EDGAR 10-K Filing

Company CIK: 318300
Filing Year: 2024
Filename: 318300_10-K_2024_0000318300-24-000140.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 subsidiary is Peoples Investment Company (“PIC”). Peoples also holds all of the common securities of NB&T Statutory Trust III, FNB Capital Trust One, Ascencia Statutory Trust I, and Porter Statutory Trusts II-IV. Peoples Bank’s operating subsidiaries include Peoples Insurance Agency, LLC (“Peoples Insurance”) and Vantage Financial, LLC (“Vantage”), a nationwide provider of equipment financing.
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, Peoples Insurance and Vantage. These products and services include the following:
◦various demand deposit accounts, savings accounts, money market accounts, certificates of deposit and governmental deposits;
◦commercial loans, residential real estate loans, home equity lines of credit, consumer loans and overdraft services;
◦insurance premium financing;
◦commercial equipment leasing;
◦technology equipment leasing;
◦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, alert notifications, Apple Pay® and Samsung Pay®;
◦interactive teller machines (“ITMs”);
◦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;
◦brokerage services;
◦custom-tailored fiduciary and trust services;
◦asset management and administration services; and
◦employee benefit, retirement, and health care plan administration services.
Peoples’ financial products and services are primarily offered through its financial service offices, ATMs, and ITMs 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 commercial and technology 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, 2023, 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 organic growth and targeted acquisitions. The organic growth may include opening de novo banking and loan production offices (“LPOs”) located in or near Peoples’ existing market area. Acquisitions have consisted of traditional banking offices and LPOs, 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, investment administration and management, insurance premium financing and commercial equipment 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 commercial equipment leasing services; and (4) improving operating efficiency by directing resources toward offices and markets with the greatest earnings opportunities.
Recent Corporate Developments
On October 25, 2022, Peoples announced the signing of a definitive Agreement and Plan of Merger providing for Peoples’ acquisition, in an all-stock merger, of Limestone Bancorp Inc. (“Limestone”), a bank holding company headquartered in Louisville, Kentucky, and the parent company of Limestone Bank. Under the terms of the Agreement and Plan of Merger, Limestone merged with and into Peoples, and Limestone Bank merged with and into Peoples’ wholly-owned subsidiary, Peoples Bank (collectively, the “Limestone Merger”). The Limestone Merger closed as of the close of business on April 30, 2023. As consideration, Limestone shareholders were paid 0.90 common shares of Peoples for each full share of Limestone that was owned at the merger date, resulting in the issuance of 6,827,668 common shares by Peoples, or aggregate consideration of $177.9 million. Peoples recorded goodwill in the amount of $68.8 million and core deposit other intangible assets in the amount of $27.7 million related to this transaction.
On January 28, 2021, Peoples’ Board of Directors approved a share repurchase program authorizing Peoples to purchase up to an aggregate of $30.0 million of Peoples’ outstanding common shares, replacing the February 27, 2020 share repurchase program which had authorized Peoples to purchase up to an aggregate of $40.0 million of Peoples’ outstanding common shares. Peoples repurchased an aggregate of 107,219 of its common shares totaling $3.0 million during 2023 and an aggregate of 263,183 of its common shares totaling $7.4 million during 2022, but did not repurchase any common shares during 2021, under the share repurchase program authorized on January 28, 2021.
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 70 offices in Ohio, 28 offices in West Virginia, 46 offices in Kentucky, two offices in Virginia, three offices in Washington D.C., one office in Maryland, an insurance premium finance lending office in Missouri, and an equipment leasing office in Vermont. Peoples’ market area consists of rural, small urban and metropolitan markets in which Peoples serves a diverse group of industries and consumers. 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.
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 services. Peoples Bank’s lending activities are focused principally on lending opportunities within its primary market area, except for its premium finance lending and equipment leasing businesses, which originate loans and leases nationwide. However, Peoples Bank may occasionally originate loans outside its primary market area. In general, Peoples Bank retains the majority of the 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 consumers and other borrowers spread over a broad range of industrial classifications. At December 31, 2023, 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, construction loans, and commercial credit card loans. Commercial loans represented the largest portion of Peoples Bank’s total loan portfolio, comprising approximately 60.8% and 54.4% of total loans at December 31, 2023, and at December 31, 2022, 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, 2023, the commercial loan portfolio consisted of 59.6% in variable interest rate loans and 40.4% 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, the customer synthetically fixes the rate on the variable rate loan. Peoples Bank offsets its exposure in each such 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 internal 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.
Commercial and Industrial Loans
Commercial and industrial loans are loans to operating companies for purposes of financing working capital needs, fixed asset purchases, 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. At December 31, 2023, commercial and industrial loans comprised 19.2% of Peoples Bank’s total loan portfolio, compared to 19.0% at December 31, 2022.
Commercial Real Estate Loans
Peoples Bank’s portfolio of commercial real estate loans comprised 35.7% of total loans at December 31, 2023, and 30.2% at December 31, 2022. 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 multifamily complexes, office buildings and complexes, retail facilities, 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 5.9% of Peoples Bank’s total loan portfolio at December 31, 2023 and 5.2% at December 31, 2022.
Construction financing is generally considered to involve higher credit risk than other types of loans 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 a 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
Based in Lee Summit, Missouri, the Peoples Premium Finance originates insurance premium finance loans 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. Peoples Bank’s portfolio of insurance premium finance loans comprised 3.3% of total loans at December 31, 2023, and 3.4% at December 31, 2022, with the original portfolio having been acquired during 2020.The loans are secured by the refundable, unearned premiums with respect to the underlying insurance policies. These loans require a 10% to 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 originates leases and equipment financing agreements through its North Star Leasing division and through its wholly-owned subsidiary Vantage. Peoples Bank’s portfolio of leases comprised 6.7% of total loans at December 31, 2023, and 7.3% at December 31, 2022.
Based in Burlington, Vermont, the North Star Leasing division underwrites, originates and services equipment leases and equipment financing agreements primarily to small businesses throughout the U.S. Based in Excelsior, Minnesota, Vantage underwrites, originates and services primarily technology equipment leases to medium and large businesses throughout the U.S. Both North Star Leasing’s and Vantage’s leases transfer substantially all of the benefits and much of the 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. For the majority of the leases, 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 12.9% of total loans at December 31, 2023, and 15.4% at December 31, 2022. 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 $1.9 million of residential real estate loans held for sale and was servicing $356.8 million of loans, consisting primarily of one-to-four family residential mortgages, which had previously been sold into the secondary market, in each case, at December 31, 2023. 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 also offers fixed rate home equity installment loans with five-year to 20-year terms.
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 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 $1.0 million that do not include an insurance escrow account. For loans secured by real estate with outstanding balances over $1.0 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, 2023, outstanding home equity lines of credit comprised 3.4% of Peoples Bank’s total loans, compared to 3.8% at December 31, 2022. Peoples Bank currently offers home equity lines of credit with a prime-based variable rate for the entire 10-year term, with interest-only payments and a balloon payment at maturity. At December 31, 2023, Peoples
Bank’s home equity loan portfolio consisted of 99.3% in variable interest rate loans and 0.7% in fixed interest rate loans. At December 31, 2023, 24.1% 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 $50.4 million and $63.2 million, respectively, and a weighted-average remaining maturity of 7.5 years. The average original loan amount under these convertible rate home equity lines of credit was $50,000 at December 31, 2023.
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, consumer credit card 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, 2023, consumer indirect loans comprised 10.8% of Peoples Bank’s total loan portfolio, compared to 13.4% at December 31, 2022.
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 2.1% of Peoples Bank’s total loan portfolio at December 31, 2023, compared to 2.3% at December 31, 2022.
Overdraft Services
Peoples Bank grants overdraft services to qualified customers, which provides overdraft protection to deposit customers, both individual and business, by establishing an overdraft amount. After a 60-day waiting period to verify account activity, each new checking account usually receives an overdraft 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 the overdraft services offered by Peoples. Once established, customers are permitted to overdraw their checking account at Peoples Bank's discretion, up to their overdraft limit, with each item being charged Peoples Bank’s regular overdraft fee, with a maximum of five charges per day when the customer’s account is overdrawn more than $5. Customers repay the overdraft with their next deposit. Peoples’ overdraft services are designed to allow Peoples Bank to fill the void between traditional overdraft protection, such as a line of credit, and non-bank “check cashing services.” Under federal banking regulations, Peoples Bank is required to obtain the consent of its customers in order to apply Peoples’ overdraft services to ATM and one-time debit card transactions. While the overdraft services generate 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, 2023, the unfunded commitment related to overdraft services was $82.3 million.
Investment Activities
At December 31, 2023, investment securities comprised 19.6% of Peoples’ total assets, compared to 24.2% at December 31, 2022. 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, 2023 included obligations of agencies and corporations of the U.S. government, including mortgage-backed securities, obligations of U.S. government sponsored agencies, bank eligible obligations of states and political subdivisions 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 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 borrowings and long-term borrowings to fund asset growth and satisfy liquidity needs. Peoples also hedges 90-day brokered deposits with interest rate swaps as part of its funding strategy. The swaps pay a fixed rate of interest while receiving variable interest based on the three-month Secured Overnight Financing Rate (“SOFR”), which offsets the rate on the brokered deposits. 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 (“ICS”) services 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 deposits in “Note 8 Deposits.”
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 Peoples Bank’s primary market area, as well as provide diversity in funding sources as 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 deposits 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.”
Borrowed Funds
Peoples obtains funds through a variety of short-term borrowings 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. Peoples also utilizes the Bank Term Funding Program (“BTFP”) which was created by the Federal Reserve Bank to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. The BTFP offers loans of up to one year in length. 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.”
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 (“fintechs”), 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 area. 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, 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 Kentucky, eastern Virginia, southern Maryland, Minnesota, West Virginia, 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, 2023, Peoples had 1,478 full-time equivalent employees, compared to 1,267 at December 31, 2022. 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 all associates were at or above this threshold as of January 2023. Peoples Bank has been recognized by Newsweek as one of America’s Best Banks in 2023, and Peoples Bank has been recognized as a “Best Bank to Work For” by American Banker in each of 2021, 2022 and 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 an anonymous ethics hotline for employees to report any issues that they may feel uncomfortable reporting to management. Peoples maintains 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.
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”). Peoples has submitted applications to the USPTO to register “Vantage Financial” and “vidTeller” as trademarks, but has yet to receive final approval. Additionally, Peoples is the owner of “tradeIT”, a registered service mark of Vantage. These service marks currently have expiration dates ranging from 2024 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 “pebo.com”, “peoplespf.com”, “northstarleasing.com”, “vantagefncl.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 (the “DIF”) of the Federal Deposit Insurance Corporation (the “FDIC”) 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 DIF. Such laws and regulations may also restrict Peoples’ ability to repurchase its common shares or to receive dividends from Peoples Bank, and may 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 Board of Governors of the Federal Reserve System (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 (the “ODFI”) and the Federal Reserve Bank of Cleveland (the “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, Vermont and Missouri 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 the other states where it conducts business.
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 (“FHLB”)
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 a loan or 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 DIF of the FDIC and Peoples Bank is subject to deposit insurance assessments to maintain the DIF. 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 DIF, 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 DIF. 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 DIF 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 perceived risk characteristics of the insured institution to the DIF, with institutions deemed less risky paying lower rates. Currently, assessments for institutions of less than $10 billion of total assets are based on financial measures and supervisory ratings derived from statistical models estimating the probability of failure within three years. The FDIC may increase or decrease the range of assessments uniformly, except that no adjustments can deviate more than two basis points from the base assessment without notice and comment rule making. The FDIC may also impose special assessments in emergency situations. The FDIC has established 2.0% as the designated reserve ratio (“DRR”), which is the amount in the DIF as a percentage of all DIF 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 Wall Street Reform and Consumer Protection Act of 2010, as amended (the “Dodd-Frank Act”). The Dodd-Frank Act required the FDIC to offset the effect on insured institutions with assets of less than $10 billion of the increase in statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. Although the FDIC’s rules reduced assessment ratio on all banks, they imposed a surcharge on banks with assets of $10 billion or more to be paid until the DRR reached 1.35%. 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.
In the semiannual update for the Restoration Plan in June 2022, the FDIC projected that the reserve ratio was at risk of not reaching the statutory minimum of 1.35% by September 30, 2028, the statutory deadline to restore the reserve ratio. Based on this update, the FDIC Board approved an Amended Restoration Plan, and concurrently proposed an increase in initial base deposit insurance assessment rate schedules uniformly by two basis points (from three basis points to five basis points), applicable to all insured depository institutions. In October 2022, the FDIC Board finalized the increase with an effective date of January 1, 2023, applicable to the first quarterly assessment period of 2023 (i.e., January 1 through March 31, 2023). The revised assessment rate schedules are intended to increase the likelihood that the reserve ratio of the DIF reaches the statutory minimum level of 1.35% percent by September 30, 2028. In the FDIC’s most recent semiannual update for the Amended Restoration Plan in November 2023, the FDIC noted that increased loss provisions associated with the failures of Silicon Valley Bank, Signature Bank and First Republic Bank in 2023 that reduced the DIF balance, coupled with strong growth in insured deposits, resulted in the reserve ratio declining 15 basis points from 1.25% as of December 31, 2022 to 1.10% as of June 30, 2023. Despite the decline in the reserve ratio, the FDIC staff projected that the reserve ratio remains on track to reach the statutory minimum of 1.35% ahead of the deadline of September 30, 2028. As a result, the FDIC staff recommended no changes to the Amended Restoration Plan and all scheduled assessment rates were maintained.
On November 16, 2023, the FDIC adopted a final rule implementing a special assessment to recover the loss to the DIF arising from the protection of uninsured depositors following the failures of Silicon Valley Bank and Signature Bank. The assessment base for the special assessment is equal to an insured depository institution’s estimated uninsured deposits reported for the quarter ended December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits. The FDIC will collect the special assessment at an annual rate of approximately 13.4 basis points, over eight quarterly assessment periods, beginning with the first quarter of 2024. Because Peoples Bank’s uninsured deposits were less than $5 billion for the quarter ended December 31, 2022, Peoples Bank will not be subject to this special assessment.
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.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts. In response to the COVID-19 pandemic, the Federal Reserve reduced reserve requirement ratios to 0% effective on March 26, 2020, to support lending to households and businesses. The reserve requirement ratio remained at 0% as of December 31, 2023.
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 (the “CARES Act”) 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.
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 Paycheck Protection Program (“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 the Consolidated Appropriates Act, 2021, which 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 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 the 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.
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/loss (“AOCI” for income, “AOCL” for loss) (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 October 2021, effective in November 2021, the FDIC issued a final rule to incorporate the Community Bank Leverage Ratio 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.”
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 the 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 that must be publicly disclosed. Peoples Bank received an overall rating of “Outstanding” pursuant to its most recent CRA rating assigned by the Federal Reserve Board.
On October 24, 2023, the federal banking agencies, including the Federal Reserve Board, issued a final rule designed to strengthen and modernize the regulations implementing the CRA. The changes are designed to encourage banks to expand access to credit, investment and banking services in low- and moderate-income communities, adapt to changes in the banking industry, including mobile and internet banking, provide greater clarity and consistency in the application of the CRA regulations, and tailor CRA evaluations and data collection to bank size and type. The applicability date for the majority of the changes to the CRA regulations is January 1, 2026, and additional requirements will be applicable on January 1, 2027. Peoples cannot predict the impact the changes to the CRA will have on its operations at this time.
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.”
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 past 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 NB&T Statutory Trust III, FNB Capital Trust One, Ascencia Statutory Trust I or Porter Statutory Trusts II-IV 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. However, due to continuing appellate litigation regarding the constitutionality of the CPFB’s funding structure, which stems, in part, from legal challenges to the Final Small Dollar Rule, the effective date for nationwide compliance with the Final Small Dollar Rule remains uncertain at this time.
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 with respect to inflation and the failure of the federal government to raise the federal debt ceiling, 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.
Following the adoption of additional listing requirements in 2023 to comply with the Dodd-Frank Act and rules adopted by the SEC in October 2022, public companies are now required to adopt and implement “clawback” policies 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 the three completed fiscal years immediately preceding the date the issuer is required to prepare a 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 at www.peoplesbancorp.com.
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 November 2021, the federal bank regulatory agencies issued a final rule, that became effective in May 2022, 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 as soon as possible and no later than 36 hours after the bank determine a computer-security incident that rises to the level of a notification 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 larger incidents. This rule also requires bank service providers to notify their bank organization customers of a computer-security incident that has occurred, or is reasonably likely to cause, a material service disruption or degradation for four or more hours.
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.
Furthermore, once final rules are adopted, the Cyber Incident Reporting for Critical Infrastructure Act, enacted in March 2022, will require certain covered entities to report a covered incident to the U.S. Department of Homeland Security’s Cybersecurity & Infrastructure Security Agency (“CISA”) within 72 hours after a covered entity reasonably believes an incident has occurred. Separate reporting to CISA will also be required within 24 hours if a ransom payment is made as a result of a ransomware attack.
