ii) require the board of directors of those financial institutions to take certain oversight actions related to incentive-based compensation; and (iii) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator. Although a final rule has not been issued, Peoples and Peoples Bank have undertaken efforts to ensure that their incentive compensation plans do not encourage inappropriate risks, consistent with the principles identified above.
In June 2010, the Federal Reserve Board, the OCC and the FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually, or as a part of a group, is based upon the key principles that a banking organization's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization's ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management and (iii) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors. These three principles are incorporated into the proposed joint compensation regulations under the Dodd-Frank Act, described above.
The Federal Reserve Board reviews, as part of its regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as Peoples Bank, that are not "large, complex banking organizations." These reviews are tailored to each organization based on the scope and complexity of the organization's activities and the prevalence of incentive compensation arrangements. Deficiencies will be incorporated into the organization's supervisory ratings, which can affect the organization's ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
Public company compensation committee members must meet heightened independence requirements and consider the independence of compensation consultants, legal counsel and other advisors to the compensation committee. A compensation committee must have the authority to hire advisors, and the public company must fund the reasonable compensation of such advisors.
SEC regulations require public companies such as Peoples to provide various disclosures about executive compensation in annual reports and proxy statements, and to present to their shareholders a non-binding vote on the approval of executive compensation.
Public companies will be required, once stock exchanges adopt additional listing requirements under the Dodd-Frank Act, to implement "clawback" procedures for incentive compensation payments and to disclose the details of the procedures which allow recovery of incentive compensation that was paid on the basis of erroneous financial information necessitating an accounting restatement due to material noncompliance with financial reporting requirements. This clawback policy is intended to apply to compensation paid within a three-year look-back window of the restatement and would cover all executives (including former executives) who received incentive awards. Peoples has implemented a clawback policy and it is posted under the "Corporate Overview - Governance Documents" tab of the "Investor Relations" page of Peoples' Internet website.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish several lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the financial institution’s operations after a cybersecurity attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the financial institution or its critical service providers fall victim to this type of cybersecurity attack. If Peoples Bank fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.
In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.
In November 2021, the federal bank regulatory agencies issued a final rule requiring banking organizations that experience a computer-security incident to notify certain entities. A computer-security incident occurs when actual or potential harm to the confidentiality, integrity or availability of information or the information system occurs, or there is a violation or imminent threat of a violation to banking security policies and procedures. The affected bank must notify its respective federal regulator of the computer-security incident has occurred. These notifications are intended to promote early awareness of threats to banking organizations and will help banks react to those threats before they manifest into bigger incidents. This rule also requires bank service providers to notify their customers of a computer-security incident.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. Peoples expects this trend of state-level activity in those areas to continue, and continues to monitor developments in the states in which Peoples' customers are located.
In the ordinary course of business, Peoples relies on electronic communications and information systems to conduct its operations and to store sensitive data. Peoples employs an in-depth, layered, defensive approach that leverages people, processes, and encryption and multi-factor authentication technology to manage and maintain cybersecurity controls. Peoples employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of Peoples’ defensive measures, the threat from cybersecurity attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, Peoples has not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, Peoples’ systems and those of its customers and third-party service providers are under constant threat and it is possible that Peoples could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by Peoples and Peoples' customers. See “ITEM 1A RISK FACTORS” for a further discussion of risks related to cybersecurity.
Volcker Rule
In December 2013, five federal agencies adopted a final regulation implementing the Volcker Rule provision of the Dodd-Frank Act (the "Volcker Rule"). The Volcker Rule placed limits on the trading activity of insured depository institutions and entities affiliated with depository institutions, subject to certain exceptions. Such trading activity included the purchase or sale as principal of a security, derivative, commodity future, option or similar instrument in order to benefit from short-term price movements or to realize short-term profits. The Volcker Rule exempts trading in specified U.S. government, agency, state and/or municipal obligations. The Volcker Rule also excepted (i) trading conducted in certain capacities; (ii) trading to satisfy a debt previously contracted; (iii) trading under certain repurchase and securities lending agreements; and (iv) trading in connection with risk-mitigating hedging activities.
In addition, the Volcker Rule prohibited a banking entity from having an ownership interest in, or substantial relationships with, a hedge fund or private equity fund, also known as "covered funds", subject to a number of exceptions.
In July 2019, the federal agencies that adopted the Volcker Rule adopted a final rule to exempt certain community banks, including Peoples Bank, from the Volcker Rule, consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act. Under the final rule, community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5.0% or less of total consolidated assets are excluded from the restrictions of the Volcker Rule. On June 25, 2020, the federal bank regulatory agencies also finalized a rule modifying the Volcker Rule's prohibition on banking entities investing in or sponsoring covered funds. Such rule permits certain banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker Rule was originally intended to address.
To the extent that Peoples Bank engages in any of the trading activities or has any ownership interest in or relationship with any of the types of funds regulated by the Volcker Rule, Peoples Bank believes that its activities and relationships comply with such rule, as amended.
Effect of Environmental Regulation
Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of Peoples and its subsidiaries. Peoples believes the nature of the operations of its subsidiaries has little, if any, environmental impact. As a result, Peoples anticipates no material capital expenditures for environmental control facilities for its current fiscal year or for the foreseeable future.
Peoples believes its primary exposure to environmental risk is through the lending activities of Peoples Bank. Peoples limits its exposure to environmental risk by lending to a diverse range of consumer and commercial customers. In cases where management believes environmental risk potentially exists, Peoples Bank mitigates its environmental risk exposure by requiring
environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. In addition, environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral.
Future Legislation
Various and significant legislation affecting financial institutions and the financial industry is from time to time introduced by the U.S. Congress. The CARES Act and the Consolidated Appropriations Act, 2021 ("CAA") were enacted during 2020. These Acts provided significant funding for PPP loans for businesses and fiscal stimulus funding for individuals, as well as updates related to reporting for troubled debt restructurings and other various changes. The PPP loan program expired on May 31, 2021 and no originations have been permitted after this date. Additionally, in September 2021, guidance issued for the reporting of troubled debt restructurings expired and no COVID-19-related deferments remained as of September 30, 2021. There were sweeping reforms in the Dodd-Frank Act adopted in 2010, and the rollback of the Dodd-Frank Act that began in 2018. Many of the regulations mentioned above were adopted or amended pursuant to the guidance issued. Such legislation may continue to change banking statutes and regulations, and the operating environment of Peoples and its subsidiaries in substantial and unpredictable ways, and such legislation could significantly increase or decrease costs of doing business, limit or expand permissible activities, and/or affect the competitive balance among financial institutions. The enactment of the Dodd-Frank Act, the subsequent rollback and the continuing implementation of final rules and regulations thereunder, and continuing political change and impact of the COVID-19 pandemic makes the nature and extent of future legislative and regulatory changes affecting financial institutions unpredictable.
Website Access to Peoples' SEC Filings
Peoples maintains an Internet website at www.peoplesbancorp.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate Peoples' Internet website into this Form 10-K). Peoples makes available free of charge on or through its website, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as Peoples' definitive proxy statement filed pursuant to Section 14 of the Exchange Act, as soon as reasonably practicable after Peoples electronically files each such report, amendment or proxy statement with, or furnishes it to, the SEC.

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ITEM 1A. RISK FACTORS
ITEM 1A RISK FACTORS
The following are certain risks that management believes are specific to Peoples' business. This should not be viewed as an all-inclusive list of risks or presenting the risk factors listed in any particular order. Additional risks that are not presently known or that Peoples presently deems to be immaterial could also have a material adverse impact on Peoples' business, financial condition or results of operations.
Economic, Political, Environmental and Market Risks
•The economic impact of COVID-19 or any other pandemic could adversely affect Peoples' business, financial condition, liquidity, and results of operations.
COVID-19 has negatively impacted global, national and local economies, disrupted global and national supply chains, lowered equity market valuations, and created significant volatility and disruption in financial markets. In addition, the pandemic resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities and may result in the same or similar restrictions in the future. As a result, the demand for Peoples’ products and services has been and may continue to be significantly impacted, which could adversely affect our revenue and results of operations. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain required to operate at diminished capacities or are required to close again, the impact on the global, national and local economies worsen, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Peoples’ business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with COVID-19. The extent to which COVID-19 impacts Peoples’ business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
As of December 31, 2021, Peoples held and serviced PPP loans. These PPP loans are subject to the provisions of the CARES Act and to complex and evolving rules and guidance issued by the SBA and other government agencies. While a large number of PPP borrowers have applied for and received full or partial forgiveness of their loan obligations, Peoples still has credit risk on the remaining PPP loans in the event the SBA determines that there is a deficiency in the manner in which Peoples originated, funded or serviced such loans, including any issue with the eligibility of a borrower to receive funding. Peoples could face additional risks in our administrative capabilities to service PPP loans and to properly determine loan forgiveness. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which Peoples
originated, funded or serviced the PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency.
The spread of COVID-19, including new variants thereof, has also caused Peoples to modify business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. Further, technology in employees’ homes may not be as robust as in Peoples' offices and could cause the networks, information systems, applications and other tools available to such employees to be more limited or less reliable. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk from phishing, malware and other cybersecurity attacks, all of which could expose Peoples to risks of data or financial loss, and could seriously disrupt Peoples' operations and the operations of any impacted customers.
COVID-19, including the rise of new variants thereof, or a new pandemic, could subject Peoples to any of the following risks, any of which could, individually or in the aggregate, have a material adverse effect on Peoples' business, financial condition, liquidity and results of operations:
•demand for Peoples' products and services may decline, making it difficult to grow assets and income;
•if the economy continues to be unable to fully re-open, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
•collateral for loans, especially real estate, may decline in value, which could cause credit losses to increase;
•Peoples' allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect Peoples' net income;
•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to Peoples;
•a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in Peoples recording a valuation allowance against current outstanding deferred tax assets;
•Peoples relies on third-party vendors for certain services and the unavailability of a critical service due to COVID-19 could have an adverse effect on Peoples; and
•continued adverse economic conditions could result in protracted volatility in the price of Peoples' common shares.
Moreover, Peoples' future success and profitability substantially depend on the management skills of the executive officers and directors, many of whom have held officer and director positions with Peoples for many years. The unanticipated loss or unavailability of key employees due to COVID-19, including new variants thereof, or any similar pandemic, could harm Peoples' ability to operate our business or execute our business strategy. Peoples may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Even after the COVID-19 pandemic subsides, the U.S. economy will likely require time to recover, the length of which is unknown and during which the U.S. may experience a recession or market correction. Peoples’ business could be materially and adversely affected by any such recession or market correction.
Peoples continues to closely monitor COVID-19 and related risks as they evolve. To the extent the effects of COVID-19 adversely impact Peoples’ business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in this Item.
•Changes in economic and political conditions could adversely affect Peoples' earnings and capital through declines in deposits, quality of investment securities, loan demand, the ability of Peoples' borrowers to repay loans and the value of the collateral securing Peoples' loans.
Peoples’ success depends, in part, on local and national economic and political conditions, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, an increasing federal government budget deficit, slowing gross domestic product, tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars, and other factors beyond Peoples’ control may adversely affect Peoples Bank’s deposit levels and composition, the quality of investment securities available for purchase, the demand for loans, the ability of Peoples Bank’s borrowers to repay their loans, and the value of the collateral securing the loans Peoples Bank makes. Disruptions in U.S. and global financial markets and changes in oil production in the Middle East also affect the economy and stock prices in the U.S., which can affect Peoples’ earnings and capital, as well as the ability of Peoples Bank’s customers to repay loans.
The local economies of the majority of Peoples' market areas historically have been less robust than the economy of the nation as a whole and typically are not subject to the same extent of fluctuations as the national economy. In general, a favorable business environment and economic conditions are characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity, or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest
rates; high unemployment; volatility in pricing and availability of natural resources; natural disasters; or a combination of these or other factors.
The continued impact on economic conditions caused by the COVID-19 pandemic could have an adverse effect on Peoples' asset quality, deposit levels and loan demand, and, therefore, Peoples' financial condition and results of operations. Because a significant amount of Peoples Bank's loans are secured by either commercial or residential real estate, decreases in real estate values could adversely affect the value of property used as collateral and Peoples Bank's ability to sell the collateral upon foreclosure.
•Changes in interest rates may adversely affect Peoples' profitability.
Peoples' earnings and cash flows are dependent to a significant degree on net interest income, which is the amount by which interest income exceeds interest expense. Interest rates are highly sensitive to many factors that are beyond Peoples' control, including general economic conditions and the policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, not only could influence the interest Peoples receives on loans and securities, and the amount of interest Peoples pays on deposits and borrowings, but such changes could also affect (1) Peoples' ability to originate loans and obtain deposits, (2) the fair value of Peoples' financial assets and liabilities, and (3) the average duration of Peoples' mortgage-backed securities portfolio. If the interest rates paid on deposits and borrowings increase at a faster rate than the interest rates received on loans and other investments, Peoples' net interest income and, therefore, earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and borrowings.
Changes in interest rates may also negatively affect the ability of Peoples' borrowers to repay their loans, particularly as interest rates rise and adjustable-rate loans become more expensive.
Peoples' management uses various measures to monitor interest rate risk and believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on Peoples' results of operations. Peoples' management also periodically adjusts the mix of assets and liabilities to manage interest rate risk. However, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on Peoples' financial condition and results of operations.
Peoples’ net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. A prolonged period of extremely volatile and unstable market conditions would likely increase Peoples’ funding costs and negatively affect market risk mitigation strategies. Higher revenue volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in the fair market values of Peoples’ assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of Peoples’ assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on Peoples’ net income, results of operations and financial condition. Peoples cannot predict the nature or timing of future changes in monetary policies in response to the COVID-19 outbreak or the precise effects that they may have on Peoples activities and financial results.
See the sections captioned “Interest Income and Expense” and “Interest Rate Sensitivity and Liquidity” in “ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this Form 10-K for further discussion related to Peoples’ interest rate risk.
•A transition away from the London Interbank Offered Rate ("LIBOR") as a reference rate for financial instruments could negatively impact Peoples' income and expenses, and the value of various financial instruments.
LIBOR is used extensively in the U.S. and globally as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks, which may stop reporting such information after 2021. On July 27, 2017, the United Kingdom’s Financial Conduct Authority (“FCA”) announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. On November 30, 2020, to facilitate an orderly LIBOR transition, the OCC, the FDIC, and the Federal Reserve Board jointly announced that entering into new contracts using LIBOR as a reference rate after December 31, 2021, would create a safety and soundness risk. On March 5, 2021, the FCA announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, in the case of 1-week and 2-month LIBOR, and immediately after June 30, 2023, in the case of the remaining LIBOR settings. In the U.S., efforts to identify a set of alternative U.S. dollar reference interest rates are ongoing, and the Alternative Reference Rate Committee (“ARRC”) has recommended the use of a Secured Overnight Funding Rate (“SOFR”). SOFR is different from LIBOR in that it is a backward-looking secured rate rather than a forward-looking unsecured rate.
These differences could lead to a greater disconnect between Peoples’ costs to raise funds for SOFR as compared to LIBOR. For cash products and loans, ARRC has also recommended Term SOFR, which is a forward looking SOFR based on SOFR futures and may in part reduce differences between SOFR and LIBOR. There are operational issues which may create a delay in the transition to SOFR or other substitute indices, leading to uncertainty across the industry. These consequences cannot be
entirely predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit.
Peoples has a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk. Since proposed alternative rates are calculated differently, payments under financial instruments referencing new rates will differ from those referencing LIBOR. The transition will change Peoples’ market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with Peoples’ customers could adversely impact our reputation. Although Peoples is currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on Peoples’ business, financial condition and results of operations.
In 2019, Peoples Bank formed a LIBOR Change Committee. The goal of the LIBOR Change Committee was to monitor Peoples Bank’s efforts to ensure an orderly transition away from LIBOR by the end of 2021, if necessary. The LIBOR Change Committee has taken actions to ensure that documentation in the loan portfolios provides for a substitution of an index if the original index is either no longer available or is replaced by a new index. Documentation on interest rate swaps has been amended in the International Swaps and Derivative Association agreements. While Peoples Bank’s securities portfolio is not heavily invested in variable rate securities, there is LIBOR exposure in the agency collateralized mortgage obligation sector. Peoples Bank will be monitoring the transition of these securities to the new index over the next several months.
•Changes in market rates and economic conditions could cause the interest rate swaps Peoples Bank has entered into to become ineffective.
The accounting treatment of the interest rate swaps entered into by Peoples as part of its interest rate management strategy may change if the hedging relationship is not as effective as currently anticipated. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for fixed payments from Peoples. As of December 31, 2021, Peoples had thirteen effective interest rate swaps, with an aggregate notional value of $125.0 million, of which $85.0 million were funded by brokered demand and savings deposits and $40.0 million were funded with FHLB advances. Brokered CDs and deposits are expected to be extended every 90 days through the maturity dates of the swaps.
Although Peoples expects that the hedging relationships described above will be highly effective, such relationships could prove ineffective. As of December 31, 2021, the termination value of derivative financial instruments in a net liability position was $12.1 million, which included accrued interest but excluded any adjustment for nonperformance risk. As of December 31, 2021, Peoples had $28.1 million collateral posted with certain of our derivative counterparties. However, the counterparties had no collateral posted against their obligations under these agreements. If Peoples had breached any of the provisions of the agreements at December 31, 2021, Peoples could have been required to settle our obligations under the agreements at the termination value.
Business Operations Risks
•Peoples is exposed to operational risk.
Similar to any large organization, Peoples is exposed to many types of operational risk, including those discussed in more detail elsewhere in this Item, such as reputational risk, cyber, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. These risks are heightened in light of COVID-19.
Peoples may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses, cyber-attacks, spikes in transaction volume and/or customer activity, electrical or telecommunications outages, or natural disasters. Peoples could be adversely affected by operating systems disruptions if new or upgraded business management systems are defective, not installed properly or not properly integrated into existing operating systems. Although Peoples has programs in place related to business continuity, disaster recovery and information security to maintain the confidentiality, integrity and availability of our operating systems, business applications and customer information, such disruptions may give rise to interruptions in service to customers, loss of data privacy and loss or liability to Peoples.
Any failure or interruption in Peoples' operating or information systems, or any security or data breach, could cause reputational damage, jeopardize the confidentiality of customer information, result in a loss of customer business, subject Peoples to regulatory intervention or expose Peoples to civil litigation and financial loss or liability, any of which could have a material adverse effect on Peoples.
Negative public opinion can result from Peoples’ actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, social media and other marketing activities, the implementation of environmental, social, and governance practices, and from actions taken by governmental regulators and community organizations
in response to any of the foregoing. Negative public opinion could adversely affect Peoples’ ability to attract and keep customers, could expose Peoples to potential litigation or regulatory action, and could have a material adverse effect on the price of Peoples’ common shares or result in heightened volatility.
Given the volume of transactions Peoples processes, certain errors may be repeated or compounded before they are discovered and successfully rectified. Peoples’ necessary dependence upon automated systems to record and process our transaction volume may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect, which may give rise to disruption of service to customers and to financial loss or liability. Peoples is further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as Peoples) or that Peoples' (or our vendors’) consumer compliance business continuity, and data security systems will prove to be inadequate.
Current and future restrictions on the access of Peoples' workforce to our facilities could limit Peoples' ability to meet customer service expectations and have a material adverse effect on operations. Peoples relies on business processes and branch activity that largely depends on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties.
Moreover, Peoples relies on many third parties in business operations, including appraisers of real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools, and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. For example, loan origination could be delayed due to the limited availability of real estate appraisers for the underlying collateral. Loan closings could be delayed due to reductions in available staff in recording offices or the closing of courthouses in certain counties, which slows the process for title work, and mortgage and UCC filings in those counties. If the third-party service providers continue to have limited capacities for a prolonged period, or if additional limitations or potential disruptions in these services materialize, it may negatively affect Peoples' operations.
•Peoples’ policies concerning COVID-19 vaccination of employees could have a material adverse impact on our business and results of operations.
Peoples requires any new employees to be fully-vaccinated, with few exceptions. Peoples cannot predict with any amount of certainty the impact that this policy will have on our workforce. Additional vaccine mandates may be announced in jurisdictions in which Peoples’ businesses operate. Peoples’ implementation of these requirements may result in attrition, including attrition of critically skilled labor, and difficulty securing future labor needs, which could have a material adverse effect on Peoples’ business, financial condition, and results of operations.
•Failures or material breaches in security of Peoples' systems and telecommunications networks, or those of a third-party service provider, may have a material adverse effect on Peoples' results of operations and financial condition and the price of Peoples' common shares.
Peoples collects, processes, and stores sensitive consumer data by utilizing computer systems and telecommunications networks operated by both Peoples and third-party service providers. Peoples’ dependence upon automated systems to record and process Peoples’ transactions poses the risk that technical system flaws, employee errors, tampering or manipulation of those systems, or attacks by third parties will result in losses and may be difficult to detect. Peoples has security and backup and recovery systems in place, as well as a business continuity plan, designed to ensure the computer systems will not become inoperable, to the extent possible. Peoples also routinely reviews documentation of such controls and backups related to third-party service providers. Peoples’ inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and efficiency of Peoples’ business operations. In recent years, several banks have experienced denial of service attacks in which individuals or organizations flood the bank’s website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions. Other businesses have been victims of ransomware attacks in which the business becomes unable to access its own information and is presented with a demand to pay a ransom in order to once again have access to its information. Peoples could be adversely affected if one of our employees or a third-party service provider causes a significant operational break-down or failure, either as a result of human error or where the individual purposefully sabotages or fraudulently manipulates Peoples’ operations or systems. Peoples may not be able to prevent employee or third-party errors or misconduct, and the precautions Peoples takes to detect this type of activity might prove ineffective. Peoples is further exposed to the risk that the third-party service providers may be unable to fulfill their contractual obligations (or will be subject to the same risks as Peoples). These disruptions may interfere with service to Peoples’ customers, cause additional regulatory scrutiny and result in a financial loss or liability.
Peoples is also at risk of the impact of natural disasters, terrorism and international hostilities on Peoples’ systems or from the effects of outages or other failures involving power or communications systems operated by others.
In addition, there have been instances where financial institutions have been victims of fraudulent activity in which criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts. Although Peoples has
policies and procedures in place to verify the authenticity of our customers, Peoples cannot ensure that such policies and procedures will prevent all fraudulent transfers.
Peoples has implemented security controls to prevent unauthorized access to our computer systems, and Peoples requires that our third-party service providers maintain similar controls. However, Peoples’ management cannot be certain that these measures will be successful. A security breach of the computer systems and loss of confidential information, such as customer account numbers and related information, could result in a loss of customers’ confidence and, thus, loss of business. Peoples could also lose revenue if competitors gain access to confidential information about Peoples’ business operations and use it to compete with Peoples. While Peoples maintains specific “cyber” insurance coverage, which would apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under Peoples’ cyber insurance coverage.
Further, Peoples may be affected by data breaches at retailers and other third parties who participate in data interchanges with Peoples and our customers that involve the theft of customer credit and debit card data, which may include the theft of Peoples’ consumer and business debit card PIN numbers and commercial card information used to make purchases at such retailers and other third parties. Such data breaches could result in Peoples incurring significant expenses to reissue debit cards and cover losses, which could result in a material adverse effect on Peoples’ operations.
All of the types of cyber incidents discussed above could result in damage to Peoples’ reputation, loss of customer business, increased costs of incentives to customers or business partners in order to maintain their relationships, litigation, increased regulatory scrutiny and potential enforcement actions, repairs of system damage, increased investments in cybersecurity (such as obtaining additional technology, making organizational changes, deploying additional personnel, training personnel and engaging consultants), increased insurance premiums, and loss of investor confidence and a reduction in the price of Peoples’ common shares, all of which could result in financial loss and material adverse effects on Peoples’ results of operations and financial condition.
•Noncompliance with the BSA and other anti-money laundering statutes and regulations could cause Peoples a material financial loss.
The BSA and the USA Patriot Act contain anti-money laundering and financial transparency provisions intended to detect and prevent the use of the U.S. financial system for money laundering and terrorist financing activities. The BSA, as amended by the USA Patriot Act and the AMLA, requires depository institutions and their holding companies to undertake activities including maintaining an anti-money laundering program, verifying the identity of clients, monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to requests for information by regulatory authorities and law enforcement agencies. Financial Crimes Enforcement Network (also known as FinCEN), a unit of the U.S. Treasury Department that administers the BSA, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the federal bank regulatory agencies, as well as the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws, which includes a codified risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement-related and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.
There is also increased scrutiny of compliance with the rules enforced by OFAC. If Peoples' policies, procedures, and systems are deemed deficient, or if the policies, procedures, and systems of the financial institutions that Peoples has already acquired or may acquire in the future are deficient, Peoples may be subject to liability, including fines and regulatory actions such as restrictions on Peoples' ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain planned business activities, including acquisition plans, which could negatively impact Peoples' business, financial condition, and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for Peoples.
For a more complete discussion of the BSA, the USA Patriot Act and the AMLA, see the section captioned "Supervision and Regulation" in "ITEM 1 BUSINESS" of this Form 10-K.
•Peoples' business could be adversely affected through events impacting third parties who perform significant operational services on behalf of Peoples.
The third parties performing operational services for Peoples are subject to risks similar to those faced by Peoples relating to cybersecurity, breakdowns or failures of their own systems, or misconduct of their employees. Like many other community banks, Peoples relies, in significant part, on a single vendor for the systems which allow Peoples to provide banking services to Peoples’ customers, with the systems being maintained on Peoples' behalf by this single vendor.
One or more of the third parties utilized by Peoples may experience a cybersecurity event or operational disruption and, if any such event or disruption does occur, it may not be adequately addressed, either operationally or financially, by such third party. Certain of these third parties may have limited indemnification obligations to Peoples in the event of a cybersecurity event or operational disruption, or may not have the financial capacity to satisfy their indemnification obligations.
Financial or operational difficulties of a third-party provider could also impair Peoples' operations if those difficulties interfere with such third party’s ability to serve Peoples. If a critical third-party provider is unable to meet the needs of Peoples in a timely manner, or if the services or products provided by such third party are terminated or otherwise delayed, and if Peoples is not able to develop alternative sources for these services and products quickly and in a cost-effective manner, Peoples’ business could be materially adversely affected.
Additionally, regulatory guidance adopted by federal bank regulators addressing how banks select, engage and manage their third-party relationships, could affect the circumstances and conditions under which Peoples works with third parties and the cost of managing such relationships.
