PEOPLES BANCORP INC 10-K

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 magnitude and continued duration of the recovery from the COVID-19 pandemic and its ongoing impact on the global economy and financial market conditions and Peoples’ businesses, results of operations and financial conditions; (2) ongoing increasing interest rate policies, changes in the interest rate environment due to economic conditions related to the COVID-19 pandemic or other factors and/or the fiscal and monetary policy measures undertaken by the U.S. government and the Federal Reserve Board in response to such economic conditions, which may adversely impact interest rates, the interest rate yield curve, interest margins, loan demand and interest rate sensitivity; (3) the effects of inflationary pressures and the impact of rising interest rates on borrowers’ liquidity and ability to repay; (4) the success, impact, and timing of the implementation of Peoples' business strategies and Peoples' ability to manage strategic initiatives, including the ongoing increasing interest rate policies of the Federal Reserve Board, the completion and successful integration of planned acquisitions, including the recently-completed Premier Merger, the recently-completed acquisition of Vantage and the pending Limestone Merger, and the expansion of commercial and consumer lending activities; (5) competitive pressures among financial institutions, or from non-financial institutions, which may increase significantly, including product and pricing pressures, which can in turn impact Peoples' credit spreads, changes to third-party relationships and revenues, changes in the manner of providing services, customer acquisition and retention pressures, and Peoples' ability to attract, develop and retain qualified professionals; (6) uncertainty regarding the nature, timing, cost, and effect of legislative or regulatory changes or actions, or deposit insurance premium levels, promulgated and to be promulgated by governmental and regulatory agencies in the State of Ohio, the Federal Deposit Insurance Corporation, the Federal Reserve Board and the Consumer Financial Protection Bureau, which may subject Peoples, its subsidiaries, or one or more acquired companies to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses; (7) the effects of easing restrictions on participants in the financial services industry; (8) local, regional, national and international economic conditions (including the impact of potential or imposed tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations, and changes in the relationship of the U.S. and U.S. global trading partners) and the impact these conditions may have on Peoples, Peoples' customers and Peoples' counterparties, and Peoples' assessment of the impact, which may be different than anticipated; (9) Peoples may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to Peoples' current shareholders; (10) changes in prepayment speeds, loan originations, levels of nonperforming assets, delinquent loans, charge-offs, and customer and other counterparties' performance and creditworthiness generally, which may be less favorable than expected in light of recent inflationary pressures and adversely impact the amount of interest income generated; (11) Peoples may have more credit risk and higher credit losses to the extent there are loan concentrations by location or industry of borrowers or collateral; (12) future credit quality and performance, including expectations regarding future credit losses and the allowance for credit losses; (13) changes in accounting standards, policies, estimates or procedures may adversely affect Peoples' reported financial condition or results of operations; 37 (14) the impact of assumptions, estimates and inputs used within models, which may vary materially from actual outcomes, including under the CECL model; (15) the replacement of the London Interbank Offered Rate ("LIBOR") with other reference rates which may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies; (16) adverse changes in the conditions and trends in the financial markets, including recent inflationary pressures, which may adversely affect the fair value of securities within Peoples' investment portfolio, the interest rate sensitivity of Peoples' consolidated balance sheet, and the income generated by Peoples' trust and investment activities; (17) the volatility from quarter to quarter of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors; (18) Peoples' ability to receive dividends from Peoples' subsidiaries; (19) Peoples' ability to maintain required capital levels and adequate sources of funding and liquidity; (20) the impact of larger or similar-sized financial institutions encountering problems, which may adversely affect the banking industry and/or Peoples' business generation and retention, funding and liquidity; (21) Peoples' ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks, including those of Peoples' third-party vendors and other service providers, which may prove inadequate, and could adversely affect customer confidence in Peoples and/or result in Peoples incurring a financial loss; (22) Peoples' ability to anticipate and respond to technological changes, and Peoples' reliance on, and the potential failure of, a number of third-party vendors to perform as expected, including Peoples' primary core banking system provider, which can impact Peoples' ability to respond to customer needs and meet competitive demands; (23) operational issues stemming from and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems on which Peoples and Peoples' subsidiaries are highly dependent; (24) changes in consumer spending, borrowing and saving habits, whether due to changes in retail distribution strategies, consumer preferences and behavior, changes in business and economic conditions, legislative or regulatory initiatives, or other factors, which may be different than anticipated; (25) the adequacy of Peoples' internal controls and risk management program in the event of changes in strategic, reputational, market, economic, operational, cybersecurity, compliance, legal, asset/liability repricing, liquidity, credit and interest rate risks associated with Peoples' business; (26) the impact on Peoples' businesses, personnel, facilities, or systems, of losses related to acts of fraud, theft, misappropriation or violence; (27) the impact on Peoples' businesses, as well as on the risks described above, of various domestic or international widespread natural or other disasters, pandemics, cybersecurity attacks, system failures, civil unrest, military or terrorist activities or international conflicts; (28) the potential further deterioration of the U.S. economy due to financial, political or other shocks; (29) the potential influence on the U.S. financial markets and economy from the effects of climate change; (30) the impact on Peoples' businesses and operating results of any costs associated with obtaining rights in intellectual property claimed by others and adequately protecting Peoples' intellectual property; (31) risks and uncertainties associated with Peoples' entry into new geographic markets and risks resulting from Peoples' inexperience in these new geographic markets; (32) Peoples' ability to integrate the NS Leasing, LLC ("NSL") and Vantage acquisitions, the Premier Merger, and the pending Limestone Merger, which may be unsuccessful, or may be more difficult, time-consuming or costly than expected; (33) the risk that expected revenue synergies and cost savings from the Premier Merger or the pending Limestone Merger, may not be fully realized or realized within the expected time frame; (34) changes in laws or regulations imposed by Peoples' regulators impacting Peoples' capital actions, including dividend payments and share repurchases; (35) the effect of a fall in stock market prices on the asset and wealth management business; (36) Peoples' continued ability to grow deposits; and 38 (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: ◦ On October 25, 2022, Peoples announced the Limestone Merger, a transaction valued at approximately $208.2 million at the time of the announcement. The Limestone Merger is expected to close in the second quarter of 2023, subject to the satisfaction of closing conditions, including regulatory approvals. As of December 31, 2022, Peoples had recognized $0.6 million in acquisition-related expenses associated with this pending transaction. ◦ On April 1, 2022, Peoples Insurance acquired substantially all of the assets and rights of an insurance agency with five locations in eastern Kentucky and certain rights to related customer accounts, which were previously developed and maintained by 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. 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 the Premier Merger. Premier merged and Premier's wholly-owned subsidiaries, Premier Bank and Citizens Deposit Bank & Trust, 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. 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 acquired the equipment finance and leasing business of NSL. The transaction closed after the end of business on March 31, 2021 and Peoples Bank began operating the acquired business as North Star Leasing, a division of Peoples Bank, on April 1, 2021. Peoples Bank acquired assets comprising NSL's equipment finance business, including $83.3 million in leases and satisfied, on behalf of NSL, certain third-party debt in the amount of $69.1 million. Peoples Bank paid total consideration of $116.5 million, plus a potential earn-out payment to NSL of up to $3.1 million. Based in Burlington, Vermont, the North Star Leasing division underwrites, originates and services equipment leases and equipment financing agreements to businesses throughout the United States. Peoples recorded 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. 