On July 26, 2023, the SEC adopted final rules that require public companies to promptly disclose material cybersecurity incidents in a Current Report on Form 8-K and detailed information regarding their cybersecurity risk management, strategy, and governance on an annual basis in its Annual Reports on Form 10-K. Companies are required to report on Form 8-K any cybersecurity incident they determine to be material within four business days of making that determination. See “ITEM 1C CYBERSECURITY” of this Form 10-K. These SEC rules, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.
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 exempted 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 bank regulatory 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 were 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 Peoples’ subsidiaries. Peoples believes the nature of the operations of Peoples’ subsidiaries has little, if any, environmental impact. As a result, Peoples anticipates no material capital expenditures for environmental control facilities for Peoples’ 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. For example, as a result of the COVID-19 pandemic, the U.S. Congress enacted the CARES Act and other legislation during 2020 that 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. Additionally, 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, 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
•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, the failure of the federal government to raise the federal debt ceiling, 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 rising inflation and changes in market interest rates 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 continued rising interest rates. A prolonged period of extremely volatile and unstable market conditions has the potential to 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 or the precise effects that they may have on Peoples’ activities and financial results.
See the sections captioned “Net Interest Income” 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.
•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 Peoples’ 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. At December 31, 2023, Peoples had eleven effective interest rate swaps, with an aggregate notional value of $105.0 million, which were designated as cash flow hedges of brokered deposits, and which 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. At December 31, 2023, the termination value of derivative financial instruments in a net liability position was $19.1 million, which included accrued interest but excluded any adjustment for nonperformance risk. At December 31, 2023, Peoples had no collateral posted with its derivative counterparties and the derivative financial counterparties had $12.8 million of cash pledged and $2.2 million of investment securities pledge. If Peoples had breached any of the provisions of the derivative financial instruments at December 31, 2023, Peoples could have been required to settle its obligations under the derivative financial agreements at the termination value.
•Instability in global economic conditions and geopolitical matters, as well as volatility in financial markets, could have a material adverse effect on Peoples’ results of operations and financial condition.
The macroeconomic environment in the U.S. is susceptible to global events and volatility in financial markets. In addition, trade negotiations between the U.S. and other nations remain uncertain and could adversely impact economic and market conditions for Peoples and its clients and counterparties. Instability in global economic conditions and geopolitical matters, as well as volatility in financial markets, could have a material adverse effect on the Peoples’ results of operations and financial condition.
For example, on February 24, 2022, Russian military forces invaded Ukraine, and sustained conflict and disruption in the region have occurred and remains likely to continue. In addition, the October 7, 2023 attack by Hamas in Israel has resulted in prolonged conflict and disruption in the Middle East. Although the length, impact and outcome of the ongoing war in Ukraine and the conflict in the Middle East are highly unpredictable, these conflicts have resulted, and could continue to result, in significant market and other disruptions, including significant volatility in commodity prices and supply of energy resources, instability in financial markets, supply chain interruptions, political and social instability, changes in consumer or purchaser preferences, as well as increases in cyberattacks and espionage. The extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have substantial impact on the global economy and Peoples’ business for an unknown period of time.
•Inflation may have an adverse impact on Peoples’ business and on its customers.
Inflation and rapid increases in interest rates have led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates. The U.S. Treasury Department, FDIC and Federal Reserve Board have announced a program to provide up to $25 billion of loans to financial institutions secured by certain of such government securities held by financial institutions to mitigate the risk of potential losses on the sale of such instruments. However,
widespread demands for customer withdrawals or other liquidity needs of financial institutions for immediate liquidity may exceed the capacity of such program. There is no guarantee that the U.S. Treasury Department, FDIC and Federal Reserve Board will provide access to uninsured funds in the future in the event of the closure of other banks or financial institutions, or that they would do so in a timely fashion. In addition, inflation generally increases the cost of goods and services Peoples uses in its business operations, such as electricity and other utilities, which increases non-interest expenses. Furthermore, Peoples’ customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans.
Any of the above-mentioned factors could affect Peoples’ business, financial condition and operating results. Any such disruptions may also magnify the impact of other risks described in this Form 10-K.
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, cybersecurity risk, 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.
Peoples may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its 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 its 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, acquisitions, social media and other marketing activities, and 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 its 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 its 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 is) or that Peoples’ (or its vendors’) consumer compliance business continuity, and data security systems will prove to be inadequate.
Any future restrictions on the access of Peoples’ workforce to its 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 depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties.
•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.
Information security risks have increased due to the sophistication and activities of organized crime, hackers, terrorists and other external parties and the use of online, telephone, and mobile banking channels by clients. 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 the business’ own information and is presented with a demand to pay a ransom in order to once again have access to the business’ information. Peoples could be adversely affected if one of its employees or a third-party service provider causes a significant operational break-down or failure, either as a result of human error or where an 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 is). These disruptions may interfere with service to Peoples’ customers, cause additional regulatory scrutiny and result in a financial loss or liability.
Any compromise to Peoples’ information security could impair Peoples’ reputation and deter Peoples’ clients from using Peoples’ banking services. Information security breaches can also disrupt the operation of information systems on which Peoples and its customers depend, adversely affecting business operations. Such events can result in costly remediation measures and litigation or governmental investigation and responding to security breaches can place unanticipated demands on the time and attention of management. Peoples relies on security systems to provide the protection and authentication necessary to secure transmission of data against damage by theft, fire, power loss, telecommunications failure or similar catastrophic event, as well as from security breaches, ransomware, denial of service attacks, viruses, worms, and other disruptive problems caused by hackers. Computer break-ins, phishing and other disruptions of customer or vendor systems could also jeopardize the security of information stored in and transmitted through Peoples’ computer systems and network infrastructure.
Peoples’ associates also confront the risk of being compromised by emails sent by perpetrators posing as company executives or vendors in order to dupe Peoples’ personnel into sending large sums of money to accounts controlled by the perpetrators. Peoples requires all employees to complete annual information security awareness training to increase their awareness of these risks and to engage them in Peoples’ mitigation efforts. If these precautions are not sufficient to protect Peoples’ systems from data breaches or compromises, Peoples’ reputation and business could be adversely affected.
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 its customers, Peoples cannot ensure that such policies and procedures will prevent all fraudulent transfers.
Peoples depends on the services of a variety of third-party vendors to meet data processing and communication needs, and Peoples has contracted with third parties to run their proprietary software on Peoples’ behalf. While Peoples performs reviews of security controls instituted by the vendor in accordance with industry standards and institutes Peoples’ own internal security controls, Peoples relies on continued maintenance of the controls by the outside party to safeguard customer data.
Additionally, Peoples issues debit cards which are susceptible to compromise at the point of sale via the physical terminal through which transactions are processed and by other means of hacking. The security and integrity of these transactions are dependent upon the retailers’ vigilance and willingness to invest in technology and upgrades. Issuing debit cards to Peoples’ clients exposes Peoples to potential losses which, in the event of a data breach at one or more major retailers may adversely affect Peoples’ business, financial condition, and results of operations.
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.
Peoples has implemented security controls to prevent unauthorized access to its computer systems, and Peoples requires that its 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 such confidential information 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 its 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 cybersecurity 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 to incur 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. The Financial Crimes Enforcement Network (also known as FinCEN), a unit of the U.S. Department of the Treasury 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, the U.S. Drug Enforcement Administration, and the U.S. 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; and 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 as well as OFAC, 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 bank organizations, 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 and state 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.
Peoples has a Loan Agreement (the “U.S. Bank Loan Agreement”) with U.S. Bank National Association that provides Peoples with a revolving line of credit. A Fifth Amendment to the U.S. Bank Loan Agreement, entered into on March 31, 2023, extended the maturity from April 1, 2023 to March 31, 2024. 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.
•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. Economic conditions, including high inflation and elevated interest rates, and political climate could 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, 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 at December 31, 2023 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 its loan portfolio.
Peoples maintains an allowance for credit losses that is believed to be a reasonable estimate of the expected losses based on management’s quarterly analysis of its 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 its 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 its 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, and Peoples adopted this guidance in 2020. 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. Additionally, the time horizon over which Peoples is required to estimate future credit losses expanded under CECL, 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 its 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 is 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 its 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 is 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 additional capital will be available on acceptable terms. The inability to raise additional 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, financial accounting and 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 DIF, 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 Bank’s business activities (including foreclosure and collection practices), limit the dividends or distributions that Peoples Bank 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 its 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 its 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 its 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 Peoples’ 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 its 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 its 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 its 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 its 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 its 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.”
•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 its subsidiaries are subject to examinations and challenges by tax authorities.
In the normal course of business, Peoples and its 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 could experience an unexpected inability to obtain needed liquidity which could adversely affect its business, profitability, and viability as a going concern.
Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities and is essential to a financial institution’s business. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to alternative sources of funds. The bank failures in 2023 exemplify the potential serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution’s ability to satisfy its obligations to depositors. Peoples seeks to ensure its funding needs are met by maintaining a level of liquidity through asset and liability management. If Peoples becomes unable to obtain funds when needed, it could have a material adverse effect on Peoples’ business, financial condition, and results of operations.
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, and the FDIC, and the regulations of the CFPB. These regulations are primarily intended to protect depositors and the DIF, 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, 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 its business and may lead to penalties that materially affect Peoples and its shareholders. Even the reduction of regulatory restrictions could have an adverse effect on Peoples and its 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 its 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” and “Note 1 Summary of Significant Accounting Policies” of this Form 10-K.
•Regulatory capital standards may have an adverse effect on its profitability, lending, and ability to pay dividends.
Peoples is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that Peoples must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. If Peoples fail to meet these minimum capital guidelines and/or other regulatory requirements, its financial condition would be materially and adversely affected. The Basel III capital framework requires Peoples to maintain significantly more capital as a result of higher required capital levels and more demanding regulatory capital risk weightings and calculations. Satisfying capital requirements may require Peoples to limit its banking operations, retain net income or reduce dividends to improve regulatory capital levels, which could negatively affect its business, financial condition and results of operations.
•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 DIF 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 its common shares at the current rate or at all.
On November 16, 2023, the FDIC Board adopted a final rule implementing a special assessment to recover the loss to the DIF arising from the protection of uninsured depositors following the failures of Silicon Valley Bank and Signature Bank. The assessment base for the special assessment is equal to an insured depository institution’s estimated uninsured deposits reported for the quarter ended December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits. The FDIC will collect the special assessment at an annual rate of approximately 13.4 basis points, over eight quarterly assessment periods, beginning with the first quarter of 2024. Because Peoples Bank’s uninsured deposits were less than $5 billion for the quarter ended December 31, 2022, Peoples Bank will not be subject to this special assessment. However, there can be no assurance that assessments may not be changed in the future and/or that additional special assessments may not be imposed in the future by the FDIC, either in response to additional bank failures or otherwise, that could increase the amount of premiums required to be paid to the FDIC by Peoples Bank. 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 its 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 its 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 regulatory approvals, it will not be able to consummate an acquisition that it believes is in its 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 it completes. 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 its financial service office premises and equipment and other assets, and may lead to increased expenditures to change its retail distribution channel.
Peoples has significant investments in financial service office premises and equipment for its financial service office network, including 20 financial service offices, consisting of LPOs and limited service locations, as well as its 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 ATMs, ITMs, 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 its retail distribution strategy, close and/or sell certain financial service offices and restructure or reduce its 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.
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 it 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.
•Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to Peoples’ environmental, social and governance practices may impose additional costs on Peoples or expose Peoples to new or additional risks.
Financial institutions are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social, and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds, and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions, and human rights. Increased ESG-related compliance costs for Peoples as well as among its suppliers, vendors and various other parties within its supply chain could result in increases to its overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact its reputation, ability to do business with certain partners, access to capital, and the price of its common shares. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.
•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 its 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 its 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 its subsidiaries may be involved from time to time in a variety of litigation arising out of each entity’s respective business. 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 its 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 its 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.
•The impact of larger or similar-sized financial institutions encountering problems may 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.
Peoples is exposed to the risk that when a peer financial institution experiences financial difficulties, there could be an adverse impact on the regional banking industry and the business environment in which Peoples operates. The bank failures of Silicon Valley Bank in California, Signature Bank in New York, First Republic Bank in California, and Heartland Tri-State Bank in Kansas during 2023 caused a degree of panic and uncertainty in the investor community and among bank customers generally. While Peoples does not believe that the circumstances of these four banks’ failures are indicators of broader issues with the banking system, the failures may reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have a negative reputational ramification for the banking industry, including Peoples. Peoples will continue to monitor the ongoing events concerning these four banks as well as any future potential bank failures and volatility within the banking industry generally, together with any responsive measures taken by the banking regulators to mitigate or manage potential turmoil in the banking industry.
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 its investment in bank-issued trust preferred securities in future periods.
•Economic and other conditions may cause volatility in the price of Peoples’ common shares.
The price of Peoples’ common shares can fluctuate widely in response to a variety of factors, including: actual or anticipated variations in the Peoples’ quarterly operating results; recommendations by securities analysts; significant acquisitions or business combinations; strategic partnerships, joint ventures or capital commitments; operating and stock price performance of other companies that investors deem comparable to Peoples; new technology used or services offered by Peoples’ competitors; news reports relating to trends, concerns and other issues in the banking and financial services industry; and changes in government regulations. General market fluctuations, industry factors and general economic and political conditions and external events, including terrorist attacks, increased inflation, economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, could also cause the price of Peoples’ common shares to decrease, regardless of Peoples’ operating results.
•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, 2023, Peoples Bank operated 67 offices in Ohio, 42 offices in Kentucky, 27 offices in West Virginia, three offices in Washington D.C, two offices in Virginia., one office in Maryland, an insurance premium finance lending office in Missouri, and an equipment leasing office in Vermont. Of these 144 offices, 34 are leased and the rest are owned by Peoples Bank.
Peoples Bank’s subsidiary, Peoples Insurance, rents office space in various Peoples Bank offices, and also leases office space from third parties in Inez and Pikeville, Kentucky. Peoples Bank’s subsidiary, Vantage, rents office space in Excelsior, Minnesota, Cherry Hill, New Jersey, Holmdel, New Jersey, Austin, Texas, Grafton, Wisconsin, and Guilford, Connecticut.
Rent expense on the leased properties totaled $3.3 million in both 2023 and 2022, which excludes intercompany rent expense. The following properties have a lease term expiring on or before June 2024:
Location Address Lease Expiration Date
Athens - State Street 801 East State Street, Athens, Ohio June 2024 (a)
Guilford (Vantage) 87 Whitfeld St, Guilford, Connecticut March 2024 (b)
Lancaster Fair Ave 2211 West Fair Avenue, Lancaster, Ohio April 2024 (a)
North Canton LPO 125 S. Main Street, North Canton, Ohio June 2024 (b)
Worthington LPO 250 E. Wilson Bridge Rd., Suite 230, Worthington, Ohio March 2024 (a)
(a) Current lease agreement has no remaining extensions available.
(b) Current lease agreement has one one-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.”

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3 LEGAL PROCEEDINGS
Peoples or one of its subsidiaries from time to time is engaged in various litigation matters including the defense of claims of improper loan or deposit practices or lending violations. In addition, 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 management’s current knowledge and after consultation with legal counsel, Peoples’ management believes that damages, if any, and other amounts related to pending legal proceedings 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, 2023, Peoples had 4,391 shareholders of record.
Peoples currently plans to continue to pay quarterly cash dividends comparable to those paid historically, subject to certain regulatory restrictions described in “Note 17 Regulatory Matters,” 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 Exchange Act of Peoples’ common shares during the three months ended December 31, 2023:
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, 2023 51,127 (1)(2)(3) $ 26.86 (1)(2)(3) 40,415 $ 21,505,159
November 1 - 30, 2023 66,804 (1) $ 28.34 (1) 66,804 $ 19,611,667
December 1 - 31, 2023 1,150 (2) $ 29.51 (2) - $ 19,611,667
Total 119,081 $ 27.72 107,219 $ 19,611,667
(1)On January 29, 2021, Peoples announced that on January 28, 2021, Peoples’ Board of Directors approved 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 40,415 and 66,804 common shares repurchased under the share repurchase program during October and November 2023, respectively.
(2)Information includes 2,335 and 1,150 common shares purchased in open market transactions during October and December 2023, respectively, 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 8,377 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 October 2023.
Performance Graph
The following Performance Graph and related information shall not be deemed to be “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, 2018, 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 2,000 in order of descending market capitalization in the Russell 3000 Index. The second is the KBW Nasdaq Bank Index, which is designed to track the performance of the leading banks and thrifts that are publicly-traded in the U.S. The KBW Nasdaq Bank Index includes 24 banking stocks representing the large U.S. national money centers, regional banks and thrift institutions.