•Peoples' failure to be in compliance with any material provision or covenant of its debt instruments could have a material adverse effect on Peoples' liquidity and operations.
On April 2, 2020, Peoples entered into a Loan Agreement (the “U.S. Bank Loan Agreement”) with U.S. Bank National Association. The U.S. Bank Loan Agreement had an original one-year term, which has been extended by a second one-year term, and provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $20.0 million. The U.S. Bank Loan Agreement imposes operating and financial covenants on Peoples. These restrictions may affect Peoples' operations and may limit the ability to take advantage of potential business opportunities as they arise. Peoples' ability to comply with the covenants contained in the U.S. Bank Loan Agreement may be affected by events beyond Peoples' control, including deteriorating economic conditions, and these events could require Peoples to seek waivers or amendments of such covenants, or alternative sources of financing. Peoples' ability to obtain such waivers, amendments or alternative financing, may be on terms unfavorable to Peoples.
A breach of any of the covenants or restrictions contained in any of the existing or future financing agreements, including financial covenants, could result in an event of default under the agreements. Such a default could allow the lenders under the financing agreements, if the agreements so provide, to discontinue lending, to accelerate the related debt, and/or to declare all borrowings outstanding thereunder to be due and payable. In addition, the lenders could terminate any commitments they have to provide Peoples with further funds. If any of these events occur, Peoples may not have sufficient funds available to pay in full the total amount of obligations that become due as a result of any such acceleration, or Peoples may not be able to find additional or alternative financing to refinance any such accelerated obligations. Even if additional or alternative financing is obtained, it may be on terms that are unfavorable to Peoples. The U.S. Bank Loan Agreement matures on March 31, 2022. Peoples is in the process of renewing this facility and expects that it will be renewed prior to such expiration.
•Peoples' exposure to credit risk could adversely affect Peoples' earnings and financial condition.
There are certain risks inherent in making loans. These risks include interest rate changes over the time period in which loans are to be repaid, risks resulting from changes in the economy, risks that Peoples will have inaccurate or incomplete information about borrowers, risks that borrowers will become unable to repay loans, and, in the case of loans secured by collateral, risks resulting from uncertainties about the future value of the collateral.
Commercial loans comprise a significant portion of Peoples' loan portfolio. Commercial loans generally are viewed as having a higher degree of credit risk than residential real estate or consumer loans because commercial loans usually involve larger loan balances to a single borrower and are more susceptible to a risk of default during an economic downturn. Since Peoples' loan portfolio contains a significant number of commercial loans, the deterioration of one or a few of these loans could cause a significant increase in nonperforming loans, and ultimately could have a material adverse effect on Peoples' earnings and financial condition. Peoples may also have credit exposures concentrated in a particular industry, resulting in a risk of a material adverse effect on earnings or financial condition, if there is an event adversely affecting such industry.
Peoples' risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of the business of Peoples' commercial borrowers and the financial circumstances of Peoples' consumer borrowers. COVID-19 has caused, and is likely to continue to cause, business shutdowns and slowdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage, auto and other consumer loan payments, and overall economic and financial market instability, which may affect individuals, households and business differently, and decreased consumer confidence generally, all of which may cause Peoples' customers to be unable to make scheduled loan payments.
Additional information regarding Peoples' credit exposure concentration as of December 31, 2021 can be found in the section captioned "Loan Concentration" in "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K.
•Peoples' allowance for credit losses may be insufficient to absorb the expected, lifetime losses in our loan portfolio.
Peoples maintains an allowance for credit losses that is believed to be a reasonable estimate of the expected losses within the CECL model, based on management's quarterly analysis of our loan portfolio. The determination of the allowance for credit losses requires management to make various assumptions and judgments about the collectability of Peoples' loans, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. Additional information regarding Peoples' allowance for credit losses methodology and the sensitivity of the estimates can be found in the discussion of "Critical Accounting Policies" included in "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K.
Peoples' estimation of future credit losses is susceptible to changes in economic, operating and other conditions, including changes in regulations and interest rates, which may be beyond Peoples' control, and the losses may exceed current estimates. Peoples cannot be assured of the amount or timing of losses, nor whether the allowance for credit losses will be adequate in the future.
If Peoples' assumptions prove to be incorrect, Peoples' allowance for credit losses may not be sufficient to cover the expected losses from our loan portfolio, resulting in the need for additions to the allowance for credit losses which could have a material adverse impact on Peoples' financial condition and results of operations. In addition, bank regulators periodically review Peoples' allowance for credit losses as part of their examination process and may require management to increase the allowance or recognize further loan charge-offs based on judgments different than those of management.
On June 16, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-13 "Financial Instruments - Credit Losses", which replaced the incurred loss model with the CECL model, an expected loss model. The new accounting guidance became effective for Peoples beginning January 1, 2020, and included most debt instruments under the new framework. The new accounting guidance under the CECL model requires banks to record, at the time of origination, credit losses expected throughout the life of financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities and reinsurance receivables, and off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees and other similar instruments) and net investments in leases recognized by a lessor. Under the CECL model, Peoples is required to use historical information, current conditions and reasonable and supportable forecasts to estimate the expected credit losses. If the methodologies and assumptions used by Peoples in the CECL model prove to be incorrect, or inadequate, the allowance for credit losses may not be sufficient, resulting in the need for additional allowance for credit losses to be established, which could have a material adverse impact on Peoples' financial condition and results of operations.
The adoption of CECL by Peoples resulted in a reduction to the retained earnings balance of $3.7 million, net of income tax, and a pre-tax increase to the allowance for credit losses of $5.8 million. Due to the COVID-19 pandemic, Peoples’ financial results were negatively impacted as deteriorating economic conditions forecasted increased Peoples’ expectations for credit losses, resulting in higher provision for credit losses during 2020. Improvement in the economic forecasts used in the CECL model during 2021 resulted in a lower provision for credit losses for the year ended December 31, 2021. As a result of the implementation of the CECL model, the time horizon over which Peoples is required to estimate future credit losses expanded, which could result in increased volatility in future provisions for credit losses. Peoples may also experience a higher or more volatile provision for credit losses due to higher levels of nonperforming loans and net charge-offs if commercial and consumer customers are unable to make scheduled loan payments.
•Peoples' accounting estimates and risk management processes rely on analytical and forecasting models.
The processes Peoples uses to estimate our expected credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on Peoples' financial condition and results of operations, depend upon the use of analytical and, in some cases, forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are accurate, the model may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the model Peoples uses for interest rate risk and asset-liability management are inadequate, Peoples may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the model used by Peoples for determining our expected credit losses is inadequate, the allowance for credit losses may not be sufficient to support future charge-offs. If the model used by Peoples to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what Peoples could realize upon sale or settlement of such financial instruments. Any such failure in Peoples' analytical or forecasting models could have a material adverse effect on Peoples' business, financial condition and results of operations.
•Peoples and Peoples Bank may elect or be compelled to seek additional capital in the future, but such capital may not be available when needed.
Peoples and Peoples Bank are required by federal and state regulatory authorities to maintain adequate levels of capital to support their operations. Federal bank regulators have adopted extensive changes to their capital requirements, including raising required amounts and eliminating the inclusion of certain instruments from the calculation of capital. If Peoples Bank experiences significant losses, additional capital may be needed. In addition, Peoples and Peoples Bank may elect to raise additional capital to support the businesses or to finance acquisitions, if any, or for other unanticipated reasons. The ability to raise additional capital, if needed, will depend on financial performance, conditions in the capital markets, economic conditions and a number of other factors, many of which are outside of Peoples' control. Therefore, there can be no assurance that additional capital will be available or that capital will be available on acceptable terms. The inability to raise capital may have a material adverse effect on Peoples' financial condition, results of operations or potential acquisitions.
•Peoples and Peoples Bank operate in a highly regulated industry, and the laws and regulations that govern Peoples’ operations, corporate governance, executive compensation and financial accounting, or financial reporting, including changes in, or failure to comply with, such laws and regulations may adversely affect Peoples.
The banking industry is highly regulated. Peoples is subject to supervision, regulation and examination by various federal and state regulators, including the Federal Reserve Board, the SEC, the CFPB, the FDIC, Financial Industry Regulatory Authority, Inc. (also known as FINRA), and various state regulatory agencies. The statutory and regulatory framework that governs Peoples is generally designed to protect depositors and customers, the Deposit Insurance Fund, the U.S. banking and financial system, and financial markets as a whole and not to protect Peoples' shareholders. These laws and regulations, among other matters, prescribe minimum capital requirements, restrict the ability of Peoples Bank to guarantee Peoples' debt, and impose limitations on Peoples’ business activities (including foreclosure and collection practices), limit the dividends or distributions that Peoples can pay, and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in capital than would otherwise be required under U.S. generally accepted accounting principles ("US GAAP"). Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs. Both the scope of the laws and regulations, and the intensity of the supervision to which Peoples is subject, have increased in recent years in response to the perceived state of the financial services industry, as well as other factors such as technological and market changes. Such regulation and supervision may increase Peoples’ costs and limit our ability to pursue business opportunities. Further, Peoples’ failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject Peoples to restrictions on business activities, fines, and other penalties, any of which could adversely affect the results of operations, the capital base, and the price of Peoples’ common shares. Further, any new laws, rules, or regulations could make compliance more difficult or expensive or otherwise adversely affect Peoples’ business and financial condition.
•Peoples may not be able to adapt to technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers while reducing costs. Peoples’ future success depends, in part, upon our ability to address customer needs by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. This could include the development, implementation, and adaptation of digital or cryptocurrency, blockchain, and other “fintech” technology. Peoples may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological changes affecting the financial services industry could negatively affect Peoples’ growth, revenue and net income.
•Peoples may not be able to attract and retain key employees.
Peoples' success depends, in large part, on our ability to attract, retain, motivate and develop key employees. Competition for key employees is ongoing and Peoples may not be able to attract, retain or hire the key employees who are wanted or needed, which may also negatively impact Peoples' ability to execute identified business strategies. Many of Peoples’ offices are located in rural areas, resulting in the possible need for Peoples to offer higher compensation equal to or greater than what is offered in metropolitan areas to attract or retain key employees, which may adversely affect salaries and employee benefit costs.
Various restrictions on the compensation which may be paid to certain executive officers were imposed under the Dodd-Frank Act and other legislation and regulations. In addition, Peoples' incentive compensation structure is subject to review by regulators, who may identify deficiencies in the structure or issue additional guidance on Peoples' compensation practices, causing Peoples to make changes that may affect our ability to offer competitive compensation to these individuals or that place Peoples at a disadvantage to non-financial service competitors. Peoples' ability to attract and retain talented employees may be affected by these restrictions, or any new executive compensation limits or regulations.
•Peoples' ability to pay dividends is limited, and Peoples may not be in the position to pay dividends in the future.
Although Peoples has paid dividends on our common shares in the past, Peoples may, at the discretion of Peoples' Board of Directors, reduce or eliminate dividends in the future, for any reason, including a determination to use funds for other purposes, or due to regulatory constraints. Peoples is a separate and distinct legal entity from Peoples' subsidiaries. Peoples receives nearly all of our liquidity from dividends from Peoples Bank, which are limited by federal and state banking laws and regulations. These dividends also serve as the primary source of funds to pay dividends on Peoples' common shares. The inability of Peoples Bank to pay sufficient dividends to Peoples could have a material, adverse effect on our business. Further discussion of Peoples' ability to pay dividends can be found under the caption "Supervision and Regulation - Dividend Restrictions" in "ITEM 1 BUSINESS" of this Form 10-K and "Note 17 Regulatory Matters" of the Notes to the Consolidated Financial Statements.
•Peoples depends upon the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, Peoples may rely on information provided by customers and counterparties, including financial statements and other financial information. Peoples may also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to a business, Peoples Bank may assume that the customer’s audited financial statements conform with US GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Peoples Bank may also rely on the audit report covering those financial statements. Peoples’ financial condition, results of operations and cash flows could be negatively impacted to the extent that Peoples Bank relies on financial statements that do not comply with US GAAP or on financial statements and other financial information that are materially misleading.
•Peoples Bank may be required to repurchase loans it has sold or to indemnify loan purchasers under the terms of the sale agreements, which could adversely affect Peoples’ liquidity, results of operations and financial condition.
When Peoples Bank sells a mortgage loan, it may agree to repurchase or substitute a mortgage loan if Peoples Bank is later found to have breached any representation or warranty Peoples Bank made about the loan or if the borrower is later found to have committed fraud in connection with the origination of the loan. While Peoples Bank has underwriting policies and procedures designed to avoid breaches of representations and warranties and borrower fraud, there can be no assurance that a breach or fraud will not occur. Required repurchases, substitutions or indemnifications could have an adverse effect on Peoples’ liquidity, results of operations and financial condition.
•Peoples and our subsidiaries are subject to examinations and challenges by tax authorities.
In the normal course of business, Peoples and our subsidiaries are routinely subject to examinations and challenges from federal and state tax authorities regarding positions taken regarding their respective tax returns. State tax authorities have become increasingly aggressive in challenging tax positions taken by financial institutions, especially those positions relating to tax compliance and calculation of taxes subject to apportionment. Any challenge or examination by a tax authority may result in adjustments to the timing or amount of taxable net worth or taxable income, or deductions or the allocation of income among tax jurisdictions.
Management believes it has taken appropriate positions with respect to all tax returns and does not anticipate that any examination would have a material impact on Peoples' Consolidated Financial Statements. However, the outcome of any such examination and the ultimate resolution of any resulting assessments are inherently difficult to predict. Thus, no assurance can be given that Peoples' tax liability for any tax year open to examination will be as reflected in Peoples' current and historical Consolidated Financial Statements.
•Peoples has identified a material weakness in its internal control over financial reporting. If Peoples fails to remediate the material weaknesses, or if Peoples fails to establish and maintain effective internal control over financial reporting, its ability to accurately and timely report financial results could be adversely affected.
The effectiveness of any controls or procedures is subject to certain inherent limitations, and as a result, there can be no assurance that our controls and procedures will prevent or detect misstatements. Even an effective system of internal control over financial reporting will provide only reasonable, not absolute, assurance with respect to financial statement preparation. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
With the participation of the Chief Executive Officer of Peoples and the Executive Vice President and Chief Financial Officer of Peoples, management evaluated the effectiveness of Peoples’ internal control over financial reporting as of December 31, 2021 using criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on management’s assessment of Peoples’ internal control over financial reporting, under the criteria described in the preceding sentence, management has identified a control deficiency during the fiscal year ended December 31, 2021, that constituted a material weakness as described within “ITEM 9A. CONTROLS & PROCEDURES.”
However, as disclosed in the "Report of Management's Assessment of Internal Control Over Financial Reporting", Peoples' management is in the process of implementing certain changes to Peoples' internal controls to remediate the material weakness disclosed in the "Report of Management's Assessment of Internal Control Over Financial Reporting."
If Peoples fails to remediate the material weakness, or are otherwise unable to maintain effective internal control over financial reporting, management could be required to expend significant resources and we could fail to meet our public reporting requirements on a timely basis, and be subject to fines, penalties, investigations or judgments, all of which could negatively affect investor confidence and adversely impact our stock price.
Legislative, Regulatory and Tax Change Risks
•Legislative or regulatory changes or actions could adversely impact Peoples or the businesses in which it is engaged.
The financial services industry is heavily regulated under both federal and state law. Peoples is subject to regulation and supervision by the Federal Reserve Board, and Peoples Bank is subject to regulation and supervision by the ODFI, the Federal Reserve Board, the FDIC and the CFPB. These regulations are primarily intended to protect depositors and the Deposit Insurance Fund, not Peoples' shareholders. Peoples' non-bank subsidiaries are also subject to the supervision of the Federal Reserve Board, in addition to other regulatory and self-regulatory agencies, including the SEC, and state securities and insurance regulators.
Regulations affecting banks and financial services businesses are undergoing continuous change, especially in light of COVID-19 and the stimulus programs implemented in connection therewith, and Peoples' management cannot predict the effect of those changes. While such changes are generally intended to lessen the regulatory burden on financial institutions, the impact of any changes to laws and regulations or other actions by regulatory agencies could adversely affect Peoples' business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets held by an institution, the appropriateness of an institution's allowance for credit losses and the ability to complete acquisitions. Additionally, actions by regulatory agencies or significant litigation against Peoples could cause Peoples to devote significant time and resources to defending our business and may lead to penalties that materially affect Peoples and our shareholders. Even the reduction of regulatory restrictions could have an adverse effect on Peoples and our shareholders if such lessening of restrictions increases competition within the financial services industry or Peoples' market area.
Further information about government regulation of Peoples' business can be found under the caption "Supervision and Regulation" in "ITEM 1 BUSINESS" of this Form 10-K.
•Changes in accounting standards, policies, estimates or procedures may impact Peoples' reported financial condition or results of operations.
The entities responsible for setting accounting standards, including the FASB, the SEC and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of Peoples' Consolidated Financial Statements. The pace of change continues to accelerate and changes in accounting standards can be difficult to predict and can materially impact how Peoples records and reports our financial condition and results of operations. In some cases, Peoples could be required to apply a new or revised guidance retroactively, resulting in the restatement of prior period financial statements.
The preparation of consolidated financial statements in conformity with US GAAP requires management to make significant estimates that affect the financial statements. Due to the inherent nature of these estimates, actual results may vary materially from management's estimates. Additional information regarding Peoples' critical accounting policies and the sensitivity of estimates can be found in the section captioned "Critical Accounting Policies" in "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K.
•Increases in FDIC insurance premiums may have a material adverse effect on Peoples' earnings.
Peoples Bank has limited ability to control the amount of premiums it is required to pay for FDIC insurance. The Deposit Insurance Fund is funded by fees assessed on insured depository institutions, such as Peoples Bank. If the costs of future bank failures increase, deposit insurance premiums may also increase. Increases in FDIC insurance premiums may have a material adverse effect on Peoples' results of operations and ability to continue to pay dividends on our common shares at the current rate or at all.
The FDIC has adopted rules revising its assessments in a manner benefiting banks with assets totaling less than $10 billion in assets. There can be no assurance, however, that assessments may not be changed in the future. Federal deposit insurance is described in more detail in the section captioned "Supervision and Regulation" in "ITEM 1 BUSINESS" of this Form 10-K.
Strategic Risks
•Peoples' ability to complete acquisitions and integrate completed acquisitions may be unsuccessful or more difficult, time-consuming or costly than expected, which could have an adverse effect on Peoples' business, earnings and financial condition.
Peoples actively evaluates opportunities to acquire other businesses. However, Peoples may not have the opportunity to make suitable acquisitions on favorable terms in the future, which could negatively impact the growth of our business. Peoples expects that other banking and financial companies, many of which have significantly greater resources, will compete to acquire compatible businesses. This competition could increase prices for acquisitions that Peoples would likely pursue, and our competitors may have greater resources to pay such acquisition prices. In addition, acquisitions of regulated businesses, such as banks, are subject to various regulatory approvals. If Peoples fails to receive the appropriate approvals, we will not be able to consummate an acquisition that we believe is in our best interest.
Peoples may not be able to integrate new acquisitions without encountering difficulties, including the loss of key employees and customers, the disruption of ongoing businesses or possible inconsistencies in standards, controls, procedures and policies. Peoples may not be able to fully achieve the strategic objectives and operating efficiencies anticipated in the acquisitions we complete. Future acquisitions may also result in other unforeseen difficulties, including in the integration of the combined companies. Further, benefits such as enhanced earnings anticipated from the acquisitions may not develop and future results of the combined companies may be materially below those estimated. In addition, Peoples may issue equity securities in connection with acquisitions, which could dilute the economic and voting interests of Peoples' shareholders. Recent changes in the stock price of financial institutions could impact the valuation of potential target companies and, therefore, Peoples' ability to compete for acquisitions.
•Changes in retail distribution strategies and consumer behavior may adversely impact Peoples’ investments in our financial service office premises and equipment and other assets, and may lead to increased expenditures to change our retail distribution channel.
Peoples has significant investments in financial service office premises and equipment for our financial service office network, including 13 financial service offices as well as our retail work force and other financial service office banking assets. Advances in technology such as e-commerce, telephone, internet and mobile banking, and in-branch self-service technologies including automatic teller machines and other equipment, as well as changing customer preferences for these other methods of accessing Peoples’ products and services, could affect the value of Peoples’ financial service office network or other retail distribution assets and may cause Peoples to change our retail distribution strategy, close and/or sell certain financial service offices and restructure or reduce our remaining financial service offices and work force. Further advances in technology and/or changes in customer preferences including those related to social media, digital or cryptocurrency, blockchain and other "fintech" technologies could result in additional changes in Peoples’ retail distribution strategy and/or financial service office network. These actions could lead to losses on these assets or could adversely impact the carrying value of other long-lived assets and may lead to increased expenditures to renovate and reconfigure remaining financial service offices or to otherwise reform Peoples’ retail distribution channel.
•Anti-takeover provisions may delay or prevent an acquisition or change in control by a third party.
Provisions in the Ohio General Corporation Law, Peoples' Amended Articles of Incorporation and Peoples' Code of Regulations, including a supermajority vote requirement for significant corporate changes, could discourage potential takeover attempts and make attempts by shareholders to remove Peoples' Board of Directors and management more difficult. These provisions may also have the effect of delaying or preventing a transaction or change in control that might be in the best interests of Peoples' shareholders.
General Risks
•Adverse changes in the financial markets may adversely impact Peoples' results of operations.
While Peoples generally invests in securities issued by U.S. government agencies and sponsored entities and domestic state and local governments with limited credit risk, certain investment securities held by Peoples possess higher credit risk since they represent beneficial interests in structured investments collateralized by residential mortgages, debt obligations and other similar asset-backed assets. Even securities issued by governmental agencies and sponsored entities may entail risk depending on political and economic changes. Regardless of the level of credit risk, all investment securities are subject to changes in market value due to changing interest rates, implied credit spreads and credit ratings.
•Peoples is subject to environmental liability risk associated with lending activities.
A significant portion of Peoples’ loan portfolio is secured by real property. During the ordinary course of business, Peoples forecloses on and takes title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, Peoples may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws and evolving regulation may require Peoples to incur
substantial expenses and may materially reduce the affected property’s value or limit Peoples’ ability to use or sell the affected property. In addition, future laws and regulations or more stringent interpretations or enforcement policies with respect to existing laws or regulations may increase Peoples’ exposure to environmental liability. Environmental reviews of real property before initiating foreclosure actions may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on Peoples’ business, financial condition and results of operations.
•The value of Peoples’ goodwill and other intangible assets may decline in the future.
As of December 31, 2021, Peoples had $291.0 million of goodwill and other intangible assets. A significant decline in expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of Peoples’ common shares may necessitate taking charges in the future related to the impairment of goodwill and other intangible assets. If Peoples were to conclude that a future write-down of goodwill and other intangible assets is necessary, the appropriate charge will be recorded, which could have a material adverse effect on Peoples' business, financial condition and results of operations.
•Peoples is at risk of increased losses from fraud.
Criminals are committing fraud at an increasing rate and are using more sophisticated techniques. In some cases, these individuals are part of larger criminal rings, which allow them to be more effective. Such fraudulent activity has taken many forms, ranging from wire fraud, debit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, or impersonation of clients through the use of falsified or stolen credentials. Additionally, an individual or business entity may properly identify itself, yet seek to establish a business relationship for the purpose of perpetrating fraud. An emerging type of fraud even involves the creation of synthetic identification in which fraudsters "create" individuals for the purpose of perpetrating fraud. In addition to fraud committed directly against Peoples, Peoples may suffer losses as a result of fraudulent activity committed against third parties. Increased deployment of technologies, such as chip card technology, defray and reduce certain aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate consumers and thereby commit fraud.
•Peoples may not be able to remain competitive.
Peoples experiences significant competition in originating loans, obtaining deposits, and maintaining and growing insurance and trust customers, principally from other commercial banks, savings associations, credit unions, trust and brokerage companies, insurance agencies, fintechs and online service providers. Several of Peoples' competitors have greater resources, larger branch systems and wider arrays of banking and non-banking services. This competition could reduce Peoples' net income by decreasing the number and size of loans that Peoples originates and the interest rates we can charge on these loans. Moreover, technology and other changes are allowing businesses and individuals to utilize alternative methods to complete financial transactions that historically have involved banks. For example, consumers can now maintain funds that have historically been held as bank deposits in brokerage accounts, mutual funds, or high yield savings accounts with online banks. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. Digital or cryptocurrencies, blockchain, and other “fintech” technologies are designed to enhance transactional security and have the potential to disrupt the financial industry, change the way banks do business, and reduce the need for banks as financial deposit-keepers and intermediaries. The process of eliminating the use of banks to complete financial transactions could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and lower cost deposits as a source of funding could have a material adverse effect on Peoples' financial condition and results of operations. If Peoples is unable to compete effectively, Peoples will lose market share, which could reduce income generated from deposits, loans and other products. For a more complete discussion of Peoples' competitive environment, see the section captioned "Competition" in "ITEM 1 BUSINESS" of this Form 10-K.
•Climate change, severe weather, natural disasters, acts of war or terrorism, the emergence of a pandemic and other adverse external events could significantly impact Peoples' business.
Natural disasters, including severe weather events of increasing strength and frequency due to climate change, acts of war or terrorism, pandemics or concern about a possible pandemic, and other adverse external events could have a significant impact on Peoples' ability to conduct business or upon third parties who perform operational services for Peoples or our customers. Such events could affect the stability of Peoples' deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, disrupt the infrastructure that supports Peoples' business and the communities Peoples is located in, negatively impact financial markets and interest rates, result in lost revenue or cause Peoples to incur additional expenses.
•Peoples or one of our subsidiaries may be a defendant from time to time in a variety of litigation and other actions, which could have a material adverse effect on Peoples' financial condition, results of operations and cash flows.
Peoples and our subsidiaries may be involved from time to time in a variety of litigation arising out of their respective businesses. The risk of litigation increases in times of increased troubled loan collection activity. Peoples' insurance may not cover all claims that may be asserted against Peoples and our subsidiaries, and any claims asserted against them, regardless of merit or eventual outcome, may harm their respective reputations. Should the ultimate judgments or settlements in any litigation exceed the applicable insurance coverage, they could have a material adverse effect on Peoples' financial condition, results of operations and cash flows. In addition, Peoples or one of our subsidiaries may not be able to obtain appropriate types or levels of insurance in the future or to obtain adequate replacement policies with acceptable terms.