39 ◦ Peoples began originating loans during the second quarter of 2020 and continued to originate loans during the first five months of 2021 under the loan guarantee program created under the CARES Act, called the PPP. These loans were targeted to provide small businesses with financial support to cover payroll and certain other specified types of expenses for a specified period of time. Loans made under the PPP are fully guaranteed by the SBA. Additional information can be found later in this discussion under the caption “FINANCIAL CONDITION - COVID-19 Loan Impacts." As of December 31, 2022, Peoples had $2.4 million aggregate principal amount, net of deferred fees, in PPP loans outstanding, which were included in commercial and industrial loan balances, compared to $87.1 million at December 31, 2021 (including $23.4 million acquired in the Premier Merger). Peoples recognized interest income of $2.2 million for deferred loan fees/cost accretion and $0.3 million of interest income on PPP loans during 2022, compared to interest income of $13.0 million for deferred loan fees/cost accretion and $2.3 million of interest income during 2021, and $7.5 million for deferred loan fees/cost accretion and $3.2 million of interest income during 2020. ◦ On January 28, 2021, Peoples' Board of Directors approved a share repurchase program authorizing Peoples to purchase up to an aggregate of $30.0 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 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. During 2020, Peoples repurchased 1,299,577 of Peoples' common shares through Peoples' then-effective common share repurchase program for a total of $29.3 million. 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. ◦ During 2022, Peoples recorded a recovery of credit losses of $3.5 million, compared to a provision for credit losses of $0.7 million for 2021 and of $26.3 million for 2020. 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 acquired purchased credit deteriorated ("PCD") loan payoffs. ◦ During 2022, Peoples incurred $3.0 million of acquisition-related expenses, compared to $21.4 million for 2021 and $0.5 million for 2020. The acquisition-related expenses in 2022 were related to the Vantage acquisition, the Premier Merger, and the Limestone Merger. The acquisition-related expenses in 2021 were primarily related to the NSL acquisition and the Premier Merger, and the acquisition-related expenses during 2020 were due to the acquisition of Triumph Premium Finance ("Premium Finance"). ◦ Peoples incurred $185,000 in pension settlement charges in 2022, compared to $143,000 in 2021 and $1.1 million in 2020, due to the aggregate amount of lump-sum distributions to participants in Peoples' defined benefit pension plan exceeding the threshold for recognizing settlement charges during the period. ◦ During 2021, Peoples recorded $1.2 million of expenses related to the COVID-19 pandemic and $1.3 million during 2020. During the fourth quarter of 2021, Peoples awarded common shares to all associates who were at the Assistant Vice President level or below. The remainder of the COVID-19-related expenses were primarily related to providing Peoples' employees meals in support of local businesses, assisting employees with childcare and elder care needs, incentivizing employees to be vaccinated and taking extra precautions in cleaning facilities. COVID-19 pandemic-related expenses were immaterial for 2022. ◦ On April 3, 2019, Peoples entered into a Loan Agreement with U.S. Bank National Association (the “U.S. Bank Loan Agreement”). A Fourth Amendment to the U.S. Bank Loan Agreement, entered into on March 31, 2022, extended the maturity from April 1, 2022 to March 31, 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 that may be used: (i) for working capital purposes; (ii) to finance dividends or other distributions (other than stock dividends and stock splits) on or in respect of Peoples’ capital stock and redemptions, repurchases or other acquisitions of any of Peoples’ capital stock permitted under the U.S. Bank Loan Agreement; and (iii) to finance acquisitions permitted under the U.S. Bank Loan Agreement. ◦ During 2020, Peoples sold restricted Class B Visa stock for a gain of $680,000, which was recorded in "Other non-interest income." ◦ Effective July 1, 2020, Peoples completed the business combination under which Peoples Bank acquired the operations and assets of Premium Finance (referred to as the "premium finance acquisition"), a division of TBK Bank, SSB. Based in Kansas City, Missouri, the division operating as Peoples Premium Finance has continued to provide insurance premium financing loans for commercial customers to purchase property and casualty insurance products through its growing network of independent insurance agency partners nationwide. Peoples Bank acquired $84.7 million in loans, at acquisition date, after fair value adjustments. Peoples also recorded $4.3 million of other intangible assets and $5.5 million of goodwill. Total consideration paid for this acquisition was $94.5 million. 40 ◦ During 2020, Peoples recognized credits to its FDIC insurance expense as the FDIC issued credits to member banks to offset against the quarterly assessment as a result of the deposit insurance fund reaching its target threshold for smaller banks. These credits were used by Peoples and were fully exhausted during the second quarter of 2020. ◦ In an effort to stimulate an economy that was being adversely impacted by the the COVID-19 pandemic, the Federal Reserve Board first lowered the benchmark Federal Funds Target Rate by 50 basis points on March 3, 2020 and then lowered the target rate another 100 basis points at the next FOMC meeting on March 15, 2020. The Federal Funds Target Rate range was 0% - 0.25% as of March 31, 2020 and maintained this rate until March 16, 2022. The Federal Reserve Board increased the Federal Funds Target Rate range to 0.25% to 0.50% on March 16, 2022, to 0.75% to 1.00% on May 4, 2022, to 1.50% to 1.75% on June 15, 2022, to 2.25% to 2.50% on July 27, 2022, to 3.00% to 3.25% on September 21, 2022, to 3.75% to 4.00% on Nov 2, 2022, to 4.25% to 4.50% on Dec 14, 2022, to 4.50% to 4.75% on February 1, 2023, and has stated it anticipates continuing to raise rates in 2023. 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, 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 19 segments for which it believes there are similar risk characteristics and utilized a discounted cash flow methodology in determining an allowance for credit losses for each segment. In estimating credit losses, Peoples uses a loss driver method, which analyzes one or more economic variables to the change in default rate using a regression analysis. Variables that had a strong correlation were selected as economic factors, or variables, for the model. If a single variable was not found to be strongly correlated, additional variables were included. Peoples utilizes U.S. unemployment, Ohio unemployment and Ohio Gross Domestic Product as economic factors in modeling. In general, Peoples completes a quarterly evaluation based on several qualitative factors to determine if there should be adjustments made to the allowance for credit losses. These factors include economic conditions, collateral, concentrations, troubled assets, Peoples' loss trends, peer loss trends, delinquency trends, portfolio composition and loan growth, underwriting, and certain other risks. 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. 41 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, 2022 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, 2022, management calculated the difference between the modeled allowance for credit losses at December 31, 2022, compared to one based on an adverse scenario. The adverse scenario reflected increases of 100 basis points in both U.S. and Ohio unemployment, and a decline in Ohio Gross Domestic Product of 100 basis points. Excluding consideration of general reserve adjustments, this sensitivity analysis would result in a hypothetical increase in the allowance for credit losses of approximately $5.0 million at December 31, 2022. Business Combinations Peoples utilizes the acquisition method of accounting for business combinations. As of the acquisition date, Peoples records the acquired company's net assets at fair value. The determination of fair value as of the acquisition date requires management to consider various factors that involve judgment and estimation, including the application of discount rates, prepayment rates, attrition rates, future estimates of interest rates, as well as many other assumptions. These assumptions can have a material impact on the estimated fair value, and as a result, the goodwill recorded in a business combination. Based on recent acquisitions, loans and leases acquired through business combinations have comprised the majority of purchase accounting adjustments in arriving at the fair values of acquired assets and liabilities, with the most significant adjustments relating to the creditworthiness of the acquired portfolios. The assumptions and inputs impacting the allowance for credit losses are discussed in the above paragraphs of this section of Management's Discussion and Analysis. Those same judgments drive the measurement of the credit adjustments of acquired loan and lease portfolios when arriving at fair value. For further information regarding business combination accounting, please refer to “Note 20 Acquisitions.” 