At December 31,
2018 2019 2020 2021 2022 2023
Peoples Bancorp Inc. $ 100.00 $ 119.94 $ 99.23 $ 121.89 $ 113.79 $ 143.71
Russell 2000 Index $ 100.00 $ 125.49 $ 150.50 $ 172.75 $ 137.40 $ 160.60
KBW Nasdaq Bank Index $ 100.00 $ 136.12 $ 122.09 $ 168.90 $ 132.76 $ 131.58

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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,” “continue,” “remain,” 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 effects of interest rate policies, changes in the interest rate environment due to economic conditions and/or the fiscal and monetary policy measures undertaken by the U.S. government and the Federal Reserve Board, including changes in the Federal Funds Target Rate, in response to such economic conditions, which may adversely impact interest rates, the interest rate yield curve, interest margins, loan demand and interest rate sensitivity;
(2)the effects of inflationary pressures and the impact of rising interest rates on borrowers’ liquidity and ability to repay;
(3)the success, impact, and timing of the implementation of Peoples’ business strategies and Peoples’ ability to manage strategic initiatives, including the interest rate policies of the Federal Reserve Board, the completion and successful integration of acquisitions, including the Limestone Merger that closed in April 2023, and the expansion of commercial and consumer lending activities;
(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 FDIC, the Federal Reserve Board, and the CFPB, which may subject Peoples, its subsidiaries, or one or more acquired companies to a variety of new and more stringent legal and regulatory requirements;
(6)the effects of easing restrictions on participants in the financial services industry;
(7)current and future local, regional, national and international economic conditions (including the impact of persistent inflation, supply chain issues or labor shortages, supply-demand imbalances affecting local real estate prices, high unemployment rates in the local or regional economies in which Peoples operates and/or the U.S. economy generally, an increasing federal government budget deficit, the failure of the federal government to raise the federal debt ceiling, potential or imposed tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations, and changes in the relationship of the U.S. and U.S. global trading partners) and the impact these conditions may have on Peoples, Peoples’ customers and Peoples’ counterparties, and Peoples’ assessment of the impact, which may be different than anticipated;
(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 recent inflationary pressures and continued elevated interest rates, and may 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)adverse changes in the conditions and trends in the financial markets, including recent inflationary pressures, which may adversely affect the fair value of securities within Peoples’ investment portfolio, the interest rate sensitivity of Peoples’ consolidated balance sheet, and the income generated by Peoples’ trust and investment activities;
(15)the volatility from quarter to quarter of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors;
(16)Peoples’ ability to receive dividends from Peoples’ subsidiaries;
(17)Peoples’ ability to maintain required capital levels and adequate sources of funding and liquidity;
(18)the impact of larger or similar-sized financial institutions encountering problems, such as the closures in 2023 of Silicon Valley Bank in California, Signature Bank in New York and First Republic Bank in California, which may adversely affect the banking industry and/or Peoples’ business generation and retention, funding and liquidity, including Peoples’ continued ability to grow deposits or maintain adequate deposit levels, and may further result in potential increased regulatory requirements, increased reputational risk and potential impacts to macroeconomic conditions;
(19)Peoples’ ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks, including those of Peoples’ third-party vendors and other service providers, which may prove inadequate, and could adversely affect customer confidence in Peoples and/or result in Peoples incurring a financial loss;
(20)any misappropriation of the confidential information which Peoples possesses could have an adverse impact on Peoples’ business and could result in regulatory actions, litigation and other adverse effects;
(21)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;
(22)operational issues stemming from and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems on which Peoples and Peoples’ subsidiaries are highly dependent;
(23)changes in consumer spending, borrowing and saving habits, whether due to changes in retail distribution strategies, consumer preferences and behavior, changes in business and economic conditions, legislative or regulatory initiatives, or other factors, which may be different than anticipated;
(24)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;
(25)the impact on Peoples’ businesses, personnel, facilities or systems of losses related to acts of fraud, theft, misappropriation or violence;
(26)the impact on Peoples’ businesses, as well as on the risks described above, of various domestic or international widespread natural or other disasters, pandemics, cybersecurity attacks, system failures, civil unrest, military or terrorist activities or international conflicts (including Russia’s war in Ukraine and the recent conflicts involving Israel and Hamas);
(27)the potential deterioration of the U.S. economy due to financial, political or other shocks;
(28)the potential influence on the U.S. financial markets and economy from the effects of climate change, including any enhanced regulatory, compliance, credit and reputational risks and costs;
(29)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;
(30)risks and uncertainties associated with Peoples’ entry into new geographic markets and risks resulting from Peoples’ inexperience in these new geographic markets;
(31)Peoples’ ability to integrate the Limestone Merger, which may be unsuccessful, or may be more difficult, time-consuming or costly than expected;
(32)the risk that expected revenue synergies and cost savings from the Limestone Merger may not be fully realized or realized within the expected time frame;
(33)changes in laws or regulations imposed by Peoples’ regulators impacting Peoples’ capital actions, including dividend payments and share repurchases;
(34)the vulnerability of Peoples’ network and online banking portals, and the systems of parties with whom Peoples contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches;
(35)Peoples’ business may be adversely affected by increased political and regulatory scrutiny of corporate environmental, social and governance (“ESG”) practices;
(36)the effect of a fall in stock market prices on the asset and wealth management business; and
(37)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:
Mergers and Acquisitions
◦During 2023, Peoples incurred $17.0 million of acquisition-related expenses, compared to $3.0 million for 2022 and $21.4 million for 2021. The acquisition-related expenses in 2023 were primarily related to the Limestone Merger. The acquisition-related expenses in 2022 were related to the Vantage acquisition (as defined below), the Premier Merger (as defined below), and the Limestone Merger, and the acquisition-related expenses during 2021 were primarily related to the NSL acquisition (as defined below) and the Premier Merger.
◦On October 25, 2022, Peoples announced the Limestone Merger, a transaction valued at $177.9 million. The Limestone Merger closed as of the close of business on April 30, 2023. Peoples acquired Limestone’s loan portfolio totaling $1.1 billion, $1.2 billion of deposits, $172.7 million of total investment securities, an aggregate of $99.5 million of short-term and long-term borrowings, and $93.5 million of total cash and cash equivalents. Peoples also recorded goodwill in the amount of $68.8 million and other intangible assets of $27.7 million, which consisted of core deposit intangibles.
◦On April 1, 2022, Peoples Insurance acquired substantially all of the assets and rights of an insurance agency with five locations in eastern Kentucky and certain rights to related customer accounts, which were previously developed and maintained by Elite Agency, Inc. (“Elite”), pursuant to an Asset Purchase Agreement between Peoples Insurance and Elite. Total consideration for this transaction was $4.4 million. Peoples recognized intangibles of $2.1 million, primarily comprised of a customer relationship intangible.
◦On March 7, 2022, Peoples Bank purchased 100% of the equity of Vantage, a nationwide provider of equipment financing headquartered in Excelsior, Minnesota (the “Vantage acquisition”). Peoples Bank acquired assets comprising Vantage’s lease business, including $154.9 million in leases and certain third-party debt in the amount of $106.9 million. Peoples Bank paid cash consideration of $54.0 million and also 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 has continued to operate under the name Vantage Financial, which leverages Vantage’s strong brand recognition within the equipment finance industry. Peoples recorded goodwill in the amount of $27.2 million and other intangible assets of $13.2 million, which included a customer relationship intangible, a trade-name intangible and non-compete agreements related to this transaction.
◦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 conditions of the definitive Agreement and Plan of Merger dated March 26, 2021, Premier merged with and into
Peoples and Premier’s wholly-owned subsidiaries, Premier Bank and Citizens, subsequently merged into Peoples’ wholly-owned subsidiary, Peoples Bank, in a transaction resulting in the issuance of 8,589,685 common shares valued at $261.9 million (the “Premier Merger”). 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 $1.2 billion in loans and $1.8 billion in deposits and recorded $66.9 million in goodwill and $4.2 million in other intangible assets in connection with the Premier Merger.
◦On May 4, 2021, 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. Total consideration for this transaction was $325,000, 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 “NSL acquisition”). 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 $116.5 million, plus an earn-out payment to NSL of $3.0 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 goodwill in the amount of $24.7 million and other intangible assets of $14.0 million, which included a customer relationship intangible, a trade-name intangible and non-compete agreements related to this transaction.
Other Significant Developments
◦During the third quarter of 2023, Peoples terminated its pension plan by settling the remaining benefit obligation of $7.7 million. The pension plan had been closed to new entrants since January 1, 2010. Peoples recorded a settlement charge of $2.4 million in the third quarter of 2023 in relation to the termination of the pension plan. Peoples does not anticipate further expenses related to the termination. Peoples incurred $185,000 in pension settlement charges in 2022, compared to $143,000 in 2021, 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.
◦During 2023, Peoples recorded a provision for credit losses of $15.2 million, compared to a recovery of credit losses of $3.5 million for 2022 and a provision for credit losses of $0.7 million for 2021. The provision for credit losses during 2023 was driven by (i) the addition of the provision for the non-purchased credit deteriorated (“non-PCD”) loans acquired in the Limestone Merger, (ii) loan growth and (iii) an increase in charge-offs, partially offset by a release of reserves on individually analyzed loans and the use of updated loss drivers. The recovery of credit losses during 2022 was primarily due to the impact of economic forecast improvement in the CECL model, coupled with loan pay-offs during certain periods.
◦On January 28, 2021, Peoples’ Board of Directors approved a share repurchase program authorizing Peoples to purchase up to an aggregate of $30.0 million of Peoples’ outstanding common shares, replacing the February 27, 2020 share repurchase program which had authorized Peoples to purchase up to an aggregate of $40.0 million of Peoples’ outstanding common shares. During 2023, Peoples repurchased 107,219 common shares totaling $3.0 million under the share repurchase program. During 2022, Peoples repurchased 263,183 common shares totaling $7.4 million under the share repurchase program. During 2021, Peoples did not repurchase any common shares under the share repurchase program authorized on January 28, 2021. On October 25, 2022, after the announcement of the Limestone Merger, the share repurchase program was paused until the vote to approve the Limestone Merger by shareholders, which occurred on February 23, 2023.
◦On April 3, 2019, Peoples entered into the U.S. Bank Loan Agreement. A Fifth Amendment to the U.S. Bank Loan Agreement, entered into on March 31, 2023, extended the maturity from April 1, 2023 to March 31, 2024. The U.S. Bank Loan Agreement provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $30.0 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.
◦To combat the effects of ongoing inflationary pressures, the Federal Reserve Board increased the Federal Funds Target Rate range to 0.25% to 0.50% beginning on March 16, 2022, and continued to raise rates up to 5.50% on July 27, 2023. The Federal Reserve Board has kept rates unchanged since July 2023 but has signaled that it expects to begin reducing rates sometime in 2024.
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.” 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 fair value measurements. These four accounting policies are described in further detail below.
Allowance for Credit Losses
The allowance for credit losses represents Peoples’ estimate of expected credit losses over the expected contractual life of the existing loan portfolio. 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, loan 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 20 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 and Ohio unemployment 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.
Loans that do not share similar risk characteristics are evaluated on an individual basis. The allowance for credit losses related to these specific loans was based on management’s estimate of potential losses 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, 2023 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, 2023, management calculated the difference between the modeled allowance for credit losses at December 31, 2023, compared to one based on an adverse scenario. The adverse scenario reflected increases of 100 basis points in both U.S. and Ohio unemployment. Excluding consideration of general reserve adjustments, this sensitivity analysis would result in a hypothetical increase in the allowance for credit losses of approximately $6.6 million at December 31, 2023.
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. ASC 805 allows for a measurement period of 12 months beyond the acquisition date to finalize the fair value measurement of the acquired company’s net assets as additional information existing as of the acquisition date becomes available. Measurement period adjustments are recorded through goodwill.
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.”
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.”
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, 2023, 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.”
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.”
New Accounting Guidance Pending Adoption
Accounting Standards Update (“ASU”) 2023-06 - Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative: The ASU was issued in response to the SEC’s August 2018 final rule that updated and simplified disclosure requirements that the SEC believed were “redundant, duplicative, overlapping, outdated, or superseded.” The new guidance is intended to align U.S. GAAP requirements with those of the SEC and to facilitate the application of U.S. GAAP for all entities. ASU 2023-06 applies to all reporting entities within the scope of the amended subtopics. The effective dates for each amendment will be the date on which the SEC’s removal of that related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, prospectively, with early adoption prohibited. Peoples will adopt such requirements when they become effective and the guidance is not expected to materially impact Peoples’ consolidated financial statements.
ASU 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures: The FASB issued ASU 2023-07 on November 27, 2023. The amendments “improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.” In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The purpose of the amendments is to enable “investors to better understand an entity’s overall performance” and assess “potential future cash flows.”
The ASU applies to all public entities that are required to report segment information in accordance with ASC 280. The enhanced segment disclosure requirements apply “retrospectively to all prior periods presented in the financial statements.” The significant segment expense and other segment item amounts “disclosed in prior periods shall be based on the significant segment expense categories identified and disclosed in the period of adoption.” The amendments in ASU 2023-07 are effective for all public entities for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. Peoples will adopt the expanded disclosure requirements beginning with its Annual Report on Form 10-K for the fiscal year ending December 31, 2024, and the guidance is not expected to materially impact Peoples’ consolidated financial statements.
ASU 2023-09 - Income Taxes (Topic 740): Improvements to Income Tax Disclosures: The FASB issued ASU 2023-09 on December 14, 2023. The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. ASU 2023-09 applies to all entities subject to income taxes. For public business entities, the new requirements will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively with early adoption is permitted. Peoples is still evaluating the applicability and materiality of the guidance.
EXECUTIVE SUMMARY
Net income for the year ended December 31, 2023 was $113.4 million, compared to $101.3 million for 2022 and $47.6 million for 2021, representing earnings per diluted common share of $3.44, $3.60 and $2.15, respectively. The increases in 2023 earnings when compared to 2022 and 2021 were driven by increases in net interest income, partially offset by increases in non-interest expenses. Non-core items, and the related tax effect of each, negatively impacted earnings per diluted common share by $0.59 for 2023 compared to $0.11 for 2022 and $0.85 for 2021.
Net interest income increased 34% to $339.4 million for 2023, compared to $253.4 million for 2022, and $172.6 million for 2021. Net interest margin was 4.56% in 2023, compared to 3.97% in 2022 and 3.40% in 2021. The increases in net interest income and net interest margin when compared to 2022 were driven by increases in market interest rates, the additional net interest income from the Limestone Merger, and improvement in investment yields. Partially offsetting these benefits was an increase in interest expense resulting from a shift in the composition of funding sources combined with an increase in market interest rates for deposits and other funding sources. Net interest margin increased during 2022 when compared to 2021 largely due to (i) the Premier Merger and the Vantage acquisition, (ii) organic growth and (iii) increases in market interest rates. Net interest margin in 2021 was impacted by 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 Merger and and insurance premium finance acquisition coupled with higher-yielding leases acquired from NSL and organic loan growth. Accretion income, net of amortization expense, from acquisitions totaled $25.3 million for 2023, $11.6 million for 2022, and $3.2 million for 2021, adding 34 basis points, 19 basis points, and 7 basis points, respectively, to the net interest margin.
The provision for credit losses for 2023 was $15.2 million, compared to a recovery of credit losses of $3.5 million for 2022 and a provision for credit losses of $0.7 million for 2021. Net charge-offs for 2023 were $8.5 million, compared to $7.3 million for 2022 and
$4.7 million for 2021. Net charge-offs as a percent of average total loans were 0.15% for 2023, 0.16% for 2022 and 0.13% for 2021. The provision for credit losses during 2023 was driven by (i) the addition of the provision for the non-PCD loans acquired in the Limestone Merger, (ii) loan growth and (iii) an increase in charge-offs, partially offset by a release of reserves on individually analyzed loans and the use of updated loss drivers. The recovery of credit losses during 2022 compared to the provision for credit losses during 2021 was driven by improvements in economic forecasts, coupled with loan pay-offs and sales during certain periods.
Total non-interest income for 2023 increased $8.6 million, or 11%, when compared to 2022. The increase was driven by (i) a $4.1 million increase in electronic banking income, (ii) a $2.3 million increase in insurance income primarily due to growth in the property and casualty insurance line, (iii) a $2.1 million increase in deposit account service charges, (iv) a $1.5 million increase in bank owned life insurance income, and (v) a $2.7 million increase in other non-interest income. Insurance income increased due to new business and market increases for premiums. The increase in other non-interest income was due to an increase in operating lease income, which was partially offset by operating lease expense recognized in other non-interest expense. The other increases for the full year of 2023, when compared to the full year of 2022, were primarily due to the additional customers brought in from the Limestone Merger. Partially offsetting the increases was a $3.6 million increase in net losses on investment securities, primarily driven by a $3.6 million pre-tax ($2.9 million after-tax) net loss on the sales of available-for-sale investment securities during the first and fourth quarters of 2023, and a $2.2 million increase in net losses on assets disposals and other transactions, mostly due to a $1.6 million write-down of an other real estate owned (“OREO”) property during the second quarter of 2023. Total non-interest income for 2022 increased $10.0 million, or 14% when compared to 2021. The increase was driven by growth of $4.4 million in deposit account service charges and $3.1 million in electronic banking income, primarily attributable to customers added in the Premier Merger. Also contributing to the growth was a $3.0 million increase in lease income due to the Vantage acquisition. Partially offsetting the impact of these 2022 increases when compared to 2021 was a $2.0 million decline in mortgage banking income due to the increased market interest rate environment in 2022 resulting in a lower volume of new loan originations.