•Defaults by larger financial institutions could adversely affect Peoples' business, earnings and financial condition.
Many financial institutions and their related operations are closely intertwined, and the soundness of such financial institutions may, to some degree, be interdependent. As a result, concerns about, or a default or threatened default by, one financial institution could lead to significant market-wide liquidity and credit problems and/or losses or defaults by other financial institutions. This "systemic risk" may adversely affect Peoples' business.
Additionally, Peoples' investment portfolio continues to include a limited amount of investments in individual bank-issued trust preferred securities. Under current market conditions, the fair value of these security types is based predominately on the present value of cash flows expected to be received in the future. Significant defaults by other financial institutions could adversely affect conditions within the financial services industry, thereby causing investors to require higher rates of return for these investments. These factors could cause Peoples to recognize impairment losses on our investment in bank-issued trust preferred securities in future periods.
•Changes in tax laws could adversely affect Peoples' performance.
Peoples is subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll, franchise, withholding and ad valorem taxes. Changes to tax laws could have a material adverse effect on Peoples' results of operations, fair values of net deferred tax assets and obligations of states and political subdivisions held in Peoples' investment securities portfolio. In addition, Peoples' customers are subject to a wide variety of federal, state and local taxes. Changes in taxes paid by Peoples' customers may adversely affect their ability to purchase homes or consumer products, which could adversely affect their demand for loans and deposit products. In addition, such negative effects on Peoples' customers could result in defaults on the loans made by Peoples Bank and decrease the value of mortgage-backed securities in which Peoples has invested.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2 PROPERTIES
Peoples' sole banking subsidiary, Peoples Bank, generally owns its offices, related facilities and unimproved real property. At December 31, 2021, Peoples Bank operated 66 offices in Ohio, 34 locations in West Virginia, 26 offices in Kentucky, three offices in Virginia, three offices in Washington D.C., one location in Maryland, an insurance premium finance lending office in Missouri and an equipment leasing office in Vermont. Of these 135 offices, 33 are leased and the rest are owned by Peoples Bank.
Peoples Insurance rents office space in various Peoples Bank offices, and also leases office space from third parties in Sciotoville, Ohio and in Pikeville, Kentucky.
Rent expense on the leased properties totaled $2.0 million in 2021 and $1.6 million in 2020, which excludes intercompany rent expense. The following properties have a lease term expiring on or before June 2023:
Location Address Lease Expiration Date
DuPont Circle 1604 17th Street
Washingtion, DC March 2022 (a)
Cincinnati West Loan Production Office 6701 Ruwes Oak Drive, Suite 4
Cincinnati, Ohio April 2022 (b)
Charleston Commercial Office 10 Hale Street
Charleston, West Virginia May 2022 (c)
Lancaster Fair Avenue Office 2211 West Fair Avenue
Lancaster, Ohio March 2023 (a)
Premium Finance 600 SW Jefferson, Suite 204
Lee's Summit, Missouri August 2022 (a)
Spencer 303 Main Street
Spencer, West Virginia November 2022 (d)
West Hamlin 40 Lincoln Plaza
Branchland, West Virginia December 2022 (a)
K Street 1501 K Street, NW
Washington, DC December 2022 (a)
Sciotoville Insurance 6606 Gallia Street
Sciotoville, Ohio December 2022 (e)
Vanceburg AA Highway 67 Commercial Drive, Suite 3
Vanceburg, Kentucky February 2023 (a)
Proctorville 7604 County Road 107
Proctorville, Ohio February 2023 (a)
North Star Leasing 747 Pine Street
Burlington, Vermont March 2023 (f)
Akron Business Production Office 354 South Main Street, Suite 200
Akron, Ohio June 2023 (a)
North Canton Loan Production Office 125 South Main Street
North Canton, Ohio June 2023 (g)
(a) Current lease agreement has no remaining extensions available.
(b) Current lease agreement is in final extension.
(c) Current lease agreement has one three-year extension remaining.
(d) Current lease agreement will change to a month-to-month lease upon expiration.
(e) Current lease has one one-year extension remaining.
(f) Current lease has two three-year extensions remaining.
(g) Current lease agreement has one two-year extension remaining.
Peoples considers its offices and related facilities to be suitable and adequate for the present needs of Peoples and its subsidiaries. Peoples evaluates on a continuing basis the suitability and adequacy of its offices and related facilities, and has opened, relocated, remodeled or closed them as appropriate to maintain efficient and attractive premises.
Additional information concerning the property and equipment owned or leased by Peoples and its subsidiaries is incorporated herein by reference from "Note 5 Bank Premises and Equipment" of the Notes to the Consolidated Financial Statements.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3 LEGAL PROCEEDINGS
In the ordinary course of their respective businesses or operations, Peoples or one of its subsidiaries may be named as a plaintiff, a defendant, or a party to a legal proceeding or any of their respective properties may be subject to various pending and threatened legal proceedings and various actual and potential claims. In view of the inherent difficulty of predicting the outcome of such matters, Peoples cannot state what the eventual outcome of any such matters will be; however, based on current knowledge and after consultation with legal counsel, Peoples' management believes the pending legal proceedings are ordinary routine litigation incidental to the business of Peoples and its subsidiaries and that they will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of Peoples.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Peoples' common shares are traded on The Nasdaq Global Select Market® under the symbol PEBO. At December 31, 2021, Peoples had 3,944 shareholders of record.
Peoples plans to continue to pay quarterly cash dividends comparable to those paid historically, subject to certain regulatory restrictions described in "Note 17 Regulatory Matters" of the Notes to the Consolidated Financial Statements, as well as in the section captioned "Supervision and Regulation - Dividend Restrictions" of "ITEM 1 BUSINESS" of this Form 10-K.
Issuer Purchases of Equity Securities
The following table details repurchases by Peoples and purchases by "affiliated purchasers" as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, of Peoples' common shares during the three months ended December 31, 2021:
Period (a)
Total Number of Common Shares Purchased
(b)
Average Price Paid per Common Share
(c)
Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs (1)
(d)
Maximum
Number (or Approximate Dollar Value) of Common Shares that May Yet Be Purchased Under the Plans or Programs (1)
October 1 - 31, 2021 425 (2) $ 32.94 (2) - $ 30,000,000
November 1 - 30, 2021 -
$ -
- $ 30,000,000
December 1 - 31, 2021 6,297 (2)(3)(4)
$ 31.00 (2)(3)(4)
- $ 30,000,000
Total 6,722 $ 31.12 - $ 30,000,000
(1)On January 29, 2021, Peoples announced that on January 28, 2021, Peoples' Board of Directors authorized a share repurchase program authorizing Peoples to purchase up to an aggregate of $30.0 million of its outstanding common shares, replacing the February 27, 2020 share repurchase program which terminated on January 28, 2021. There were no common shares repurchased under the share repurchase program during the three months ended December 31, 2021.
(2)Information includes 425 common shares and 700 common shares purchased in open market transactions during October and December by Peoples Bank under the Rabbi Trust Agreement. The Rabbi Trust Agreement establishes a rabbi trust that holds assets to provide funds for the payment of the benefits under the Peoples Bancorp Inc. Third Amended and Restated Deferred Compensation Plan for Directors of Peoples Bancorp Inc. and Subsidiaries.
(3) Information reported includes an aggregate of 350 common shares withheld to satisfy income taxes associated with restricted common shares which were granted under the Peoples Bancorp Inc. Third Amended and Restated 2006 Equity Plan and vested during December 2021.
(4) Information reported includes an aggregate of 5,247 common shares withheld to satisfy income taxes associated with unrestricted common shares which were granted during December 2021 and were not subject to vesting requirements.
Performance Graph
The following Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the SEC, nor shall such information be deemed to be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that Peoples specifically incorporates the Performance Graph by reference into such filing.
The following line graph compares the five-year cumulative total shareholder return of Peoples' common shares, based on an initial investment of $100 on December 31, 2016, and assuming reinvestment of dividends, against two indices. The first is the Russell 2000 Index, which is a leading benchmark for small cap domestic stocks and is comprised of the stocks ranked 1,001 to 3,000 in order of descending market capitalization in the Russell 3000 Index. The second is the Russell 2000 Financial Services Index, which is comprised of the financial services companies within the Russell 2000 Index.
COMPARISON OF FIVE-YEAR TOTAL SHAREHOLDER RETURN AMONG
PEOPLES BANCORP INC., RUSSELL 2000 INDEX,
AND RUSSELL 2000 FINANCIAL SERVICES INDEX
At December 31,
2016 2017 2018 2019 2020 2021
Peoples Bancorp Inc. $ 100.00 $ 103.10 $ 98.18 $ 117.76 $ 97.42 $ 119.67
Russell 2000 Index $ 100.00 $ 114.63 $ 101.99 $ 127.98 $ 153.49 $ 176.18
Russell 2000 Financial Services Index $ 100.00 $ 105.73 $ 94.17 $ 116.86 $ 114.48 $ 148.56

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6 [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements made in this Form 10-K, which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of 1995. Words such as "anticipate," "estimate," "may," "feel," "expect," "believe," "plan," "will," "will likely," "would," "should," "could," "project," "goal," "target," "potential," "seek," "intend," and similar expressions are intended to identify these forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. Factors that might cause such a difference include, but are not limited to:
(1)the ever-changing effects of the COVID-19 pandemic - the duration, extent and severity of which are impossible to predict, including the possibility of further resurgence in the spread of COVID-19 or variants thereof - on economies (local, national and international), supply chains and markets, on the labor market, including the potential for a sustained reduction in labor force participation and on our customers, counterparties, employees and third-party service providers, as well as the effects of various responses of governmental and nongovernmental authorities to the COVID-19 pandemic, including public health actions directed toward the containment of the COVID-19 pandemic (such as quarantines, shut downs and other restrictions on travel and commercial, social and other activities), the availability, effectiveness and acceptance of vaccines, and the implementation of fiscal stimulus packages, which could adversely impact sales volumes, add volatility to the global stock markets, and increase loan delinquencies and defaults;
(2)changes in the interest rate environment due to economic conditions related to the COVID-19 pandemic or other factors and/or the fiscal and monetary policy measures undertaken by the U.S. government and the Federal Reserve Board in response to such economic conditions, which may adversely impact interest rates, the interest rate yield curve, interest margins, loan demand and interest rate sensitivity;
(3)the success, impact, and timing of the implementation of Peoples' business strategies and Peoples' ability to manage strategic initiatives, including the completion and successful integration of planned acquisitions, including the recently-completed merger with Premier and recently-completed acquisitions of NSL and Vantage, and the expansion of commercial and consumer lending activities, in light of the continuing impact of the COVID-19 pandemic on customers' operations and financial condition;
(4)competitive pressures among financial institutions, or from non-financial institutions, which may increase significantly, including product and pricing pressures, which can in turn impact Peoples' credit spreads, changes to third-party relationships and revenues, changes in the manner of providing services, customer acquisition and retention pressures, and Peoples' ability to attract, develop and retain qualified professionals;
(5)uncertainty regarding the nature, timing, cost, and effect of legislative or regulatory changes or actions, or deposit insurance premium levels, promulgated and to be promulgated by governmental and regulatory agencies in the State of Ohio, the Federal Deposit Insurance Corporation, the Federal Reserve Board and the Consumer Financial Protection Bureau, which may subject Peoples, its subsidiaries, or one or more acquired companies to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses, including in particular the rules and regulations promulgated and to be promulgated under the CARES Act, and the follow-up legislation enacted as the Consolidated Appropriations Act, 2021, the American Rescue Plan Act of 2021, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Basel III regulatory capital reform;
(6)the effects of easing restrictions on participants in the financial services industry;
(7)local, regional, national and international economic conditions (including the impact of potential or imposed tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations, closing of border crossings and changes in the relationship of the U.S. and its global trading partners) and the impact these conditions may have on Peoples, its customers and its counterparties, and Peoples' assessment of the impact, which may be different than anticipated;
(8)Peoples may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to Peoples' current shareholders;
(9)changes in prepayment speeds, loan originations, levels of nonperforming assets, delinquent loans, charge-offs, and customer and other counterparties' performance and creditworthiness generally, which may be less favorable than expected in light of the COVID-19 pandemic and adversely impact the amount of interest income generated;
(10)Peoples may have more credit risk and higher credit losses to the extent there are loan concentrations by location or industry of borrowers or collateral;
(11)future credit quality and performance, including expectations regarding future credit losses and the allowance for credit losses;
(12)changes in accounting standards, policies, estimates or procedures may adversely affect Peoples' reported financial condition or results of operations;
(13)the impact of assumptions, estimates and inputs used within models, which may vary materially from actual outcomes, including under the CECL model;
(14)the discontinuation of LIBOR and other reference rates which may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies;
(15)adverse changes in the conditions and trends in the financial markets, including the impacts of the COVID-19 pandemic and the related responses by governmental and nongovernmental authorities to the pandemic, which may adversely affect the fair value of securities within Peoples' investment portfolio, the interest rate sensitivity of Peoples' consolidated balance sheet, and the income generated by Peoples' trust and investment activities;
(16)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;
(17)the effect of the current interest rate environment or changes in interest rates or in the level or composition of our assets or liabilities on our net interest income and our loan originations;
(18)Peoples' ability to receive dividends from its 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, which may adversely affect the banking industry and/or Peoples' business generation and retention, funding and liquidity;
(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 its 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 (including as a result of the COVID-19 pandemic), legislative or regulatory initiatives (including those in response to the COVID-19 pandemic), or other factors, which may be different than anticipated;
(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 (including COVID-19), cybersecurity attacks, system failures, civil unrest, military or terrorist activities or international conflicts;
(28)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;
(29)risks and uncertainties associated with Peoples' entry into new geographic markets and risks resulting from Peoples' inexperience in these new geographic markets;
(30)changes in law or requirements imposed by Peoples' regulators impacting Peoples' capital actions, including dividend payments and share repurchases;
(31)the effect of a fall in stock market prices on the asset and wealth management business;
(32)Peoples' continued ability to grow deposits;
(33)the impact of future governmental and regulatory actions upon Peoples' participation in and execution of government programs related to the COVID-19 pandemic;
(34)uncertainty regarding the impact of the current U.S. presidential administration and Congress on the regulatory landscape, capital markets, elevated government debt, potential changes in tax legislation that may increase tax rates and the response to and management of the COVID-19 pandemic, infrastructure spending and social programs; and,
(35)other risk factors relating to the banking industry or Peoples as detailed from time to time in Peoples' reports filed with the SEC, including those risk factors included in the disclosures under the heading "ITEM 1A RISK FACTORS" of this Form 10-K.
All forward-looking statements speak only as of the filing date of this Form 10-K and are expressly qualified in their entirety by the cautionary statements. Although management believes the expectations in these forward-looking statements are based on reasonable assumptions within the bounds of management’s knowledge of Peoples’ business and operations, it is possible that actual results may differ materially from these projections. Additionally, Peoples undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the filing date of this Form 10-K or to reflect the occurrence of unanticipated events except as may be required by applicable legal requirements. Copies of documents filed with the SEC are available free of charge at the SEC’s website at www.sec.gov and/or through Peoples' website - www.peoplesbancorp.com under the "Investor Relations" section.
The following discussion and analysis of Peoples' Consolidated Financial Statements is presented to provide insight into management's assessment of the financial position and results of operations for the periods presented. This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, as well as the ratios and statistics, contained elsewhere in this Form 10-K.
Summary of Significant Transactions and Events
The following is a summary of transactions or events that have impacted or are expected by management to impact Peoples’ results of operations or financial condition:
◦On March 7, 2022, Peoples wholly-owned subsidiary, Peoples Bank, closed on its acquisition of Vantage, a nationwide provider of equipment financing headquartered in Excelsior, Minnesota. Under the terms of the agreement, Peoples Bank purchased 100% of the equity of Vantage for total cash consideration of $54.0 million. Peoples Bank repaid approximately $28.9 million in recourse debt on behalf of Vantage. Vantage offers mid-ticket equipment leases, primarily for business essential information technology equipment across a wide array of industries. Upon completion of the transaction, Vantage became a subsidiary of Peoples Bank. As a subsidiary, Vantage will continue to operate under the name Vantage Financial, which will leverage Vantage's strong brand recognition within the equipment finance industry.
◦On September 17, 2021, Peoples completed its merger with Premier Financial Bancorp, Inc. (“Premier”), in which Peoples acquired, in an all-stock merger, Premier, a bank holding company headquartered in Huntington, West Virginia, and the parent company of Premier Bank, Inc. (“Premier Bank”) and Citizens Deposit Bank and Trust, Inc. (“Citizens”). Under the terms and subject to the conditions of the definitive Agreement and Plan of Merger dated March 26, 2021, Premier merged with and into Peoples (the “Merger”), and Premier Bank and Citizens subsequently merged with and into Peoples’ wholly-owned subsidiary, Peoples Bank, in a transaction valued at $261.9 million. At the close of business on September 17, 2021, the financial services offices of each of Premier Bank and Citizens became branches of Peoples Bank. Peoples acquired $1.1 billion in loans and $1.8 billion in deposits. Peoples preliminarily recorded $68.2 million in goodwill and $4.2 million in other intangible assets in connection with the Merger.
◦On May 4, 2021, Peoples Insurance Agency, LLC ("Peoples Insurance") acquired substantially all of the assets and rights of an insurance agency located in Pikeville, Kentucky and certain rights to related customer accounts, which were previously developed and maintained by Justice & Stamper Insurance Agency, Inc., pursuant to an Asset Purchase Agreement between Peoples Insurance and Justice & Stamper Insurance Agency, Inc. Total consideration for this transaction was $325,000, with $162,500 paid at closing and the second installment in the amount of $162,500 to be paid on the first anniversary of the closing date, less any adjustments pursuant to adverse claims incurred or sustained by or imposed by Peoples Insurance. Peoples recorded customer relationship intangible assets of $230,000 and goodwill of $46,000, related to this transaction.
◦On March 31, 2021, Peoples completed its acquisition of NS Leasing, LLC ("NSL") pursuant to an Asset Purchase Agreement, dated March 24, 2021, in which Peoples Bank acquired the equipment finance and leasing business of NSL. The transaction closed after the end of business on March 31, 2021 and Peoples Bank began operating the acquired business as North Star Leasing, a division of Peoples Bank on April 1, 2021. Peoples Bank acquired assets comprising NSL's equipment finance business, including $83.3 million in leases and satisfied, on behalf of NSL, certain third-party debt in the amount of $69.1 million. Peoples Bank paid total consideration of $116.6 million, plus a potential earn-out payment to NSL of up to $3.1 million. Based in Burlington, Vermont, the North Star Leasing division underwrites, originates and services equipment leases and equipment financing agreements to businesses throughout the United States. Peoples recorded preliminary goodwill in the amount of $24.7 million and preliminary other intangibles of $14.0 million, which included a customer relationship intangible, trade name intangible and non-compete agreements related to this transaction. Peoples recorded an additional $0.6 million in non-interest expense during the last six months of 2021 related to an update to the estimated earn-out provision of $3.0 million. As of December 31, 2021, equipment leases had grown to $122.5 million.
◦Peoples began originating loans during the second quarter of 2020 and continued to originate loans during the first five months of 2021 under the loan guarantee program created under the CARES Act, called the Paycheck Protection Program ("PPP"). These loans were targeted to provide small businesses with financial support to cover payroll and certain other specified types of expenses for a specified period of time. Loans made under the PPP are fully guaranteed by the Small Business Administration ("SBA"). Additional information can be found later in this discussion under the caption “FINANCIAL CONDITION - COVID-19 Loan Impacts." As of December 31, 2021, Peoples had $87.1 million aggregate
principal amount in PPP loans outstanding (including $23.4 million acquired in the Merger with Premier), which were included in commercial and industrial loan balances, compared to $366.9 million at December 31, 2020. Peoples recognized interest income of $13.0 million for deferred loan fees/cost accretion and $2.3 million of interest income on PPP loans during 2021 compared to $7.5 million for deferred loan fees/cost accretion and $3.2 million of interest income during 2020.
◦On January 28, 2021, Peoples' Board of Directors approved a share repurchase program authorizing Peoples to purchase up to an aggregate of $30 million of Peoples' outstanding common shares, replacing the share repurchase program which had authorized Peoples to purchase up to an aggregate of $40 million of Peoples' outstanding common shares. During 2021, Peoples did not repurchase any common shares under the share repurchase program authorized on January 28, 2021. On February 27, 2020, Peoples' Board of Directors approved a share repurchase program authorizing Peoples to purchase up to an aggregate of $40.0 million of Peoples' outstanding common shares, replacing the share repurchase program which had authorized Peoples to purchase up to an aggregate of $20.0 million of Peoples' outstanding common shares. During 2020, Peoples repurchased 1,299,577 of Peoples' common shares through Peoples' then-effective common share repurchase program for a total of $29.3 million.
◦During 2021, Peoples recorded a provision for credit losses of $0.7 million, compared to $26.3 million for 2020 and $2.5 million for 2019. The lower provision for credit losses recognized in 2021 was the result of improvement in loss drivers and Moody's economic outlook published in December 2021.
◦During 2021, Peoples recorded $1.2 million of expenses related to the COVID-19 pandemic, compared to $1.3 million for 2020. During the fourth quarter of 2021, Peoples awarded common shares to all associates who were at the Assistant Vice President level or below. The remainder of the COVID-19-related expenses were primarily related to providing Peoples' employees meals in support of local businesses, assisting employees with childcare and elder care needs, incentivizing employees to be vaccinated and taking extra precautions in cleaning facilities.
◦During 2021, Peoples incurred $21.4 million of acquisition-related expenses, compared to $0.5 million for 2020 and $7.3 million for 2019. The acquisition-related expenses in 2021 were primarily related to the NSL acquisition and the Premier acquisition, while the expenses during 2020 and 2019 were due to the Triumph Premium Finance and First Prestonsburg acquisitions, respectively.
◦Peoples incurred $0.1 million in pension settlement charges in 2021 compared to $1.1 million in 2020, due to the aggregate amount of lump-sum distributions to participants in Peoples' defined benefit pension plan exceeding the threshold for recognizing settlement charges during the period. There were no such settlement charges during 2019.
◦On April 2, 2020, Peoples entered into a First Amendment to the Loan Agreement with U.S. Bank National Association (the “U.S. Bank Loan Agreement”), entered into on April 3, 2019, to extend the maturity. A Second Amendment to the U.S. Bank Loan Agreement entered into on April 1, 2021 extends the maturity from April 1, 2021 to March 31, 2022. The U.S. Bank Loan Agreement provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $20.0 million that may be used: (i) for working capital purposes; (ii) to finance dividends or other distributions (other than stock dividends and stock splits) on or in respect of Peoples’ capital stock and redemptions, repurchases or other acquisitions of any of Peoples’ capital stock permitted under the U.S. Bank Loan Agreement; and (iii) to finance acquisitions permitted under the U.S. Bank Loan Agreement.
◦During 2020, Peoples sold restricted Class B Visa stock for a gain of $680,000, which was recorded in other non-interest income. Peoples also sold restricted Class B Visa stock during 2019, resulting in a gain of $787,000.
◦Effective July 1, 2020, Peoples completed the business combination under which Peoples Bank acquired the operations and assets of Triumph Premium Finance (referred to as the "premium finance acquisition"), a division of TBK Bank, SSB. Based in Kansas City, Missouri, the division operating as Peoples Premium Finance will continue to provide insurance premium financing loans for commercial customers to purchase property and casualty insurance products through its growing network of independent insurance agency partners nationwide. Peoples Bank acquired $84.7 million in loans, at acquisition date, after fair value adjustments. Peoples also recorded $4.3 million of other intangible assets and $5.5 million of goodwill. Total consideration paid for this acquisition was $94.5 million. As of December 31, 2020, Peoples Premium Finance loans had grown to $114.8 million.
◦During 2020, Peoples recognized credits to its FDIC insurance expense as the FDIC issued credits to member banks to offset against the quarterly assessment as a result of the deposit insurance fund reaching its target threshold for smaller banks. These credits were used by Peoples beginning in 2019 and were fully exhausted during the second quarter of 2020.
◦During 2020, Peoples recognized $109,000 in bank owned life insurance ("BOLI") income related to tax-free death benefits, compared to $482,000 in 2019. Peoples recognized no BOLI income related to death benefits in 2021.
◦In an effort to stimulate an economy that was being adversely impacted by the impacts of the COVID-19 pandemic, the Federal Reserve Board first lowered the benchmark Federal Funds Target Rate by 50 basis points on March 3, 2020 and then lowered the target rate another 100 basis points at the next FOMC meeting on March 15, 2020. The Federal Funds Target
Rate range was 0% - 0.25% as of March 31, 2020 and maintained this rate as of December 31, 2021. According to the Chair of the Federal Reserve Board, the Federal Funds Target Rate is not likely to drop below this range. However, the Federal Reserve Board does have other tools available that it can employ and has expressed an intention to do so in order to maintain a targeted level of liquidity.
◦On January 1, 2020, Peoples Insurance acquired a property and casualty-focused independent insurance agency for a purchase price amount equal to $866,000, and recorded $735,000 of customer relationship intangibles, and $27,000 of other assets, resulting in $104,000 of goodwill.
◦On August 22, 2019, Peoples Risk Management, Inc., a wholly-owned subsidiary of Peoples, was formed. Peoples Risk Management, Inc. is a Nevada-chartered captive insurance company which insures against certain risks unique to the operations of Peoples and for which insurance may not be currently available or economically feasible. Peoples Risk Management, Inc. pools resources with several other similar insurance company subsidiaries of financial institutions to help minimize the risk allocable to each participating insurer.
The impact of these transactions, where material, is discussed in the applicable sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Critical Accounting Policies
The accounting and reporting policies of Peoples conform to US GAAP and to general practices within the financial services industry. A summary of significant accounting policies is contained in "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements. While all of these policies are important to understanding the Consolidated Financial Statements, certain accounting policies require management to exercise judgment and make estimates or assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. These estimates and assumptions are based on information available as of the date of the Consolidated Financial Statements; accordingly, as this information changes, the Consolidated Financial Statements could reflect different estimates or assumptions.
Management has identified four accounting policies as those that, due to the judgments, estimates and assumptions inherent in the policies, are critical to an understanding of Peoples' Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. The four accounting policies identified were the allowance for credit losses, business combinations, goodwill, and income taxes. These four accounting policies are described in further detail below.