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, 2022, 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. 42 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." EXECUTIVE SUMMARY Net income for the year ended December 31, 2022 was $101.3 million, compared to $47.6 million for 2021 and $34.8 million for 2020, representing earnings per diluted common share of $3.60, $2.15 and $1.73, respectively. The increases in 2022 earnings when compared to 2021 and 2020 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 $0.11 for 2022 compared to $0.85 for 2021 and $0.22 for 2020. Net interest income increased 47% to $253.4 million for 2022, compared to $172.6 million for 2021, and $138.9 million for 2020. Net interest margin was 3.97% in 2022, compared to 3.40% in 2021 and 3.24% in 2020. The increases in net interest income and net interest margin when compared to 2021 were driven by (i) the Premier Merger and the Vantage acquisition, (ii) organic growth and (iii) increases in market interest rates. Net interest margin increased during 2021 when compared to 2020 largely due to the impact of PPP loan forgiveness and lower funding costs due to customers' maintaining higher cash balances, as well as a higher volume of loans due to the Premier Merger and Premium Finance acquisition coupled with higher-yielding leases acquired from NSL and organic loan growth. Net interest margin in 2020 was impacted by the low interest rate environment and lower investment securities yields, partially offset by premium amortization due to a high level of refinancing activity. Accretion income, net of amortization expense, from acquisitions totaled $11.6 million for 2022, $3.2 million for 2021, and $2.8 million for 2020, adding 19 basis points to the 2022 net interest margin and 7 basis points to each of the 2021 and 2020 net interest margins. Included in net interest income during 2022, 2021 and 2020 was the impact of the PPP loans. Peoples recognized interest income on deferred loan fees/costs of $2.2 million, $13.0 million and $7.5 million during 2022, 2021 and 2020, respectively, along with $0.3 million, $2.3 million and $3.2 million of interest earned on PPP loans during 2022, 2021 and 2020, respectively. The recovery of credit losses for 2022 was $3.5 million, compared to provisions for credit losses of $0.7 million for 2021 and $26.3 million for 2020. Net charge-offs for 2022 were $7.3 million, compared to $4.7 million for 2021 and $1.8 million for 2020. Net charge-offs as a percent of average total loans were 0.16% for 2022, 0.13% for 2021 and 0.05% for 2020. 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. The lower provision for credit losses recognized in 2021 when compared to 2020 was the result of improvement in loss drivers and Moody's economic outlook published in December 2021. The provision for credit losses recognized in 2020 was due to the impact the COVID-19 pandemic had on the economic forecasts and qualitative factors used in the CECL model. 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 service charges on deposit accounts 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. In 2021, all non-interest income categories were impacted by the Premier Merger, with the exception of mortgage banking income and commercial loan swap fees. Mortgage banking income in 2021 decreased when compared to 2020 due to the volume of refinance activity experienced in 2020 when interest rates declined, which was not repeated in 2021. Swap fee income in 2021 also decreased when compared to 2020 as a result of lower customer demand caused by the sustained lower rate environment in 2021. Total non-interest income for 2020 was largely impacted by a lower level of deposit account service charges, which was driven by the COVID-19 pandemic and the higher balances being maintained by customers throughout 2020. Total non-interest expense was $207.1 million for 2022, an increase of $23.4 million, or 13%, 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 43 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 was a decrease in acquisition-related expenses due to the amount of expenses incurred in connection with the Premier Merger in 2021. Total non-interest expense was $183.7 million for 2021, an increase of $50.0 million compared to 2020. The Premier Merger and the acquisition of NSL increased acquisition-related expenses included in other expenses, professional fees, salaries and employee benefit costs, as well as net occupancy and equipment expenses, and amortization of intangible assets. Included in total non-interest expense during 2022 were certain non-core expenses which included acquisition-related expenses of $3.0 million. Non-core expenses for 2021 included acquisition-related expenses of $21.4 million, COVID-19-related expenses of $1.2 million, contract negotiation expenses of $1.2 million and a Peoples Bank Foundation, Inc. contribution of $0.5 million. Non-core expenses for 2020 included COVID-19-related expenses of $1.3 million, severance expenses and pension settlement charges that totaled $1.1 million each, and acquisition-related expenses of $0.5 million. 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 59.6% for 2022, compared to 73.6% for 2021 and 63.9% for 2020. The increase in the efficiency ratio during 2021 was caused by increased non-core expenses discussed above. The efficiency ratio, when adjusted for non-core items, was 58.6% for 2022, 63.5% for 2021 and 61.9% for 2020. Income tax expense totaled $27.3 million for 2022, compared to $9.4 million for 2021 and $7.9 million for 2020. The effective tax rate for 2022 was 21.3%, 16.5% for 2021 and 18.5% for 2020. The increase for 2022 compared to 2021 was driven by higher pre-tax income and a higher effective tax rate primarily due to apportionment in additional states due to recent acquisitions. The variance in income tax expense for 2021 compared to 2020, was the result of higher pre-tax income in 2021 that resulted from the Premier Merger and the NSL acquisition. Income tax expense for 2021 was also impacted by an income tax benefit related to an adjustment from a prior period of $1.1 million. Total assets increased 2% to $7.21 billion at December 31, 2022, compared to $7.06 billion at year-end 2021. The increase was primarily due to increases of $225.6 million in loan and lease balances and $186.1 million in held-to-maturity investment securities. The increase in the period-end total loan and lease balances was primarily driven by $154.9 million of leases acquired from Vantage 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. Held-to-maturity investment securities increased due to purchases throughout 2022. The allowance for credit losses decreased to $53.2 million or 1.13% of total loans, net of deferred fees and costs, compared to $64.0 million and 1.43%, respectively, at December 31, 2021. 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. Total liabilities were $6.42 billion at December 31, 2022, an increase of $203.5 million since at December 31, 2021. Total deposits decreased $145.6 million, to $5.72 billion at December 31, 2022. The 2022 decline in the total deposit balances from December 31, 2021 was driven by decreases of (i) $113.5 million in retail certificates of deposits, (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 deposit accounts. Total demand deposits comprised 48% of total deposits at both December 31, 2022 and December 31, 2021. Total stockholders' equity was $785.3 million at December 31, 2022, a decrease of 7% from December 31, 2021 due to (i) an other comprehensive loss of $115.5 million, (ii) dividends paid of $42.4 million and (iii) share repurchases of $7.4 million, partially offset by net income of $101.3 million for the full year of 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. Peoples continued to exceed the capital required by the Federal Reserve Board to be deemed "well capitalized." Peoples' tier 1 capital ratio was 12.19% at December 31, 2022, versus 12.81% at December 31, 2021, while the total capital ratio was 13.06% at December 31, 2022, versus 14.06% at December 31, 2021. The common equity tier 1 risk-based capital ratio was 11.92% at December 31, 2022 compared to 12.52% at December 31, 2021. Compared to December 31, 2021, the capital ratios decreased due to the Vantage acquisition and other comprehensive losses from unrealized losses on available-for-sale fixed maturities. Peoples' book value and tangible book value per share were $27.76 and $16.23, respectively, at December 31, 2022, compared to $29.86 and $19.58, respectively, at December 31, 2021. 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 76% of total revenue during 2022. The amount of net interest income earned by Peoples is affected by various 44 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 2022, 22.3% for 2021, and a statutory federal corporate income tax rate of 21% for 2020. 