Total non-interest expense for the year ended December 31, 2023, was impacted by the Limestone Merger and acquisition-related non-interest expenses, which added $17.0 million across various line-items within non-interest expense. The table below summarizes the amount of acquisition-related expenses for each line item that is a component of non-interest expense. Acquisition-related expenses are considered a non-core non-interest expense by Peoples. This information is used by Peoples to provide information useful to investors in understanding Peoples’ operating performance and trends.
(Dollars in thousands) 2023 2022 2021
Non-interest expense:
Salaries and employee benefit costs $ 144,031 $ 112,690 94,612
Data processing and software expense 21,607 14,241 10,542
Net occupancy and equipment expense 21,368 19,516 14,918
Professional fees 17,041 12,094 15,783
Amortization of other intangible assets 11,222 7,763 4,775
Electronic banking expense 7,150 9,231 8,885
Marketing expense 5,017 3,728 3,658
FDIC insurance premiums 4,785 3,702 1,976
Franchise tax expense 3,540 3,487 3,357
Other loan expenses 2,859 2,735 2,001
Communication expense 2,834 2,484 1,657
Other non-interest expense 25,033 15,476 21,573
Total non-interest expense 266,487 207,147 183,737
Acquisition-related non-interest expense:
Salaries and employee benefit costs 5,827 29 3,818
Data processing and software expense 1,850 410 65
Net occupancy and equipment expense 109 50 212
Professional fees 6,062 2,407 7,144
Electronic banking expense 115 (92) -
Marketing expense 81 51 241
Other loan expenses 2 (4) 3
Communication expense 1 2 54
Other non-interest expense 2,923 163 9,886
Total acquisition-related non-interest expense 16,970 3,016 21,423
Non-interest expense excluding acquisition-related expense:
Salaries and employee benefit costs 138,204 112,661 90,794
Data processing and software expense 19,757 13,831 10,477
Net occupancy and equipment expense 21,259 19,466 14,706
Professional fees 10,979 9,687 8,639
Amortization of other intangible assets 11,222 7,763 4,775
Electronic banking expense 7,035 9,323 8,885
Marketing expense 4,936 3,677 3,417
FDIC insurance premiums 4,785 3,702 1,976
Franchise tax expense 3,540 3,487 3,357
Other loan expenses 2,857 2,739 1,998
Communication expense 2,833 2,482 1,603
Other non-interest expense 22,110 15,313 11,687
Total non-interest expense excluding acquisition-related expense $ 249,517 $ 204,131 $ 162,314
Total non-interest expense was $266.5 million for 2023, an increase of $59.3 million, or 29%, compared to 2022. Excluding acquisition-related expenses, non-interest expenses increased $45.4 million, or 22%, due to increases in all non-interest expense line items except for electronic banking expense, which decreased $2.3 million when compared to 2022. The increases were primarily driven by non-interest expenses, excluding acquisition-related expenses, attributable to the Limestone Merger, as well as organic growth. The increase in other non-interest expense was also driven by the previously discussed pension plan settlement charges and a $1.7 million increase in operating lease depreciation expenses. Electronic banking expense decreased when compared to 2022 due to reduced costs for Peoples’ online banking platform and a reclassification of those costs relative to the prior period to data processing and software expense. Total non-interest expense was $207.1 million for 2022, an increase of $23.4 million compared to 2021. The growth was driven by increases of (i) $18.1 million in salaries and employee benefit costs, (ii) $4.6 million in net occupancy and equipment expense, (iii) $3.7 million in data processing and software expenses, and (iv) $3.0 million in intangible asset amortization.
These increases were primarily due to growth over the last year, driven by mergers and acquisitions. Partially offsetting the impact of these increases on non-interest expense in 2022 was a decrease in acquisition-related expenses due to the amount of expenses incurred in connection with the Premier Merger in 2021. Included in total non-interest expense during 2023 were certain non-core expenses which included acquisition-related expenses of $17.0 million compared to $3.0 million in 2022. Non-core expenses for 2021 included acquisition-related expenses of $21.4 million (detailed in the table above), 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.
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 58.7% for 2023, compared to 59.6% for 2022 and 73.6% for 2021. The efficiency ratio was elevated during 2021 primarily due to the non-core expenses discussed above. The efficiency ratio, when adjusted for non-core items, was 54.4% for 2023, 58.6% for 2022 and 63.5% for 2021.
Income tax expense totaled $31.8 million for 2023, compared to $27.3 million for 2022 and $9.4 million for 2021. The effective tax rate for 2023 was 21.9%, 21.3% for 2022 and 16.5%% for 2021. The increases for 2023 compared to 2022, and for 2022 compared to 2021, were driven by higher pre-tax income and a higher effective tax rate primarily due to apportionment in additional states due to recent acquisitions.
Total assets increased 27% to $9.16 billion at December 31, 2023, compared to $7.21 billion at year-end 2022. The increase was primarily due to $1.46 billion of assets, primarily loans, acquired in the Limestone Merger. Excluding the loans acquired in the Limestone Merger, the period-end loan and lease balance increased $472.2 million, or 10%, driven by increases of $203.6 million, $78.2 million, $68.9 million, $44.0 million, $37.9 million, and $37.0 million in other commercial real estate loans, commercial and industrial loans, leases, premium finance loans, construction loans, and indirect consumer loans, respectively. The increase in total assets from at December 31, 2022 was also impacted by purchases of held-to-maturity investment securities and sales of lower-yielding available-for-sale investment securities. Management underwent investment portfolio restructurings during 2023 to increase portfolio yield and reduce Peoples’ sensitivity to falling intermediate and long-term interest rates. The allowance for credit losses increased to $62.0 million or 1.01% of total loans, net of deferred fees and costs, compared to $53.2 million and 1.13%, respectively, at December 31, 2022. The increase in the allowance balance at December 31, 2023 when compared to at December 31, 2022 was driven by (i) the addition of the provision for the non-PCD loans acquired in the Limestone Merger, (ii) loan growth and (iii) an increase in charge-offs, partially offset by a release of reserves on individually analyzed loans and the use of updated loss drivers. The decrease in the ratio of the allowance for credit losses to total loans was due to the items noted above, primarily the release of reserves on individually analyzed loans.
Total liabilities were $8.10 billion at December 31, 2023, an increase of $1.68 billion since at December 31, 2022, primarily due to $1.35 billion of liabilities, primarily deposits, acquired in the Limestone Merger. Excluding Limestone deposit balances, total deposits at December 31, 2023 increased $615.3 million, or 11%, compared to at December 31, 2022, primarily due to increases of $785.6 million in retail certificates of deposit and $449.8 million in brokered certificates of deposit, partially offset by decreases of $226.8 million, $223.3 million, and $193.7 million, in non-interest bearing deposits, savings accounts, and interest-bearing demand deposit accounts, respectively. Total demand deposit accounts comprised 38% and 48% of total deposits at December 31, 2023, and at December 31, 2022, respectively.
Total stockholders’ equity was $1.05 billion at December 31, 2023, an increase of $268.2 million, or 34%, from December 31, 2022 due to (i) the issuance of 6.8 million common shares (valued at $177.9 million) in the Limestone Merger, (ii) net income of $113.4 million for the full year of 2023, and (iii) a decrease in other comprehensive loss of $25.5 million, partially offset by dividends paid of $52.1 million and share repurchases of $3.0 million. The decrease in other comprehensive loss was the result of changes in the market value of available-for-sale investment securities, which were primarily driven by changes in market interest rates.
Peoples continued to exceed the capital required by the Federal Reserve Board to be deemed “well capitalized.” Peoples’ tier 1 capital ratio was 12.58% at December 31, 2023, versus 12.19% at December 31, 2022, while the total capital ratio was 13.38% at December 31, 2023, versus 13.06% at December 31, 2022. The common equity tier 1 risk-based capital ratio was 11.75% at December 31, 2023 compared to 11.92% at December 31, 2022. Compared to at December 31, 2022, the tier 1 risk-based capital and the total risk-based capital ratios improved due to higher net income, partially offset by the impact of the Limestone Merger and dividends paid. The common equity tier 1 risk-based capital ratio at December 31, 2023 decreased compared to at December 31, 2022 due to the common shares issued in the Limestone Merger. Peoples’ book value and tangible book value per share were $29.83 and $18.16, respectively, at December 31, 2023, compared to $27.76 and $16.23, respectively, at December 31, 2022. Additional information regarding capital requirements can be found in “Note 17 Regulatory Matters.”
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 80% of total revenue during 2023. 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 23.3% for 2023 and 2022, and 22.3% for 2021. 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) 2023 2022 2021
Net interest income $ 339,374 $ 253,442 $ 172,553
Taxable equivalent adjustments 1,703 1,644 1,349
FTE net interest income $ 341,077 $ 255,086 $ 173,902
The following table details Peoples’ average balance sheets, with corresponding income/expense and yield/cost, for the years ended December 31:
2023 2022 2021
(Dollars in thousands)
Average Balance Income/ Expense Yield/Cost Average Balance Income/Expense Yield/Cost Average Balance Income/ Expense Yield/Cost
Short-term investments (a) $ 57,464 $ 2,763 4.81 % $ 178,781 $ 1,710 0.96 % $ 219,849 $ 313 0.14 %
Investment securities (b)(c):
Taxable 1,621,852 49,469 3.05 % 1,481,368 29,091 1.96 % 1,042,419 15,219 1.46 %
Nontaxable 190,479 5,643 2.96 % 199,279 5,444 2.73 % 163,095 4,326 2.65 %
Total investment securities 1,812,331 55,112 3.04 % 1,680,647 34,535 2.05 % 1,205,514 19,545 1.62 %
Loans (c)(d):
Construction 347,317 27,833 7.90 % 223,197 10,732 4.74 % 131,834 5,130 3.84 %
Commercial real estate, other 1,757,676 120,479 6.76 % 1,327,064 65,405 4.86 % 1,061,323 42,308 3.93 %
Commercial and industrial 1,052,647 79,475 7.45 % 875,754 41,358 4.66 % 870,682 37,321 4.23 %
Premium finance 168,077 12,155 7.13 % 150,135 6,789 4.46 % 118,242 5,872 4.90 %
Leases 371,809 42,931 11.39 % 271,349 34,720 12.62 % 74,442 13,572 17.98 %
Residential real estate (e) 913,069 43,647 4.78 % 881,136 37,851 4.30 % 700,691 29,686 4.24 %
Home equity lines of credit 194,415 14,722 7.57 % 170,567 8,300 4.87 % 133,340 5,410 4.06 %
Consumer, indirect 656,736 33,263 5.06 % 563,887 23,029 4.08 % 529,994 21,480 4.05 %
Consumer, direct
128,707 8,726 6.78 % 111,148 6,769 6.09 % 88,611 5,501 6.21 %
Total loans 5,590,453 383,231 6.79 % 4,574,237 234,953 5.09 % 3,709,159 166,280 4.44 %
Allowance for credit losses
(57,391) (55,233) (56,038)
Net loans 5,533,062 383,231 6.86 % 4,519,004 234,953 5.15 % 3,653,121 166,280 4.51 %
Total earning assets 7,402,857 441,106 5.91 % 6,378,432 271,198 4.22 % 5,078,484 186,138 3.64 %
Goodwill and other intangible assets 384,172 322,639 234,667
Other assets 511,748 393,636 359,443
Total assets
$ 8,298,777 $ 7,094,707 $ 5,672,594
Interest-bearing deposits:
Savings accounts $ 1,034,713 $ 1,394 0.13 % $ 1,069,097 $ 356 0.03 % $ 772,726 $ 112 0.01 %
Government deposit accounts
709,887 12,252 1.73 % 701,587 2,172 0.31 % 529,955 2,035 0.38 %
Interest-bearing demand accounts
1,156,953 1,605 0.14 % 1,165,106 583 0.05 % 848,526 303 0.04 %
Money market accounts 684,015 9,986 1.46 % 632,364 1,015 0.16 % 575,237 390 0.07 %
Retail certificates of deposit 948,310 25,198 2.66 % 580,660 2,978 0.51 % 497,181 3,952 0.79 %
Brokered deposits (f) 483,483 21,712 4.49 % 88,234 2,067 2.34 % 150,716 3,130 2.08 %
Total interest-bearing deposits
5,017,361 72,147 1.44 % 4,237,048 9,171 0.22 % 3,374,341 9,922 0.29 %
Borrowed funds:
Short-term FHLB advances (f) 353,532 18,058 5.11 % 83,356 2,386 2.86 % 30,289 475 1.57 %
Repurchase agreements and other 110,025 1,664 1.54 % 113,434 275 0.24 % 70,674 66 0.09 %
Total short-term borrowings 463,557 19,722 4.27 % 196,790 2,661 1.35 % 100,963 541 0.54 %
Long-term FHLB advances 54,457 1,779 3.27 % 53,102 984 1.85 % 94,050 1,413 1.50 %
Long-term notes payable 45,038 2,560 5.43 % 56,865 2,562 4.51 % - - - %
Other borrowings 42,031 3,821 8.97 % 13,718 734 5.27 % 9,364 360 3.79 %
Total long-term borrowings 141,526 8,160 5.68 % 123,685 4,280 3.46 % 103,414 1,773 1.71 %
Total borrowed funds 605,083 27,882 4.59 % 320,475 6,941 2.15 % 204,377 2,314 1.13 %
Total interest-bearing liabilities
5,622,444 100,029 1.78 % 4,557,523 16,112 0.35 % 3,578,718 12,236 0.34 %
Non-interest-bearing deposits 1,598,009 1,637,690 1,347,702
Other liabilities 137,527 101,510 89,541
Total liabilities 7,357,980 6,296,723 5,015,961
Stockholders’ equity 940,797 797,984 656,633
Total liabilities and stockholders’ equity $ 8,298,777 $ 7,094,707 $ 5,672,594
Interest rate spread (b) $ 341,077 4.13 % $ 255,086 3.87 % $ 173,902 3.30 %
Net interest margin (b) 4.56 % 3.97 % 3.40 %
(a) Balances are primarily composed of interest bearing demand deposits at the FRB and FHLB.
(b) Average balances are based on carrying value.
(c) Interest income and yields are presented on a fully tax-equivalent basis, using a blended federal and state corporate income tax rate of 23.3% for 2023 and 2022, and 22.3% for 2021.
(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.
Peoples’ average balances compared to prior periods have been impacted by recent acquisitions, which included: (i) the Limestone Merger as of the close of business on April 30, 2023, which added to average short-term investments, average total investment securities, and average loan, deposit and borrowed funds balances, (ii) the acquisition of Vantage on March 7, 2022, which added to average lease and borrowed funds balances, and (iii) the Premier Merger on September 17, 2021, which added to average short-term investments, average total investment securities, average total loans and average total deposits. Additionally, Peoples completed the NSL acquisition on April 1, 2021 which also added to average lease balances. Peoples’ cash balances have increased primarily due to an increase in interest-bearing deposits in other banks, mostly with the FRB. The increases in market interest rates have increased asset yields and increased borrowing costs.
The following table provides an analysis of the changes in FTE net interest income:
(Dollars in thousands) Changes from 2022 to 2023 Changes from 2021 to 2022
Increase (decrease) in: Rate Volume Total (a)
Rate Volume Total (a)
INTEREST INCOME:
Short-term investments $ 2,900 $ (1,847) $ 1,053 $ 1,461 $ (64) $ 1,397
Investment securities (b):
Taxable 17,396 2,982 20,378 6,436 7,436 13,872
Nontaxable 466 (267) 199 186 932 1,118
Total investment income 17,862 2,715 20,577 6,622 8,368 14,990
Loans (b):
Construction 9,323 7,778 17,101 1,421 4,181 5,602
Commercial real estate, other 30,089 24,985 55,074 11,216 11,881 23,097
Commercial and industrial 28,502 9,615 38,117 3,818 219 4,037
Premium finance 4,474 892 5,366 (550) 1,467 917
Leases (3,577) 11,788 8,211 (5,031) 26,179 21,148
Residential real estate 4,387 1,409 5,796 419 7,746 8,165
Home equity lines of credit 5,132 1,290 6,422 1,204 1,686 2,890
Consumer, indirect 6,071 4,163 10,234 166 1,383 1,549
Consumer, direct 818 1,139 1,957 (137) 1,405 1,268
Total loan income 85,219 63,059 148,278 12,526 56,147 68,673
Total interest income 105,981 63,927 169,908 20,609 64,451 85,060
INTEREST EXPENSE:
Deposits:
Savings accounts 1,049 (11) 1,038 187 57 244
Government deposit accounts 10,054 26 10,080 (442) 579 137
Interest-bearing demand accounts 1,026 (4) 1,022 145 135 280
Money market accounts 8,881 90 8,971 582 43 625
Retail certificates of deposit 19,297 2,923 22,220 (1,562) 588 (974)
Brokered deposit 3,338 16,307 19,645 362 (1,425) (1,063)
Total deposit cost 43,645 19,331 62,976 (728) (23) (751)
Borrowed funds:
Short-term borrowings 4,455 12,606 17,061 761 1,359 2,120
Long-term borrowings 2,806 1,074 3,880 373 2,134 2,507
Total borrowed funds cost 7,261 13,680 20,941 1,134 3,493 4,627
Total interest expense 50,906 33,011 83,917 406 3,470 3,876
Net interest income $ 55,075 $ 30,916 $ 85,991 $ 20,203 $ 60,981 $ 81,184
(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 23.3% for 2023 and 2022, and 22.3% for 2021.