Allowance for Credit Losses
Peoples adopted ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" on January 1, 2020, and began using the CECL model to estimate its allowance for credit losses. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is measured on a pool basis, with loans collectively evaluated when similar risk characteristics exist. Peoples evaluated risk characteristics, including but not limited to: internal or third-party credit scores or credit ratings, risk ratings or classifications, financial asset type, collateral type, size, effective interest rate, term, geographical location, industry of the borrower, vintage, historical or credit loss patterns, and reasonable and supportable forecast periods. Peoples identified 18 segments for which it believes there are similar risk characteristics and utilized a discounted cash flow methodology in determining an allowance for credit losses for each segment.
In estimating credit losses, Peoples uses a loss driver method, which analyzes one or more economic variables to the change in default rate using a regression analysis. Variables that had a strong correlation were selected as economic factors, or variables, for the model. If a single variable was not found to be strongly correlated, additional variables were included. Peoples utilizes U.S. unemployment, Ohio unemployment and Ohio Gross Domestic Product as economic factors in modeling.
In general, Peoples completes a quarterly evaluation based on several qualitative factors to determine if there should be adjustments made to the allowance for credit losses. These factors include economic conditions, collateral, concentrations, troubled assets, Peoples' loss trends, peer loss trends, delinquency trends, portfolio composition and loan growth, underwriting, and certain other risks.
The allowance for credit losses related to specific loans was based on management's estimate of potential losses on impaired loans as determined by (1) the present value of expected future cash flows, (2) the fair value of collateral if the loan is determined to be collateral dependent, or (3) the loan's observable market price.
Peoples also completes a quarterly evaluation for unfunded commitments for loans that are not unconditionally cancellable, which includes construction loans, floor plan lines of credit, home equity lines of credit, other credit lines and letters of credit. Peoples performed a study to determine the historical funding rates of unadvanced portions of loans, and applied these funding rates to the unfunded commitments at period end. The loss rates, including qualitative factors, in
determining the allowance for credit losses were applied at the segment level to the unfunded commitment amounts to determine the allowance for credit loss liability for unfunded commitments.
There can be no assurance that the allowance for credit losses will be adequate to cover all losses, but management believes the allowance for credit losses at December 31, 2021 was adequate to provide for expected losses from existing loans based on information available at that time. While management uses available information to estimate losses, the ultimate collectability of a substantial portion of the loan portfolio, and the need for future additions to the allowance, will be based on changes in economic conditions and other relevant factors. As such, adverse changes in economic conditions could reduce currently estimated cash flows for both commercial and consumer borrowers, which would likely cause Peoples to experience increases in problem assets, delinquencies and losses on loans in the future.
To demonstrate the sensitivity to key economic parameters used in the measurement of the allowance for credit losses at December 31, 2021, management calculated the difference between the modeled allowance for credit losses at December 31, 2021, compared to one based on an adverse scenario. The adverse scenario reflected increases of 100 basis points in both U.S. and Ohio unemployment, and a decline in Ohio Gross Domestic Product of 100 basis points. Excluding consideration of general reserve adjustments, this sensitivity analysis would result in a hypothetical increase in the allowance for credit losses of approximately $3.4 million at December 31, 2021.
Prior to January 1, 2020, Peoples utilized the incurred loss model for estimating its allowance for loan losses.
Business Combinations
Peoples utilizes the acquisition method of accounting for business combinations. As of the acquisition date, Peoples records the acquired company's net assets at fair value. The determination of fair value as of the acquisition date requires management to consider various factors that involve judgment and estimation, including the application of discount rates, prepayment rates, attrition rates, future estimates of interest rates, as well as many other assumptions. These assumptions can have a material impact on the estimated fair value, and as a result, the goodwill recorded in a business combination.
Based on recent acquisitions, loans and leases acquired through business combinations have comprised the majority of purchase accounting adjustments in arriving at the fair values of acquired assets and liabilities, with the most significant adjustments relating to the creditworthiness of the acquired portfolios. The assumptions and inputs impacting the allowance for credit losses are discussed in the above paragraphs of this section of Management's Discussion and Analysis. Those same judgments drive the measurement of the credit adjustments of acquired loan and lease portfolios when arriving at fair value. For further information regarding business combination accounting, please refer to “Note 20 Acquisitions” of the Notes to the Consolidated Financial Statements.
Goodwill
Peoples records goodwill as a result of acquisitions accounted for under the acquisition method of accounting. Under the acquisition method, Peoples is required to allocate the consideration paid for an acquired company to the assets acquired, including identified intangible assets, and liabilities assumed based on their estimated fair values at the date of acquisition. Goodwill represents the excess cost over the fair value of net assets acquired and is not amortized but is tested for impairment when indicators of impairment exist, and, in any case, at least annually. For further information regarding the fair values of assets and liabilities recently acquired in business combinations, please refer to “Note 20 Acquisitions” of the Notes to the Consolidated Financial Statements.
The value of recorded goodwill is supported by revenue that is driven by the volume of business transacted and Peoples' ability to provide quality, cost-effective services in a competitive market place. A decline in earnings as a result of a lack of growth or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. Goodwill impairment exists when the carrying value of the reporting unit (as defined by US GAAP) exceeds its fair value and an impairment loss is recognized in earnings in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit.
The process of evaluating goodwill for impairment involves highly subjective and complex judgments, estimates and assumptions regarding the fair value of Peoples' reporting unit and, in some cases, goodwill itself. As a result, changes to these judgments, estimates and assumptions in future periods could result in materially different results.
Peoples currently maintains a single reporting unit for goodwill impairment testing. While quoted market prices exist for Peoples' common shares since they are publicly traded, these market prices do not necessarily reflect the value associated with gaining control of an entity. Thus, management takes into account all appropriate fair value measurements in determining the estimated fair value of the reporting unit.
Peoples performs its required annual impairment test as of October 1st each year. Peoples first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, including goodwill. In this evaluation, Peoples assesses relevant events and circumstances, which may include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, events specific to Peoples, significant changes in the reporting unit, or a sustained decrease in stock price. If Peoples determines that it is more-
likely-than-not that the fair value of the reporting unit is greater than its carrying amount, then performing the quantitative impairment test is unnecessary.
At October 1, 2021, management completed a qualitative assessment of goodwill. This test resulted in management concluding it was more-likely-than-not that the fair value of the reporting unit exceeded its carrying value.
Peoples is required to perform interim tests for goodwill impairment in subsequent quarters if events occur or circumstances change that indicate potential goodwill impairment exists, such as adverse changes to Peoples' business or a significant decline in Peoples' market capitalization. For further information regarding goodwill, refer to "Note 7 Goodwill and Other Intangible Assets" of the Notes to the Consolidated Financial Statements.
Fair Value Measurements
As a financial services company, the carrying value of certain financial assets and liabilities is impacted by the application of fair value measurements, either directly or indirectly. In certain cases, an asset or liability is measured and reported at fair value on a recurring basis, such as available-for-sale investment securities. In other cases, management must rely on estimates or judgments to determine if an asset or liability not measured at fair value warrants an impairment write-down or whether a valuation reserve should be established. Given the inherent volatility, the use of fair value measurements may have a significant impact on the carrying value of assets or liabilities, or result in material changes to the Consolidated Financial Statements, from period to period.
Detailed information regarding fair value measurements can be found in "Note 2 Fair Value of Financial Instruments" of the Notes to the Consolidated Financial Statements.
EXECUTIVE SUMMARY
Net income for the year ended December 31, 2021 was $47.6 million, compared to $34.8 million for 2020 and $53.7 million for 2019, representing earnings per diluted common share of $2.15, $1.73 and $2.63, respectively. The increase in earnings compared to 2020 was driven by a lower provision for credit losses, which was a result of improved economic factors and updated loss drivers and their impact on assumptions used in the CECL model throughout 2021. Non-core items, and the related tax effect of each, in net income included acquisition-related expenses, contract negotiation expenses, COVID-19-related expenses, a contribution to Peoples Bank Foundation, Inc., pension settlement charges, severance expenses, losses on investment securities, and gains and losses on asset disposals and other transactions. Non-core items negatively impacted earnings per diluted common share by $0.85 for 2021 compared to $0.22 for 2020 and $0.30 for 2019.
Net interest income increased 24% to $172.6 million for 2021, compared to $138.9 million for 2020, and totaled $140.8 million for 2019. Net interest margin was 3.40% in 2021, compared to 3.24% in 2020 and 3.69% in 2019. The increase in net interest income and net interest margin compared to 2020 was largely due to the impact of PPP loan forgiveness and lower funding costs due to customers' maintaining higher cash balances, as well as a higher volume of loans due to the Premier and Premium Finance acquisitions coupled with higher-yielding leases acquired from NSL and organic loan growth. Net interest margin compressed during 2020 as loan yields declined due to the low interest rate environment and investment securities yields decreased as premium amortization increased due to higher refinancing activity. Included in net interest income during 2021 and 2020 was the impact of the PPP loans. Peoples recognized interest income on deferred loan fees/costs of $13.0 million and $7.5 million during the 2021 and 2020, respectively, along with $2.3 million and $3.2 million of interest earned on PPP loans during 2021 and 2020, respectively. Funding costs were controlled during 2021, and declined 20 basis points compared to 2020. Net interest income in 2019 was largely driven by loan growth, which was positively impacted by the First Prestonsburg and ASB acquisitions, and higher loan yields. Accretion income, net of amortization expense, from acquisitions totaled $3.2 million for 2021, $2.8 million for 2020, and $4.9 million for 2019, adding 7 basis points, 7 basis points, and 12 basis points, respectively, to the net interest margin.
The provision for credit losses for 2021 was $0.7 million for 2021, compared to $26.3 million for 2020 and $2.5 million for 2019. Net charge-offs for 2021 were $4.7 million compared to $1.8 million for 2020 and $1.1 million for 2019. Net charge-offs as a percent of average total loans were 0.13% for 2021, 0.05% for 2020 and 0.04% for 2019. The lower provision for credit losses recognized in 2021 was the result of improvement in loss drivers and Moody's economic outlook published in December 2021. The provision for credit losses recognized in 2020 was due to the impact the COVID-19 pandemic had on the economic forecasts and qualitative factors used in the CECL model. The provision for credit losses recognized in 2019 was a result of lower net charge-offs in 2019, which included a $1.8 million recovery on a previously charged-off loan.
Total non-interest income increased 8% compared to 2020. All non-interest income categories were impacted by the Premier acquisition, with the exception of mortgage banking income and commercial loan swap fees. Mortgage banking income decreased due to the volume of refinance activity experienced in 2020 when interest rates declined, which was not repeated in 2021. Swap fee income also decreased as a result of lower customer demand caused by the sustained lower rate environment in 2021. Total non-interest income for 2020 was largely impacted by deposit account service charges, which was driven by the COVID-19 pandemic and the higher balances being maintained by customers throughout 2020. The decline in deposit account service charges during 2020, compared to 2019, was partially offset by higher mortgage banking income, as a result of higher refinancing activity in 2020 due to the low interest rate environment. Increases in trust and investment income and electronic banking income in 2020, compared to 2019,
were more than offset by decreases in insurance income, commercial loan swap fee income and bank owned life insurance income. Total non-interest income was positively impacted during 2019 due to the additional deposit accounts and cardholders associated with the acquisitions of First Prestonsburg and ASB.
Total non-interest expense was $183.7 million for 2021, an increase of $50.0 million compared to 2020. The acquisitions of Premier and NSL increased acquisition-related expenses included in other expenses, professional fees, salaries and employee benefit costs, as well as net occupancy and equipment expenses, and amortization of intangible assets. Total non-interest expense for 2020 decreased $3.6 million, or 3%, from 2019 and was driven by a reduction in acquisition-related expenses. Declines in salaries and employee benefit costs, which were mostly due to increased deferred personnel costs associated with the origination of PPP loans, were partially offset by higher data processing and software expense that was largely a result of implementation of new software, coupled with higher core processing costs. Peoples also recorded higher FDIC insurance expense during 2020 compared to 2019, as credits had been received and recognized during 2019, and were fully utilized during the second quarter of 2020. Included in total non-interest expense during 2021 were certain non-core expenses which included acquisition-related expenses of $21.4 million, COVID-19-related expenses of $1.2 million, contract negotiation expenses of $1.2 million and a Peoples Bank Foundation, Inc. contribution of $0.5 million. Non-core expenses for 2020 included COVID-19-related expenses of $1.3 million, severance expenses and pension settlement charges that totaled $1.1 million each, and acquisition-related expenses of $0.5 million. During 2019, non-core expenses included $7.3 million of acquisition-related expenses. Total non-interest expense for 2019 was mostly impacted by increases in salaries and employee benefit costs, net occupancy and equipment expense, electronic banking expense and data processing and software expense, largely attributable to the acquisitions in 2019, which were partially offset by lower FDIC insurance expense and professional fees.
Peoples' efficiency ratio, which is calculated as total non-interest expense less amortization of other intangible assets divided by fully tax-equivalent ("FTE") net interest income, plus total non-interest income, excluding all gains and losses, was 73.6% for 2021, compared to 63.9% for 2020 and 64.7% for 2019. The increase in the efficiency ratio during 2021 was caused by increased non-core expenses discussed above. The improvement in the efficiency ratio during 2020 was mostly due to a reduction in total non-interest expense, which more than offset declines in revenue. The efficiency ratio during 2019 was impacted by higher total revenue, which outpaced increases in total non-interest expense. The efficiency ratio, when adjusted for non-core items, was 63.5% for 2021, 61.9% for 2020 and 61.1% for 2019.
Income tax expense totaled $9.4 million for 2021, compared to $7.9 million for 2020 and $11.7 million for 2019. The effective tax rate for 2021 was 16.5%, 18.5% for 2020 and 17.8% for 2019. The variance in income tax expense for 2021 compared to 2020, was the result of higher pre-tax income in 2021 that resulted from the acquisitions of Premier and NSL.
Total assets increased 48% to $7.06 billion at December 31, 2021, compared to $4.76 billion at year-end 2020. The key contributor to the increase was the assets acquired from the Premier and NSL acquisitions. The allowance for credit losses increased to $64.0 million or 1.43% of total loans, net of deferred fees and costs, compared to $50.4 million and 1.48%, respectively, at December 31, 2020. The increase in the allowance for credit losses compared to December 31, 2020 was due to a $16.9 million increase in the allowance for credit losses related to the purchased credit deteriorated loans acquired from Premier, the establishment of an allowance for credit losses for non-purchased credit deteriorated loans of $11.7 million, and a liability for unfunded commitments of $0.4 million. For the NSL acquisition, Peoples recorded $3.3 million in provision for credit losses during 2021 in order to establish the allowance for credit losses for the acquired leases and $493,000 to establish the allowance for credit losses on purchased credit deteriorated leases.
Total liabilities were $6.22 billion at December 31, 2021, an increase of $2.0 billion since December 31, 2020. Total deposits increased $2.0 billion, to $5.86 billion at December 31, 2021. The significant increase in deposits compared to December 31, 2020 was largely due to deposits acquired from Premier. Total demand deposits comprised 48% of total deposits at December 31, 2021 and were 43% of total deposits at December 31, 2020.
Total stockholders' equity was $845.0 million at December 31, 2021, an increase of 47% from December 31, 2020. The increase compared to 2020 was due to common shares issued for the Premier acquisition and net income for 2021 of $47.6 million, offset partially by dividends paid of $31.2 million and $13.0 million in accumulated other comprehensive losses.
Peoples continued to exceed the capital required by the Federal Reserve Board to be deemed "well capitalized." Peoples' tier 1 capital ratio was 12.81% at December 31, 2021, versus 13.25% at December 31, 2020, while the total capital ratio was 14.06% at December 31, 2021, versus 14.50% at December 31, 2020. The common equity tier 1 risk-based capital ratio was 12.52% at December 31, 2021 compared to 13.01% at December 31, 2020. Compared to December 31, 2020, the change in the capital ratios was due to a lower provision for credit losses recognized during 2021, partially offset by increased acquisition-related expenses and dividends paid to shareholders. Peoples' book value and tangible book value per share were $29.86 and $19.58, respectively, at December 31, 2021, compared to $29.43 and $19.99, respectively, at December 31, 2020. Additional information regarding capital requirements can be found in "Note 17 Regulatory Matters" of the Notes to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Net Interest Income
Peoples earns interest income on investments, loans and leases, and incurs interest expense on interest-bearing deposits and borrowed funds. Net interest income, the amount by which interest income exceeds interest expense, remains Peoples' largest source of revenue and was 71% of total revenue during 2021. The amount of net interest income earned by Peoples is affected by various factors, including changes in market interest rates due to the Federal Reserve Board's monetary policy, the level and degree of pricing competition for both loans and deposits in Peoples' markets, and the amount and composition of Peoples' earning assets and interest-bearing liabilities.
Peoples monitors net interest income performance and manages its balance sheet composition through regular ALCO meetings. The asset-liability management process employed by the ALCO is intended to mitigate the impact of future interest rate changes on Peoples' net interest income and earnings. However, the frequency and/or magnitude of changes in market interest rates are difficult to predict, and may have a greater impact on net interest income than adjustments management is able to make.
As part of the analysis of net interest income, management converts tax-exempt income earned on obligations of states and political subdivisions to the pre-tax equivalent of taxable income using a blended federal and state corporate income tax rate of 22.3% for 2021, and a statutory federal corporate income tax rate of 21% for 2020 and 2019. Management believes the resulting FTE net interest income allows for a more meaningful comparison of tax-exempt income and yields to their taxable equivalents. 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 earning assets and interest-bearing liabilities.
The following table details the calculation of FTE net interest income for the years ended December 31:
(Dollars in thousands) 2021 2020 2019
Net interest income $ 172,553 $ 138,923 $ 140,838
Taxable equivalent adjustments 1,349 1,054 1,068
FTE net interest income $ 173,902 $ 139,977 $ 141,906
The following table details Peoples’ average balance sheets, with corresponding income/expense and yield/cost, for the years ended December 31:
2021 2020 2019
(Dollars in thousands)
Average Balance Income/ Expense Yield/Cost Average Balance Income/Expense Yield/Cost Average Balance Income/ Expense Yield/Cost
Short-term investments $ 219,849 $ 313 0.14 % $ 103,767 $ 343 0.33 % $ 43,157 $ 919 2.13 %
Investment securities (a)(b)(c):
Taxable 1,042,419 15,219 1.46 % 868,930 14,370 1.65 % 870,921 23,420 2.69 %
Nontaxable 163,095 4,326 2.65 % 101,965 3,146 3.09 % 106,437 3,331 3.13 %
Total investment securities 1,205,514 19,545 1.62 % 970,895 17,516 1.80 % 977,358 26,751 2.74 %
Loans (b)(c)(d):
Construction 131,834 5,130 3.84 % 107,862 4,883 4.45 % 111,734 6,008 5.30 %
Commercial real estate, other 1,061,323 42,308 3.93 % 854,749 36,499 4.20 % 829,581 44,574 5.30 %
Commercial and industrial 870,682 37,321 4.23 % 925,060 34,458 3.66 % 601,900 31,611 5.18 %
Premium finance 118,242 5,872 4.90 % 50,687 2,855 5.54 % - - - %
Leases 74,442 13,572 17.98 % - - - % - - - %
Residential real estate (e) 700,691 29,686 4.24 % 660,025 31,155 4.72 % 641,053 30,671 4.78 %
Home equity lines of credit 133,340 5,410 4.06 % 127,454 5,799 4.55 % 132,235 7,715 5.83 %
Consumer, indirect 529,994 21,480 4.05 % 453,379 19,364 4.27 % 416,768 17,350 4.16 %
Consumer, direct
88,611 5,501 6.21 % 79,138 5,286 6.68 % 78,838 5,564 7.06 %
Total loans 3,709,159 166,280 4.44 % 3,258,354 140,299 4.26 % 2,812,109 143,493 5.06 %
Allowance for credit losses
(56,038) (47,692) (21,239)
Net loans 3,653,121 166,280 4.51 % 3,210,662 140,299 4.33 % 2,790,870 143,493 5.10 %
Total earning assets 5,078,484 186,138 3.64 % 4,285,324 158,158 3.66 % 3,811,385 171,163 4.46 %
Goodwill and other intangible assets 234,667 181,526 173,529
Other assets 359,443 272,439 237,568
Total assets
$ 5,672,594 $ 4,739,289 $ 4,222,482
Interest-bearing deposits:
Savings accounts $ 772,726 $ 112 0.01 % $ 571,676 $ 175 0.03 % $ 511,112 $ 437 0.09 %
Government deposit accounts
529,955 2,035 0.38 % 375,305 2,226 0.59 % 323,768 3,220 0.99 %
Interest-bearing demand accounts
848,526 303 0.04 % 658,214 455 0.07 % 605,637 1,111 0.18 %
Money market accounts 575,237 390 0.07 % 549,276 1,416 0.26 % 425,207 2,745 0.65 %
Retail certificates of deposit 497,181 3,952 0.79 % 473,244 6,748 1.43 % 465,381 8,002 1.72 %
Brokered deposits (f) 150,716 3,130 2.08 % 223,940 2,480 1.11 % 272,553 6,695 2.46 %
Total interest-bearing deposits
3,374,341 9,922 0.29 % 2,851,655 13,500 0.47 % 2,603,658 22,210 0.85 %
Borrowed funds:
Short-term FHLB advances (f) 30,289 475 1.57 % 129,928 2,489 1.92 % 197,987 4,455 2.25 %
Repurchase agreements and other 70,674 66 0.09 % 46,706 82 0.18 % 46,812 257 0.55 %
Total short-term borrowings 100,963 541 0.54 % 176,634 2,571 1.46 % 244,799 4,712 1.92 %
Long-term FHLB advances 94,050 1,413 1.50 % 107,935 1,740 1.61 % 87,472 1,814 2.07 %
Other borrowings 9,364 360 3.79 % 8,757 370 4.23 % 7,368 521 7.07 %
Total long-term borrowings 103,414 1,773 1.71 % 116,692 2,110 1.81 % 94,840 2,335 2.46 %
Total borrowed funds 204,377 2,314 1.13 % 293,326 4,681 1.59 % 339,639 7,047 2.07 %
Total interest-bearing liabilities
3,578,718 12,236 0.34 % 3,144,981 18,181 0.58 % 2,943,297 29,257 0.99 %
Non-interest-bearing deposits 1,347,702 924,799 653,082
Other liabilities 89,541 94,123 59,980
Total liabilities 5,015,961 4,163,903 3,656,359
Stockholders’ equity 656,633 575,386 566,123
Total liabilities and stockholders’ equity $ 5,672,594 $ 4,739,289 $ 4,222,482
Interest rate spread (b) $ 173,902 3.30 % $ 139,977 3.08 % $ 141,906 3.47 %
Net interest margin (b) 3.40 % 3.24 % 3.69 %
(a) Average balances are based on carrying value.
(b) Interest income and yields are presented on a fully tax-equivalent basis, using a blended federal and state corporate income tax rate of 22.3% for 2021, and a statutory federal corporate income tax rate of 21% for 2020 and 2019.
(c) On January 1, 2020, Peoples adopted ASU 2016-13 and adopted the CECL model, recording an adjustment in cost basis of purchased credit deteriorated assets to reflect the addition of $2.6 million to establish the allowance for credit losses; an increase to the allowance for credit losses (which was the "allowance for loan
losses" prior to January 1, 2020) of $5.8 million; the addition of $1.5 million unfunded commitment liability included in accrued expenses and other liabilities; and a cumulative-effect adjustment to reduce retained earnings of $3.7 million, net of statutory corporate federal income tax.
(d) Average balances include nonaccrual, impaired loans, and loans held for sale. 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.
(e) Loans held for sale are included in the average loan balances listed. Related interest income on loans originated for sale prior to the loan being sold is included in loan interest income.
(f) 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.
On September 17, 2021, Peoples acquired Premier, which included $1.1 billion in loans and $1.8 billion in deposits. Additionally, Peoples acquired North Star Leasing on April 1, 2021 and an insurance premium finance division on July 1, 2020. During 2021, Peoples had excess cash which increased short-term investments, due to PPP forgiveness and increased deposit balances.
The following table provides an analysis of the changes in FTE net interest income:
(Dollars in thousands) Changes from 2020 to 2021 Changes from 2019 to 2020
Increase (decrease) in: Rate Volume Total (a)
Rate Volume Total (a)
INTEREST INCOME:
Short-term investments $ (258) $ 228 $ (30) $ (1,163) $ 587 $ (576)
Investment Securities (b):
Taxable (4,274) 5,123 849 (8,997) (53) (9,050)
Nontaxable (1,431) 2,611 1,180 (46) (139) (185)
Total investment income (5,705) 7,734 2,029 (9,043) (192) (9,235)
Loans (b):
Construction (723) 970 247 (925) (200) (1,125)
Commercial real estate, other (2,414) 8,223 5,809 (9,372) 1,297 (8,075)
Commercial and industrial 4,955 (2,092) 2,863 (10,807) 13,654 2,847
Premium finance (358) 3,375 3,017 - 2,855 2,855
Leases - 13,572 13,572 - - -
Residential real estate (3,315) 1,846 (1,469) (416) 900 484
Home equity lines of credit (648) 259 (389) (1,646) (270) (1,916)
Consumer, indirect (1,028) 3,144 2,116 459 1,555 2,014
Consumer, direct (391) 606 215 (298) 20 (278)
Total loan income (3,922) 29,903 25,981 (23,005) 19,811 (3,194)
Total interest income (9,885) 37,865 27,980 (33,211) 20,206 (13,005)
INTEREST EXPENSE:
Deposits:
Savings accounts (112) 49 (63) (309) 47 (262)
Government deposit accounts (934) 743 (191) (1,448) 454 (994)
Interest-bearing demand accounts (260) 108 (152) (745) 89 (656)
Money market accounts (1,090) 64 (1,026) (1,973) 644 (1,329)
Retail certificates of deposit (3,122) 326 (2,796) (1,387) 133 (1,254)
Brokered deposit 1,654 (1,004) 650 (3,182) (1,033) (4,215)
Total deposit cost (3,864) 286 (3,578) (9,044) 334 (8,710)
Borrowed funds:
Short-term borrowings (433) (1,597) (2,030) (1,605) (536) (2,141)
Long-term borrowings (177) (160) (337) (687) 462 (225)
Total borrowed funds cost (610) (1,757) (2,367) (2,292) (74) (2,366)
Total interest expense (4,474) (1,471) (5,945) (11,336) 260 (11,076)
Net interest income $ (5,411) $ 39,336 $ 33,925 $ (21,875) $ 19,946 $ (1,929)
(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 changes in each.