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) 2022 2021 2020 Net interest income $ 253,442 $ 172,553 $ 138,923 Taxable equivalent adjustments 1,644 1,349 1,054 FTE net interest income $ 255,086 $ 173,902 $ 139,977 45 The following table details Peoples’ average balance sheets, with corresponding income/expense and yield/cost, for the years ended December 31: 2022 2021 2020 ( Dollars in thousands) Average Balance Income/ Expense Yield/Cost Average Balance Income/Expense Yield/Cost Average Balance Income/ Expense Yield/Cost Short-term investments $ 178,781 $ 1,710 0.96 % $ 219,849 $ 313 0.14 % $ 103,767 $ 343 0.33 % Investment securities (a)(b): Taxable 1,481,368 29,091 1.96 % 1,042,419 15,219 1.46 % 868,930 14,370 1.65 % Nontaxable 199,279 5,444 2.73 % 163,095 4,326 2.65 % 101,965 3,146 3.09 % Total investment securities 1,680,647 34,535 2.05 % 1,205,514 19,545 1.62 % 970,895 17,516 1.80 % Loans (b)(c): Construction 223,197 10,732 4.74 % 131,834 5,130 3.84 % 107,862 4,883 4.45 % Commercial real estate, other 1,327,064 65,405 4.86 % 1,061,323 42,308 3.93 % 854,749 36,499 4.20 % Commercial and industrial 875,754 41,358 4.66 % 870,682 37,321 4.23 % 925,060 34,458 3.66 % Premium finance 150,135 6,789 4.46 % 118,242 5,872 4.90 % 50,687 2,855 5.54 % Leases 271,349 34,720 12.62 % 74,442 13,572 17.98 % — — — % Residential real estate (d) 881,136 37,851 4.30 % 700,691 29,686 4.24 % 660,025 31,155 4.72 % Home equity lines of credit 170,567 8,300 4.87 % 133,340 5,410 4.06 % 127,454 5,799 4.55 % Consumer, indirect 563,887 23,029 4.08 % 529,994 21,480 4.05 % 453,379 19,364 4.27 % Consumer, direct 111,148 6,769 6.09 % 88,611 5,501 6.21 % 79,138 5,286 6.68 % Total loans 4,574,237 234,953 5.09 % 3,709,159 166,280 4.44 % 3,258,354 140,299 4.26 % Allowance for credit losses (55,233) (56,038) (47,692) Net loans 4,519,004 234,953 5.15 % 3,653,121 166,280 4.51 % 3,210,662 140,299 4.33 % Total earning assets 6,378,432 271,198 4.22 % 5,078,484 186,138 3.64 % 4,285,324 158,158 3.66 % Goodwill and other intangible assets 322,639 234,667 181,526 Other assets 393,636 359,443 272,439 Total assets $ 7,094,707 $ 5,672,594 $ 4,739,289 Interest-bearing deposits: Savings accounts $ 1,069,097 $ 356 0.03 % $ 772,726 $ 112 0.01 % $ 571,676 $ 175 0.03 % Government deposit accounts 701,587 2,172 0.31 % 529,955 2,035 0.38 % 375,305 2,226 0.59 % Interest-bearing demand accounts 1,165,106 583 0.05 % 848,526 303 0.04 % 658,214 455 0.07 % Money market accounts 632,364 1,015 0.16 % 575,237 390 0.07 % 549,276 1,416 0.26 % Retail certificates of deposit 580,660 2,978 0.51 % 497,181 3,952 0.79 % 473,244 6,748 1.43 % Brokered deposits (e) 88,234 2,067 2.34 % 150,716 3,130 2.08 % 223,940 2,480 1.11 % Total interest-bearing deposits 4,237,048 9,171 0.22 % 3,374,341 9,922 0.29 % 2,851,655 13,500 0.47 % Borrowed funds: Short-term FHLB advances (f) 83,356 2,386 2.86 % 30,289 475 1.57 % 129,928 2,489 1.92 % Repurchase agreements and other 113,434 275 0.24 % 70,674 66 0.09 % 46,706 82 0.18 % Total short-term borrowings 196,790 2,661 1.35 % 100,963 541 0.54 % 176,634 2,571 1.46 % Long-term FHLB advances 53,102 984 1.85 % 94,050 1,413 1.50 % 107,935 1,740 1.61 % Long-term notes payable 56,865 2,562 4.51 % — — — % — — — % Other borrowings 13,718 734 5.27 % 9,364 360 3.79 % 8,757 370 4.23 % Total long-term borrowings 123,685 4,280 3.46 % 103,414 1,773 1.71 % 116,692 2,110 1.81 % Total borrowed funds 320,475 6,941 2.15 % 204,377 2,314 1.13 % 293,326 4,681 1.59 % Total interest-bearing liabilities 4,557,523 16,112 0.35 % 3,578,718 12,236 0.34 % 3,144,981 18,181 0.58 % Non-interest-bearing deposits 1,637,690 1,347,702 924,799 Other liabilities 101,510 89,541 94,123 Total liabilities 6,296,723 5,015,961 4,163,903 Stockholders’ equity 797,984 656,633 575,386 Total liabilities and stockholders’ equity $ 7,094,707 $ 5,672,594 $ 4,739,289 Interest rate spread (b) $ 255,086 3.87 % $ 173,902 3.30 % $ 139,977 3.08 % Net interest margin (b) 3.97 % 3.40 % 3.24 % (a) Average balances are based on carrying value. (b) Interest income and yields are presented on a fully tax-equivalent basis, using a blended federal and state corporate income tax rate of 23.3% for 2022, 22.3% for 2021, and a statutory federal corporate income tax rate of 21% for 2020. 46 (c) 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. (d) 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. (e) Interest related to interest rate swap transactions is included, as appropriate to the transaction, in interest expense on short-term FHLB advances and interest expense on brokered deposits for the periods presented in which FHLB advances and brokered deposits were being utilized. Peoples' average balances compared to prior periods have been impacted by recent acquisitions, which included: the acquisition of Vantage on March 7, 2022, which added to average lease and borrowed funds balances, and 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 acquired North Star Leasing on April 1, 2021 and an insurance premium finance division on July 1, 2020. Peoples has begun to reduce cash balances after previously maintaining high cash balances in recent prior periods due to an influx of deposits, coupled with PPP proceeds. The following table provides an analysis of the changes in FTE net interest income: (Dollars in thousands) Changes from 2021 to 2022 Changes from 2020 to 2021 Increase (decrease) in: Rate Volume Total (a) Rate Volume Total (a) INTEREST INCOME: Short-term investments $ 1,461 $ (64) $ 1,397 $ (258) $ 228 $ (30) Investment securities (b): Taxable 6,436 7,436 13,872 (4,274) 5,123 849 Nontaxable 186 932 1,118 (1,431) 2,611 1,180 Total investment income 6,622 8,368 14,990 (5,705) 7,734 2,029 Loans (b) : Construction 1,421 4,181 5,602 (723) 970 247 Commercial real estate, other 11,216 11,881 23,097 (2,414) 8,223 5,809 Commercial and industrial 3,818 219 4,037 4,955 (2,092) 2,863 Premium finance (550) 1,467 917 (358) 3,375 3,017 Leases (5,031) 26,179 21,148 — 13,572 13,572 Residential real estate 419 7,746 8,165 (3,315) 1,846 (1,469) Home equity lines of credit 1,204 1,686 2,890 (648) 259 (389) Consumer, indirect 166 1,383 1,549 (1,028) 3,144 2,116 Consumer, direct (137) 1,405 1,268 (391) 606 215 Total loan income 12,526 56,147 68,673 (3,922) 29,903 25,981 Total interest income 20,609 64,451 85,060 (9,885) 37,865 27,980 INTEREST EXPENSE: Deposits: Savings accounts 187 57 244 (112) 49 (63) Government deposit accounts (442) 579 137 (934) 743 (191) Interest-bearing demand accounts 145 135 280 (260) 108 (152) Money market accounts 582 43 625 (1,090) 64 (1,026) Retail certificates of deposit (1,562) 588 (974) (3,122) 326 (2,796) Brokered deposit 362 (1,425) (1,063) 1,654 (1,004) 650 Total deposit cost (728) (23) (751) (3,864) 286 (3,578) Borrowed funds: Short-term borrowings 761 1,359 2,120 (433) (1,597) (2,030) Long-term borrowings 373 2,134 2,507 (177) (160) (337) Total borrowed funds cost 1,134 3,493 4,627 (610) (1,757) (2,367) Total interest expense 406 3,470 3,876 (4,474) (1,471) (5,945) Net interest income $ 20,203 $ 60,981 $ 81,184 $ (5,411) $ 39,336 $ 33,925 47 (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 2022, 22.3% for 2021, and a statutory federal corporate income tax rate of 21% for 2020. Net interest income increased $80.9 million, or 47%, for 2022 when compared to 2021, and net interest margin increased 57 basis points to 3.97%. 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. 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. During 2021, net interest income grew 24% when compared to 2020. The increase was primarily driven by the Premier Merger and the acquisition of NSL, coupled with growth in Peoples' core business. Net interest margin improved 16 basis points compared to 2020, as loan yields improved and offset declining investment yields, while controlled funding costs benefited net interest margin. Peoples recorded $15.3 million in PPP income during 2021, which was mostly due to the forgiveness of loans, resulting in accretion of net deferred loan fees and costs, and positively impacted net interest margin by 16 basis points. Accretion income, net of amortization expense, from acquisitions, added $3.2 million to net interest income and 7 basis points to net interest margin. Additional interest income in 2022 from prepayment fees and interest recovered on nonaccrual loans was $647,000, compared to $825,000 in 2021 and $738,000 in 2020. Detailed information regarding changes in the Consolidated Balance Sheets can be found under appropriate captions of the "FINANCIAL CONDITION" section of this discussion. Additional information regarding Peoples' interest rate risk and the potential impact of interest rate changes on Peoples' results of operations and financial condition can be found later in this discussion under the caption "Interest Rate Sensitivity and Liquidity." Provision for Credit Losses On January 1, 2020, Peoples adopted the provisions of ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", commonly referred to as the CECL model. The following table details Peoples’ provision for credit losses recognized for the years ended December 31: (Dollars in thousands) 2022 2021 2020 (Recovery of) Provision for other credit losses $ (4,560) $ 339 $ 25,798 Provision for checking account overdrafts 1,050 392 456 (Recovery of) Provision for credit losses $ (3,510) $ 731 $ 26,254 As a percent of average total loans (0.08) % 0.02 % 0.81 % 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 2022, the recovery of credit losses compared to a provision for credit losses for 2021 was driven by improvements in economic forecasts, coupled with loan pay-offs during certain periods of 2022. During 2021, Peoples recorded a lower provision for credit losses compared to a sizable provision for credit losses during 2020. 