Net interest income increased $85.9 million, or 34%, for 2023 when compared to 2022, and net interest margin increased 59 basis points to 4.56%. The increase in net interest income was driven by increases in market interest rates, the additional net interest income from the Limestone Merger, and improvement in investment yields. Accretion income, net of amortization expense, from acquisitions was $25.3 million for 2023, which added 34 basis points to net interest margin for 2023. Accretion income for 2023 was primarily the result of the Limestone Merger, the Premier Merger, and the acquisitions of Vantage and NSL.
During 2022, net interest income increased $80.9 million, or 47%, when compared to 2021. The increase in net interest income was driven by (i) the Premier Merger and the Vantage acquisition, (ii) core growth and (iii) increases in market interest rates. Net interest margin increased 57 basis points to 3.97% compared to 2021. Accretion income, net of amortization expense,
from acquisitions was $11.6 million for 2022, which added 19 basis points to net interest margin for 2022. Accretion income for 2022 was a result of the Premier Merger and the acquisitions of Vantage and NSL.
Additional interest income in 2023 from prepayment fees and interest recovered on nonaccrual loans was $0.7 million, compared to $0.6 million in 2022 and $0.8 million in 2021.
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
The following table details Peoples’ provision for credit losses recognized for the years ended December 31:
(Dollars in thousands) 2023 2022 2021
Provision for (Recovery of) other credit losses $ 14,236 $ (4,560) $ 339
Provision for checking account overdrafts 938 1,050 392
Provision for (Recovery of) credit losses $ 15,174 $ (3,510) $ 731
As a percent of average total loans 0.27 % (0.08) % 0.02 %
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.
For 2023, the provision for credit losses compared to a recovery of credit losses for 2022 was driven by (i) the addition of the provision for the non-PCD loans acquired in the Limestone Merger, (ii) loan growth and (iii) an increase in charge-offs, partially offset by a release of reserves on individually analyzed loans and the use of updated loss drivers.
During 2022, the recovery of credit losses was driven by improvements in economic forecasts, coupled with loan pay-offs during certain periods of 2022.
During 2021, the provision for credit losses was impacted by improvements in economic factors and loss drivers, partially offset by the provision for credit losses required to establish the allowance for credit losses for acquired non-PCD loans and leases during 2021.
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 (Losses) Gains Included in Total Non-Interest Income
Net (losses) gains 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 (losses) gains for the years ended December 31 recognized by Peoples:
(Dollars in thousands) 2023 2022 2021
Net loss on investment securities $ (3,700) $ (61) $ (862)
Net (loss) gain on asset disposals and other transactions:
Net loss on other assets $ (1,143) $ (326) $ (460)
Net (loss) gain on OREO (1,623) (139) 56
Net (loss) gain on other transactions (71) (151) 897
Net (loss) gain on asset disposals and other transactions $ (2,837) $ (616) $ 493
For 2023, Peoples’ net loss on investment securities was primarily due to the $3.7 million pre-tax net loss on the sales of available-for-sale investment securities in the first and fourth quarters of 2023. During the first quarter of 2023, Peoples executed sales of $96.7 million of lower yielding available-for-sale investment securities for a pre-tax loss of $2.0 million. Proceeds from sales were used to pay down overnight borrowings. During the fourth quarter of 2023, Peoples executed the sales of an additional $36.5 million of lower yielding available-for-sale investment securities for a pre-tax loss of $1.7 million. Proceeds from the sales were used to purchase higher yielding agency investment securities.
The loss on the sales of these available-for-sale investment securities had a nominal impact on tangible book value as such loss was previously reflected in capital through accumulated other comprehensive loss. The realized losses recognized due to the first
quarter transactions were earned back within the 2023 fiscal year, and the realized losses recognized due to the fourth quarter transactions are expected to be earned back within 14 months.
Peoples’ net loss on asset disposals and other transactions during 2023 was primarily driven by a $1.6 million write-down of an OREO property during the second quarter of 2023, and net losses on repossessed assets.
During 2022, Peoples’ net loss on asset disposals and other transactions was primarily due to net losses on other assets, which was mainly due to net losses on repossessed assets.
During 2021, net gains on other transactions were driven by the sale of $59.8 million of predominantly purchased credit deteriorated (“PCD”) 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 $0.9 million related to the discount recorded on those PCD loans when they were acquired from Premier.
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. Total non-interest income excluding net gains and losses accounted for 21.7% of Peoples’ total revenues (defined as net interest income plus total non-interest income excluding net gains and losses) in 2023, compared to 23.9% in 2022 and 28.6% in 2021.
The decline in Peoples’ total non-interest income excluding net gains and losses, as a percent of total revenue during 2023 compared to 2022, was largely due to the growth in net interest income of 34% outpacing the growth in non-interest income excluding gains and losses of 18% during 2023. The growth in net interest income was primarily driven by the Limestone Merger and rate increases.
E-banking income comprised the largest portion of Peoples’ total non-interest income excluding net gains and losses, for 2023. The following table shows Peoples’ e-banking income for the years ended December 31:
(Dollars in thousands) 2023 2022 2021
E-banking income $ 25,210 $ 21,094 $ 18,010
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. For 2023 compared to 2022, e-banking income grew 20%, primarily due to additional customers from the Limestone Merger as well as organic growth. For 2022 compared to 2021, e-banking income increased 17%, primarily from a full year’s impact of the acquired Premier accounts in addition to increased customer activity. In 2023, Peoples’ customers used their debit cards to complete $1.9 billion of transactions, up from $1.7 billion in 2022 and $1.4 billion in 2021.
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) 2023 2022 2021
Fiduciary $ 7,537 $ 7,508 $ 7,930
Brokerage 6,865 6,343 5,966
Employee benefit plan fees 2,758 2,540 2,560
Trust and investment income $ 17,160 $ 16,391 $ 16,456
For 2023, trust and investment income increased primarily due to increases in brokerage income, as Peoples added new accounts and the underlying market values of assets under administration and management grew, and employee benefit plan fees. For 2022,
trust and investment was relatively flat compared to 2021, as the increase in brokerage income was offset by the decrease in fiduciary income.
The following table details Peoples’ assets under administration and management at December 31:
(Dollars in thousands) 2023 2022 2021
Trust $ 2,021,249 $ 1,764,639 $ 2,009,871
Brokerage 1,473,814 1,211,868 1,183,927
Total $ 3,495,063 $ 2,976,507 $ 3,193,798
Annual average $ 3,236,449 $ 2,965,985 $ 3,053,807
The increase in total assets under administration and management at December 31, 2023, compared to December 31, 2022, was primarily due to market value increases in 2023, new account activity and an acquisition of an independent financial advisor in January of 2023 which increased brokerage assets by $30 million. During 2022, Peoples’ assets under administration and management declined, driven by a decrease in market values throughout 2022 due to the economic downturn.
The following table details Peoples’ insurance income for the years ended December 31:
(Dollars in thousands) 2023 2022 2021
Property and casualty insurance commissions
$ 13,852 $ 11,986 $ 11,192
Performance-based commissions 1,634 1,424 2,044
Life and health insurance commissions
2,229 1,975 1,627
Other fees and charges 301 342 389
Insurance income $ 18,016 $ 15,727 $ 15,252
Insurance income for 2023 increased compared to 2022, primarily driven by the increases in (i) property and casualty insurance commissions, (ii) performance-based commissions and (iii) life and health insurance commissions, which were slightly offset by the decrease in other fees and charges. Peoples Insurance increased its clientele throughout 2023, which drove the increases in commissions. Insurance income for 2022 was relatively flat when compared to 2021, as the increases in property and casualty insurance commissions and life and health insurance commissions were substantially offset by the decrease in performance-based commissions.
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) 2023 2022 2021
Overdraft and non-sufficient funds fees $ 9,016 $ 8,324 $ 5,528
Account maintenance fees 6,425 5,323 3,808
Other fees and charges 1,241 936 807
Deposit account service charges $ 16,682 $ 14,583 $ 10,143
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 in 2023 increased compared to 2022 due to the additional customers associated with the Limestone Merger, as well as organic growth. Deposit account service charges in 2022 increased compared to 2021 due to increased customer activity compared to the very low levels of early 2021, which had been impacted by fiscal stimulus payments and PPP loan proceeds provided to customers, along with changed customer spending habits due to the COVID-19 pandemic. Also contributing to the increases in 2022 when compared to 2021 were the additional customers associated with the Premier Merger, as 2022 had a full year of the benefit from the additional Premier accounts, whereas 2021 only had three and a half months of the benefit. Deposit account service charges were positively impacted during 2021 by the Premier Merger and associated additional accounts.
The following table details the other items included within Peoples’ total non-interest income for the years ended December 31:
(Dollars in thousands) 2023 2022 2021
Lease income $ 5,552 $ 4,267 $ 1,293
Bank owned life insurance income 4,151 2,624 1,767
Mortgage banking income 1,078 1,397 3,439
Other non-interest income $ 6,101 $ 3,430 $ 2,894
Lease income is primarily comprised of (i) gains on the early termination of leases, net of any associated purchase accounting adjustments, (ii) month-to-month lease payments in excess of net investment in the lease, (iii) fees received for referrals, (iv) gains and losses recognized on the sales of residual assets, and (v) syndication income. The increase in lease income for 2023 when compared to 2022 was driven primarily by an increase in month-to-month lease income from Vantage. The 2022 increase in lease income when compared to 2021 was due to the Vantage acquisition. In 2021, Peoples acquired NSL which first introduced lease income as a component of non-interest income.
Bank owned life insurance income (“BOLI”) for 2023 increased when compared to 2022 due to a $0.4 million death benefit related to the cash surrender value of the underlying policy in the fourth quarter of 2023, and additional income from policies acquired in the Limestone Merger. BOLI income for 2022 increased when compared to 2021 due to a $248,000 death benefit related to the cash surrender value of the underlying policy in the third quarter of 2022 and $30.0 million of additional investments in policies. Peoples purchased no additional BOLI policies during 2023 or 2021.
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. Mortgage banking income declined for 2023 when compared to 2022 and declined for 2022 when compared to 2021 due to lower volumes of new loan originations as a result of the rising market interest rate environment. In 2023, Peoples sold approximately $2.7 million of loans to the secondary market with servicing retained and sold approximately $30.7 million in loans with servicing released, compared to approximately $18.5 million and $31.1 million, respectively, in 2022. Peoples sold $57.6 million of loans to the secondary market with servicing retained and $37.4 million of loans with servicing released during 2021. The volume of sales has a direct impact on the amount of mortgage banking income.
For 2023, other non-interest income increased when compared to 2022 due primarily to increased operating lease income. Other non-interest income increased during 2022, primarily due to increased other operating income. Other non-interest income during 2021 was impacted by a decline in the fair value of equity securities 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) 2023 2022 2021
Base salaries and wages $ 95,604 $ 74,593 $ 60,622
Sales-based and incentive compensation 23,085 18,732 16,668
Employee benefit costs 16,249 13,654 11,091
Employee stock-based compensation 5,476 3,819 3,515
Deferred personnel costs (4,517) (4,975) (3,695)
Payroll taxes and other employment costs 8,134 6,867 6,411
Salaries and employee benefit costs $ 144,031 $ 112,690 $ 94,612
Full-time equivalent employees:
Actual at end of the period 1,478 1,267 1,188
Average during the period 1,411 1,245 1,003
Base salaries and wages increased for 2023 compared to 2022, driven by the additional salaries associated with the Limestone Merger, including $5.8 million in acquisition-related salary and employee benefit expenses related to the Limestone Merger in 2023. Base salaries and wages increased in 2022 compared to 2021, driven by the additional salaries associated with the acquisition of Vantage, and the Premier Merger. Base salaries and wages in 2021 were impacted by the Premier Merger and the NSL acquisition. During 2021, Peoples incurred $3.8 million of one-time expenses associated with acquisitions. Base salaries and wages were impacted by merit increases, as well as movement towards a $15 per hour minimum wage throughout Peoples’ organization. The $15 per hour minimum was phased in and fully implemented by January of 2023.
The increase in sales-based and incentive compensation for 2023 compared to 2022 was primarily due to the overall company performance measures used in calculating incentive awards and $1.3 million in Vantage-related sales-based and incentive compensation. Sales-based and incentive compensation increased in 2022 compared to 2021, largely due to sales incentives earned by Vantage employees. Peoples’ sales-based and incentive compensation plans are designed to grow core earnings while managing risk, while not encouraging unnecessary and excessive risk-taking that could threaten the value of Peoples. The sales-based and incentive compensation plans are designed to reward employees for appropriate behaviors and include provisions addressing inappropriate practices with respect to Peoples and its customers, including clawbacks for executives.
The increase in employee benefit costs for 2023 compared to 2022 was due to increased medical and 401(k) costs with the addition of the Limestone employees. Employee benefit costs in 2022 increased compared to 2021 due to higher medical and 401(k) costs with the addition of the Premier and Vantage employees.
Employee 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. Employee stock-based compensation for 2023 increased when compared to 2022 due to additional employees primarily as a result of the Limestone Merger, as well as a full year with Vantage employees. Employee stock-based compensation increased for 2022 compared to 2021 due to employees added in the acquisition of Vantage and the Premier Merger.
Deferred personnel costs represent the portion of current period salaries and employee benefit costs considered to be direct loan origination costs. These costs are capitalized and recognized over the life of the loan as a yield adjustment in interest income. As a result, the amount of deferred personnel costs for each period corresponds directly with the volume of loan originations, coupled with the average deferred costs per loan that are updated annually at the beginning of each year. Deferred personnel costs in 2023 decreased compared to 2022, primarily due to a decrease in business loan origination volume. Higher deferred personnel costs in 2022 compared to 2021 was primarily due to an increase in loan origination volume. Additional information regarding Peoples’ loan activity can be found later in this discussion under the caption “Loans” within “FINANCIAL CONDITION.”
For 2023, payroll taxes and other employment costs increased compared to 2022, primarily due to the employees added from the Limestone Merger. Payroll taxes and other employee costs increased during 2022 compared to 2021, primarily due to recent mergers and acquisitions.
Peoples’ net occupancy and equipment expense for the years ended December 31 was comprised of the following:
(Dollars in thousands) 2023 2022 2021
Depreciation expense $ 7,724 $ 7,015 $ 6,143
Repairs and maintenance costs 6,037 5,323 3,972
Net rent expense 2,780 2,974 1,723
Property taxes, utilities and other costs 4,827 4,204 3,080
Net occupancy and equipment expense $ 21,368 $ 19,516 $ 14,918
For 2023, net occupancy and equipment expense increased when compared to 2022 due to the additional locations and equipment from the Limestone Merger. Net occupancy and equipment expense grew during 2022 when compared to 2021 due to the additional locations and equipment from recent mergers and acquisitions.
The following table details the other items included within Peoples’ total non-interest expense for the years ended December 31:
(Dollars in thousands) 2023 2022 2021
Data processing and software expense $ 21,607 $ 14,241 $ 10,542
Professional fees 17,041 12,094 15,783
Amortization of other intangible assets 11,222 7,763 4,775
E-banking expense 7,150 9,231 8,885
Marketing expense 5,017 3,728 3,658
FDIC insurance expense 4,785 3,702 1,976
Franchise tax expense 3,540 3,487 3,357
Other loan expenses 2,859 2,735 2,001
Communication expense 2,834 2,484 1,657
Other non-interest expense $ 25,033 $ 15,476 $ 21,573
Data processing and software expense includes software support, maintenance and depreciation expense. Data processing and software expense for 2023 increased relative to 2022, driven by (i) software upgrades, (ii) implementation of new systems, (iii) growth from the Limestone Merger, and (iv) $1.9 million in acquisition-related expenses related to the Limestone Merger. During 2022, data processing and software expense grew when compared to 2021 due to software upgrades and implementation of new systems, coupled with the increased size of Peoples’ organization.
Professional fees increased for 2023 when compared to 2022, primarily driven by a $3.7 million increase in acquisition-related expenses, due to increased expenses related to the Limestone Merger in 2023. Professional fees during 2022 decreased when compared 2021, primarily driven by acquisition-related expenses related to the Premier Merger which had been realized in 2021.