(b)Interest income and yields are presented on a fully tax-equivalent basis, using a blended federal and state corporate income tax rate of 22.3% for 2021 and a statutory federal corporate income tax rate of 21% for 2020 and 2019.
During 2021, net interest income grew 24%, and the increase was primarily driven by the acquired Premier and leasing divisions, coupled with growth in Peoples' core business. Net interest margin improved 16 basis points compared to 2020, as loan yields improved and offset declining investment yields, while controlled funding costs benefited net interest margin. Peoples recorded $15.3 million in PPP income during 2021, which was mostly due to the forgiveness of loans, resulting in accretion of net deferred loan fees and costs, and positively impacted net interest margin by 16 basis points. Accretion income, net of amortization expense, from acquisitions, added $3.2 million to net interest income and 7 basis points to net interest margin.
For 2020, net interest income decreased $1.9 million, or 1% compared to 2019, and net interest margin declined to 3.24%, compared to 3.69% for 2019. Net interest income and net interest margin were negatively impacted by the low interest rate environment during 2020, which also led to a $5.0 million increase in premium amortization on Peoples' investment securities portfolio during 2020, compared to 2019. Peoples recorded $10.7 million in interest income on PPP loans during 2020, which included the impact of accretion of net deferred loan fees and costs, which added 2 basis points to net interest margin. Premium finance loans added $2.9 million of interest income during 2020, and 2 basis points to net interest margin. Funding costs declined to 58 basis points compared to 99 basis points for 2019, which was driven by reductions in interest rates on deposits, coupled with controlled borrowing costs. During 2020, Peoples recognized accretion income, net of amortization expense, from acquisitions of $2.8 million, which added 7 basis points to net interest margin, compared to $4.9 million and 12 basis points in 2019.
Additional interest income in 2021 from prepayment fees and interest recovered on nonaccrual loans was $825,000, compared to $738,000 in 2020 and $564,000 in 2019.
Detailed information regarding changes in the Consolidated Balance Sheets can be found under appropriate captions of the "FINANCIAL CONDITION" section of this discussion. 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 discussion under the caption "Interest Rate Sensitivity and Liquidity."
Provision for Credit Losses
On January 1, 2020, Peoples adopted the provisions of ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", commonly referred to as the CECL model. Prior to the adoption of the CECL methodology, the provision for credit losses was the "provision for loan losses." The following table details Peoples’ provision for credit losses recognized for the years ended December 31:
(Dollars in thousands) 2021 2020 2019
Provision for other credit losses $ 339 $ 25,798 $ 1,845
Provision for checking account overdrafts 392 456 659
Provision for credit losses $ 731 $ 26,254 $ 2,504
As a percent of average total loans 0.02 % 0.81 % 0.09 %
The provision for credit losses represents the amount needed to maintain the appropriate level of the allowance for credit losses based on management’s formal quarterly analysis of the loan portfolio and procedural methodology that estimates the amount of probable credit losses. The CECL methodology utilized by Peoples relies on economic forecasts, as well as other key assumptions including prepayments, probability of default and loss given default. Under the incurred loss model (the accounting methodology prior to 2020), the process for estimating allowance for loan losses considered various factors that affect losses, such as changes in Peoples’ loan quality and historical loss experience. Given the relatively low recent loss history, the incurred loss model was highly dependent on qualitative factors to arrive at an appropriate allowance for loan losses in periods prior to 2020. These qualitative factors included current economic conditions, and other environmental factors such as changes in real estate market conditions and unemployment.
During 2021, Peoples recorded a lower provision for credit losses compared to a sizable provision for credit losses during 2020. 2020 was impacted by the COVID-19 pandemic, which drove a higher provision for credit losses. During 2021 economic factors and loss drivers improved and resulted in a reduction in the allowance for credit losses, resulting in a lower provision for credit losses. The improvement in economic factors and loss drivers for 2021 were partially offset by the provision for credit losses required to establish the allowance for credit losses for acquired non-purchased credit deteriorated loans and leases during 2021.
During 2020, the COVID-19 pandemic caused the economic outlook and assumptions used in the CECL model to be unfavorable, and as a result, caused the need for additional provision for credit losses to be recorded resulting in a higher allowance for credit losses at the end of the year, compared to 2019.
Additional information regarding changes in the allowance for credit losses and loan credit quality can be found later in this discussion under the caption "Allowance for Credit Losses."
Net Gains (Losses) Included in Total Non-Interest Income
Net gains (losses) include gains and losses on investment securities, asset disposals and other transactions, which are recognized in total non-interest income.
The following table details the net gains (losses) for the years ended December 31 recognized by Peoples:
(Dollars in thousands) 2021 2020 2019
Net (loss) gain on investment securities $ (862) $ (368) $ 164
Net gain (loss) on asset disposals and other transactions:
Net loss on other assets $ (460) $ (367) $ (692)
Net gain (loss) on OREO 56 (120) (98)
Net gain on other transactions 897 197 8
Net gain (loss) on asset disposals and other transactions $ 493 $ (290) $ (782)
During 2021, net gains on other transactions were driven by the sale of $59.8 million of predominantly purchased credit deteriorated loans acquired in the Premier Merger ($52.9 million of which were criticized or classified) primarily in the hospitality industry. Peoples recognized a gain of $897,000 related to the discount recorded on those loans when they were acquired from Premier.
The net loss on other assets during 2020 was primarily due to the loss of $145,000 on the sale of a closed branch from the ASB acquisition, and market value write-down of $108,000 related to closed offices that were held for sale. The net gain on other transactions during 2020 was due to receiving $197,000 in funds from a limited partnership investment.
The net loss on other assets during 2019 was driven by net losses on repossessed assets of $320,000, the write-offs of fixed assets acquired from First Prestonsburg of $243,000 and market value write-downs related to closed offices that were held for sale.
Total Non-Interest Income Excluding Net Gains and Losses
Peoples generates total non-interest income excluding net gains and losses from four primary sources: electronic banking income ("e-banking"); trust and investment income; insurance income; and deposit account service charges. Peoples continues to focus on revenue growth from non-interest income sources in order to maintain a diversified revenue stream through greater reliance on total non-interest income excluding net gains and losses. As a result, total non-interest income excluding net gains and losses accounted for 28.6% of Peoples' total revenues (defined as net interest income plus total non-interest income excluding net gains and losses) in 2021, compared to 31.7% in 2020 and 31.5% in 2019.
The decline in Peoples' total non-interest income excluding net gains and losses, as a percent of total revenue during 2021 compared to 2020, was largely due to the Premier Merger and the North Star Leasing acquisition, which caused improved net interest income, resulting in a smaller portion of total revenue being provided by other revenue sources.
E-banking income comprised the largest portion of Peoples' total non-interest income excluding net gains and losses, for 2021. The following table shows Peoples' e-banking income for the years ended December 31:
(Dollars in thousands) 2021 2020 2019
E-banking income $ 18,010 $ 14,246 $ 13,680
Peoples' e-banking services include ATM and debit cards, direct deposit services, Internet and mobile banking, and remote deposit capture, and serve as alternative delivery channels to traditional sales offices for providing services to clients. Revenue is derived largely from ATM and debit cards, as other services are mainly provided at no charge to the customers. The amount of e-banking income is largely dependent on the timing and volume of customer activity. During 2021, e-banking income increased $3.8 million, or 26%, and was driven by the combination of the addition of the Premier acquired accounts, along with increased usage of debit cards. The growth in e-banking income in 2020 of $566,000, or 4%, compared to 2019, was largely due to increased usage of debit cards, coupled with the full year impact of the addition of the First Prestonsburg acquired accounts. In 2021, Peoples' customers used their debit cards to complete $1.4 billion of transactions, versus $1.0 billion in 2020 and $913.7 million in 2019.
Peoples' fiduciary and brokerage revenues continue to be based primarily upon the value of assets under administration and management. The following table details Peoples’ trust and investment income for the years ended December 31:
(Dollars in thousands) 2021 2020 2019
Fiduciary $ 7,930 $ 6,906 $ 6,761
Brokerage 5,966 4,560 4,198
Employee benefit plan fees 2,560 2,196 2,200
Trust and investment income $ 16,456 $ 13,662 $ 13,159
For 2021, trust and investment income grew 20%, as Peoples added new accounts and the underlying market values of assets under administration and management grew, compared to 2020. Peoples also increased its employee benefit plans business during 2021, compared to 2020. During 2020, trust and investment income increased $503,000, or 4%, compared to 2019, while employee benefit plan fees for 2020 were relatively flat compared to 2019.
The following table details Peoples’ assets under administration and management at year-end December 31:
(Dollars in thousands) 2021 2020 2019
Trust $ 2,009,871 $ 1,885,324 $ 1,572,933
Brokerage 1,183,927 1,009,521 944,002
Total $ 3,193,798 $ 2,894,845 $ 2,516,935
Annual average $ 3,053,807 $ 2,510,596 $ 2,382,017
During 2021, Peoples grew assets under administration and management by over 10%, which was partially due to new accounts as well as improved market values, resulting in increased fiduciary and brokerage income compared to 2020. For 2020, Peoples grew assets under management by 15% compared to 2019, as a result of new accounts and higher market values, driving the increase in both fiduciary and brokerage income compared to the prior year. Peoples has had success in recent years in increasing client accounts within its fiduciary and brokerage business, while the market values of existing assets under administration and management have also increased.
The following table details Peoples’ insurance income for the years ended December 31:
(Dollars in thousands) 2021 2020 2019
Property and casualty insurance commissions
$ 11,192 $ 10,240 $ 10,605
Performance-based commissions 2,044 1,457 1,530
Life and health insurance commissions
1,627 1,897 2,065
Other fees and charges 389 448 602
Insurance income $ 15,252 $ 14,042 $ 14,802
Insurance income grew 9% for 2021, compared to 2020. This increase was driven by higher property and casualty insurance commissions, as Peoples added new accounts, and higher performance-based commissions. Insurance income declined 5% during 2020, compared to 2019, and decreased across each category of insurance income. This decline was mostly due to the impact of the COVID-19 pandemic. The majority of performance-based commissions typically is recorded annually in the first quarter and is based on a combination of factors, such as loss experience of insurance policies sold, production volumes and overall financial performance of the individual insurance carriers.
Deposit account service charges are based on the costs associated with services provided by Peoples. The following table details deposit account service charges for the years ended December 31:
(Dollars in thousands) 2021 2020 2019
Overdraft and non-sufficient funds fees $ 5,528 $ 5,073 $ 7,069
Account maintenance fees 3,808 3,573 3,832
Other fees and charges 807 772 799
Deposit account service charges $ 10,143 $ 9,418 $ 11,700
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 these fees to ensure they are reasonable based on operational costs and similar to fees charged in Peoples' markets by competitors. Deposit account service charges were positively impacted during 2021 by the Premier Merger and associated additional accounts, while growth was also experienced within fees on existing accounts, which had previously declined since the beginning of the COVID-19 pandemic. During 2020, deposit account service charges declined 20% as customer habits changed as a result of the COVID-19 pandemic, with customers maintaining higher
balances, coupled with fiscal stimulus funds provided by the government to individuals and proceeds from PPP loans to businesses compared to 2019.
The following table details the other items included within Peoples' total non-interest income for the years ended December 31:
(Dollars in thousands) 2021 2020 2019
Mortgage banking income $ 3,439 $ 6,499 $ 4,328
Bank owned life insurance income 1,767 1,977 2,430
Commercial loan swap fees 543 1,741 2,228
Other non-interest income $ 3,644 $ 2,745 $ 2,565
Mortgage banking income is comprised mostly of net gains from the origination and sale of long-term, fixed-rate real estate loans in the secondary market, as well as servicing income for sold loans. 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. During 2021, mortgage banking declined by 47% and was driven by lower customer demand due to the low rate environment that had been in place since the beginning of 2020. During 2020, mortgage banking income increased by 50% compared to 2019, as the low interest rate environment during the year resulted in heavy refinance activity. In 2021, Peoples sold approximately $57.6 million of loans to the secondary market with servicing retained and sold approximately $37.4 million in loans with servicing released, compared to approximately $111.9 million and $150.9 million, respectively, in 2020. Peoples sold $98.2 million of loans to the secondary market with servicing retained and $55.4 million of loans with servicing released during 2019. The volume of sales has a direct impact on the amount of mortgage banking income.
BOLI income declined 11% during 2021, compared to 2020, and was mostly due to the 2020 recognition of a $109,000 tax-free death benefit that exceeded the cash surrender value of the insurance policies. BOLI income declined $453,000 during 2020, compared to 2019, with the reduction largely driven by the recognition of $482,000 of tax-free death benefits that exceeded the cash surrender value of the insurance policies during 2019. Peoples purchased no additional BOLI policies during 2021, 2020 and 2019.
Commercial loan swap fees are largely dependent on the timing and volume of customer activity. For 2021, commercial loan swap fees declined 69%, as customer demand decreased due to the continued low interest rate environment. The low interest rate environment also resulted in lower commercial loan swap fees during 2020, which were down $487,000 compared to 2019.
Other non-interest income grew during 2021, and was positively impacted by the non-interest income recognized by the leasing division, which contributed $1.3 million of income. Other non-interest income during 2020 and 2019 included additional income related to gains recorded on the sale of restricted Class B Visa stock of $680,000 and $787,000, respectively. There were no similar gains recorded during 2021.
Total Non-Interest Expense
Salaries and employee benefit costs remain Peoples’ largest non-interest expense, accounting for over half of total non-interest expense. The following table details Peoples’ salaries and employee benefit costs for the years ended December 31:
(Dollars in thousands) 2021 2020 2019
Base salaries and wages $ 60,622 $ 52,016 $ 51,835
Sales-based and incentive compensation 16,668 12,200 11,850
Employee benefit costs 11,091 8,510 8,497
Stock-based compensation 3,515 3,607 3,655
Deferred personnel costs (3,695) (4,342) (2,768)
Payroll taxes and other employment costs 6,411 4,370 4,791
Salaries and employee benefit costs $ 94,612 $ 76,361 $ 77,860
Full-time equivalent employees:
Actual at end of the period 1,188 894 900
Average during the period 1,003 894 900
Base salaries and wages increased in 2021 by $8.6 million, or 17%, compared to 2020, and were impacted by the acquisitions of Premier and North Star Leasing. During 2021, Peoples incurred $3.8 million of one-time expenses associated with acquisitions, whereas Peoples incurred $1.1 million in severance expenses in 2020, due primarily to a management restructuring that occurred in the latter half of 2020. Base salaries and wages in 2020 were relatively flat compared to 2019. Base salaries and wages were impacted by merit increases, as well as continued movement towards a $15 per hour minimum wage throughout Peoples' organization. The $15 per hour minimum is being phased in and will largely be implemented by January 1, 2023. Base salaries and wages were also impacted by the addition of employees, primarily as a result of the First Prestonsburg acquisition in 2019.
Sales-based and incentive compensation increased in 2021 compared to 2020, largely due to higher incentive compensation related to the overall company performance measures combined with trust and investment income growth. During 2020, sales-based and incentive compensation increased compared to 2019 due to mortgage banking income growth from an increase in real estate loans sold in the secondary market. Peoples' sales-based and incentive compensation plans are designed to grow core earnings while managing risk, and do not encourage unnecessary and excessive risk-taking that could threaten the value of Peoples. The sales-based and incentive compensation plans reward employees for appropriate behaviors and include provisions addressing inappropriate practices with respect to Peoples and its customers, including clawbacks for executives.
Employee benefit costs increased $2.6 million compared to 2020, and were impacted by the Premier and North Star Leasing acquisitions creating an increase in the number of participants in the insurance plan. During 2020, employee benefit costs were relatively flat compared to 2019.
Stock-based compensation is generally recognized over the vesting period, which generally ranges from immediate vesting to vesting at the end of three years, and an adjustment is made at the vesting date to reverse expense for non-vested awards. The majority of Peoples' stock-based compensation is attributable to annual equity-based incentive awards to employees, which are awarded in the first quarter and based upon Peoples achieving certain performance goals during the prior year. During the years presented in the table above, Peoples granted restricted common shares to officers and key employees with performance-based vesting periods and time-based vesting periods, generally with a three-year cliff vesting. Stock-based compensation was relatively flat for 2021, compared to 2020 and 2019.
Deferred personnel costs represent the portion of current period salaries and employee benefit costs considered to be direct loan origination costs. These costs are capitalized and recognized over the life of the loan as a yield adjustment in interest income. As a result, the amount of deferred personnel costs for each period corresponds directly with the volume of loan originations, coupled with the average deferred costs per loan that are updated annually at the beginning of each year. Deferred personnel costs decreased in 2021 compared to 2020. Materially impacting the comparison was the recognition of $921,000 in deferred personnel costs during 2020 related to the origination of PPP loans. Increased production in residential real estate and indirect consumer loans, coupled with PPP loan originations, resulted in higher deferred personnel costs in 2020 compared to 2019. Additional information regarding Peoples' loan activity can be found later in this discussion under the caption "Loans" within "FINANCIAL CONDITION."
Payroll taxes and other employee costs increased during 2021 as a result of the higher base salaries, sales-based and incentive compensation, and employee benefits. During 2020, $454,000 in dividends were received from Ohio Bureau of Workers' Compensation in an effort to ease the impact of COVID-19 on the state's business community and workforce.
Peoples’ net occupancy and equipment expense for the years ended December 31 was comprised of the following:
(Dollars in thousands) 2021 2020 2019
Depreciation expense $ 6,143 $ 5,955 $ 5,702
Repairs and maintenance costs 3,972 2,988 3,016
Net rent expense 1,723 1,293 1,022
Property taxes, utilities and other costs 3,080 2,572 2,691
Net occupancy and equipment expense $ 14,918 $ 12,808 $ 12,431
Net occupancy and equipment expense grew 16% during 2021, compared to 2020, driven by the recent acquisitions and ongoing costs related to the larger footprint. During 2020, net occupancy and equipment expense increased primarily due to increased depreciation expense and net rent expense. The increase in depreciation expense was due to a full year of depreciation related to the First Prestonsburg acquisition in 2019, while net rent expense increased due to the addition of new leases for the recent insurance acquisition and insurance premium finance acquisition, as well as a full year of rent expense for the First Prestonsburg branches.
The following table details the other items included within Peoples' total non-interest expense for the years ended December 31:
(Dollars in thousands) 2021 2020 2019
Professional fees $ 15,783 $ 6,912 $ 7,095
Data processing and software expense 10,542 7,441 6,332
E-banking expense 8,885 7,777 7,186
Amortization of other intangible assets 4,775 3,223 3,359
Marketing expense 3,658 2,101 2,291
Franchise tax expense 3,357 3,506 3,071
Other loan expenses 2,001 1,584 1,956
FDIC insurance expense 1,976 1,302 602
Communication expense 1,657 1,134 1,181
Other non-interest expense $ 21,573 $ 9,546 $ 13,886
Total non-interest expense during 2021 increased considerably due to acquisition-related expenses, which totaled $21.4 million, and impacted several lines. Additionally, Peoples had increased ongoing expenses associated with the Premier and North Star Leasing acquisition during 2021, and the full year impact of the Premium Finance acquisition completed during 2020.
Data processing and software expense includes software support, maintenance and depreciation expense. During 2021, data processing and software expense grew due to systems and software upgrades, annual contractual increases and overall growth, which included: the implementation of enhanced functionalities for Peoples' core banking system, including making certain mobile banking tools available to customers; software upgrades; and additional network capacity and security features in the latter part of 2020 and first quarter of 2021. The higher expense during 2021 also reflected increases related to the Premier acquisition. The increase in data processing and software expense for 2020 was driven by systems and software upgrades, annual contractual increases and overall growth, which included: the implementation of enhanced functionalities for Peoples' core banking system, including making certain mobile banking tools available to customers; software upgrades; and additional network capacity and security features.
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 2021, as customer usage increased, coupled with the additional accounts acquired from Premier. E-banking expense was up for 2020, compared to 2019, due to an increased usage by customers as a result of the COVID-19 pandemic, which in turn increased the volume of transactions involving debit cards and Peoples' internet and mobile banking service.
Peoples' amortization of other intangible assets is driven by acquisition-related activity. During 2021, amortization of other intangible assets increased as a result of the recent acquisitions of Premier and North Star Leasing and the full year impact of premium finance. Amortization of other intangible assets declined in 2020 due to the reduced amortization from previous acquisitions.
Marketing expense, which includes advertising, donations, marketing campaigns, and other public relations costs, was higher for 2021, compared to 2020, and was mostly due to additional advertising campaigns relating to the addition of the Premier locations. Additionally, Peoples' donations increased during 2021, which included a $500,000 special contribution to the Peoples Bank Foundation, Inc., and donations to each of Marietta College and the Ohio Valley Museum of Discovery. Marketing expense decreased slightly in 2020, compared to 2019, due to declines in electronic and print media, ad agency fees and other public relations expenses.
Peoples is subject to state franchise taxes, which are based largely on Peoples' equity at year-end, in the states where Peoples has a physical presence. Franchise tax expense declined slightly for 2021, and was driven by a change in the calculation for Kentucky, which become income-based instead of an equity-based calculation, and reduced the related tax expense for 2021, compared to 2020. During 2020, franchise tax expense increased compared to 2019, due to higher equity as of December 31, 2019, coupled with additional taxes in Kentucky as a result of the First Prestonsburg acquisition in 2019. 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.
During 2021, other loan expenses increased mostly due to the higher volume of indirect consumer loan originations during 2020 and related recognition of deferred costs, which lowered expense during 2020, and was not duplicated during 2021. Other loan expenses declined during 2020, primarily due to the higher deferral of costs associated with an increase in the origination volume of consumer indirect loans.
FDIC insurance expense increased during 2021, and was partially due to credits used by Peoples during the first two quarters of 2020 to offset its FDIC insurance premium, coupled with a lower leverage ratio during early 2020, which negatively impacted insurance expense for 2021. Peoples recorded higher FDIC insurance expense during 2020 compared to the prior year, as credits were received and recognized during 2019, and were fully utilized during the second quarter of 2020. The FDIC quarterly assessment rate is applied to average total assets less average tangible equity, and is based on the leverage ratio, net income before taxes, nonperforming loans as a percent of total assets, OREO, loan mix and asset growth. Additional information regarding Peoples' FDIC insurance assessments may be found in "ITEM 1 BUSINESS" of this Form 10-K in the section captioned "Supervision and Regulation."
Communication expense increased 46% during 2021, compared to 2020, and grew as a result of the upgrading of the network to certain branches (including new branches acquired from Premier coupled with the addition of the NSL location and the full year impact of the location of Premium Finance that was acquired) and increased costs compared to the prior periods among certain vendors that provide communication services. Communication expense was relatively flat for 2020 compared to 2019.
Other non-interest expense increased $12.0 million in 2021 compared to 2020, and decreased $4.3 million in 2020 compared to 2019. Other non-interest expense increased considerably during 2021, and was primarily related to acquisition-related expenses recognized.
Income Tax Expense
A key driver for the amount of income tax expense or benefit recognized by Peoples each year is the amount of pre-tax income. In addition to the expense recognized, Peoples receives tax benefits from tax-exempt investments and loans, BOLI, stock awards that settled or vested during the year, and investments in tax credit funds, which reduce Peoples' effective tax rate. A reconciliation of
Peoples' recorded income tax expense/benefit and effective tax rate to the statutory tax rate can be found in "Note 13 Income Taxes" of the Notes to the Consolidated Financial Statements.
For the full year of 2021, income tax expense totaled $9.4 million, compared to $7.9 million in 2020, and $11.7 million in 2019, and the effective tax rate for 2021 was 16.5%, compared to 18.5% for 2020, and 17.8% for 2019. Income tax expense increased during 2021, and was due to higher pre-tax income, which benefited from the recent acquisitions and reduced provision for credit losses. The decrease in income tax expense in 2020 compared to 2019 was the result of lower pre-tax income in 2020 related to the increase in the provision for credit losses recorded during 2020.
For 2021, the effective tax rate was down 2% compared to 2020. Income tax expense for 2021 was impacted by an income tax benefit related to an adjustment from the prior period of $1.1 million. During 2020, income tax expense and the effective tax rate were positively impacted by tax-exempt interest income, non-taxable BOLI income and the full-year impact of the investment in Peoples Risk Management, Inc., which reduced income tax expense by $412,000. Income tax expense for 2020 was also impacted by additional income tax expense related to an adjustment from the prior year of $863,000.
Peoples also recorded a tax expense of $74,000 in 2021, and tax benefits of $5,000 in 2020, and $195,000 in 2019 related to stock awards that settled or vested during the year, with the substantial majority recorded in the first quarter of each year.
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. PPNR excludes income tax 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 credit losses and all gains and losses included in earnings.
The following table provides a reconciliation of this non-US GAAP financial measure to the amounts of income before income taxes reported in Peoples' Consolidated Financial Statements for the periods presented:
(Dollars in thousands) 2021 2020 2019
Income before income taxes $ 56,970 $ 42,646 $ 65,358
Add: provision for credit losses (a) 731 26,254 2,504
Add: net loss on OREO - 120 98
Add: net loss on investment securities 862 368 -
Add: net loss on other assets 252 170 692
Less: net gain on OREO 56 - -
Less: net gain on investment securities - - 164
Less: net gain on other assets - - 8
Less: net gain on other transactions 897 - -
Pre-provision net revenue $ 57,862 $ 69,558 $ 68,480
Total average assets $ 5,672,594 $ 4,739,289 $ 4,222,482
Pre-provision net revenue to total average assets 1.02 % 1.47 % 1.62 %
Weighted-average common shares outstanding - diluted 21,959,883 19,843,806 20,273,725
Pre-provision net revenue per common share - diluted $ 2.63 $ 3.49 $ 3.37
(a)On January 1, 2020, Peoples adopted ASU 2016-13 and implemented the CECL model. Prior to the adoption of CECL, the provision for credit losses was the "provision for loan losses." The provision for credit losses includes changes related to the allowance for credit losses on loans, which includes held-to-maturity investment securities and the unfunded commitment liability.
During 2021, PPNR declined, and was heavily impacted by the $21.4 million in acquisition-related expenses, which more than offset the positive impact of higher total revenue compared to 2020. PPNR increased in 2020 mostly due to the reduction in acquisition-related expenses incurred during 2020, compared to 2019, offset by a decrease in net interest income due to the low interest rate environment.
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 financial measure since it excludes the impact of all acquisition-related expenses, contract negotiation expenses, pension settlement charges, severance expenses, COVID-19-related expenses and a Peoples Bank Foundation, Inc. contribution.