2020 was impacted by the COVID-19 pandemic, which drove a higher provision for credit losses. During 2021, economic factors and loss drivers improved and resulted in a reduction in the allowance for credit losses, resulting in a lower provision for credit losses. The improvement in economic factors and loss drivers for 2021 were partially offset by the provision for credit losses required to establish the allowance for credit losses for acquired non-PCD loans and leases during 2021. During 2020, the COVID-19 pandemic caused the economic outlook and assumptions used in the CECL model to be unfavorable, and as a result, caused the need for additional provision for credit losses to be recorded resulting in a higher allowance for credit losses at the end of the year. 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: 48 (Dollars in thousands) 2022 2021 2020 Net loss on investment securities $ (61) $ (862) $ (368) Net (loss) gain on asset disposals and other transactions: Net loss on other assets $ (326) $ (460) $ (367) Net (loss) gain on OREO (139) 56 (120) Net (loss) gain on other transactions (151) 897 197 Net (loss) gain on asset disposals and other transactions $ (616) $ 493 $ (290) For 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 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 $897,000 related to the discount recorded on those loans when they were acquired from Premier. The net loss on other assets during 2020 was primarily due to the loss of $145,000 on the sale of a closed branch from the ASB Financial Corporation ("ASB") acquisition, and market value write-down of $108,000 related to closed offices that were held for sale. The net gain on other transactions during 2020 was due to receiving $197,000 in funds from a limited partnership investment. 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 23.9% of Peoples' total revenues (defined as net interest income plus total non-interest income excluding net gains and losses) in 2022, compared to 28.6% in 2021 and 31.7% in 2020. The decline in Peoples' total non-interest income excluding net gains and losses, as a percent of total revenue during 2022 compared to 2021, was largely due to having a full year of the customers gained from the Premier Merger as well as the Vantage acquisition, which caused improved net interest income, resulting in a smaller portion of total revenue being provided by other revenue sources. E-banking income comprised the largest portion of Peoples' total non-interest income excluding net gains and losses, for 2022. The following table shows Peoples' e-banking income for the years ended December 31: (Dollars in thousands) 2022 2021 2020 E-banking income $ 21,094 $ 18,010 $ 14,246 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 2022 compared to 2021, e-banking income grew 17%, primarily from a full year's impact of the acquired Premier accounts in addition to increased customer activity. During 2021, e-banking income increased 26% when compared to 2020 and was driven by the combination of the addition of the Premier acquired accounts, along with increased usage of debit cards. In 2022, Peoples' customers used their debit cards to complete $1.7 billion of transactions, versus $1.4 billion in 2021 and $1.0 billion in 2020. 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) 2022 2021 2020 Fiduciary $ 7,508 $ 7,930 $ 6,906 Brokerage 6,343 5,966 4,560 Employee benefit plan fees 2,540 2,560 2,196 Trust and investment income $ 16,391 $ 16,456 $ 13,662 For 2022, trust and investment income was relatively flat compared to 2021, as the increase in brokerage income was offset by the decrease in fiduciary income. For 2021, trust and investment income grew 20% when compared to 2020, as Peoples added new 49 accounts and the underlying market values of assets under administration and management grew. Peoples also increased its employee benefit plans business during 2021 when compared to 2020. The following table details Peoples’ assets under administration and management at December 31: (Dollars in thousands) 2022 2021 2020 Trust $ 1,764,639 $ 2,009,871 $ 1,885,324 Brokerage 1,211,868 1,183,927 1,009,521 Total $ 2,976,507 $ 3,193,798 $ 2,894,845 Annual average $ 2,965,985 $ 3,053,807 $ 2,510,596 The decline in total assets under administration and management at December 31, 2022, compared to December 31, 2021, was driven by a decrease in market values throughout 2022 due to the recent economic downturn. During 2021, Peoples grew assets under administration and management by over 10% when compared to 2020, which was partially due to new accounts as well as improved market values, resulting in increased fiduciary and brokerage income. Peoples has had success in recent years in increasing client accounts within its fiduciary and brokerage business. The following table details Peoples’ insurance income for the years ended December 31: (Dollars in thousands) 2022 2021 2020 Property and casualty insurance commissions $ 11,986 $ 11,192 $ 10,240 Performance-based commissions 1,424 2,044 1,457 Life and health insurance commissions 1,975 1,627 1,897 Other fees and charges 342 389 448 Insurance income $ 15,727 $ 15,252 $ 14,042 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. Insurance income grew 9% for 2021, compared to 2020. This increase was driven by higher property and casualty insurance commissions, as Peoples added new accounts, and higher performance-based commissions. 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) 2022 2021 2020 Overdraft and non-sufficient funds fees $ 8,324 $ 5,528 $ 5,073 Account maintenance fees 5,323 3,808 3,573 Other fees and charges 936 807 772 Deposit account service charges $ 14,583 $ 10,143 $ 9,418 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 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, while growth was also experienced within fees on existing accounts, which had previously declined since the beginning of the COVID-19 pandemic. During 2020, deposit account service charges were down as customer habits changed as a result of the COVID-19 pandemic, with customers maintaining higher balances, coupled with fiscal stimulus funds provided by the government to individuals and proceeds from PPP loans to businesses. 50 The following table details the other items included within Peoples' total non-interest income for the years ended December 31: (Dollars in thousands) 2022 2021 2020 Lease income $ 4,267 $ 1,293 $ — Bank owned life insurance income 2,624 1,767 1,977 Mortgage banking income 1,397 3,439 6,499 Other non-interest income $ 3,430 $ 2,894 $ 4,486 Lease income is primarily comprised of (i) gains on the early termination of leases, (ii) fees received for referrals and (iii) gains and losses recognized on the sales of residual assets. The 2022 increase in lease income when compared to 2021 was due to the Vantage acquisition. In 2021, Peoples acquired NSL which brought in the lease portfolio to begin recognizing lease income. Bank owned life insurance income ("BOLI") 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. BOLI income declined 11% during 2021, compared to 2020, and was mostly due to the 2020 recognition of a $109,000 tax-free death benefit that exceeded the cash surrender value of the insurance policies. Peoples purchased no additional BOLI policies during 2021 and 2020. 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 2022 when compared to 2021 due to the increased market interest rate environment and a lower volume of new loan originations. During 2021, mortgage banking income declined by 47% when compared to 2020 and was driven by lower customer demand due to the low rate environment that had been in place since the beginning of 2020. In 2022, Peoples sold approximately $18.5 million of loans to the secondary market with servicing retained and sold approximately $31.1 million in loans with servicing released, compared to approximately $57.6 million and $37.4 million, respectively, in 2021. Peoples sold $111.9 million of loans to the secondary market with servicing retained and $150.9 million of loans with servicing released during 2020. The volume of sales has a direct impact on the amount of mortgage banking income. For 2022, other non-interest income increased when compared to 2021 due primarily to increased other operating income. Other non-interest income declined during 2021, primarily due to a decline in the fair value of equity securities. Other non-interest income during 2020 included additional income related to gains recorded on the sale of restricted Class B Visa stock of $680,000. There were no similar gains recorded during 2022 and 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) 2022 2021 2020 Base salaries and wages $ 74,593 $ 60,622 $ 52,016 Sales-based and incentive compensation 18,732 16,668 12,200 Employee benefit costs 13,654 11,091 8,510 Employee stock-based compensation 3,819 3,515 3,607 Deferred personnel costs (4,975) (3,695) (4,342) Payroll taxes and other employment costs 6,867 6,411 4,370 Salaries and employee benefit costs $ 112,690 $ 94,612 $ 76,361 Full-time equivalent employees: Actual at end of the period 1,267 1,188 894 Average during the period 1,245 1,003 894 Base salaries and wages increased compared to 2021, driven by the additional salaries associated with the acquisition of Vantage, and the Premier Merger. Base salaries and wages increased in 2021 compared to 2020, and were impacted by the Premier Merger and the acquisition of North Star Leasing. During 2021, Peoples incurred $3.8 million of one-time expenses associated with acquisitions; whereas, Peoples incurred $1.1 million in severance expenses in 2020, due primarily to a management restructuring that occurred in the latter half of 2020. Base salaries and wages were impacted by merit increases, as well as continued movement towards a $15 per hour minimum wage throughout Peoples' organization. The $15 per hour minimum was phased in and fully implemented by January of 2023. The increase in sales-based and incentive compensation for 2022 compared to 2021 was primarily due to sales incentives earned by Vantage employees. Sales-based and incentive compensation increased in 2021 compared to 2020, largely due to higher incentive 51 compensation related to the overall company performance measures combined with trust and investment income growth. Peoples' sales-based and incentive compensation plans are designed to grow core earnings while managing risk, and do not encourage unnecessary and excessive risk-taking that could threaten the value of Peoples. The sales-based and incentive compensation plans reward employees for appropriate behaviors and include provisions addressing inappropriate practices with respect to Peoples and its customers, including clawbacks for executives. The increase in employee benefits for 2022 compared to 2021 was due to higher medical costs with the addition of the Premier and Vantage employees. Employee benefit costs in 2021 increased $2.6 million compared to 2020, and were impacted by the Premier Merger and North Star Leasing acquisition, creating an increase in the number of participants in the insurance plan. 