Amortization of other intangible assets increased for 2023 when compared to 2022 due to the increased intangible assets recognized as a result of the Limestone Merger. During 2022, amortization of other intangible assets increased when compared to 2021 due to the increased intangible assets recognized as a result of the recent mergers and acquisitions.
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 decreased for 2023 when compared to 2022 due to decreased costs for Peoples’ online banking platform. E-banking expense increased for 2022 when compared to 2021 due to both core growth, and growth through mergers and acquisitions.
Marketing expense, which includes advertising, donations, marketing campaigns, and other public relations costs, for 2023 increased when compared to 2022, primarily driven by increased marketing related to the Limestone Merger, an increase in donations, and a full year of expenses from Vantage. Marketing expense was relatively flat for 2022, compared to 2021.
FDIC insurance premiums for 2023 increased when compared to 2022 due to organic and acquisitive growth, in addition to an increase in rates assessed by the FDIC. FDIC insurance expense increased during 2022 compared to 2021 due to organic and acquisitive growth. 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.”
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 for 2023 when compared to 2022 was relatively flat. Franchise tax expense increased during 2022 versus 2021, driven by recent growth through acquisitions and organic means. 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.
Other loan expenses during 2023 increased when compared to 2022 primarily due to Limestone-related expenses and increases in business loan expenses and credit bureau expenses. During 2022, other loan expenses increased primarily due to higher indirect lending volume and increased collection expense driven by the Premier Merger.
Communications expense increased during 2023 when compared to 2022 and increased during 2022 when compared to 2021, in each case due to upgraded networking to certain branches (including new branches acquired in acquisitions and mergers) and increased costs compared to the prior period among certain vendors that provide communication services.
Other non-interest expense for 2023 increased when compared to 2022 primarily due to $2.8 million in additional acquisition-related expenses related to the Limestone Merger, a $2.4 million settlement charge in relation to the termination of the pension plan and $1.7 million in operating lease expense. Other non-interest expense decreased for 2022 when compared to 2021, which was primarily due to less acquisition-related expenses.
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 income, common share 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.”
For the full year of 2023, income tax expense totaled $31.8 million, compared to $27.3 million in 2022, and $9.4 million in 2021, and the effective tax rate for 2023 was 21.9%, compared to 21.3% for 2022, and 16.5% for 2021. The 2023 increase in income tax expense when compared to 2022 was driven by higher pre-tax income. Income tax expense increased during 2022 when compared to 2021, which was driven by higher pre-tax income and a higher effective tax rate primarily due to apportionment in additional states due to recent acquisitions. Income tax expense for 2021 was impacted by an income tax benefit related to an adjustment from the prior period of $1.1 million.
Peoples also recorded a tax benefit of $128,000 in 2023, a tax benefit of $5,000 in 2022, and a tax expense of $74,000 in 2021 related to common share 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) 2023 2022 2021
Pre-Provision Net Revenue:
Income before income taxes $ 145,126 $ 128,641 $ 56,970
Add: provision for credit losses 15,174 - 731
Add: net loss on OREO 1,623 138 -
Add: net loss on investment securities 3,700 61 862
Add: net loss on other assets 1,143 326 252
Add: net loss on other transactions 71 151 -
Less: recovery of credit losses - 3,510 -
Less: net gain on OREO - - 56
Less: net gain on other transactions - - 897
Pre-provision net revenue $ 166,837 $ 125,807 $ 57,862
Total average assets $ 8,298,777 $ 7,094,707 $ 5,672,594
Pre-provision net revenue to total average assets 2.01 % 1.77 % 1.02 %
Weighted-average common shares outstanding - diluted 32,760,808 27,999,602 21,959,883
Pre-provision net revenue per common share - diluted $ 5.06 $ 4.48 $ 2.63
PPNR grew in 2023 when compared to 2022 mostly due to (i) the impact of the Limestone Merger in improving net interest income, (ii) increases in market interest rates, and (iii) higher non-interest income. During 2022, PPNR grew when compared to 2021 mostly due to (i) the impact of the Premier Merger and the Vantage and NSL acquisitions in improving net interest income, (ii) the increases in market interest rates, (iii) higher non-interest income, and (iv) lower acquisition-related expenses.
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 a non-US GAAP financial measure since it excludes the impact of all COVID-19-related expenses, severance expenses, pension settlement charges, acquisition-related expenses, a Peoples Bank Foundation, Inc. contribution, and contract negotiation non-recurring expenses.
The following table provides a reconciliation of this non-US GAAP financial measure to the amounts of total non-interest expense reported in Peoples’ Consolidated Financial Statements for the years presented:
(Dollars in thousands) 2023 2022 2021
Core non-interest expense:
Total non-interest expense $ 266,487 $ 207,147 $ 183,737
Less: COVID-19-related expenses - 134 1,248
Less: severance expenses - - 79
Less: pension settlement charges 2,424 185 143
Less: acquisition-related expenses 16,970 3,016 21,423
Less: Peoples Bank Foundation, Inc. contribution - - 500
Less: contract negotiation expenses - - 1,248
Add: COVID-19 Employee Retention Credit 548 - -
Core non-interest expense $ 247,641 $ 203,812 $ 159,096
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 years presented:
(Dollars in thousands) 2023 2022 2021
Efficiency ratio:
Total non-interest expense $ 266,487 $ 207,147 $ 183,737
Less: amortization of other intangible assets 11,222 7,763 4,775
Adjusted total non-interest expense 255,265 199,384 178,962
Total non-interest income 87,413 78,836 68,885
Less: net loss on investment securities (3,700) (61) (862)
Less: net (loss) gain on asset disposals and other transactions (2,837) (616) 493
Total non-interest income excluding net gains and losses 93,950 79,513 69,254
Net interest income 339,374 253,442 172,553
Add: fully-tax-equivalent adjustment (a) 1,703 1,644 1,349
Net interest income on a fully-tax equivalent basis 341,077 255,086 173,902
Adjusted revenue $ 435,027 $ 334,599 $ 243,156
Efficiency ratio 58.68 % 59.59 % 73.60 %
Efficiency ratio adjusted for non-core items:
Core non-interest expense $ 247,641 $ 203,812 $ 159,096
Less: amortization of other intangible assets 11,222 7,763 4,775
Adjusted core non-interest expense 236,419 196,049 154,321
Core non-interest income excluding net gains and losses 93,950 79,513 69,254
Net interest income on a fully-tax-equivalent basis 341,077 255,086 173,902
Adjusted core revenue $ 435,027 $ 334,599 $ 243,156
Efficiency ratio adjusted for non-core items 54.35 % 58.59 % 63.47 %
(a)Based on 21% statutory federal corporate income tax rate.
The efficiency ratio and the efficiency ratio adjusted for non-core items for 2023 improved when compared to 2022, due to higher net interest income driven by the Limestone Merger, increases in market interest rates, and higher non-interest income. The efficiency ratio and the efficiency ratio adjusted for non-core items for 2022 improved when compared to 2021, due to higher net interest income driven by increases in market interest rates.
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 positively impacted in 2023 and 2022 by the rising market interest rate environment and the related increase to net interest income; whereas, 2021 net interest income was negatively impacted by a lower market interest rate environment.
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. contributions and contract negotiation non-recurring expenses included in net income.
The following table provides a reconciliation of this non-US GAAP financial measure to the amounts of net income reported in Peoples’ Consolidated Financial Statements for the years presented:
(Dollars in thousands) 2023 2022 2021
Net income adjusted for non-core items:
Net income $ 113,363 $ 101,292 $ 47,555
Add: net loss on investment securities
3,700 61 862
Less: tax effect of net loss on investment securities (a)
777 13 181
Add: net loss on asset disposals and other transactions
2,837 616 -
Less: tax effect of net loss on asset disposals and other transactions (a)
596 129 -
Less: net gain on asset disposals and other transactions (a) - - 493
Add: tax effect of net gain on asset disposals and other transactions (a) - - 104
Add: acquisition-related expenses
16,970 3,016 21,423
Less: tax effect of acquisition-related expenses (a)
3,564 633 4,499
Add: severance expenses - - 79
Less: tax effect of severance expenses (a) - - 17
Add: pension settlement charges
2,424 185 143
Less: tax effect of pension settlement charges (a)
509 39 30
Add: COVID-19-related expenses - 134 1,248
Less: tax effect of COVID-19-related expenses (a) - 28 262
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) $ 133,848 $ 104,462 $ 67,313
Return on average assets:
Net income $ 113,363 $ 101,292 $ 47,555
Total average assets 8,298,777 7,094,707 5,672,594
Return on average assets 1.37 % 1.43 % 0.84 %
Return on average assets adjusted for non-core items:
Net income adjusted for non-core items
$ 133,848 $ 104,462 $ 67,313
Total average assets
8,298,777 7,094,707 5,672,594
Return on average assets adjusted for non-core items
1.61 % 1.47 % 1.19 %
(a) Based on a 21% statutory federal corporate income tax rate.
The decrease in the return on average assets for 2023 compared to 2022 was attributable to a greater impact from non-core items, primarily due to (i) an increase in net acquisition-related expenses as a result of the Limestone Merger, (ii) higher net losses on
investment securities and asset disposals and other transactions, and (iii) pension settlement charges of $2.4 million in relation to the termination of the pension plan. Return on average assets adjusted for non-core items for 2023 increased when compared to 2022 due to higher net interest income and non-interest income, which were driven by the Limestone Merger, and increases in market interest rates. The increase in the return on average assets for 2022 compared to 2021 was attributable to higher net interest income and non-interest income, which were driven by the recent acquisitions and mergers and increases in market interest rates.
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.
The following table provides a reconciliation of this non-US GAAP financial measure to the amounts of total average stockholders’ equity and the return on average stockholders’ equity ratios reported in Peoples’ Consolidated Financial Statements for the years presented:
(Dollars in thousands) 2023 2022 2021
Net income excluding amortization of other intangible assets:
Net income $ 113,363 $ 101,292 $ 47,555
Add: amortization of other intangible assets 11,222 7,763 4,775
Less: tax effect of amortization of other intangible assets (a) 2,357 1,630 1,003
Net income excluding amortization of other intangible assets 122,228 107,425 51,327
Average tangible equity:
Total average stockholders’ equity $ 940,797 $ 797,984 $ 656,633
Less: average goodwill and other intangible assets 384,172 322,639 234,667
Average tangible equity $ 556,625 $ 475,345 $ 421,966
Return on average stockholders’ equity ratio:
Net income $ 113,363 $ 101,292 $ 47,555
Average stockholders’ equity $ 940,797 $ 797,984 $ 656,633
Return on average stockholders’ equity 12.05 % 12.69 % 7.24 %
Return on average tangible equity ratio:
Net income excluding amortization of other intangible assets $ 122,228 $ 107,425 $ 51,327
Average tangible equity $ 556,625 $ 475,345 $ 421,966
Return on average tangible equity 21.96 % 22.60 % 12.16 %
(a) Based on a 21% statutory federal corporate income tax rate.
The return on total average stockholders’ equity and average tangible equity ratios were lower in 2023 relative to 2022, due to (i) the issuance of 6.8 million common shares as consideration in the Limestone Merger, (ii) an increase in acquisition-related expenses, and (iii) an increase in the provision for credit losses due to the initial provision for the non-PCD loans acquired from Limestone, partially offset by an increase in total net interest income driven by the recent increases in market interest rates and additional net interest income from Limestone following the Limestone Merger. At the same time, average tangible equity for 2023 was negatively impacted by the Limestone Merger, for which Peoples recorded additional goodwill and other intangible assets. Return on total average stockholders’ equity and average tangible equity ratios were higher in 2022 relative to 2021, due to higher total net interest income driven by the recent increases in market interest rates and loans and leases added in the Premier Merger and the acquisitions of Vantage and NSL, coupled with higher non-interest income. At the same time, average tangible equity for 2022 was negatively impacted by the Vantage acquisition, for which People did not issue any equity, and recorded additional goodwill and other intangible assets.
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, 2023, excess cash reserves at the FRB were $309.8 million, compared to $33.1 million at December 31, 2022. The amount of excess cash reserves maintained is dependent upon Peoples’ daily liquidity position, which is driven primarily by changes in deposit and loan balances.
In 2023, Peoples’ total cash and cash equivalents increased $272.7 million, due to cash provided by financing activities of $262.0 million and cash provided by operating activities of $143.6 million, partially offset by cash used in investing activities of $132.9 million. Peoples’ investing activities reflected a net increase of $356.1 million in loans held for investment and $282.8 million in purchases of available-for-sale investment securities and held-to-maturity investment securities, which were more than offset by $434.1 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 $201.4 million net increase in deposits, an increase of $41.0 million in short-term borrowings, a net increase of $74.9 million in long-term borrowings, as well as $51.8 million of cash dividends paid.
In 2022, Peoples’ total cash and cash equivalents decreased $261.7 million, due to cash used in investing activities of $414.2 million, partially offset by cash provided by operating activities and financing activities of $119.8 million and $32.7 million, respectively. Peoples’ investing activities reflected a net decrease of $58.1 million in loans held for investment and $452.9 million in purchases of available-for-sale investment securities and held-to-maturity investment securities, which were primarily offset by $237.8 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 $145.1 million net decrease in deposits and an increase of $328.6 million in short-term borrowings, as well as $42.4 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 2023 2022 2021
Available-for-sale securities, at fair value:
Obligations of:
U.S. Treasury and government agencies 3.30 % $ 30,296 $ 152,422 $ 35,604
U.S. government sponsored agencies 2.97 % 118,607 88,115 81,739
States and political subdivisions 2.74 % 213,296 225,882 259,319
Residential mortgage-backed securities 2.44 % 628,924 604,653 828,517
Commercial mortgage-backed securities 1.86 % 51,234 50,049 63,519
Bank-issued trust preferred securities 3.70 % 5,965 10,278 6,795
Total fair value $ 1,048,322 $ 1,131,399 $ 1,275,493
Total amortized cost $ 1,184,288 $ 1,300,719 $ 1,283,146
Net unrealized loss $ (135,966) $ (169,320) $ (7,653)
Held-to-maturity securities, at amortized cost:
Obligations of:
U.S. government sponsored agencies 5.29 % $ 188,475 $ 132,366 $ 36,431
States and political subdivisions (a) 2.94 % 144,258 145,022 151,402
Residential mortgage-backed securities 3.44 % 248,559 176,215 110,708
Commercial mortgage-backed securities 2.22 % 102,365 106,609 75,588
Total amortized cost $ 683,657 $ 560,212 $ 374,129
Other investment securities $ 63,421 $ 51,609 $ 33,987
Total investment securities:
Amortized cost $ 1,931,366 $ 1,912,540 $ 1,691,262
Carrying value $ 1,795,400 $ 1,743,220 $ 1,683,609
(a)Amortized cost is presented net of the allowance for credit losses of $238 at December 31, 2023, $241 at December 31, 2022 and $286 at December 31, 2021.
At December 31, 2023, Peoples’ investment securities represented approximately 19.6% of total assets, compared to 24.2% at December 31, 2022. For 2023, total investment securities increased compared to the prior year, largely due to purchases of held-to-maturity securities, partially offset by available-for-sale securities sold, both of which were part of portfolio restructurings throughout 2023. During the first quarter of 2023, Peoples executed the sales of $96.7 million of its lower yielding available-for-sale investment securities for an after-tax loss of $1.6 million. Proceeds from the sales were used to pay down overnight borrowings. During the fourth quarter of 2023, Peoples executed the sales of an additional $36.5 million of its lower yielding available-for-sale investment securities for an after-tax loss of $1.3 million. Proceeds from the sales were used to purchase higher yielding agency investment securities. During 2022, total investment securities increased compared to the prior year, largely due to investments made in held-to-maturity securities, in an effort to deploy cash, improve investment yields and reduce risk, partially offset by the reduction in market value of
available-for-sale securities driven by the increases in market interest rates during 2022. During 2021, Peoples acquired, in the Premier Merger, investment securities totaling $552.0 million and subsequently sold $395.2 million of available-for-sale 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.
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.”