The following tables provide reconciliations of these non-US GAAP financial measures to the amounts of total non-interest expense reported in Peoples' Consolidated Financial Statements for the periods presented:
(Dollars in thousands) 2021 2020 2019
Core non-interest expense:
Total non-interest expense $ 183,737 $ 133,695 $ 137,250
Less: COVID-19-related expenses 1,248 1,332 -
Less: severance expenses 79 1,055 270
Less: pension settlement charges 143 1,054 -
Less: acquisition-related expenses 21,423 489 7,287
Less: Peoples Bank Foundation, Inc. contribution 500 - -
Less: contract negotiation expenses 1,248 - -
Core non-interest expense $ 159,096 $ 129,765 $ 129,693
The increase in core non-interest expense for 2021, compared to 2020, was driven by higher ongoing costs associated with recent acquisitions. This includes the impact of the Premier acquisition since September 17, 2021, North Star Leasing since April 1, 2021, and the full year impact of the Premium Finance acquisition that was completed on July 1, 2020.
Efficiency Ratio (non-US GAAP)
The efficiency ratio is a key financial measure used to monitor performance. The efficiency ratio is calculated as total non-interest expense (less amortization of other intangible assets) as a percentage of FTE net interest income plus total non-interest income excluding net gains and losses. This financial measure is non-US GAAP since it excludes amortization of other intangible assets and all gains and/or losses included in earnings, and uses FTE net interest income.
The following table provides a reconciliation of this non-US GAAP financial measure to the amounts of total non-interest income and total non-interest expense reported in Peoples' Consolidated Financial Statements for the periods presented:
(Dollars in thousands) 2021 2020 2019
Efficiency ratio:
Total non-interest expense $ 183,737 $ 133,695 $ 137,250
Less: amortization of other intangible assets 4,775 3,223 3,359
Adjusted total non-interest expense 178,962 130,472 133,891
Total non-interest income 68,885 63,672 64,274
Less: net (loss) gain on investment securities (862) (368) 164
Less: net gain (loss) on asset disposals and other transactions 493 (290) (782)
Total non-interest income excluding net gains and losses 69,254 64,330 64,892
Net interest income 172,553 138,923 140,838
Add: fully-tax-equivalent adjustment (a) 1,349 1,054 1,068
Net interest income on a fully-tax equivalent basis 173,902 139,977 141,906
Adjusted revenue $ 243,156 $ 204,307 $ 206,798
Efficiency ratio 73.60 % 63.86 % 64.74 %
Efficiency ratio adjusted for non-core items:
Core non-interest expense $ 159,096 $ 129,765 $ 129,693
Less: amortization of other intangible assets 4,775 3,223 3,359
Adjusted core non-interest expense 154,321 126,542 126,334
Core non-interest income excluding net gains and losses 69,254 64,330 64,892
Net interest income on a fully-tax-equivalent basis 173,902 139,977 141,906
Adjusted core revenue $ 243,156 $ 204,307 $ 206,798
Efficiency ratio adjusted for non-core items 63.47 % 61.94 % 61.09 %
(a)Based on 21% statutory federal corporate income tax rate for 2021, 2020 and 2019.
The efficiency ratio increased during 2021, and was largely due to the acquisition-related expenses. The efficiency ratio, when adjusted for non-core items, increased compared to 2020, and was driven by the higher non-interest expense, coupled with the continued low interest rate environment and related impact to net interest income. The efficiency ratio for 2020 improved due to a decrease in non-interest expense. The higher efficiency ratio adjusted for non-core items for 2020, compared to 2019, was driven by lower revenue, while adjusted core non-interest expense was relatively flat.
Managing expenses has been a major focus over recent years; however, during this time Peoples has continued to make meaningful investments in its infrastructure and systems. Peoples was also negatively impacted during 2021 and 2020 by the low interest rate environment and the related reduction to net interest income.
Return on Average Assets Adjusted for Non-Core Items (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 ratio adjusted for non-core items 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, severance expenses, COVID-19-related expenses, Peoples Bank Foundation, Inc. and contract negotiation non-recurring expenses in earnings.
The following table provides a reconciliation of this non-US GAAP financial measure to the amount of net income reported in Peoples' Consolidated Financial Statements for the periods presented:
(Dollars in thousands) 2021 2020 2019
Net income adjusted for non-core items:
Net income $ 47,555 $ 34,767 $ 53,695
Add: net loss on investment securities
862 368 -
Less: tax effect of net loss on investment securities (a)
181 77 -
Less: net gain on investment securities
- - 164
Add: tax effect of net gain on investment securities (a)
- - 34
Add: net loss on asset disposals and other transactions
- 290 782
Less: tax effect of net loss on asset disposals and other transactions (a)
- 61 164
Less: net gain on asset disposals and other transactions (a) 493 - -
Add: tax effect of net loss on asset disposals and other transactions (a) 104 - -
Add: acquisition-related expenses
21,423 1,459 7,530
Less: tax effect of acquisition-related expenses (a)
4,499 306 1,581
Add: severance expenses 79 1,055 270
Less: tax effect of severance expenses (a) 17 222 57
Add: pension settlement charges
143 1,054 -
Less: tax effect of pension settlement charges (a)
30 221 -
Add: COVID-19-related expenses 1,248 1,332 -
Less: tax effect of COVID-19-related expenses (a) 262 280 -
Add: Peoples Bank Foundation, Inc. contribution 500 - -
Less: tax effect of Peoples Bank Foundation, Inc. contribution 105 - -
Add: contract negotiation expenses 1,248 - -
Less: tax effect of contract negotiation expenses 262 - -
Net income adjusted for non-core items (after tax) $ 67,313 $ 39,158 $ 60,345
Return on average assets:
Net income $ 47,555 $ 34,767 $ 53,695
Total average assets 5,672,594 4,739,289 4,222,482
Return on average assets 0.84 % 0.73 % 1.27 %
Return on average assets adjusted for non-core items:
Net income adjusted for non-core items
$ 67,313 $ 39,158 $ 60,345
Total average assets
5,672,594 4,739,289 4,222,482
Return on average assets adjusted for non-core items
1.19 % 0.83 % 1.43 %
(a) Based on a 21% statutory federal corporate income tax rate for 2021, 2020 and 2019.
The return on average assets and return on average assets adjusted for non-core items, both increased compared to 2020, as Peoples recorded a lower provision for credit losses during 2021 compared to 2020, while net income improved due to recent acquisitions and core growth. The decreases in return on average assets and return on average assets, adjusted for non-core items for 2020 compared to 2019, were driven by a reduction in income due to the implementation of CECL, which was impacted by the COVID-19 pandemic.
Return on Average Tangible Equity (non-US GAAP)
The return on average tangible equity ratio is a key financial measure used to monitor performance. The return on tangible equity is calculated as net income (less after-tax impact of amortization of other intangible assets) divided by tangible equity. This measure is non-US GAAP since it excludes amortization of other intangible assets from earnings and the impact of goodwill and other intangible assets acquired through acquisitions on total stockholders' equity.
(Dollars in thousands) 2021 2020 2019
Net income excluding amortization of other intangible assets:
Net income $ 47,555 $ 34,767 $ 53,695
Add: amortization of other intangible assets 4,775 3,223 3,359
Less: tax effect of amortization of other intangible assets (a) 1,003 677 705
Net income excluding amortization of other intangible assets 51,327 37,313 56,349
Average tangible equity:
Total average stockholders' equity $ 656,633 $ 575,386 $ 566,123
Less: average goodwill and other intangible assets 234,667 181,526 173,529
Average tangible equity $ 421,966 $ 393,860 $ 392,594
Return on average stockholders' equity ratio:
Net income $ 47,555 $ 34,767 $ 53,695
Average stockholders' equity $ 656,633 $ 575,386 $ 566,123
Return on average stockholders' equity 7.24 % 6.04 % 9.48 %
Return on average tangible equity ratio:
Net income excluding amortization of other intangible assets $ 51,327 $ 37,313 $ 56,349
Average tangible equity $ 421,966 $ 393,860 $ 392,594
Return on average tangible equity 12.16 % 9.47 % 14.35 %
(a) Based on a 21% statutory federal corporate income tax rate for 2021, 2020 and 2019.
Return on average stockholders' equity and return on average tangible equity both improved compared to 2020, and were driven by the recent acquisitions, core growth and reduced provision for credit losses. The decrease in return on average tangible equity for 2020, compared to 2019, was driven by a reduction in net income due to the implementation of CECL, which was negatively impacted by the COVID-19 pandemic.
FINANCIAL CONDITION
Cash and Cash Equivalents
Peoples considers cash and cash equivalents to consist of federal funds sold, cash and balances due from banks, interest-bearing balances in other institutions and other short-term investments that are readily liquid. The amount of cash and cash equivalents fluctuates on a daily basis due to customer activity and Peoples' liquidity needs. At December 31, 2021, excess cash reserves at the FRB of Cleveland were $318.1 million, compared to $25.1 million at December 31, 2020. Peoples also acquired $248.4 million in cash and cash equivalents from Premier. The amount of excess cash reserves maintained is dependent upon Peoples' daily liquidity position, which is driven primarily by changes in deposit and loan balances, coupled with increased liquidity needs due to the COVID-19 pandemic.
In 2021, Peoples' total cash and cash equivalents increased $263.6 million, as cash provided by operating activities and financing activities of $156.4 million and $181.6 million, respectively, were partially offset by cash used in investing activities of $74.4 million. Peoples' investing activities reflected a net decrease of $113.5 million in loans and $852.5 million in purchases of available-for-sale investment securities, which were primarily offset by $849.1 million in net proceeds from sales, principal payments, calls and prepayments on available-for-sale and held-to-maturity investment securities. Financing activities included a $200.8 million net increase in deposits and increase of $14.4 million in short-term borrowings, as well as $31.0 million of cash dividends paid.
In 2020, Peoples' total cash and cash equivalents increased $36.9 million, as cash provided by operating activities and financing activities of $85.5 million and $345.3 million, respectively, were partially offset by cash used in investing activities of $393.9 million.
Peoples' investing activities reflected a net increase of $444.1 million in loans and $261.4 million in purchases of available-for-sale investment securities, which were partially offset by $444.6 million in net proceeds from sales, principal payments, calls and prepayments on available-for-sale and held-to-maturity investment securities. Financing activities included a $618.9 million net increase in deposits and $50.0 million of proceeds from long-term borrowings, offset partially by a decrease of $263.7 million in short-term borrowings, as well as the purchase of $29.3 million of treasury stock under the share repurchase program and $27.1 million of cash dividends paid.
Further information regarding the management of Peoples' liquidity position can be found later in this discussion under "Interest Rate Sensitivity and Liquidity."
Investment Securities
The following table provides information regarding Peoples’ investment portfolio at December 31:
(Dollars in thousands) Weighted average yield 2021 2020 2019
Available-for-sale securities, at fair value:
Obligations of:
U.S. Treasury and government agencies 1.05 % $ 35,604 $ - $ -
U.S. government sponsored agencies 0.07 % 81,739 5,363 8,209
States and political subdivisions 2.23 % 259,319 114,919 114,104
Residential mortgage-backed securities 1.58 % 828,517 623,218 791,009
Commercial mortgage-backed securities 1.37 % 63,519 4,783 18,088
Bank-issued trust preferred securities 3.00 % 6,795 4,730 4,691
Total fair value $ 1,275,493 $ 753,013 $ 936,101
Total amortized cost $ 1,283,146 $ 734,544 $ 929,395
Net unrealized (loss) gain $ (7,653) $ 18,469 $ 6,706
Held-to-maturity securities, at amortized cost:
Obligations of:
U.S. government sponsored agencies 2.03 % $ 36,431 $ - $ -
States and political subdivisions (a) 2.23 % $ 151,402 $ 35,139 $ 4,346
Residential mortgage-backed securities 1.90 % 110,708 25,890 21,494
Commercial mortgage-backed securities 1.80 % 75,588 5,429 5,907
Total amortized cost $ 374,129 $ 66,458 $ 31,747
Other investment securities $ 33,987 $ 37,560 $ 42,730
Total investment securities:
Amortized cost $ 1,691,262 $ 838,562 $ 1,003,872
Carrying value $ 1,683,609 $ 857,031 $ 1,010,578
(a)Amortized cost is presented net of the allowance for credit losses of $286 at December 31, 2021 and $60 at December 31, 2020.
At December 31, 2021, Peoples' investment securities represented approximately 23.8% of total assets, compared to 18.0% at December 31, 2020. During 2021, Peoples acquired, in the Premier acquisition, investment securities totaling $552.0 million and subsequently sold $395.2 million of available-for-sale securities. The increase in investment securities compared to 2020 also reflected Peoples' continued reinvestment of proceeds from available-for-sale investment securities and the investment of excess cash in higher-yielding investment securities. During 2021, Peoples acquired from Premier, and made investments into, tax-exempt securities, which are included in obligations of state and political subdivisions. The investments into these securities were made in an effort to reduce exposure to amortizing investment securities, while also maintaining an appropriate level of risk-adjusted yield.
During 2020, Peoples sold $82.6 million of available-for-sale securities and reinvested the majority of the proceeds in held-to-maturity investment securities to minimize the volatility in the securities portfolio, should interest rates begin to rise.
Peoples designates certain securities as "held-to-maturity" at the time of their purchase if management determines Peoples would have the intent and ability to hold the purchased securities until maturity. The unrealized gain or loss related to held-to-maturity investment securities does not directly impact total stockholders' equity, in contrast to the impact from the available-for-sale investment securities portfolio.
Additional information regarding Peoples' investment portfolio can be found in "Note 3 Investment Securities" of the Notes to the Consolidated Financial Statements.
Loans
The following table provides information regarding outstanding loan balances at or for the year ended December 31:
(Dollars in thousands) 2021 2020 2019
Originated loans:
Construction $ 137,437 $ 103,169 $ 83,283
Commercial real estate, other 861,610 780,324 671,576
Commercial real estate 999,047 883,493 754,859
Commercial and industrial 779,064 943,024 622,175
Premium finance 136,121 100,571 -
Leases 69,169 - -
Residential real estate 350,595 281,623 314,935
Home equity lines of credit 104,176 93,296 93,013
Consumer, indirect 530,532 503,526 417,127
Consumer, direct 81,330 75,591 70,852
Consumer 611,862 579,117 487,979
Deposit account overdrafts 756 351 878
Total originated loans $ 3,050,790 $ 2,881,475 $ 2,273,839
Acquired loans:
Construction $ 72,795 $ 3,623 $ 5,235
Commercial real estate, other 688,471 149,529 161,662
Commercial real estate 761,266 153,152 166,897
Commercial and industrial 112,328 30,621 40,818
Premium finance 15 14,187 -
Leases 53,339 - -
Residential real estate 421,123 292,384 346,541
Home equity lines of credit 59,417 27,617 39,691
Consumer, indirect - 1 58
Consumer, direct 23,322 3,503 5,681
Consumer 23,322 3,504 5,739
Total acquired loans (a) $ 1,430,810 $ 521,465 $ 599,686
Total loans $ 4,481,600 $ 3,402,940 $ 2,873,525
Average total loans 3,709,159 3,258,354 2,812,109
Average allowance for credit losses (56,038) (47,692) (21,239)
Average loans, net of average allowance for credit losses $ 3,653,121 $ 3,210,662 $ 2,790,870
(Dollars in thousands) 2021 2020 2019
Percent of loans to total loans:
Construction 4.7 % 3.1 % 3.1 %
Commercial real estate, other 34.7 % 27.3 % 29.0 %
Commercial real estate 39.4 % 30.4 % 32.1 %
Commercial and industrial 19.9 % 28.6 % 23.1 %
Premium finance 3.0 % 3.4 % - %
Leases 2.7 % - % - %
Residential real estate 17.2 % 16.9 % 23.0 %
Home equity lines of credit 3.7 % 3.6 % 4.6 %
Consumer, indirect 11.8 % 14.8 % 14.5 %
Consumer, direct 2.3 % 2.3 % 2.7 %
Consumer 14.1 % 17.1 % 17.2 %
Deposit account overdrafts (b) NM NM NM
Total percentage 100.0 % 100.0 % 100.0 %
Residential real estate loans being serviced for others $ 430,597 $ 485,972 $ 496,802
(a)Includes all loans acquired, and related loan discount recorded as part of acquisition accounting, in 2012 and thereafter. Loans that were acquired and subsequently re-underwritten are reported as originated upon execution of such credit actions (for example, renewals, and increase in lines of credit).
(b)NM=not meaningful.
As of December 31, 2021, total loans increased 32%, compared to December 31, 2020, which was driven by the Premier and North Star Leasing acquisitions, coupled with core growth. The Premier acquisition added $1.1 billion in loans at December 31, 2021, which were comprised of $96.1 million in construction; $534.9 million in commercial real estate, other; $132.1 million in commercial and industrial; $331.1 million in residential real estate; $45.9 million in home equity lines of credit; and $21.6 million of consumer, direct loan balances. During 2021, the outstanding balance of SBA PPP loans declined $279.8 million, from $366.9 million at December 31, 2020, to $87.1 million at December 31, 2021, which was mainly due to forgiveness proceeds received from the SBA.
During 2020, total loans grew 18%, or $529.4 million. The growth compared to December 31, 2019 was mostly driven by PPP loans added during 2020, which are included in commercial and industrial loan balances, and the new loans being originated through the acquired premium finance sector. At December 31, 2020, PPP loan balances totaled $366.9 million, while the premium finance loans totaled $114.8 million. Consumer indirect loans also contributed to the growth during 2020, and were up $86.3 million, or 21%.
The following table details the maturities of Peoples' loan portfolio at December 31, 2021:
(Dollars in thousands) Due in One Year or Less Due in One to Five Years Due in Five to Fifteen Years Due After Fifteen Years Total % of Total
Construction:
Fixed $ 6,503 $ 15,680 $ 9,839 $ 13 $ 32,035 15.2 %
Variable 36,976 90,558 31,254 19,409 178,197 84.8 %
Total 43,479 106,238 41,093 19,422 210,232 100.0 %
Commercial real estate, other:
Fixed 42,107 151,471 215,692 9,183 418,453 27.0 %
Variable 91,549 238,760 485,195 316,124 1,131,628 73.0 %
Total 133,656 390,231 700,887 325,307 1,550,081 100.0 %
Commercial and industrial:
Fixed 104,468 160,955 44,023 214 309,660 34.7 %
Variable 167,851 132,487 266,573 14,821 581,732 65.3 %
Total 272,319 293,442 310,596 15,035 891,392 100.0 %
Premium finance:
Fixed 136,136 - - - 136,136 100.0 %
Leases:
Fixed 122,508 - - - 122,508 100.0 %
Residential real estate:
Fixed 72,874 14,169 174,673 217,831 479,547 62.1 %
Variable 11,655 7,158 93,301 180,057 292,171 37.9 %
Total 84,529 21,327 267,974 397,888 771,718 100.0 %
Home equity lines of credit:
Fixed 5 458 1,019 872 2,354 1.4 %
Variable 1,493 34,292 103,086 22,368 161,239 98.6 %
Total 1,498 34,750 104,105 23,240 163,593 100.0 %
Consumer, indirect:
Fixed 4,070 239,873 286,589 - 530,532 100.0 %
Consumer, direct:
Fixed 3,671 59,469 34,948 291 98,379 94.0 %
Variable 555 2,246 2,945 527 6,273 6.0 %
Total 4,226 61,715 37,893 818 104,652 100.0 %
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, continue to comprise the largest portion of Peoples' loan portfolio.
The following table provides information regarding the largest concentrations of commercial real estate loans within the loan portfolio at December 31, 2021:
(Dollars in thousands) Outstanding Balance Available Loan Commitments Total Exposure % of Total
Construction:
Apartment complexes $ 69,717 $ 121,583 $ 191,300 44.1 %
Mixed-use facilities 29,419 34,168 63,587 14.7 %
Assisted living facilities and nursing homes 19,183 25,960 45,143 10.4 %
Office buildings and complexes 7,161 14,438 21,599 5.0 %
Residential property 8,545 11,658 20,203 4.7 %
Lodging and lodging related 12,447 1,635 14,082 3.2 %
Retail 9,132 2,747 11,879 2.7 %
Other (a) 54,628 11,554 65,943 15.2 %
Construction $ 210,232 $ 223,743 $ 433,736 100.0 %
Commercial real estate, other:
Retail facilities:
Owner occupied 55,513 1,965 57,478 3.6 %
Non-owner occupied 134,230 1,736 135,966 8.5 %
Total retail 189,743 3,701 193,444 12.1 %
Office buildings and complexes:
Owner occupied 77,603 3,492 81,095 5.1 %
Non-owner occupied 94,634 4,822 99,456 6.2 %
Total office buildings and complexes 172,237 8,314 180,551 11.3 %
Light industrial facilities:
Owner occupied 91,329 1,891 93,220 5.8 %
Non-owner occupied 38,666 633 39,299 2.5 %
Total light industrial facilities 129,995 2,524 132,519 8.3 %
Mixed commercial use facilities:
Owner occupied 53,673 424 54,097 3.4 %
Non-owner occupied 58,716 4,000 62,716 3.9 %
Total mixed commercial use facilities 112,389 4,424 116,813 7.3 %
Lodging and lodging related:
Owner occupied 13,941 - 13,941 0.9 %
Non-owner occupied 85,713 150 85,863 5.4 %
Total lodging and lodging related 99,654 150 99,804 6.3 %
Apartment complexes 93,246 3,508 96,754 6.1 %
Warehouse facilities:
Owner occupied 40,271 2,790 43,061 2.7 %
Non-owner occupied 40,176 74 40,250 2.5 %
Total warehouse facilities 80,447 2,864 83,311 5.2 %
(Dollars in thousands) Outstanding Balance Available Loan Commitments Total Exposure % of Total
Assisted living facilities and nursing homes $ 81,349 $ 750 $ 82,099 5.1 %
Education services:
Owner occupied 16,896 98 16,994 1.1 %
Non-owner occupied 22,508 4,000 26,508 1.7 %
Total education services 39,404 4,098 43,502 2.8 %
Restaurant/bar facilities:
Owner occupied 24,482 50 24,532 1.5 %
Non-owner occupied 12,908 253 13,161 0.8 %
Total restaurant/bar facilities 37,390 303 37,693 2.3 %
Healthcare:
Owner occupied 26,085 422 26,507 1.7 %
Non-owner occupied 11,482 - 11,482 0.7 %
Total healthcare facilities 37,567 422 37,989 2.4 %
Agriculture 30,792 1,536 32,328 2.0 %
Other (a) 445,868 15,446 461,314 28.8 %
Commercial real estate, other $ 1,550,081 $ 48,040 $ 1,598,121 100.0 %
(a)All other outstanding balances are less than 2% of the total loan portfolio.
Peoples' commercial lending activities continue to focus on lending opportunities inside its primary and secondary market areas within Ohio, Kentucky, West Virginia, Virginia, Washington, D.C. and Maryland. In all other states, the aggregate outstanding balances of commercial loans in each state were less than 4% of total loans at either December 31, 2021 or December 31, 2020.
Additional information regarding Peoples' loan portfolio can be found in "Note 4 Loans and Leases" of the Notes to the Consolidated Financial Statements.
COVID-19 Loan Impacts
Small Business Administration Paycheck Protection Program
In March 2020, the CARES Act created a new loan guarantee program called the PPP targeted to provide small businesses with support to cover payroll and certain other 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 are not be held liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness. The PPP expired on May 31, 2021 and no new originations will be made under the program; however, forgiveness proceeds will continue to be received until the loans are paid in full.
Peoples is a PPP participating lender, and the PPP loans originated (including $23.4 million acquired in the merger with Premier) are included in commercial and industrial loans. Peoples also recorded deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, which will be amortized over the life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income. The following tables detail Peoples' PPP loans and related income at December 31:
(Dollars in millions) 2021 2020
PPP aggregate outstanding principal balances $ 89.3 $ 374.8
PPP net deferred loan origination fees 2.2 7.9
Amortization of net deferred loan origination fees 13.0 7.5
Allowance for Credit Losses
On January 1, 2020, Peoples adopted the provisions of ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", commonly referred to as the CECL model. Prior to the adoption of the CECL model, the allowance for credit losses was the "allowance for loan losses." The amount of the allowance for credit losses at the end of each period represents management's estimate of expected credit losses from existing loans based upon its formal quarterly analysis of the loan portfolio described in the "Critical Accounting Policies" section of this discussion. While this process involves allocations being made to specific loans and pools of loans, the entire allowance is available for all losses incurred within the loan portfolio.
The following details management's allocation of the allowance for credit losses at December 31:
(Dollars in thousands) 2021 2020 2019
Commercial real estate $ 32,146 $ 19,423 $ 7,333
Commercial and industrial 11,063 12,763 8,432
Total commercial 43,209 32,186 15,765
Premium finance 379 1,095 -
Leases 4,797 - -
Residential real estate 7,233 6,044 1,191
Home equity lines of credit 2,005 1,860 546
Consumer, indirect 5,326 8,030 2,937
Consumer, direct 961 1,081 294
Consumer 6,287 9,111 3,231
Deposit account overdrafts 57 63 94
Originated allowance for credit losses 63,967 50,359 20,827
Acquired allowance for credit losses (a) - - 729
Allowance for credit losses (b) $ 63,967 $ 50,359 $ 21,556
As a percent of total loans 1.43 % 1.48 % 0.75 %
(a)Beginning on January 1, 2020, the amounts previously included in "acquired allowance for credit losses" were included in the "originated allowance for credit losses" under the CECL model.
(b)Beginning on January 1, 2020, Peoples calculated the allowance for credit losses using the CECL model, while 2019 used the incurred loss model.
During 2021, the allowance for credit losses grew 27%, which was largely due to the Premier and North Star Leasing acquisitions, and the related need to establish an allowance for credit losses on those portfolios, coupled with organic growth in loan balances during 2021. The North Star Leasing acquisition added $3.3 million to the allowance for credit losses at the acquisition date, of which $493,000 was established for purchased credit deteriorated loans as part of the acquisition accounting, and the remainder was established through the recording of a provision for credit losses. The Premier acquisition added $28.6 million to the allowance for credit losses during the third quarter of 2021, of which $16.9 million was established for purchased credit deteriorated loans as part of the acquisition accounting, and the remainder was established using provision for credit losses. Also during 2021, economic factors and loss drivers improved compared to 2020, and had a positive impact on the CECL model. The allowance for credit losses as a percent of total loans increased slightly during 2021, compared to 2020.