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 2022 increased when compared to 2021 due to employees added in the acquisition of Vantage and the Premier Merger. Employee stock-based compensation was relatively flat for 2021 compared to 2020. Deferred personnel costs represent the portion of current period salaries and employee benefit costs considered to be direct loan origination costs. These costs are capitalized and recognized over the life of the loan as a yield adjustment in interest income. As a result, the amount of deferred personnel costs for each period corresponds directly with the volume of loan originations, coupled with the average deferred costs per loan that are updated annually at the beginning of each year. Higher deferred personnel costs in 2022 compared to 2021 was primarily due to an increase in loan origination volume. Deferred personnel costs decreased in 2021 compared to 2020. Materially impacting the comparison was the recognition of $921,000 in deferred personnel costs during 2020 related to the origination of PPP loans. Additional information regarding Peoples' loan activity can be found later in this discussion under the caption "Loans" within "FINANCIAL CONDITION." For 2022, payroll taxes and other employment costs increased compared to 2021, primarily due to recent mergers and acquisitions. Payroll taxes and other employee costs increased during 2021 as a result of the higher base salaries, sales-based and incentive compensation, and employee benefits. During 2020, $454,000 in dividends were received by Peoples from Ohio Bureau of Workers' Compensation in an effort to ease the impact of COVID-19 on the state's business community and workforce. Peoples’ net occupancy and equipment expense for the years ended December 31 was comprised of the following: (Dollars in thousands) 2022 2021 2020 Depreciation expense $ 7,015 $ 6,143 $ 5,955 Repairs and maintenance costs 5,323 3,972 2,988 Net rent expense 2,974 1,723 1,293 Property taxes, utilities and other costs 4,204 3,080 2,572 Net occupancy and equipment expense $ 19,516 $ 14,918 $ 12,808 For 2022, net occupancy and equipment expense increased when compared to 2021 due to the additional locations and equipment from recent mergers and acquisitions. Net occupancy and equipment expense grew during 2021 when compared to 2020, driven by the recent acquisitions and ongoing costs related to the larger footprint. The following table details the other items included within Peoples' total non-interest expense for the years ended December 31: (Dollars in thousands) 2022 2021 2020 Data processing and software expense $ 14,241 $ 10,542 $ 7,441 Professional fees 12,094 15,783 6,912 E-banking expense 9,231 8,885 7,777 Amortization of other intangible assets 7,763 4,775 3,223 Marketing expense 3,728 3,658 2,101 FDIC insurance expense 3,702 1,976 1,302 Franchise tax expense 3,487 3,357 3,506 Other loan expenses 2,735 2,001 1,584 Communication expense 2,484 1,657 1,134 Other non-interest expense $ 15,476 $ 21,573 $ 9,546 Data processing and software expense includes software support, maintenance and depreciation expense. Data processing and software expense for 2022 increased relative to 2021, driven by software upgrades and implementation of new systems, coupled with the increased size of Peoples' organization. During 2021, data processing and software expense grew when compared to 2020 due to systems and software upgrades, annual contractual increases and overall growth, which included: the implementation of enhanced 52 functionalities for Peoples' core banking system, including making certain mobile banking tools available to customers; software upgrades; and additional network capacity and security features in the latter part of 2020 and first quarter of 2021. The higher expense during 2021 when compared to 2020 also reflected increases related to the Premier Merger. Professional fees decreased for 2022 when compared 2021, primarily driven by acquisition-related expenses related to the Premier Merger which had been realized in 2021. Professional fees during 2021 increased considerably when compared to 2020 due to acquisition-related expenses associated with the Premier Merger and the NSL acquisition during 2021. Peoples' e-banking expense is comprised of costs associated with debit and ATM cards, as well as Internet and mobile banking costs. E-banking expense increased for 2022 when compared to 2021 due to growth, both core and through mergers and acquisitions. E-banking expense increased during 2021 when compared to 2020, as customer usage increased, coupled with the additional accounts acquired in the Premier Merger. Amortization of other intangible assets increased for 2022 when compared to 2021 due to the increased intangible assets recognized as a result of the recent mergers and acquisitions. During 2021, amortization of other intangible assets increased when compared to 2020 as a result of the recent Premier Merger, the North Star Leasing acquisition and the full-year impact of Premium Finance. Marketing expense, which includes advertising, donations, marketing campaigns, and other public relations costs, for 2022 was relatively flat when compared to 2021. Marketing expense was higher for 2021, compared to 2020, which increase was mostly due to additional advertising campaigns relating to the addition of the Premier locations. Additionally, Peoples' donations increased during 2021, which included a $500,000 special contribution to the Peoples Bank Foundation, Inc., and donations to each of Marietta College and the Ohio Valley Museum of Discovery. FDIC insurance premiums for 2022 increased when compared to 2021 due to organic and acquisitive growth. FDIC insurance expense increased during 2021, compared to 2020, which increase was partially due to credits used by Peoples during the first two quarters of 2020 to offset its FDIC insurance premium, coupled with a lower leverage ratio during early 2020, which negatively impacted insurance expense for 2021. 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. The 2022 increase versus 2021 was driven by recent growth through acquisitions and organic means. Franchise tax expense declined slightly for 2021, and was driven by a change in the calculation for Kentucky, which became an income-based instead of an equity-based calculation, and reduced the related tax expense for 2021, compared to 2020. 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 2022 increased when compared to 2021 primarily due to higher indirect lending volume and increased collection expense driven by the Premier Merger. During 2021, other loan expenses increased mostly due to the higher volume of indirect consumer loan originations during 2020 and related recognition of deferred costs, which lowered expense during 2020, and was not duplicated during 2021. Communications expense increased during 2022 when compared to 2021 and increased during 2021 when compared to 2020, 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 2022 decreased when compared to 2021 primarily due to less acquisition-related expenses. Other non-interest expense increased considerably during 2021 when compared to 2020, which increase was primarily related to acquisition-related expenses recognized. Income Tax Expense A key driver for the amount of income tax expense or benefit recognized by Peoples each year is the amount of pre-tax income. In addition to the expense recognized, Peoples receives tax benefits from tax-exempt investments and loans, BOLI 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 2022, income tax expense totaled $27.3 million, compared to $9.4 million in 2021, and $7.9 million in 2020, and the effective tax rate for 2022 was 21.3%, compared to 16.5% for 2021, and 18.5% for 2020. The 2022 increase in income tax expense when compared to 2021 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 increased during 2021 when compared to 2020, which was due to higher pre-tax income, benefiting from the recent merger and acquisitions and reduced provision for credit losses. Income tax expense 53 for 2021 was impacted by an income tax benefit related to an adjustment from the prior period of $1.1 million. During 2020, income tax expense and the effective tax rate were positively impacted by tax-exempt interest income, non-taxable BOLI income and the full-year impact of the investment in Peoples Risk Management, Inc., which reduced income tax expense by $412,000. Income tax expense for 2020 was also impacted by additional income tax expense related to an adjustment from the prior year of $863,000. Peoples also recorded a tax benefit of $5,000 in 2022, a tax expense of $74,000 in 2021, and a tax benefit of $5,000 in 2020 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) 2022 2021 2020 Pre-Provision Net Revenue: Income before income taxes $ 128,641 $ 56,970 $ 42,646 Add: provision for credit losses — 731 26,254 Add: net loss on OREO 138 — 120 Add: net loss on investment securities 61 862 368 Add: net loss on other assets 326 252 170 Add: net loss on other transactions 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 $ 125,807 $ 57,862 $ 69,558 Total average assets $ 7,094,707 $ 5,672,594 $ 4,739,289 Pre-provision net revenue to total average assets 1.77 % 1.02 % 1.47 % Weighted-average common shares outstanding - diluted 27,999,602 21,959,883 19,843,806 Pre-provision net revenue per common share - diluted $ 4.48 $ 2.63 $ 3.49 PPNR grew in 2022 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 recent increases in market interest rates, (iii) higher non-interest income, and (iv) lower acquisition-related expenses. During 2021, PPNR declined when compared to 2020, and was heavily impacted by $21.4 million in acquisition-related expenses, which more than offset the positive impact of higher total revenue compared to 2020. 