Loans
The following table provides information regarding outstanding loan balances at or for the year ended December 31:
(Dollars in thousands) 2023 2022 2021
Originated loans:
Construction $ 279,335 $ 212,869 $ 137,437
Commercial real estate, other 1,209,204 919,531 861,610
Commercial real estate 1,488,539 1,132,400 999,047
Commercial and industrial 938,659 835,178 779,064
Premium finance 203,177 159,197 136,121
Leases 357,217 226,438 69,169
Residential real estate 418,570 384,262 350,595
Home equity lines of credit 148,155 132,093 104,176
Consumer, indirect 666,472 629,426 530,532
Consumer, direct 112,292 98,706 81,330
Consumer 778,764 728,132 611,862
Deposit account overdrafts 986 722 756
Total originated loans $ 4,334,067 $ 3,598,422 $ 3,050,790
Acquired loans:
Construction $ 84,684 $ 34,072 $ 72,795
Commercial real estate, other 987,753 503,987 688,471
Commercial real estate 1,072,437 538,059 761,266
Commercial and industrial 246,327 57,456 112,328
Premium finance - - 15
Leases 56,843 118,693 53,339
Residential real estate 372,525 339,098 421,123
Home equity lines of credit 60,520 45,765 59,417
Consumer, direct 16,477 9,657 23,322
Total acquired loans (a) $ 1,825,129 $ 1,108,728 $ 1,430,810
Total loans $ 6,159,196 $ 4,707,150 $ 4,481,600
Average total loans 5,590,453 4,574,237 3,709,159
Average allowance for credit losses (57,391) (55,233) (56,038)
Average loans, net of average allowance for credit losses $ 5,533,062 $ 4,519,004 $ 3,653,121
(Dollars in thousands) 2023 2022 2021
Percent of loans to total loans:
Construction 5.9 % 5.2 % 4.7 %
Commercial real estate, other 35.7 % 30.2 % 34.7 %
Commercial real estate 41.6 % 35.4 % 39.4 %
Commercial and industrial 19.2 % 19.0 % 19.9 %
Premium finance 3.3 % 3.4 % 3.0 %
Leases 6.7 % 7.3 % 2.7 %
Residential real estate 12.9 % 15.4 % 17.2 %
Home equity lines of credit 3.4 % 3.8 % 3.7 %
Consumer, indirect 10.8 % 13.4 % 11.8 %
Consumer, direct 2.1 % 2.3 % 2.3 %
Consumer 12.9 % 15.7 % 14.1 %
Deposit account overdrafts (b) NM NM NM
Total percentage 100.0 % 100.0 % 100.0 %
Residential real estate loans being serviced for others $ 356,784 $ 392,364 $ 430,597
(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, 2023, total loans increased $1.5 billion, compared to at December 31, 2022, primarily due to the Limestone Merger. Excluding the loans acquired in the Limestone Merger, the period-end loan and lease balance increased $472.2 million, or 10%, driven by increases of $203.6 million in other commercial real estate loans, $78.2 million in commercial and industrial loans, $68.9 million in leases, $44.0 million in premium finance loans, $37.9 million in construction loans, and $37.0 million in indirect consumer loans, respectively.
As of December 31, 2022, total loans increased 5%, compared to at December 31, 2021. The increase in 2022 total loan and lease balances was primarily driven by $89.4 million in leases acquired from Vantage remaining at December 31, 2022 and increases of (i) $98.9 million in indirect consumer loans, (ii) $36.7 million in construction loans and (iii) $23.1 million in premium finance loans, partially offset by reductions of $126.6 million in other commercial real estate loans and $48.4 million in residential real estate loans.
The following table details the maturities of Peoples’ loan portfolio at December 31, 2023:
(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 $ 5,488 $ 28,100 $ 10,154 $ 3,677 $ 47,419 13.0 %
Variable 129,176 166,590 18,311 2,523 316,600 87.0 %
Total 134,664 194,690 28,465 6,200 364,019 100.0 %
Commercial real estate, other:
Fixed 68,743 474,639 400,452 48,870 992,704 45.2 %
Variable 127,363 406,304 462,898 207,688 1,204,253 54.8 %
Total 196,106 880,943 863,350 256,558 2,196,957 100.0 %
Commercial and industrial:
Fixed 188,236 167,872 117,718 391 474,217 40.0 %
Variable 223,166 165,969 310,129 11,505 710,769 60.0 %
Total 411,402 333,841 427,847 11,896 1,184,986 100.0 %
Premium finance:
Fixed 203,177 - - - 203,177 100.0 %
Leases:
Fixed 89,117 309,810 15,133 - 414,060 100.0 %
Residential real estate:
Fixed 51,407 19,200 153,777 311,203 535,587 67.7 %
Variable 8,182 7,288 72,733 167,305 255,508 32.3 %
Total 59,589 26,488 226,510 478,508 791,095 100.0 %
Home equity lines of credit:
Fixed 37 231 1,397 207 1,872 0.9 %
Variable 7,159 31,239 159,186 9,219 206,803 99.1 %
Total 7,196 31,470 160,583 9,426 208,675 100.0 %
Consumer, indirect:
Fixed 4,416 333,965 328,091 - 666,472 100.0 %
Consumer, direct:
Fixed 20,566 66,082 35,652 72 122,372 95.0 %
Variable 1,477 2,941 1,876 103 6,397 5.0 %
Total 22,043 69,023 37,528 175 128,769 100.0 %
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, 2023:
(Dollars in thousands) Outstanding Balance Available Loan Commitments Total Exposure % of Total Exposure
Construction:
Apartment complexes $ 202,217 $ 228,038 $ 430,255 61.7 %
Land development 40,508 17,150 57,658 8.3 %
Land only 31,538 2,808 34,346 4.9 %
Retail 23,643 5,012 28,655 4.1 %
Lodging and lodging related 3,677 16,456 20,133 2.9 %
Industrial 10,108 7,002 17,110 2.5 %
Student housing 7,022 7,978 15,000 2.2 %
Other (a) 45,306 48,998 94,304 13.4 %
Construction $ 364,019 $ 333,442 $ 697,461 100.0 %
Commercial real estate, other:
Apartment complexes 307,060 4,565 311,625 13.7 %
Retail facilities:
Owner occupied 59,082 1,525 60,607 2.7 %
Non-owner occupied 220,188 897 221,085 9.7 %
Total retail 279,270 2,422 281,692 12.4 %
Light industrial facilities:
Owner occupied 143,460 2,721 146,181 6.4 %
Non-owner occupied 97,386 5,496 102,882 4.5 %
Total light industrial facilities 240,846 8,217 249,063 10.9 %
Office buildings and complexes:
Owner occupied 85,004 3,616 88,620 3.9 %
Non-owner occupied 135,423 7,011 142,434 6.3 %
Total office buildings and complexes 220,427 10,627 231,054 10.2 %
Lodging and lodging related:
Owner occupied 25,524 1,902 27,426 1.2 %
Non-owner occupied 136,854 1 136,855 6.0 %
Total lodging and lodging related 162,378 1,903 164,281 7.2 %
Assisted living facilities and nursing homes 130,907 6,412 137,319 6.0 %
Warehouse facilities:
Owner occupied 47,818 679 48,497 2.1 %
Non-owner occupied 44,041 494 44,535 2.0 %
Total warehouse facilities 91,859 1,173 93,032 4.1 %
Restaurant/bar facilities:
Owner occupied 42,142 89 42,231 1.9 %
Non-owner occupied 35,954 - 35,954 1.6 %
Total restaurant/bar facilities 78,096 89 78,185 3.5 %
Healthcare:
Owner occupied 23,643 221 23,864 1.1 %
Non-owner occupied 25,668 769 26,437 1.2 %
Total healthcare facilities 49,311 990 50,301 2.3 %
Education services:
Owner occupied 16,519 - 16,519 0.7 %
Non-owner occupied 29,983 4,000 33,983 1.5 %
Total education services 46,502 4,000 50,502 2.2 %
Mixed commercial use facilities:
Owner occupied 22,655 1,227 23,882 1.1 %
Non-owner occupied 24,090 1,636 25,726 1.1 %
Total mixed commercial use facilities 46,745 2,863 49,608 2.2 %
Other (a) 543,556 31,032 574,588 25.3 %
Commercial real estate, other $ 2,196,957 $ 74,293 $ 2,271,250 100.0 %
(a)All other total exposures by industry are less than 2% of the Total Exposure.
Peoples’ commercial lending activities continue to focus on lending opportunities 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 both December 31, 2023 and December 31, 2022.
Additional information regarding Peoples’ loan portfolio can be found in “Note 4 Loans and Leases.”
Allowance for Credit 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 making allocations 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) 2023 2022 2021
Construction $ 699 $ 1,250 $ 2,999
Commercial real estate 20,915 17,710 29,147
Commercial and industrial 10,490 8,229 11,063
Premium finance 484 344 379
Leases 10,850 8,495 4,797
Residential real estate 5,937 6,357 7,233
Home equity lines of credit 1,588 1,693 2,005
Consumer, indirect 8,590 7,448 5,326
Consumer, direct 2,343 1,575 961
Deposit account overdrafts 115 61 57
Allowance for credit losses $ 62,011 $ 53,162 $ 63,967
As a percent of total loans 1.01 % 1.13 % 1.43 %
The increase in the allowance balance at December 31, 2023 when compared to at December 31, 2022 was driven by (i) the additional allowance related to the loans acquired in the Limestone Merger, (ii) loan growth and (iii) an increase in charge-offs, partially offset by a release of the reserves on individually analyzed loans and the use of updated loss drivers.
The decline in the allowance balance at December 31, 2022 when compared to at December 31, 2021 was driven by decreases in the allowances for individually analyzed loans, as well as changes in qualitative factors period-over-period and the use of updated prepayment speeds. Those decreases were partially offset by loan growth and deterioration in the economic forecast. Peoples recorded $0.8 million of provision for credit losses to establish the allowance for credit losses for non-PCD leases acquired from Vantage. The allowance for credit losses as a percent of total loans at December 31, 2022 decreased compared to at December 31, 2021, which was mostly due to the composition of Peoples’ loan and lease portfolio as well as the aforementioned reduction in the allowance for credit losses.
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.”
The following table summarizes the changes in the allowance for credit losses for the years ended December 31:
(Dollars in thousands) 2023 2022 2021
Allowance for credit losses, January 1 $ 53,162 $ 63,967 $ 50,359
Gross charge-offs:
Construction 9 16 -
Commercial real estate, other 614 489 387
Commercial and industrial 851 943 1,057
Premium finance 122 124 45
Leases 3,997 2,585 1,434
Residential real estate 170 668 385
Home equity lines of credit 110 88 197
Consumer, indirect 4,030 2,233 1,756
Consumer, direct 416 363 152
Consumer 4,446 2,596 1,908
Deposit account overdrafts 1,161 1,246 575
Total gross charge-offs 11,480 8,755 5,988
Recoveries:
Commercial real estate, other 965 297 204
Commercial and industrial 552 49 26
Premium finance 24 13 -
Leases 362 420 339
Residential real estate 192 84 143
Home equity lines of credit 1 45 41
Consumer, indirect 487 328 253
Consumer, direct 73 47 112
Consumer 560 375 365
Deposit account overdrafts 277 200 177
Total recoveries 2,933 1,483 1,295
Net charge-offs (recoveries):
Construction 9 16 -
Commercial real estate, other (351) 192 183
Commercial and industrial 299 894 1,031
Premium finance 98 111 45
Leases 3,635 2,165 1,095
Residential real estate (22) 584 242
Home equity lines of credit 109 43 156
Consumer, indirect 3,543 1,905 1,503
Consumer, direct 343 316 40
Consumer 3,886 2,221 1,543
Deposit account overdrafts 884 1,046 398
Total net charge-offs $ 8,547 $ 7,272 $ 4,693
Provision for (recovery of) credit losses, December 31 (a) 15,345 (2,904) 731
Initial allowance for PCD assets $ 2,051 $ (629) $ 17,570
Allowance for credit losses, December 31 $ 62,011 $ 53,162 $ 63,967
Net charge-offs (recoveries) as a percent of average total loans:
Construction - % - % - %
Commercial real estate, other (0.01) % 0.01 % - %
Commercial and industrial 0.01 % 0.02 % 0.03 %
Premium finance - % - % - %
Leases 0.06 % 0.05 % 0.03 %
Residential real estate - % 0.01 % 0.01 %
Home equity lines of credit - % - % - %
Consumer, indirect 0.06 % 0.04 % 0.05 %
Consumer, direct 0.01 % 0.01 % - %
Consumer 0.07 % 0.05 % 0.05 %
Deposit account overdrafts 0.02 % 0.02 % 0.01 %
Total 0.15 % 0.16 % 0.13 %
(a)Amount does not include the provision for unfunded commitment liability.
Net charge-offs as a percent of average total loans for 2023 decreased to 0.15% compared to 0.16% at 2022. The decrease was due to (i) an increase in average loan balances, primarily driven by the loans acquired in the Limestone Merger, (ii) decreases in net charge-offs of residential real estate loan balances and commercial and industrial loan balances, and (iii) net recoveries in 2023 compared to net charge-offs in 2022 of other commercial real estate loan balances, mostly offset by increases in net charge-offs related to total consumer loan balances and lease balances.
During 2022, net charge-offs as a percent of average total loans increased to 0.16%, compared to 0.13% for 2021. The increase was due to increases in net charge-offs related to (i) lease balances, (ii) total consumer loan balances, and (iii) deposit account overdraft balances.
The following table details Peoples’ nonperforming assets at December 31:
(Dollars in thousands) 2023 2022 2021
Loans 90+ days past due and accruing:
Construction $ - $ - $ 90
Commercial real estate, other 78 167 689
Commercial and industrial 316 130 1,139
Premium finance 1,355 504 865
Leases 3,826 3,041 -
Residential real estate 877 917 805
Home equity lines of credit 171 58 50
Consumer, indirect 68 - -
Consumer, direct 25 25 85
Consumer 93 25 85
Total loans 90+ days past due and accruing 6,716 4,842 3,723
Nonaccrual loans:
Construction - 12 6
Commercial real estate, other 2,816 12,121 17,067
Commercial and industrial 2,758 3,462 3,572
Leases 8,436 3,178 1,581
Residential real estate 7,921 9,496 9,647
Home equity lines of credit 1,022 820 1,039
Consumer, indirect 2,412 2,176 1,574
Consumer, direct 112 208 279
Consumer 2,524 2,384 1,853
Total nonaccrual loans 25,477 31,473 34,765
Total nonperforming loans (“NPLs”) 32,193 36,315 38,488
OREO:
Commercial 7,118 8,730 9,105
Residential 56 165 391
Total OREO 7,174 8,895 9,496
Total nonperforming assets (“NPAs”) $ 39,367 $ 45,210 $ 47,984
Criticized loans (a) $ 235,239 $ 191,355 $ 194,016
Classified loans (b) 120,027 89,604 106,547
Asset Quality Ratios:
Nonaccrual loans as a percent of total loans (c) 0.41 % 0.67 % 0.78 %
NPLs as a percent of total loans (c)(d) 0.52 % 0.77 % 0.86 %
NPAs as a percent of total assets (c)(d) 0.43 % 0.63 % 0.68 %
NPAs as a percent of total loans and OREO (c)(d) 0.64 % 0.96 % 1.07 %
Allowance for credit losses as a percent of nonaccrual loans (c) 245.79 % 168.91 % 184.00 %
Allowance for credit losses as a percent of NPLs (c)(d) 194.38 % 146.39 % 166.20 %
Criticized loans as a percent of total loans (a)(c) 3.82 % 4.07 % 4.33 %
Classified loans as a percent of total loans (b)(c) 1.95 % 1.90 % 2.38 %
(a)Includes loans categorized as special mention, substandard or doubtful.
(b)Includes loans categorized as substandard or doubtful.
(c)Data presented as of the end of the year indicated.
(d)Nonperforming loans include loans 90+ days past due and accruing, troubled debt restructured loans and nonaccrual loans. Nonperforming assets include nonperforming loans and OREO.
Peoples’ NPAs decreased to 0.43% of total assets at December 31, 2023, compared to 0.63% of total assets at December 31, 2022. Loans 90+ days past due and accruing increased compared to at December 31, 2022, primarily due to the loans acquired in the Limestone Merger and an increase in leases and premium finance loans 90+ days past due and accruing. During 2023, both criticized and classified loans increased when compared to 2022, primarily due to criticized and classified loans acquired in the Limestone Merger.
Nonperforming assets decreased to 0.63% of total assets at December 31, 2022 compared to 0.68% of total assets at December 31, 2021. Loans 90+ days past due and accruing increased compared to at December 31, 2021, mostly due to the leases acquired in the
Vantage acquisition. During 2022, both criticized and classified loans declined when compared to 2021. The decrease at December 31, 2022 in the amount of criticized loans when compared to at December 31, 2021 was largely due to a reduction in the criticized loans acquired in the Premier Merger. The decrease in classified loans when compared to December 31, 2021 was largely attributable to pay-offs and upgrades of classified loans acquired in the Premier Merger.
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 $0.8 million for 2023, $1.7 million for 2022 and $1.3 million for 2021. No portion of these amounts was recorded during 2023, 2022 or 2021.
Overall, management believes the allowance for credit losses was appropriate at December 31, 2023, 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.”
Deposits
The following table details Peoples’ deposit balances at December 31:
(Dollars in thousands) 2023 2022 2021
Non-interest-bearing deposits (a) $ 1,567,649 $ 1,589,402 $ 1,641,422
Interest-bearing deposits:
Interest-bearing demand accounts (a) 1,144,357 1,160,182 1,167,460
Savings accounts 919,244 1,068,547 1,036,738
Retail CDs 1,443,417 530,236 643,759
Money market deposit accounts 775,488 617,029 651,169
Governmental deposit accounts 726,713 625,965 617,259
Brokered deposits 575,429 125,580 104,745
Total interest-bearing deposits 5,584,648 4,127,539 4,221,130
Total deposits $ 7,152,297 $ 5,716,941 $ 5,862,552
(a) The sum of amounts presented are considered total demand deposits.