The allowance for credit losses as a percent of total loans was relatively stable at December 31, 2021 compared to December 31, 2020, and was mostly due to the composition of Peoples' loan and lease portfolio. The increase in the allowance for credit losses as a percent of total loans grew at December 31, 2020 compared to December 31, 2019, as a result of the implementation of the CECL model, along with the impact of the COVID-19 pandemic on economic forecasts.
Peoples implemented ASU 2016-13 on January 1, 2020, which resulted in an increase of $5.8 million in the allowance for credit losses. The remaining significant increase in the allowance for credit losses at December 31, 2020 compared to December 31, 2019 was mostly due to the recent COVID-19 pandemic, and the resulting impact on economic forecasts utilized in the CECL model. Peoples calculates its allowance for credit losses using a discounted cash flow model, and incorporates economic forecasts.
Additional information regarding Peoples' allowance for credit losses can be found in "Note 1 Summary of Significant Accounting Policies" and "Note 4 Loans and Leases" of the Notes to the Consolidated Financial Statements.
The following table summarizes the changes in the allowance for credit losses for the years ended December 31:
(Dollars in thousands) 2021 2020 2019
Allowance for credit losses, January 1 $ 50,359 $ 25,868 $ 20,195
Gross charge-offs:
Commercial real estate (a) 387 528 156
Commercial and industrial 1,057 1,565 1,062
Premium finance 45 3 -
Leases 1,434 - -
Residential real estate 385 353 312
Home equity lines of credit 197 103 55
Consumer, indirect 1,756 1,923 1,829
Consumer, direct 152 187 211
Consumer 1,908 2,110 2,040
Deposit account overdrafts 575 673 851
Total gross charge-offs 5,988 5,335 4,476
Recoveries:
Commercial real estate 204 200 151
Commercial and industrial 26 2,521 2,415
Premium finance - - -
Leases 339 - -
Residential real estate 143 302 229
Home equity lines of credit 41 12 11
Consumer, indirect 253 302 270
Consumer, direct 112 49 52
Consumer 365 351 322
Deposit account overdrafts 177 186 205
Total recoveries 1,295 3,572 3,333
Net charge-offs (recoveries):
Commercial real estate 183 328 5
Commercial and industrial 1,031 (956) (1,353)
Premium finance 45 3 -
Leases 1,095 - -
Residential real estate 242 51 83
Home equity lines of credit 156 91 44
Consumer, indirect 1,503 1,621 1,559
Consumer, direct 40 138 159
Consumer 1,543 1,759 1,718
Deposit account overdrafts 398 487 646
Total net charge-offs $ 4,693 $ 1,763 $ 1,143
Provision for credit losses, December 31 (b)(c)(d) 731 26,254 2,504
Initial allowance for purchased credit deteriorated assets $ 17,570 $ - $ -
Allowance for credit losses, December 31 (e) $ 63,967 $ 50,359 $ 21,556
Net charge-offs (recoveries) as a percent of average total loans:
Commercial real estate - % 0.01 % - %
Commercial and industrial 0.03 % (0.03) % (0.05) %
Premium finance - % - % - %
Leases 0.03 % - % - %
Residential real estate 0.01 % - % - %
Home equity lines of credit - % - % - %
Consumer, indirect 0.05 % 0.05 % 0.06 %
Consumer, direct - % - % 0.01 %
Consumer 0.05 % 0.05 % 0.07 %
Deposit account overdrafts 0.01 % 0.02 % 0.02 %
Total 0.13 % 0.05 % 0.04 %
(a)Includes nonimpaired loan charge-offs of $2 in 2019.
(b)Includes purchased credit impaired loan provision for credit losses of $19 in 2019.
(c)Includes nonimpaired loan provision for credit losses of $215 in 2019.
(d)Amount does not include the provision for unfunded commitment liability.
(e)Beginning on January 1, 2020, the amounts previously included in "acquired allowance for credit losses" were included in the "originated allowance for credit losses" under the CECL model.
During 2021, net charge-offs as a percent of average total loans increased to 0.13%, compared to 0.05% for 2020. This increase was driven by the additional net charge-offs related to lease balances, coupled with the impact of a recovery of $2.5 million on a single commercial loan relationship during 2020, which lowered the ratio for that period. Prior to the acquisition, North Star Leasing was experiencing net charge-off rates of around 3% of average lease balances, and Peoples anticipates that net charge-off levels will increase in future periods as the net charge-offs for the leasing division return to this historical rate.
Net charge-offs for 2020 were $1.8 million, or 0.05% of average total loans, an increase of $0.6 million compared to $1.1 million, or 0.04% of average total loans, for 2019. Net charge-offs in 2020 included a recovery of $2.5 million on a single commercial loan relationship that was previously charged-off; while in 2019, a $2.4 million recovery occurred on the same relationship. The increase in commercial real estate net charge-offs in 2020 compared to 2019 was due to an increase in charge-off activity in 2020. This activity consisted of two larger commercial real estate loans with a total of $200,000 in charge-offs coupled with other smaller commercial real estate charge-offs.
The following table details Peoples’ nonperforming assets at December 31:
(Dollars in thousands) 2021 2020 2019
Loans 90+ days past due and accruing (a):
Construction $ 90 $ - $ -
Commercial real estate, other 689 - 907
Commercial and industrial 1,139 50 155
Premium finance 865 589 -
Leases - - -
Residential real estate 805 1,975 2,677
Home equity lines of credit 50 82 108
Consumer, indirect - 39 -
Consumer, direct 85 17 85
Consumer 85 56 85
Total loans 90+ days past due and accruing 3,723 2,752 3,932
Nonaccrual loans (a):
Construction 6 4 411
Commercial real estate, other 16,849 8,744 6,699
Commercial real estate 16,855 8,748 7,110
Commercial and industrial 2,505 4,017 1,824
Leases 1,581 - -
Residential real estate 8,016 6,080 4,471
Home equity lines of credit 687 708 955
Consumer, indirect 1,302 883 629
Consumer, direct 273 160 48
Consumer 1,575 1,043 677
Total nonaccrual loans 31,219 20,596 15,037
(Dollars in thousands) 2021 2020 2019
Nonaccrual troubled debt restructurings (TDRs):
Commercial real estate, other $ 218 $ 367 $ 102
Commercial and industrial 1,067 2,175 331
Leases - - -
Residential real estate 1,631 2,295 1,890
Home equity lines of credit 352 159 210
Consumer, indirect 272 190 211
Consumer, direct 6 11 -
Total nonaccrual TDRs 3,546 5,197 2,744
Total nonperforming loans (NPLs) 38,488 28,545 21,713
OREO:
Commercial 9,105 - 145
Residential 391 134 82
Total OREO 9,496 134 227
Total nonperforming assets (NPAs) $ 47,984 $ 28,679 $ 21,940
Criticized loans (b) $ 194,016 $ 126,619 $ 96,830
Classified loans (c) 106,547 72,518 66,154
Asset Quality Ratios:
Nonaccrual loans as a percent of total loans (d) 0.78 % 0.76 % 0.62 %
NPLs as a percent of total loans (d)(e) 0.86 % 0.82 % 0.75 %
NPAs as a percent of total assets (d)(e) 0.68 % 0.59 % 0.50 %
NPAs as a percent of total loans and OREO (d)(e) 1.07 % 0.84 % 0.76 %
Allowance for credit losses as a percent of nonaccrual loans (d) 184.00 % 195.24 % 121.23 %
Allowance for credit losses as a percent of NPLs (d)(e) 166.20 % 180.14 % 99.28 %
Criticized loans as a percent of total loans (b)(d) 4.33 % 3.72 % 3.37 %
Classified loans as a percent of total loans (c)(d) 2.38 % 2.13 % 2.30 %
(a)On January 1, 2020, Peoples adopted ASU 2016-13 and implemented the CECL model. The accounting for purchased credit deteriorated loans under CECL resulted in the movement of $3.9 million of loans from the 90+ days past due and accruing category to the nonaccrual category as of January 1, 2020. As of December 31, 2019, these loans were presented as 90+ days past due and accruing. Although they were not accruing contractual interest income, they were accreting income from the discount that was recognized due to acquisition accounting.
(b)Includes loans categorized as special mention, substandard or doubtful.
(c)Includes loans categorized as substandard or doubtful.
(d)Data presented as of the end of the year indicated.
(e)Nonperforming loans include loans 90+ days past due and accruing, troubled debt restructured loans and nonaccrual loans. Nonperforming assets include nonperforming loans and OREO.
Nonperforming assets grew 67% during 2021 compared to 2020. These increases were primarily driven by the Premier acquisition. At the same time, criticized loans, which are those categorized as special mention, substandard or doubtful, grew $67.4 million, or 53%, while classified loans, which are those categorized as substandard or doubtful, increased $34.0 million, or 47%, compared to December 31, 2020. These increases were also due to the Premier acquisition.
Nonperforming loans increased in 2020 due to two commercial relationships aggregating $3.2 million and several smaller commercial relationships being placed on nonaccrual. Criticized loans increased $29.8 million, or 31%, at December 31, 2020, compared to December 31, 2019, while classified loans grew $6.4 million, or 10%, at December 31, 2020, compared to December 31, 2019. During 2020, Peoples downgraded several relationships due to the COVID-19 pandemic. The COVID-related downgrades contributed $29.8 million of additional criticized loans and $9.4 million of additional classified loans compared to balances at December 31, 2019.
Based on the provisions provided by the CARES Act, on March 22, 2020, federal and state government banking regulators issued a joint statement, with which the FASB concurred as to the approach, regarding accounting for loan modifications for borrowers affected by COVID-19. In this guidance, short-term modifications, made on a good faith basis in response to COVID-19, to borrowers who were current prior to any relief, are not considered TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment which are insignificant. Under the guidance, borrowers that are considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. In addition, modification or deferral programs mandated by the U.S. federal government or any state government related to COVID-19 are not in the scope of ASC 310-40.
On August 3, 2020, federal and state banking regulators issued a joint statement, encouraging financial institutions to consider prudent accommodation options to mitigate losses for the borrower and financial institution beyond the initial accommodation period. In this guidance, institutions should also provide consumers with available options for repaying missed payments at the end of their accommodation to avoid delinquencies, as well as options for changes to terms to support sustainable and affordable payments for the long term. These considerations should also include prudent risk management practices at the financial institution based on the credit risk of the borrower. Peoples is actively working with its customers to address any further accommodation needs while carefully evaluating the associated credit risk of the borrowers.
The majority of Peoples' nonaccrual commercial real estate loans consists primarily of owner occupied commercial properties. In general, management believes repayment of these loans is dependent on the sale of the underlying collateral. As such, the carrying values of these loans are ultimately supported by management's estimate of the net proceeds Peoples would receive upon the sale of the collateral. These estimates are based in part on market values provided by independent, licensed or certified appraisers periodically, but no less frequently than annually. Given the volatility in commercial real estate values, management continues to monitor changes in real estate values from quarter-to-quarter and updates its estimates as needed based on observable changes in market prices and/or updated appraisals for similar properties.
Peoples discontinues the accrual of interest on a loan when conditions cause management to believe collection of all or any portion of the loan's contractual interest is doubtful. Such conditions may include the borrower being 90 days or more past due on any contractual payments or the availability of updated information regarding the borrower's financial condition and repayment ability. All unpaid accrued interest deemed uncollectable is reversed, which would reduce Peoples' net interest income. Interest received on nonaccrual loans is included in income only if principal recovery is reasonably assured. Interest income on loans classified as nonaccrual and renegotiated at each year-end that would have been recorded under the original terms of the loans was $1.3 million for 2021, $1.6 million for 2020 and $1.4 million for 2019. No portion of these amounts were recorded during 2021, 2020 or 2019.
Overall, management believes the allowance for credit losses was appropriate at December 31, 2021, based on all significant information currently available. Still, there can be no assurance that the allowance for credit losses will be adequate to cover future losses in Peoples’ loan portfolio.
Additional information regarding Peoples' allowance for credit losses can be found in "Note 4 Loans and Leases" of the Notes to the Consolidated Financial Statements.
Deposits
The following table details Peoples’ deposit balances at December 31:
(Dollars in thousands) 2021 2020 2019
Non-interest-bearing deposits (a) $ 1,641,422 $ 997,323 $ 671,208
Interest-bearing deposits:
Interest-bearing demand accounts (a) 1,167,460 692,113 635,720
Savings accounts 1,036,738 628,190 521,914
Retail CDs 643,759 445,930 490,830
Money market deposit accounts 651,169 591,373 469,893
Governmental deposit accounts 617,259 385,384 293,908
Brokered deposits 104,745 170,146 207,939
Total interest-bearing deposits 4,221,130 2,913,136 2,620,204
Total deposits $ 5,862,552 $ 3,910,459 $ 3,291,412
(a) The sum of amounts presented are considered total demand deposits.
The significant increase in deposits compared to December 31, 2020 was largely due to deposits acquired from Premier. Total demand deposits comprised 48% of total deposits at December 31, 2021 and were 43% of total deposits at December 31, 2020. At December 31, 2021, the period-end deposit increase of $2.0 billion, or 50%, compared to December 31, 2020, was primarily due to deposits acquired from Premier. Also, throughout 2021 and 2020, customers maintained higher balances due to changes in customer habits in light of the COVID-19 pandemic, as well as fiscal stimulus funds and PPP loan proceeds. During 2020, Peoples had reduced its reliance on higher-rate brokered deposits, which included one-way buy Certificate of Deposit Account Registry Services. This was partially offset by the issuance of 90-day brokered demand and savings deposits to fund interest rate swaps. As of December 31, 2021, Peoples had thirteen effective interest rate swaps, with an aggregate notional value of $125.0 million, which were funded by $40.0 million in 90-day FHLB advances and $100.0 million in overnight brokered deposits, which are expected to be extended every 90 days through the maturity dates of the swaps.
The increase in total deposits between December 31, 2020 and December 31, 2019 was largely due to an increase of $326.1 million in non-interest bearing deposits. The growth in non-interest-bearing deposits was related to customers maintaining higher balances due to changes in customer habits in light of the COVID-19 pandemic, as well as fiscal stimulus funds and PPP loan proceeds. During 2020, Peoples had reduced its reliance on higher-rate brokered deposits, which included one-way buy Certificate of
Deposit Account Registry Services. This was partially offset by the issuance of 90-day brokered demand and savings deposits to fund interest rate swaps.
Peoples' governmental deposit accounts represent savings and interest-bearing transaction accounts from state and local governmental entities. These funds are subject to periodic fluctuations based on the timing of tax collections and subsequent expenditures or disbursements. Peoples normally experiences an increase in balances annually during the first and third quarter, corresponding with tax collections, with declines normally in the second and fourth quarter of each year, corresponding with expenditures by the governmental entities. Peoples continues to emphasize growth of low-cost deposits that do not require Peoples to pledge assets as collateral, which is required in the case of governmental deposit accounts.
The maturities of retail CDs with total balances of $100,000 or more at December 31 were as follows:
(Dollars in thousands) 2021 2020 2019
3 months or less $ 71,374 $ 55,402 $ 36,623
Over 3 to 6 months 74,529 56,516 48,581
Over 6 to 12 months 83,094 36,448 49,796
Over 12 months 90,864 70,452 104,914
Total $ 319,861 $ 218,818 $ 239,914
Additional information regarding Peoples' deposits can be found in "Note 8 Deposits" of the Notes to the Consolidated Financial Statements.
Borrowed Funds
The following table details Peoples’ short-term and long-term borrowings at December 31:
(Dollars in thousands) 2021 2020 2019
Short-term borrowings:
Overnight borrowings $ - $ - $ 141,000
FHLB 90-day advances 40,000 - 110,000
Current portion of long-term FHLB advances 15,000 20,000 23,009
Repurchase agreements 111,482 53,261 42,968
Total short-term borrowings 166,482 73,261 316,977
Long-term borrowings:
FHLB advances 85,825 102,957 75,672
Junior subordinated debt securities 13,650 7,611 7,451
Total long-term borrowings 99,475 110,568 83,123
Total borrowed funds $ 265,957 $ 183,829 $ 400,100
Total borrowed funds, which include overnight borrowings, are mainly a function of loan growth and changes in total deposit balances. Peoples continually evaluates the overall balance sheet position given the interest rate environment. During 2021, Peoples' repurchase agreements grew mostly due to accounts associated with the Premier acquisition. Peoples also acquired additional junior subordinated debt securities in the Premier acquisition, leading to the increase in long-term borrowings compared to 2020.
During 2020, long-term FHLB advances increased due to borrowing under a $50.0 million long-term FHLB putable, non-amortizing fixed rate advance and the reclassification of $20.0 million to short-term borrowings as the time to maturity of these advances had become less than one year.
In 2019, Peoples' short-term FHLB advances generally consisted of overnight borrowings maintained in connection with the management of Peoples' daily liquidity position.
During 2019, Peoples had seventeen effective interest rate swaps with an aggregate notional value of $160.0 million, of which $110.0 million were funded by FHLB 90-day advances. The remaining $50.0 million were funded by 90-day brokered CDs. Long-term FHLB advances declined by $26.7 million due to the reclassification to short-term borrowings as the time to maturity of these advances had become less than one year.
On April 3, 2019, Peoples entered into a Loan Agreement (the “U.S. Bank Loan Agreement”) with U.S. Bank National Association, the term of which has been extended to March 31, 2022 through an amendment in April 2021. The U.S. Bank Loan Agreement provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $20.0 million.
Additional information regarding Peoples' borrowed funds can be found in "Note 9 Short-Term Borrowings" and "Note 10 Long-Term Borrowings" of the Notes to the Consolidated Financial Statements.
Capital/Stockholders’ Equity
During 2021, Peoples' total stockholders' equity grew 47%, mostly due to the issuance of $261.9 million in common shares related to the Premier acquisition. Peoples also recorded net income of $47.6 million, which exceeded dividends paid of $31.2 million.
At December 31, 2021, capital levels for both Peoples and Peoples Bank remained substantially higher than the minimum amounts needed to be considered "well capitalized" under banking regulations. These higher capital levels reflect Peoples' desire to maintain a strong capital position.
During 2020, total stockholders' equity declined mainly due to the repurchase of common shares in the amount of $29.3 million and dividends paid to shareholders of $27.5 million, partially offset by net income of $34.8 million. Also contributing to the decline was the implementation of ASU 2016-13 on January 1, 2020, in which Peoples recorded a one-time transition adjustment to reduce retained earnings by $3.7 million. This adjustment reflected the increase in the allowance for credit losses for loans (excluding the gross up of loan balances related to the establishment of an allowance for credit losses for purchased credit deteriorated loans), the allowance for credit losses for held-to-maturity investment securities and the addition of an unfunded commitment liability, net of statutory federal corporate income taxes. Based on current accounting guidance, Peoples is electing to utilize the five-year phase-in period for the transition adjustment due to the implementation of ASU 2016-13. This phase-in period also includes a 25% deferment of the impact on regulatory capital of the estimated increase in the allowance for credit losses related to the CECL model, which is applied during the first two years of application. For the first two years of the phase-in period, 100% of the transition adjustment due to ASU 2016-13 is excluded for regulatory capital purposes, along with 25% of the increase in the allowance for credit losses compared to the January 1, 2020 allowance for credit losses. In year three of the phase-in, 75% of the transition adjustment, and the cumulative 25% increase in the allowance for credit losses compared to January 1, 2020, are excluded from regulatory capital, while 50% and 25% of these amounts are excluded in years four and five, respectively, under this phase-in period.
Under the risk-based capital rules, 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. These three minimum required ratios are the common equity tier 1 capital ratio, tier 1 risk-based capital ratio and total risk-based capital ratio. Peoples had a capital conservation buffer of 6.06% at December 31, 2021, 6.50% at December 31, 2020 and 7.58% at December 31, 2019. As such, Peoples exceeded the minimum ratios, including the capital conservation buffer, at December 31, 2021.
The following table details Peoples' actual risk-based capital levels and corresponding ratios at December 31:
(Dollars in thousands) 2021 2020 2019
Capital Amounts:
Common equity tier 1 $ 577,565 $ 409,400 $ 427,415
Tier 1 591,215 417,011 434,866
Total (tier 1 and tier 2) 648,948 456,384 456,422
Net risk-weighted assets $ 4,614,259 $ 3,146,767 $ 2,930,355
Capital Ratios:
Common equity tier 1 12.52 % 13.01 % 14.59 %
Tier 1 12.81 % 13.25 % 14.84 %
Total (tier 1 and tier 2) 14.06 % 14.50 % 15.58 %
Tier 1 leverage ratio 8.67 % 8.97 % 10.41 %
In addition to traditional capital measurements, management uses tangible capital measures to evaluate the adequacy of Peoples' total stockholders' equity. Such financial measures represent non-US GAAP financial information since they exclude the impact of goodwill and other intangible assets acquired through acquisitions on the Consolidated Balance Sheets. Peoples' 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 level of intangible assets similar to that of Peoples. Further, intangible assets generally are difficult to convert into cash, especially during a financial crisis, and could decrease substantially in value should there be deterioration in the overall franchise value. As a result, tangible equity represents a conservative measure of the capacity for Peoples to incur losses but remain solvent.
The following table reconciles the calculation of these non-US GAAP financial measures to amounts reported in Peoples' Consolidated Financial Statements at December 31:
(Dollars in thousands) 2021 2020 2019
Tangible equity:
Total stockholders' equity $ 845,025 $ 575,673 $ 594,393
Less: goodwill and other intangible assets 291,009 184,597 177,503
Tangible equity $ 554,016 $ 391,076 $ 416,890
Tangible assets:
Total assets $ 7,063,521 $ 4,760,764 $ 4,354,165
Less: goodwill and other intangible assets 291,009 184,597 177,503
Tangible assets $ 6,772,512 $ 4,576,167 $ 4,176,662
Tangible book value per common share:
Tangible equity $ 554,016 $ 391,076 $ 416,890
Common shares outstanding 28,297,771 19,563,979 20,698,941
Tangible book value per common share $ 19.58 $ 19.99 $ 20.14
Tangible equity to tangible assets ratio:
Tangible equity $ 554,016 $ 391,076 $ 416,890
Tangible assets $ 6,772,512 $ 4,576,167 $ 4,176,662
Tangible equity to tangible assets 8.18 % 8.55 % 9.98 %
The tangible equity to tangible assets ratio declined during 2021, compared to 2020. This reduction was mainly due to the acquisition of North Star Leasing, for which no stockholders' equity was issued and additional goodwill and intangibles were recorded. The decline in tangible equity to tangible assets at December 31, 2020, compared to 2019, was partially due to the origination of PPP loans during 2020, coupled with the repurchase of common shares completed during the year and dividends paid to shareholders, which exceeded net income for the year.
Future Outlook
During 2021, Peoples successfully closed the largest acquisition in its history, along with the acquisition of a specialty financing leasing business that has significant growth potential. During 2022, Peoples will look to expand on the progress made with recent acquisitions, both strengthening the pipeline of referrals between lines of businesses for new clients, as well as growing the specialty finance lending and leasing portfolios.
Net interest income is expected to improve considerably over 2021, as the full year impact of Premier and the acquired leasing business are recognized for 2022. People also anticipates core growth that will contribute to overall higher net interest income than for 2021, while it anticipates that net interest margin will be between 3.50% and 3.60%, excluding any potential increase to the Federal Funds Target Rate. Net interest margin for 2022 will be positively impacted by the full year recognition of the accretion income, net of amortization expense, associated with the Premier acquisition. However, the impact of this improvement will be muted by the lower accretion of net deferred loan fees and costs from the PPP loan forgiveness, which will be much smaller during 2022 than it was during 2021. During 2021, Peoples has significantly improved its deposit costs, which declined 18 basis points to 29 basis points, but will have less opportunity to further decrease deposit costs during 2022. Peoples has also had a negative impact to net interest margin during 2021 as a result of excess liquidity, and anticipates that to continue through portions of 2022.
Total non-interest income, excluding net gains and losses, will benefit from both the acquisitions during 2021, as the Premier acquisition will positively impact electronic banking income and deposit account service charges, while the leasing division will continue to provide a boost from its fee-based income. For 2022, Peoples anticipates growth of 14% to 16% compared to 2021, in total non-interest income, excluding net gains and losses. This increase includes expected growth within trust and investment income, and insurance income, which increased 20% and 9%, respectively, for 2021, compared to 2020.
Excluding acquisition-related expenses, total non-interest expense is anticipated to grow for 2022, which will be mostly due to the additional ongoing costs associated with the recent acquisitions. During 2021, Peoples worked to reduce future data processing and software costs associated with its core processor, and will begin to recognize those savings during 2022. The efficiency ratio for 2022 is expected to improve as Peoples fully recognizes the cost savings associated with the acquisitions, and anticipates an efficiency ratio in the high 50% range.
The balance sheet mix of Peoples will be continually evaluated in an effort to mitigate exposure risk, as interest rates are anticipated to increase during 2022. Peoples will work to effectively deploy its excess liquidity into higher yielding opportunities, as they arise.
Peoples will continue to place importance on loan growth. It anticipates that the annual loan growth for 2022, compared to 2021, will be between 6% and 8%. This growth excludes any PPP loan payoffs, and incorporates the expected increases in specialty finance loan and lease balances. At the same time, Peoples will focus on maintaining a high credit quality standard when underwriting new business. While Peoples will focus on asset quality, Peoples anticipates an annual gross charge-off rate, as a percent of average total loans, of between 25 to 40 basis points. This rate includes the expectation of returning to historical charge-off rates for loans, as well as the addition of the leasing portfolio charge-offs, which are traditionally higher than loan charge-off rates.
Peoples does not anticipate a significant amount of deposit growth for 2022, as deposit balances have remained inflated in recent periods. The influx of deposits during the COVID-19 pandemic, which was the result of fiscal stimulus, PPP proceeds and changed consumer spending habits, is not expected to continue into 2022. While Peoples does not anticipate significant runoff of deposits, it does not believe there will be large growth during 2022.
Capital is a key priority for Peoples, and continues to be a source of strength. Peoples' regulatory capital ratios at December 31, 2021 exceeded the minimums needed to be considered well capitalized. Peoples intends to make meaningful investments with capital as opportunities arise, such as acquisitions, and return shareholder value in the form of dividends.
For more information regarding risks and uncertainties that could impact the projections described, please refer to "ITEM 1A RISK FACTORS" of this Form 10-K.