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 expenses. 54 The following tables provide reconciliations of this non-US GAAP financial measure to the amount of total non-interest expense reported in Peoples' Consolidated Financial Statements for the years presented: (Dollars in thousands) 2022 2021 2020 Core non-interest expense: Total non-interest expense $ 207,147 $ 183,737 $ 133,695 Less: COVID-19-related expenses 134 1,248 1,332 Less: severance expenses — 79 1,055 Less: pension settlement charges 185 143 1,054 Less: acquisition-related expenses 3,016 21,423 489 Less: Peoples Bank Foundation, Inc. contribution — 500 — Less: contract negotiation expenses — 1,248 — Core non-interest expense $ 203,812 $ 159,096 $ 129,765 The 2022 increase in core non-interest expense when compared to 2021 was due to an increase in total non-interest expenses as noted in the above section captioned "Total Non-Interest Expense." The increase in core non-interest expense for 2021, compared to 2020, was driven by higher ongoing costs associated with recent mergers and acquisitions. This includes the impact of the Premier Merger since September 17, 2021, the North Star Leasing acquisition since April 1, 2021, and the impact of the Premium Finance acquisition since July 1, 2020. Efficiency Ratio (non-US GAAP) The efficiency ratio is a key financial measure used to monitor performance. The efficiency ratio is calculated as total non-interest expense (less amortization of other intangible assets) as a percentage of FTE net interest income plus total non-interest income excluding net gains and losses. This financial measure is non-US GAAP since it excludes amortization of other intangible assets and all gains and/or losses included in earnings, and uses FTE net interest income. The following table provides a reconciliation of this non-US GAAP financial measure to the amount of total non-interest income and total non-interest expense reported in Peoples' Consolidated Financial Statements for the years presented: 55 (Dollars in thousands) 2022 2021 2020 Efficiency ratio: Total non-interest expense $ 207,147 $ 183,737 $ 133,695 Less: amortization of other intangible assets 7,763 4,775 3,223 Adjusted total non-interest expense 199,384 178,962 130,472 Total non-interest income 78,836 68,885 63,672 Less: net loss on investment securities (61) (862) (368) Less: net (loss) gain on asset disposals and other transactions (616) 493 (290) Total non-interest income excluding net gains and losses 79,513 69,254 64,330 Net interest income 253,442 172,553 138,923 Add: fully-tax-equivalent adjustment (a) 1,644 1,349 1,054 Net interest income on a fully-tax equivalent basis 255,086 173,902 139,977 Adjusted revenue $ 334,599 $ 243,156 $ 204,307 Efficiency ratio 59.59 % 73.60 % 63.86 % Efficiency ratio adjusted for non-core items: Core non-interest expense $ 203,812 $ 159,096 $ 129,765 Less: amortization of other intangible assets 7,763 4,775 3,223 Adjusted core non-interest expense 196,049 154,321 126,542 Core non-interest income excluding net gains and losses 79,513 69,254 64,330 Net interest income on a fully-tax-equivalent basis 255,086 173,902 139,977 Adjusted core revenue $ 334,599 $ 243,156 $ 204,307 Efficiency ratio adjusted for non-core items 58.59 % 63.47 % 61.94 % (a) Based on 21% statutory federal corporate income tax rate. 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. Additionally, the efficiency ratio and adjusted efficiency ratio for 2022 both improved when compared to 2021 due to improvements in net interest income from the recent acquisitions, coupled with higher non-interest income, outpacing increases in total non-interest expense. The efficiency ratio increased during 2021 when compared to 2020, and was largely due to the acquisition-related expenses. The efficiency ratio, when adjusted for non-core items, increased for 2021 compared to 2020, which was driven by the higher non-interest expense, coupled with the continued low interest rate environment and related impact to net interest income. 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 2022 by the rising market interest rate environment and the related increase to net interest income; whereas, 2021 and 2020 net interest incomes were negatively impacted by the 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. 56 The following table provides a reconciliation of this non-US GAAP financial measure to the amount of net income reported in Peoples' Consolidated Financial Statements for the years presented: (Dollars in thousands) 2022 2021 2020 Net income adjusted for non-core items: Net income $ 101,292 $ 47,555 $ 34,767 Add: net loss on investment securities 61 862 368 Less: tax effect of net loss on investment securities (a) 13 181 77 Add: net loss on asset disposals and other transactions 616 — 290 Less: tax effect of net loss on asset disposals and other transactions (a) 129 — 61 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 3,016 21,423 1,459 Less: tax effect of acquisition-related expenses (a) 633 4,499 306 Add: severance expenses — 79 1,055 Less: tax effect of severance expenses (a) — 17 222 Add: pension settlement charges 185 143 1,054 Less: tax effect of pension settlement charges (a) 39 30 221 Add: COVID-19-related expenses 134 1,248 1,332 Less: tax effect of COVID-19-related expenses (a) 28 262 280 Add: Peoples Bank Foundation, Inc. contribution — 500 — Less: tax effect of Peoples Bank Foundation, Inc. contribution — 105 — Add: contract negotiation expenses — 1,248 — Less: tax effect of contract negotiation expenses — 262 — Net income adjusted for non-core items (after tax) $ 104,462 $ 67,313 $ 39,158 Return on average assets: Net income $ 101,292 $ 47,555 $ 34,767 Total average assets 7,094,707 5,672,594 4,739,289 Return on average assets 1.43 % 0.84 % 0.73 % Return on average assets adjusted for non-core items: Net income adjusted for non-core items $ 104,462 $ 67,313 $ 39,158 Total average assets 7,094,707 5,672,594 4,739,289 Return on average assets adjusted for non-core items 1.47 % 1.19 % 0.83 % (a) Based on a 21% statutory federal corporate income tax rate. 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. The 2021 return on average assets and return on average assets adjusted for non-core items, both increased compared to 2020, as Peoples recorded a lower provision for credit losses during 2021 compared to 2020, while net income improved due to recent acquisitions and mergers and core growth. 57 Return on Average Tangible Equity (non-US GAAP) The return on average tangible equity ratio is a key financial measure used to monitor performance. The return on tangible equity is calculated as net income (less after-tax impact of amortization of other intangible assets) divided by tangible equity. This measure is non-US GAAP since it excludes amortization of other intangible assets from earnings and the impact of goodwill and other intangible assets acquired through acquisitions on total stockholders' equity. (Dollars in thousands) 2022 2021 2020 Net income excluding amortization of other intangible assets: Net income $ 101,292 $ 47,555 $ 34,767 Add: amortization of other intangible assets 7,763 4,775 3,223 Less: tax effect of amortization of other intangible assets (a) 1,630 1,003 677 Net income excluding amortization of other intangible assets 107,425 51,327 37,313 Average tangible equity: Total average stockholders' equity $ 797,984 $ 656,633 $ 575,386 Less: average goodwill and other intangible assets 322,639 234,667 181,526 Average tangible equity $ 475,345 $ 421,966 $ 393,860 Return on average stockholders' equity ratio: Net income $ 101,292 $ 47,555 $ 34,767 Average stockholders' equity $ 797,984 $ 656,633 $ 575,386 Return on average stockholders' equity 12.69 % 7.24 % 6.04 % Return on average tangible equity ratio: Net income excluding amortization of other intangible assets $ 107,425 $ 51,327 $ 37,313 Average tangible equity $ 475,345 $ 421,966 $ 393,860 Return on average tangible equity 22.60 % 12.16 % 9.47 % (a) Based on a 21% statutory federal corporate income tax rate. The 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, the average tangible equity was negatively impacted by the Vantage acquisition, for which People did not issue any equity, and recorded additional goodwill and other intangible assets. Return on average stockholders' equity and return on average tangible equity in 2021 both improved compared to 2020, and were driven by the recent acquisitions and mergers, core growth and reduced provision for credit losses. 