The increase in total deposits between December 31, 2023 and December 31, 2022 was primarily due to deposits acquired in the Limestone Merger. Excluding Limestone deposit balances, total deposits at December 31, 2023 increased $615.3 million, or 11%, compared to at December 31, 2022, primarily due to increases of $785.6 million in retail certificates of deposit (“CDs”) and $449.8 million in brokered deposits, partially offset by decreases of $226.8 million, $223.3 million, and $193.7 million, in non-interest bearing deposits, savings accounts, and interest-bearing demand deposit accounts, respectively. Total demand deposits comprised 38% and 48% of total deposits at December 31, 2023 and December 31, 2022, respectively.
The decrease in total deposits between December 31, 2022 and December 31, 2021 was due to decreases in both interest-bearing and non-interest-bearing deposits. The variance was driven by decreases of (i) $113.5 million in retail CDs, (ii) $52.0 million in total non-interest-bearing deposit accounts and (iii) $34.1 million in money market deposit accounts, partially offset by increases of $31.8 million in savings account deposits and $20.8 million in brokered deposits. Total demand deposits comprised 48% of total deposits at each of December 31, 2022 and December 31, 2021.
As part of its funding strategy, Peoples hedges 90-day brokered deposits with interest rate swaps. The swaps pay a fixed rate of interest while receiving three-month SOFR, which offsets the rate on the brokered deposits. As of December 31, 2023, Peoples had eleven effective interest rate swaps, with an aggregate notional value of $105.0 million, which were designated as cash flow hedges of brokered deposits, and are expected to be extended every 90 days through the maturity dates of the swaps. Peoples continually evaluates the overall balance sheet position given the interest rate environment.
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 quarters, corresponding with tax collections, with declines normally in the second and fourth quarters 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) 2023 2022 2021
3 months or less $ 135,806 $ 54,471 $ 71,374
Over 3 to 6 months 239,057 39,031 74,529
Over 6 to 12 months 353,433 58,342 83,094
Over 12 months 86,489 110,972 90,864
Total $ 814,785 $ 262,816 $ 319,861
Additional information regarding Peoples’ deposits can be found in “Note 8 Deposits.”
Borrowed Funds
The following table details Peoples’ short-term and long-term borrowings at December 31:
(Dollars in thousands) 2023 2022 2021
Short-term borrowings:
FHLB overnight borrowings $ 369,000 $ 400,000 $ -
FHLB 90-day advances - - 40,000
Current portion of long-term FHLB advances - - 15,000
Repurchase agreements 99,121 100,138 111,482
Bank Term Funding Program (“BTFP”) 133,000 - -
Total short-term borrowings 601,121 500,138 166,482
Long-term borrowings:
FHLB advances 112,865 34,158 85,825
Vantage non-recourse debt 49,572 53,147 -
Other long-term borrowings 53,804 13,788 13,650
Total long-term borrowings 216,241 101,093 99,475
Total borrowed funds $ 817,362 $ 601,231 $ 265,957
Total borrowed funds, which include overnight borrowings, are mainly a function of loan growth and changes in total deposit balances. Other long-term borrowings include trust preferred securities held for investments and floating rate junior subordinated deferrable interest debentures. Peoples continually evaluates its overall balance sheet position given the interest rate environment and liquidity needs. Total borrowed funds increased at December 31, 2023 compared to at December 31, 2022 due to the addition of $133.0 million of BTFP borrowings at December 31, 2023, an increase in FHLB long-term advances, and an increase in other long-term borrowings assumed in the Limestone Merger. Peoples’ borrowed funds increased at December 31, 2022 compared to at December 31, 2021 due to FHLB overnight borrowings of $400.0 million at December 31, 2022.
On April 3, 2019, Peoples entered into the U.S. Bank Loan Agreement with U.S. Bank National Association, the term of which has been extended to March 31, 2024 through an amendment in March 2023. The U.S. Bank Loan Agreement provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $30.0 million.
Additional information regarding Peoples’ borrowed funds can be found in “Note 9 Short-Term Borrowings” and “Note 10 Long-Term Borrowings.”
Capital/Stockholders’ Equity
Peoples’ total stockholders’ equity at December 31, 2023 increased 34% when compared to at December 31, 2022, which was due to (i) 6.8 million common shares (valued at $177.9 million) issued in the Limestone Merger, (ii) net income of $113.4 million for 2023, and (iii) a decrease in other comprehensive loss of $25.5 million, partially offset by dividends paid of $52.1 million and share repurchases of $3.0 million. The decrease in other comprehensive loss was the result of changes in the fair market value of available-for-sale investment securities, which were driven by changes in market interest rates. At December 31, 2023, 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 2022, total stockholders’ equity decreased 7% when compared to 2021 due to (i) an other comprehensive loss of $115.5 million, (ii) dividends paid of $42.4 million and (iii) common share repurchases of $7.4 million, partially offset by net income of $101.3 million for 2022. The other comprehensive loss was the result of changes in the market value of available-for-sale investment securities, which were driven by changes in market interest rates.
On January 1, 2020, 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 PCD 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. Peoples elected 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 was 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 was 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 (i.e., 2023), 75% of the transition adjustment, and the cumulative 25% increase in the allowance for credit losses compared to January 1, 2020, were excluded from regulatory capital, while 50% and 25% of these amounts will be 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 a capital conservation buffer of 2.50%. 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 5.38% at December 31, 2023, 5.06% at December 31, 2022 and 6.06% at December 31, 2021. As such, Peoples exceeded the minimum ratios, including the capital conservation buffer, at December 31, 2023.
The following table details Peoples’ actual risk-based capital levels and corresponding ratios at December 31:
(Dollars in thousands) 2023 2022 2021
Capital Amounts:
Common equity tier 1 $ 766,691 $ 604,566 $ 577,565
Tier 1 820,495 618,354 591,215
Total (tier 1 and tier 2) 873,225 662,421 648,948
Net risk-weighted assets $ 6,524,577 $ 5,071,240 $ 4,614,259
Capital Ratios:
Common equity tier 1 11.75 % 11.92 % 12.52 %
Tier 1 12.58 % 12.19 % 12.81 %
Total (tier 1 and tier 2) 13.38 % 13.06 % 14.06 %
Tier 1 leverage ratio 9.57 % 8.92 % 8.67 %
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 the identified non-US GAAP financial measures to amounts reported in Peoples’ Consolidated Financial Statements at December 31:
(Dollars in thousands) 2023 2022 2021
Tangible equity:
Total stockholders’ equity $ 1,053,534 $ 785,328 $ 845,025
Less: goodwill and other intangible assets 412,172 326,329 291,009
Tangible equity $ 641,362 $ 458,999 $ 554,016
Tangible assets:
Total assets $ 9,157,382 $ 7,207,304 $ 7,063,521
Less: goodwill and other intangible assets 412,172 326,329 291,009
Tangible assets $ 8,745,210 $ 6,880,975 $ 6,772,512
Tangible book value per common share:
Tangible equity $ 641,362 $ 458,999 $ 554,016
Common shares outstanding 35,314,745 28,287,837 28,297,771
Tangible book value per common share $ 18.16 $ 16.23 $ 19.58
Tangible equity to tangible assets ratio:
Tangible equity $ 641,362 $ 458,999 $ 554,016
Tangible assets $ 8,745,210 $ 6,880,975 $ 6,772,512
Tangible equity to tangible assets 7.33 % 6.67 % 8.18 %
The increase in tangible book value per common share at December 31, 2023 from at December 31, 2022 was due to tangible equity increasing as a result of common shares issued throughout 2023, including shares issued due to the Limestone Merger, a decrease in other comprehensive losses recognized on available-for-sale investment securities, which was driven by changes in market interest rates, and net income for 2023.
The decline in tangible book value per common share at December 31, 2022 from December 31, 2021 was due to tangible equity declining as a result of other comprehensive losses recognized on available-for-sale investment securities, which were driven by changes in market interest rates.
Future Outlook
Peoples improved its performance for the second consecutive year during 2023, recording record annual net income despite the challenges that were presented to the banking industry due to the bank failures in 2023. In 2024, Peoples expects net interest income to benefit from the full year impact of the Limestone Merger, but to also be impacted by the projected market interest rate reductions in 2024.
For 2024, Peoples expects net interest margin to be between 4.10% and 4.30% for the full year, which is based on between 75 to 150 basis points of reductions in the Federal Funds effective rate. These projections will vary depending on the timing and magnitude of the anticipated rate cuts and the level of competition for deposits.
Peoples projects growth in total non-interest income, excluding net gains and losses, to be in the high single-digits to low double-digits in 2024 compared to 2023. Total non-interest expenses, excluding acquisition-related expenses, are expected to be between $67 million and $69 million for the second, third and fourth quarters of 2024, with the first quarter of 2024 being higher due to annual expenses typically recognized during the first quarter of each year. The efficiency ratio is projected to be between 55% and 60% for 2024.
Peoples will continue to place importance on loan growth. Peoples anticipates that the annual loan growth for 2024, compared to 2023, will be between 6% and 8%. With the anticipated loan growth and return of net charge-offs to pre-pandemic levels, there is an expectation of an increase in the provision for credit losses during 2024 with a charge-off rate of approximately 20 basis points. The balance sheet mix of Peoples will be continually evaluated in an effort to mitigate exposure risk during 2024.
Total deposit balances are expected to grow by approximately 2% in 2024. Peoples expects continued growth despite increased competition in its markets plus additional upward pressure on rates paid. Throughout 2023, deposits balances increased primarily due to the Limestone Merger, as well as promotional efforts throughout the second half of the year.
Management believes Peoples is in position to maintain strong asset quality metrics and continued growth into 2024. Peoples came through 2023 with positive financial results despite the challenging economic environment and believes it will continue this trend into 2024.
For more information regarding risks and uncertainties that could impact the projections described above, 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 for the year ended December 31, 2022.
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, 2023 December 31, 2022 December 31, 2023 December 31, 2022
300 15,063 4.6 % 13,000 4.4 % (157,625) (9.4) % (82,959) (5.4) %
200 10,282 3.1 % 8,716 3.0 % (107,620) (6.4) % (55,809) (3.6) %
100 5,468 1.7 % 4,380 1.5 % (53,585) (3.2) % (28,157) (1.8) %
(100) (7,427) (2.3) % (11,404) (3.9) % 31,722 1.9 % (21,124) (1.4) %
(200) (15,446) (4.7) % (27,659) (9.4) % 46,537 2.8 % (80,484) (5.2) %
(300) (16,822) (5.1) % (43,728) (14.8) % 47,198 2.8 % (152,152) (9.8) %
This table uses a standard, parallel shock analysis for assessing the IRR to net interest income and the economic value of equity. A parallel shock assumes all points on the yield curve (one year, two year, three year, etc.) are directionally changed by the same degree. Management regularly assesses the impact of both increasing and decreasing interest rates. The table above shows the impact of upward and downward parallel shocks of 100, 200 and 300 basis points.
Estimated changes in net interest income and the economic value of equity are partially driven by assumptions regarding the rate at which non-maturity deposits will reprice given a move in short-term interest rates. These assumptions are monitored closely by Peoples and are reviewed at least semi-annually. At December 31, 2023, 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 impact that might occur as a result of the Federal Reserve Board increasing short-term interest rates in the future could be offset by an inverse movement in long-term 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, 2023, consideration of the bear steepener and bear flattener scenarios provide insights which were not captured by parallel shifts.
The bear steepener scenario highlights the risk to net interest income and 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, 2023, the bear steepener scenario resulted in an increase in net interest income of 0.90% and a decrease in economic value of equity of 1.00%.
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, 2023, the bear flattener scenario resulted in an increase in net interest income of 2.00%% and an increase in economic value of equity of 0.50%
During 2023, Peoples’ Consolidated Balance Sheet was positioned to benefit from rising interest rates in terms of the potential impact on net interest income, while in 2024, Peoples is positioned to see slight declines in net interest income in a projected falling interest rate environment. The table above illustrates this point as net interest income increases in the rising rate scenarios and decreases in the falling 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, 2023, Peoples had eleven interest rate swap contracts, with an aggregate notional value of $105.0 million. Additional information regarding Peoples’ interest rate swaps can be found in “Note 15 Derivative Financial Instruments.”
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 or are indicative of future
results. 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), 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, 2023, Peoples maintained liquid assets of $457.1 million, representing 4.5% 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, 2023, Peoples maintained liquefiable assets of $616.6 million, representing 6.0% 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. At December 31, 2023, Peoples had a ratio of 3.36 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. At December 31, 2023, Peoples had a ratio of 3.85 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. As of December 31, 2023, Peoples had unused collateral-based borrowing capacities of $322.2 million and $318.7 million, respectively, available with the FHLB of Cincinnati and the FRB. Together, these unused borrowing capacities represent 6.3% of total assets and unfunded loan commitments. Additionally, Peoples had $150.9 million of unpledged loan collateral eligible to secure additional borrowing capacity with the FRB as of December 31, 2023.
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. 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.
Starting at March 31, 2020, there was an increase in deposit balances due to the influx of funds from fiscal stimulus, the PPP and other government actions that persisted throughout 2021. During 2022, deposit balances declined due to customers returning to pre-COVID-19 pandemic balances as well as rising market interest rates due to high levels of inflation. During 2023, the Federal Reserve continued a historically aggressive rate-hiking campaign, leading to higher interest rates. As a result, competition for deposits increased. Peoples responded to the increased competition by offering various CD special rates to retain current clients and attract new clients.
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.
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 25 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 net income. 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 supervision and participation 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, 2023. Based upon that evaluation, Peoples’ President and Chief Executive Officer and Peoples’ Executive Vice President, Chief Financial Officer and Treasurer have concluded that:
(a)information required to be disclosed by Peoples in this Form 10-K and other reports Peoples files or submits under the Exchange Act would be accumulated and communicated to Peoples’ management, including its President and Chief Executive Officer and its Executive Vice President, Chief Financial Officer and Treasurer, as appropriate to allow timely decisions regarding required disclosure;
(b)information required to be disclosed by Peoples in this Form 10-K and other reports Peoples files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and
(c)Peoples’ disclosure controls and procedures were effective as of the end of the period covered by this Form 10-K.
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 79 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 Form 10-K, has issued an attestation report on the effectiveness of Peoples’ internal control over financial reporting as of December 31, 2023. The report, which expresses the opinion that Peoples’ management has maintained effective internal control over financial reporting as of December 31, 2023, is included in the “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Control Over Financial Reporting
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, 2023, that have materially affected, or are reasonably likely to materially affect, Peoples’ internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B OTHER INFORMATION
(a) None.
(b) During the three months ended December 31, 2023, no director of Peoples and no officer of Peoples (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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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 “CORPORATE GOVERNANCE AND BOARD MATTERS - Nominating Procedures” of the definitive Proxy Statement of Peoples Bancorp Inc. relating to the Annual Meeting of Shareholders to be held on April 25, 2024 (“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 2023 Annual Meeting of Shareholders held on April 27, 2023.
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.
The information required by Item 405 of SEC Regulation S-K 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 Peoples’ 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, in accordance with the rules of the Nasdaq Stock Market, 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 2023,” “GRANTS OF PLAN-BASED AWARDS FOR 2023,” “OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2023,” “OPTION EXERCISES AND STOCK VESTED FOR 2023,” “PENSION BENEFITS FOR 2023,” “NON-QUALIFIED DEFERRED COMPENSATION FOR 2023,” “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, 2023, 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. Fourth Amended and Restated 2006 Equity Plan, as successor to 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 603,496 (1)
$ - 841,674 (2)
Total 603,496 $ - 841,674
(1)Includes an aggregate of 546,389 restricted common shares subject to time-based or performance-based vesting restrictions granted under the 2006 Equity Plan, and 57,107 common shares allocated to participants’ bookkeeping accounts under the Directors’ Deferred Compensation Plan.
(2)Includes 697,190 common shares remaining available for future grants under the 2006 Equity Plan at December 31, 2023, as well as 144,484 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.”

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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,” “CORPORATE GOVERNANCE AND BOARD MATTERS - Independence of Directors,” and “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” of Peoples’ Definitive Proxy Statement, which sections are incorporated herein 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 at December 31, 2023 and 2022
Consolidated Statements of Income for each of the fiscal years in the three-year period ended December 31, 2023
Consolidated Statements of Comprehensive (Loss) Income for each of the fiscal years in the three-year period ended December 31, 2023
Consolidated Statements of Stockholders’ Equity for each of the fiscal years in the three-year period ended December 31, 2023
Consolidated Statements of Cash Flows for each of the fiscal years in the three-year period ended December 31, 2023
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 SEC 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.