Interest Rate Sensitivity and Liquidity
While Peoples is exposed to various business risks, the risks relating to interest rate sensitivity and liquidity are major risks that can materially impact future results of operations and financial condition due to their complexity and dynamic nature. The objective of Peoples' asset-liability management function is to measure and manage these risks in order to optimize net interest income within the constraints of prudent capital adequacy, liquidity and safety. This objective requires Peoples to focus on interest rate risk exposure and adequate liquidity through its management of the mix of assets and liabilities, their related cash flows and the rates earned and paid on those assets and liabilities. Ultimately, the asset-liability management function is intended to guide management in the acquisition and disposition of earning assets and selection of appropriate funding sources.
Interest Rate Risk
Interest rate risk ("IRR") is one of the most significant risks arising in the normal course of business of financial services companies like Peoples. IRR is the potential for economic loss due to future interest rate changes that can impact the earnings stream, as well as market values, of financial assets and financial liabilities. Peoples' exposure to IRR is due primarily to differences in the maturity or repricing of earning assets and interest-bearing liabilities. In addition, other factors, such as prepayments of loans and investment securities, or early withdrawal of deposits, can affect Peoples' exposure to IRR and increase interest costs or reduce revenue streams.
Peoples has assigned overall management of IRR to the ALCO, which has established an IRR management policy that sets minimum requirements and guidelines for monitoring and managing the level of IRR. The objective of Peoples' IRR management policy is to assist the ALCO in its evaluation of the impact of changing interest rate conditions on earnings and the economic value of equity, as well as assist with the implementation of strategies intended to reduce Peoples' IRR. The management of IRR involves either maintaining or changing the level of risk exposure by changing the repricing and maturity characteristics of the cash flows for specific assets or liabilities. Additional oversight of Peoples' IRR is provided by the Board of Directors of Peoples Bank, which reviews and approves Peoples' IRR management policy at least annually.
The ALCO uses various methods to assess and monitor the current level of Peoples' IRR and the impact of potential strategies or other changes. However, the ALCO predominantly relies on simulation modeling in its overall management of IRR since it is a dynamic measure. Simulation modeling also estimates the impact of potential changes in interest rates and balance sheet structures on future earnings and projected economic value of equity. The methods used by ALCO to assess IRR remain largely unchanged from those disclosed at December 31, 2020.
The modeling process starts with a base case simulation using the current balance sheet and current interest rates held constant for the next twenty-four months. Alternate scenarios are prepared which simulate the impact of increasing and decreasing market interest rates, assuming parallel yield curve shifts. Comparisons produced from the simulation data, showing the changes in net interest income from the base interest rate scenario, illustrate the risks associated with the current balance sheet structure. Additional simulations, when deemed appropriate or necessary, are prepared using different interest rate scenarios from those used with the base case simulation and/or possible changes in balance sheet composition. The additional simulations include non-parallel shifts in interest rates whereby the direction and/or magnitude of changes in short-term interest rates is different from the changes applied to longer-term interest rates. Comparisons showing the net interest income and economic value of equity variances from the base case are provided to the ALCO for review and discussion.
The ALCO has established limits on changes in the twelve-month net interest income forecast and the economic value of equity from the base case. The ALCO may establish risk tolerances for other parallel and non-parallel rate movements, as deemed necessary. The following table details the current policy limits used to manage the level of Peoples' IRR:
Immediate and Sustained Shift in Interest Rates Net Interest Income Economic Value of Equity
+ / - 100 basis points -5% -10%
+ / - 200 basis points -10% -15%
+ / - 300 basis points -15% -20%
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 Rates Estimated Increase (Decrease) in
Net Interest Income Estimated (Decrease) Increase in Economic Value of Equity
(in Basis Points) December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020
300 $ 24,903 11.7 % $ 22,034 17.3 % $ (24,232) (2.0) % $ 117,235 15.7 %
200 16,312 7.7 % 15,899 12.5 % (16,541) (1.3) % 95,189 12.7 %
100 7,899 3.7 % 8,981 7.1 % (5,308) (0.4) % 60,384 8.1 %
(100) (8,615) (4.1) % (7,030) (5.5) % (91,568) (7.4) % (116,205) (15.5) %
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 means all points on the yield curve (one year, two year, three year, etc.) are directionally changed the same amount of basis points. Management regularly assesses the impact of both increasing and decreasing interest rates. The table above shows the impact of upward parallel shocks and a downward parallel shock of 100 basis points. Downward parallel shocks of 300 and 200 basis points are excluded from the table as they are not probable given the current interest rate environment.
Estimated changes in net interest income and 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. These assumptions are monitored closely by Peoples and are reviewed at least semi-annually. As of December 31, 2021, the actual deposit betas experienced by Peoples in the repricing of non-maturity deposits were lower than those used in Peoples’ interest rate risk modeling.
While parallel interest rate shock scenarios are useful in assessing the level of IRR inherent in the balance sheet, interest rates typically move in a nonparallel manner with differences in the timing, direction and magnitude of changes in short-term and long-term interest rates. Thus, any benefit that might occur as a result of the Federal Reserve Board increasing short-term interest rates in the future could be offset by an inverse movement in long-term rates, and vice versa. For this reason, Peoples considers other interest rate scenarios in addition to analyzing the impact of parallel yield curve shifts. These include various flattening and steepening scenarios in which short-term and long-term rates move in different directions with varying magnitude. Peoples believes these scenarios to be more reflective of how interest rates change versus the severe parallel rate shocks described above. Given the shape of market yield curves at December 31, 2021, 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 the economic value of equity when short-term rates remain constant while long-term rates rise. In such a scenario, Peoples' variable rate asset yields along with deposit and short-term borrowing costs, which are correlated with short-term rates, remain constant, while long-term asset yields and long-term borrowing costs, which are more correlated with long-term rates, rise. Increased asset yields would not be offset by increases in deposit or funding costs, resulting in an increased amount of net interest income and higher net interest margin. At December 31, 2021, the bear steepener scenario resulted in an increase in both net interest income and the economic value of equity of 0.6% and 4.5%, respectively.
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 higher net interest margin. At December 31, 2021, the bear flattener scenario resulted in an increase in net interest income of 1.0% and a decline in the economic value of equity of 3.7%.
During 2021, Peoples' Consolidated Balance Sheet was positioned to benefit from rising interest rates in terms of the potential impact on net interest income. The table illustrates this point as net interest income increases in the rising rate scenarios.
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 December 31, 2021, Peoples had 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 15 Derivative Financial Instruments" of the Notes to the Consolidated Financial Statements.
An asset/liability model used to produce the analysis above requires assumptions to be made such as prepayment rates on interest-earning assets and repricing impact on non-maturity deposits. These business assumptions are based on business plans, economic and market trends, and available industry data. Management believes that its methodology for developing such assumptions is reasonable; however, there can be no assurance that modeled results will be achieved. The asset/liability model along with key modeling assumptions are subjected to a third-party review annually for effectiveness and regulatory compliance.
Liquidity
In addition to IRR management, another major objective of the ALCO is to ensure sufficient levels of liquidity are maintained. The ALCO defines liquidity as the ability to meet anticipated and unanticipated operating cash needs, loan demand and deposit withdrawals without incurring a sustained negative impact on profitability.
A primary source of liquidity for Peoples is deposits. Liquidity is also provided by cash generated from earning assets such as loans and investment securities. Peoples also uses various wholesale funding sources to supplement funding from customer deposits. These external sources provide Peoples with the ability to obtain large quantities of funds in a relatively short time period in the event of sudden unanticipated cash needs. However, an over-utilization of external funding sources can expose Peoples to greater liquidity risk, as these external sources may not be accessible during times of market stress. Additionally, Peoples may be exposed to the risk associated with providing excess collateral to external funding providers, commonly referred to as counterparty risk. As a result, the ALCO's liquidity management policy sets limits on the net liquidity position and the concentration of non-core funding sources, which includes wholesale funding and brokered deposits.
In addition to external sources of funding, Peoples considers certain types of deposits to be less stable or "volatile funding." These deposits include special money market products, large CDs and public funds. Peoples has established volatility factors for these various deposit products, and the liquidity management policy establishes a limit on the total level of volatile funding. Additionally, Peoples measures the maturities of external sources of funding for periods of one month, three months, six months and twelve months, and has established policy limits for the amounts maturing in each of these periods. The purpose of these limits is to minimize exposure to what is commonly termed rollover risk.
An additional strategy used by Peoples in the management of liquidity risk is maintaining a targeted level of liquid assets. Management defines liquid assets as unencumbered cash (including cash on deposit at the FRB of Cleveland), and the market value of unpledged U.S. government and agency securities. Excluded from this definition are pledged securities, non-government securities, non-agency securities, municipal securities and loans. Management has established a minimum level of liquid assets in the liquidity management policy, which is expressed as a percentage of total loans and unfunded loan commitments. At December 31, 2021, Peoples maintained liquid assets of $723.4 million, representing 9.2% of total assets plus unfunded loan commitments. Peoples has also established a policy limit around the level of liquefiable assets expressed as a percentage of total loans and unfunded loan commitments. Liquefiable assets are defined as liquid assets plus the market value of unpledged securities not included in the liquid asset measurement. At December 31, 2021, Peoples maintained liquefiable assets of $991.6 million, representing 12.6% of total assets plus unfunded loan commitments.
An essential element in the management of liquidity risk is a forecast of the sources and uses of anticipated cash flows. On a monthly basis, Peoples forecasts sources and uses of cash for the next twelve months. To assist in the management of liquidity, management has established a liquidity coverage ratio, which is defined as the total sources of cash divided by the total uses of cash. A ratio of greater than 1.0 times indicates that forecasted sources of cash are adequate to fund forecasted uses of cash. The liquidity management policy establishes a minimum limit of 1.0 times. As of December 31, 2021, Peoples had a ratio of 7.53 times, which was within policy limits. Peoples also forecasts secondary or contingent sources of cash, and this includes external sources of funding and liquid assets. These sources of cash would be required if and when the forecasted liquidity coverage ratio dropped below the policy limit of 1.0 times. An additional liquidity measurement used by management includes the total forecasted sources of cash and the contingent sources of cash divided by the forecasted uses of cash. Management has established a minimum ratio of 3.0 times for this liquidity management policy limit. As of December 31, 2021, Peoples had a ratio of 8.28 times, which was within policy limits.
Peoples maintains multiple contingent sources of liquidity including secured wholesale funding lines and unsecured brokered deposit networks. Peoples' primary sources of secured wholesale funding are the FHLB of Cincinnati and the FRB of Cleveland. As of December 31, 2021, Peoples had unused collateral-based borrowing capacities of $427.5 million and $174.4 million, respectively, available with the FHLB of Cincinnati and the FRB of Cleveland. Together, these unused borrowing capacities
represent 7.6% of total assets and unfunded loan commitments. Additionally, Peoples had $241.8 million of unpledged loan collateral eligible to secure additional borrowing capacity with the FRB of Cleveland.
Disruptions in the sources and uses of cash can occur which can drastically alter the actual cash flows and negatively impact Peoples' ability to access internal and external sources of cash. Such disruptions might occur due to increased withdrawals of deposits, increases in the funding required for loan commitments, a decrease in the ability to access external funding sources and other factors that would increase the need for funding and limit Peoples' ability to access needed funds. As a result, Peoples maintains a liquidity contingency funding plan ("LCFP") that considers various degrees of disruptions and develops action plans around these scenarios.
Peoples' LCFP identifies scenarios where funding disruptions might occur and creates scenarios of varying degrees of severity. The disruptions considered include an increase in funding of unfunded loan commitments, unanticipated withdrawals of deposits, decreases in the renewal of maturing CDs and reductions in cash earnings. Additionally, the LCFP creates stress scenarios where access to external funding sources, or contingency funding, is suddenly limited, which includes a significant increase in the margin requirements where securities or loans are pledged, limited access to funding from other banks and limited access to funding from the FHLB of Cincinnati and the FRB of Cleveland. Peoples' LCFP scenarios include a base scenario, a mild stress scenario, a moderate stress scenario and a severe stress scenario. Each of these is defined as to the related severity and action plans are developed around each.
Liquidity management also requires the monitoring of risk indicators that may alert the ALCO to a developing liquidity situation or crisis. Early detection of stress scenarios allows Peoples to take actions to help mitigate the impact to Peoples Bank's business operations. The LCFP contains various indicators, termed key risk indicators ("KRIs") that are monitored on a monthly basis, at a minimum. The KRIs include both internal and external indicators and include loan delinquency levels, criticized and classified loan levels, the ratios of non-performing loans to loans and to total assets, the total loan to total deposit ratio, the level of net non-core funding dependence, the level of contingency funding sources, the liquidity coverage ratio, changes in regulatory capital levels, forecasted operating loss and negative media concerning Peoples, irrational competitor pricing that persists, and an increase in rates for external funding sources. The LCFP establishes levels that define each of these KRIs under base, mild, moderate and severe scenarios.
The LCFP is reviewed and updated at least on an annual basis by the ALCO and Peoples Bank's Board of Directors. Additionally, testing of the LCFP is required on an annual basis. Various stress scenarios and the related actions are simulated according to the LCFP. The results are reviewed and discussed and changes or revisions are made to the LCFP accordingly. Additionally, the LCFP is subjected to a third-party review annually for effectiveness and regulatory compliance.
Since March 31, 2020, there has been an increase in deposit balances due to the influx of funds from fiscal stimulus, the PPP and other government actions. Peoples anticipates that these deposit balances will decline over time as the funds are used for intended business purposes; however, this deposit outflow should be partially offset as the associated PPP loans are forgiven and loan reimbursement funds are received. At the same time, we have experienced a decrease in the utilization rate for commercial lines of credit. This decrease is related to the receipt of PPP loan proceeds and other increased cash flows for certain companies. Peoples expects the commercial line of credit utilization percentage to revert back to more historical averages as time progresses.
Overall, management believes the current balance of cash and cash equivalents, anticipated investment portfolio cash flows and the availability of other funding sources will allow Peoples to meet anticipated cash obligations, as well as special needs and off-balance sheet commitments.
Off-Balance Sheet Activities and Contractual Obligations
Peoples routinely engages in activities that involve, to varying degrees, elements of risk that are not reflected in whole or in part in the Consolidated Financial Statements. These activities are part of Peoples' 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.
The following is a summary of Peoples’ significant off-balance sheet activities and contractual obligations. Detailed information regarding these activities and obligations can be found in the Notes to the Consolidated Financial Statements as follows:
Activity or Obligation Note
Off-balance sheet credit-related financial instruments 16
Operating lease obligations 6
Long-term borrowing obligations 10
Traditional off-balance sheet credit-related financial instruments are primarily commitments to extend credit and standby letters of credit. These activities are necessary to meet the financing needs of customers and could require Peoples to make cash payments to third parties in the event certain specified future events occur. The contractual amounts represent the extent of Peoples’ exposure in
these off-balance sheet activities. However, since certain off-balance sheet commitments, particularly standby letters of credit, are expected to expire or be only partially used, the total amount of commitments does not necessarily represent future cash requirements.
Peoples continues to lease certain facilities and equipment under noncancellable operating leases with terms providing for fixed monthly payments over periods generally ranging from two to thirty years. Several of Peoples’ leased facilities are inside retail shopping centers or office buildings and, as a result, are not available for purchase. Management believes these leased facilities increase Peoples’ visibility within its markets and afford sales associates additional access to current and potential clients.
For certain acquisitions, often those involving insurance businesses and wealth management books of business, a portion of the consideration is contingent upon revenue metrics being achieved. US GAAP requires that the amounts be recorded upon acquisition based on the best estimate of the future amounts to be paid at the time of acquisition. Any subsequent adjustment to the estimate is recorded in earnings. Based on the acquisitions completed to date, management does not expect contingent consideration to have a material impact on Peoples' future performance.
Management does not anticipate that Peoples’ current off-balance sheet activities will have a material impact on its future results of operations and financial condition based on historical experience and recent trends.
Effects of Inflation on Financial Statements
Substantially all of Peoples’ assets relate to banking and are monetary in nature. As a result, inflation does not impact Peoples to the same degree as companies in capital-intensive industries in a replacement cost environment. During a period of rising prices, a net monetary asset position results in a loss in purchasing power and conversely a net monetary liability position results in an increase in purchasing power. The opposite would be true during a period of decreasing prices. In the banking industry, monetary assets typically exceed monetary liabilities.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to the section captioned "Interest Rate Sensitivity and Liquidity" under "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of this Form 10-K, which is incorporated herein by reference.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and accompanying notes, and the report of independent registered public accounting firm, are set forth immediately following "ITEM 9C DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS" of this Form 10-K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No response required.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Peoples’ management, with the participation and supervision of Peoples’ President and Chief Executive Officer and Peoples’ Executive Vice President, Chief Financial Officer and Treasurer, has evaluated the effectiveness of Peoples’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2021. Based upon that evaluation, Peoples’ President and Chief Executive Officer and Peoples’ Executive Vice President, Chief Financial Officer and Treasurer have concluded that our disclosure controls and procedures were not effective as of December 31, 2021 because of a material weakness in internal controls over financial reporting described in Management’s Annual Report on Internal Control Over Financial Reporting below.
Management's Annual Report on Internal Control Over Financial Reporting
The "Report of Management's Assessment of Internal Control Over Financial Reporting” required by Item 308(a) of SEC Regulation S-K is included on page 80 of this Form 10-K.
Attestation Report of Independent Registered Public Accounting Firm
The “Report of Independent Registered Public Accounting Firm” required by Item 308(b) of SEC Regulation S-K is included on page 81 of this Form 10-K.
Ernst & Young LLP (U.S. PCAOB Auditor Firm I.D.: 42), the independent registered public accounting firm that audited Peoples' consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2021. The report, which expresses the opinion that management has not maintained effective internal control over financial reporting as of December 31, 2021, is included in the "Report of Independent Registered Public Accounting Firm"
Changes in Internal Control Over Financial Reporting
Except for the material weakness identified, there were no changes in Peoples’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, Peoples’ internal control over financial reporting. However, as disclosed in the “Report of Management’s Assessment of Internal Control Over Financial Reporting”, Peoples’ management is in the process of implementing certain changes to Peoples’ internal controls to remediate the material weakness disclosed in the “Report of Management’s Assessment of Internal Control Over Financial Reporting.”

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ITEM 9B. OTHER INFORMATION
ITEM 9B OTHER INFORMATION
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning (a) directors of Peoples Bancorp Inc. ("Peoples"), (b) the procedures by which shareholders of Peoples may recommend nominees to Peoples' Board of Directors, (c) the Audit Committee of Peoples' Board of Directors and (d) the Board of Directors' determination that Peoples has an "audit committee financial expert" serving on its Audit Committee required by Items 401, 407(c)(3), 407(d)(4) and 407(d)(5) of SEC Regulation S-K will be included in the sections captioned "PROPOSAL NUMBER 1: ELECTION OF DIRECTORS," "THE BOARD AND COMMITTEES OF THE BOARD" and "NOMINATING PROCEDURES" of the definitive Proxy Statement of Peoples Bancorp Inc. relating to the Annual Meeting of Shareholders to be held on April 28, 2022 ("Peoples' Definitive Proxy Statement"), which sections are incorporated herein by reference. The procedures by which shareholders of Peoples may recommend nominees to Peoples' Board of Directors have not changed materially from those described in Peoples' definitive Proxy Statement for the 2021 Annual Meeting of Shareholders held on April 22, 2021.
The information regarding Peoples' executive officers required by Item 401 of SEC Regulation S-K will be included in the section captioned "EXECUTIVE OFFICERS" of Peoples' Definitive Proxy Statement, which section is incorporated herein by reference.
Information regarding beneficial ownership reporting compliance under Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by reference from the text to be included under the caption "DELINQUENT SECTION 16(a) REPORTS" of Peoples' Definitive Proxy Statement, to the extent that disclosure of information is required.
The Board of Directors of Peoples has adopted charters for each of the Audit Committee, the Compensation Committee, the Executive Committee, the Governance and Nominating Committee, and the Risk Committee.
In accordance with the requirements of Rule 5610 of the Nasdaq Stock Market Corporate Governance Requirements, the Board of Directors of Peoples has adopted a Code of Ethics covering the directors, officers and employees of Peoples and its subsidiaries, including, without limitation, the principal executive officer, the principal financial officer, the principal accounting officer and the controller of Peoples. Peoples intends to disclose the following events, if they occur, in a Current Report on Form 8-K and on the "Investor Relations" page of Peoples' Internet website at www.peoplesbancorp.com within four business days following their occurrence:
(A)the date and nature of any amendment to a provision of Peoples' Code of Ethics that
(a)applies to the principal executive officer, principal financial officer, principal accounting officer or controller of Peoples, or persons performing similar functions,
(b)relates to any element of the code of ethics definition set forth in Item 406(b) of SEC Regulation S-K, and
(c)is not a technical, administrative or other non-substantive amendment; and
(B)a description (including the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver) of any waiver, including an implicit waiver, from a provision of the Code of Ethics granted to the principal executive officer, principal financial officer, principal accounting officer or controller of Peoples, or persons performing similar functions, that relates to one or more of the elements of the code of ethics definition set forth in Item 406(b) of SEC Regulation S-K.
In addition, Peoples will disclose any waivers from the provisions of the Code of Ethics granted to a director or an executive officer of Peoples in a Current Report on Form 8-K within four business days following their occurrence.
Each of the Code of Ethics, the Audit Committee Charter, the Compensation Committee Charter, the Executive Committee Charter, the Governance and Nominating Committee Charter and the Risk Committee Charter is posted under the "Corporate Overview - Governance Documents" tab of the "Investor Relations" page of Peoples' Internet website. Interested persons may also obtain copies of the Code of Ethics without charge by writing to Peoples Bancorp Inc., Attention: Corporate Secretary, 138 Putnam Street, P.O. Box 738, Marietta, Ohio 45750-0738.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11 EXECUTIVE COMPENSATION
The information required by this Item 11 will be included in the sections captioned "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION," "EXECUTIVE COMPENSATION: COMPENSATION DISCUSSION AND ANALYSIS," "SUMMARY COMPENSATION TABLE FOR 2021," "GRANTS OF PLAN-BASED AWARDS FOR 2021," "OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2021," "OPTION EXERCISES AND STOCK VESTED FOR 2021," "PENSION BENEFITS FOR 2021," "NON-QUALIFIED DEFERRED COMPENSATION FOR 2021," "OTHER POTENTIAL POST-EMPLOYMENT PAYMENTS," "DIRECTOR COMPENSATION" and "COMPENSATION COMMITTEE REPORT" of Peoples' Definitive Proxy Statement, which sections are incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 regarding the security ownership of certain beneficial owners and management will be included in the section captioned "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" of Peoples' Definitive Proxy Statement, which section is incorporated herein by reference.
Equity Compensation Plan Information
The table below provides information as of December 31, 2021, with respect to compensation plans under which common shares of Peoples are authorized for issuance to directors, officers or employees in exchange for consideration in the form of goods or services. These compensation plans include:
(i)the Peoples Bancorp Inc. Third Amended and Restated 2006 Equity Plan (the "2006 Equity Plan");
(ii)the Peoples Bancorp Inc. Third Amended and Restated Deferred Compensation Plan for Directors of Peoples Bancorp Inc. and Subsidiaries (the "Directors' Deferred Compensation Plan"); and
(iii)the Peoples Bancorp Inc. Employee Stock Purchase Plan (the "ESPP").
All of these compensation plans were approved by the shareholders of Peoples.
Plan Category (a)
Number of common shares to be issued upon exercise of outstanding options, warrants and rights (b)
Weighted-average exercise price of outstanding options, warrants and rights (c)
Number of common shares remaining available for future issuance under equity compensation plans (excluding common shares reflected in column (a))
Equity compensation plans approved by shareholders 378,457 (1)
$ - (2)
754,416 (3)
Total 378,457 $ - 754,416
(1)Includes an aggregate of 336,268 restricted common shares subject to time-based or performance-based vesting restrictions granted under the 2006 Equity Plan, and 42,189 common shares allocated to participants' bookkeeping accounts under the Directors' Deferred Compensation Plan.
(2)The weighted-average exercise price does not take into account the common shares allocated to participants' time-based or performance-based restricted common share awards granted under the 2006 Equity Plan or bookkeeping accounts under the Directors' Deferred Compensation Plan.
(3)Includes 556,711 common shares remaining available for future grants under the 2006 Equity Plan at December 31, 2021, as well as 197,705 common shares remaining available for issuance and delivery under the ESPP. No amount is included for potential future allocations to participants' bookkeeping accounts under the Directors' Deferred Compensation Plan since the terms of the Directors' Deferred Compensation Plan do not provide for a specified limit on the number of common shares which may be allocated to participants' bookkeeping accounts.
Additional information regarding Peoples' stock-based compensation plans can be found in "Note 18 Stock-Based Compensation" of the Notes to the Consolidated Financial Statements.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 will be included in the sections captioned "TRANSACTIONS WITH RELATED PERSONS," "PROPOSAL NUMBER 1: ELECTION OF DIRECTORS," "THE BOARD AND COMMITTEES OF THE BOARD" and "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" of Peoples' Definitive Proxy Statement, which sections are incorporated by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 will be included in the section captioned "INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM" of Peoples' Definitive Proxy Statement, which section is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements:
The following reports of the independent registered public accounting firm and consolidated financial statements of Peoples Bancorp Inc. and subsidiaries are filed as required by "ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" and set forth immediately following "ITEM 9C DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS" of this Form 10-K:
Page
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP) on Effectiveness of Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm (Ernst & Young LLP) on Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Income for each of the fiscal years in the three-year period ended December 31, 2021
Consolidated Statements of Comprehensive Income for each of the fiscal years in the three-year period ended December 31, 2021
Consolidated Statements of Stockholders’ Equity for each of the fiscal years in the three-year period ended December 31, 2021
Consolidated Statements of Cash Flows for each of the fiscal years in the three-year period ended December 31, 2021
Notes to the Consolidated Financial Statements
Peoples Bancorp Inc. Parent Company Only Financial Information is included in Note 21 of the Notes to the Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(a)(3) Exhibits
The documents listed in the Index to Exhibits that immediately precedes the signature page of this Form 10-K, are filed/furnished with this Form 10-K as exhibits or incorporated into this Form 10-K by reference as noted. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K is identified as such in the list below.
(b) Exhibits
The documents listed in the Index to Exhibits that immediately precedes the signature page of this Form 10-K are filed/furnished with this Form 10-K as exhibits or incorporated into this Form 10-K by reference as noted.
(c) Financial Statement Schedules
None