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, 2022, excess cash reserves at the FRB of Cleveland were $33.1 million, compared to $318.1 million at December 31, 2021. Peoples also acquired $248.4 million in cash and cash equivalents in the Premier Merger in 2021. 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 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 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. In 2021, Peoples' total cash and cash equivalents increased $263.6 million, as cash provided by operating activities and financing activities of $156.4 million and $181.6 million, respectively, were partially offset by cash used in investing activities of $74.4 million. Peoples' investing activities reflected a net increase of $113.5 million in loans and $852.5 million in purchases of available-for-sale investment securities, which were partially offset by $849.1 million in net proceeds from sales, principal payments, calls and 58 prepayments on available-for-sale and held-to-maturity investment securities. Financing activities included a $200.8 million net increase in deposits and increase of $14.4 million in short-term borrowings, as well as $31.0 million of cash dividends paid. 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 2022 2021 2020 Available-for-sale securities, at fair value: Obligations of: U.S. Treasury and government agencies 1.88 % $ 152,422 $ 35,604 $ — U.S. government sponsored agencies 1.80 % 88,115 81,739 5,363 States and political subdivisions 2.20 % 225,882 259,319 114,919 Residential mortgage-backed securities 1.75 % 604,653 828,517 623,218 Commercial mortgage-backed securities 1.51 % 50,049 63,519 4,783 Bank-issued trust preferred securities 4.80 % 10,278 6,795 4,730 Total fair value $ 1,131,399 $ 1,275,493 $ 753,013 Total amortized cost $ 1,300,719 $ 1,283,146 $ 734,544 Net unrealized (loss) gain $ (169,320) $ (7,653) $ 18,469 Held-to-maturity securities, at amortized cost: Obligations of: U.S. government sponsored agencies 4.23 % $ 132,366 $ 36,431 $ — States and political subdivisions (a) 2.23 % $ 145,022 $ 151,402 $ 35,139 Residential mortgage-backed securities 3.48 % 176,215 110,708 25,890 Commercial mortgage-backed securities 2.38 % 106,609 75,588 5,429 Total amortized cost $ 560,212 $ 374,129 $ 66,458 Other investment securities $ 51,609 $ 33,987 $ 37,560 Total investment securities: Amortized cost $ 1,912,540 $ 1,691,262 $ 838,562 Carrying value $ 1,743,220 $ 1,683,609 $ 857,031 (a) A mortized cost is presented net of the allowance for credit losses of $241 at December 31, 2022, $286 at December 31, 2021 and $60 at December 31, 2020. At December 31, 2022, Peoples' investment securities represented approximately 24.2% of total assets, compared to 23.8% at December 31, 2021. For 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 recent increases in market interest rates. 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. The 2021 increase in investment securities compared to 2020 also reflected Peoples' continued reinvestment of proceeds from available-for-sale investment securities and the investment of excess cash in higher-yielding investment securities. During 2021, Peoples acquired from Premier, and made investments into, tax-exempt securities, which are included in obligations of state and political subdivisions. The investments into these securities were made in an effort to reduce exposure to amortizing investment securities, while also maintaining an appropriate level of risk-adjusted yield. During 2020, Peoples sold $82.6 million of available-for-sale securities and reinvested the majority of the proceeds in held-to-maturity investment securities to minimize the volatility in the securities portfolio, should interest rates begin to rise. Peoples designates certain securities as "held-to-maturity" at the time of their purchase if management determines Peoples would have the intent and ability to hold the purchased securities until maturity. The unrealized gain or loss related to held-to-maturity investment securities does not directly impact total stockholders' equity, in contrast to the impact from the available-for-sale investment securities portfolio. Additional information regarding Peoples' investment portfolio can be found in "Note 3 Investment Securities." 59 Loans The following table provides information regarding outstanding loan balances at or for the year ended December 31: (Dollars in thousands) 2022 2021 2020 Originated loans: Construction $ 212,869 $ 137,437 $ 103,169 Commercial real estate, other 919,531 861,610 780,324 Commercial real estate 1,132,400 999,047 883,493 Commercial and industrial 835,178 779,064 943,024 Premium finance 159,197 136,121 100,571 Leases 226,438 69,169 — Residential real estate 384,262 350,595 281,623 Home equity lines of credit 132,093 104,176 93,296 Consumer, indirect 629,426 530,532 503,526 Consumer, direct 98,706 81,330 75,591 Consumer 728,132 611,862 579,117 Deposit account overdrafts 722 756 351 Total originated loans $ 3,598,422 $ 3,050,790 $ 2,881,475 Acquired loans: Construction $ 34,072 $ 72,795 $ 3,623 Commercial real estate, other 503,987 688,471 149,529 Commercial real estate 538,059 761,266 153,152 Commercial and industrial 57,456 112,328 30,621 Premium finance — 15 14,187 Leases 118,693 53,339 — Residential real estate 339,098 421,123 292,384 Home equity lines of credit 45,765 59,417 27,617 Consumer, indirect — — 1 Consumer, direct 9,657 23,322 3,503 Consumer 9,657 23,322 3,504 Total acquired loans (a) $ 1,108,728 $ 1,430,810 $ 521,465 Total loans $ 4,707,150 $ 4,481,600 $ 3,402,940 Average total loans 4,574,237 3,709,159 3,258,354 Average allowance for credit losses (55,233) (56,038) (47,692) Average loans, net of average allowance for credit losses $ 4,519,004 $ 3,653,121 $ 3,210,662 60 (Dollars in thousands) 2022 2021 2020 Percent of loans to total loans: Construction 5.2 % 4.7 % 3.1 % Commercial real estate, other 30.2 % 34.7 % 27.3 % Commercial real estate 35.4 % 39.4 % 30.4 % Commercial and industrial 19.0 % 19.9 % 28.6 % Premium finance 3.4 % 3.0 % 3.4 % Leases 7.3 % 2.7 % — % Residential real estate 15.4 % 17.2 % 16.9 % Home equity lines of credit 3.8 % 3.7 % 3.6 % Consumer, indirect 13.4 % 11.8 % 14.8 % Consumer, direct 2.3 % 2.3 % 2.3 % Consumer 15.7 % 14.1 % 17.1 % Deposit account overdrafts (b) NM NM NM Total percentage 100.0 % 100.0 % 100.0 % Residential real estate loans being serviced for others $ 392,364 $ 430,597 $ 485,972 (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, 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. As of December 31, 2021, total loans increased 32%, compared to December 31, 2020, which was driven by the Premier Merger and the North Star Leasing acquisition, coupled with core growth. The Premier Merger added $1.1 billion in loans at December 31, 2021, which were comprised of $96.1 million in construction; $534.9 million in commercial real estate, other; $132.1 million in commercial and industrial; $331.1 million in residential real estate; $45.9 million in home equity lines of credit; and $21.6 million of consumer, direct loan balances. During 2021, the outstanding balance of SBA PPP loans declined $279.8 million, from $366.9 million at December 31, 2020, to $87.1 million at December 31, 2021, which was mainly due to forgiveness proceeds received from the SBA. 61 The following table details the maturities of Peoples' loan portfolio at December 31, 2022: (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 $ 1,219 $ 23,385 $ 1,886 $ 86 $ 26,576 10.8 % Variable 48,257 140,618 28,706 2,784 220,365 89.2 % Total 49,476 164,003 30,592 2,870 246,941 100.0 % Commercial real estate, other: Fixed 39,752 141,641 254,289 16,727 452,409 31.8 % Variable 49,165 278,811 438,528 204,605 971,109 68.2 % Total 88,917 420,452 692,817 221,332 1,423,518 100.0 % Commercial and industrial: Fixed 117,974 75,638 67,289 408 261,309 29.3 % Variable 242,527 106,263 270,645 11,890 631,325 70.7 % Total 360,501 181,901 337,934 12,298 892,634 100.0 % Premium finance: Fixed 159,197 — — — 159,197 100.0 % Leases: Fixed 52,588 280,273 12,270 — 345,131 100.0 % Residential real estate: Fixed 57,979 14,200 157,240 249,472 478,891 66.2 % Variable 8,997 6,990 82,213 146,269 244,469 33.8 % Total 66,976 21,190 239,453 395,741 723,360 100.0 % Home equity lines of credit: Fixed 18 271 1,136 402 1,827 1.0 % Variable 2,622 35,185 122,700 15,524 176,031 99.0 % Total 2,640 35,456 123,836 15,926 177,858 100.0 % Consumer, indirect: Fixed 4,762 280,227 344,437 — 629,426 100.0 % Consumer, direct: Fixed 2,757 61,077 39,894 89 103,817 95.8 % Variable 376 2,506 1,560 104 4,546 4.2 % Total 3,133 63,583 41,454 193 108,363 100.0 % 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. 62 The following table provides information regarding the largest concentrations of commercial real estate loans within the loan portfolio at December 31, 2022: (Dollars in thousands) Outstanding Balance Available Loan Commitments Total Exposure % of Total Exposure Construction: Apartment complexes $ 120,981 $ 181,393 $ 302,374 58.7 % Assisted living facilities and nursing homes 37,484 17,508 54,992 10.7 % Mixed-use facilities 29,282 10,910 40,192 7.8 % Land only 19,702 11,434 31,136 6.1 % Office buildings and complexes 10,100 9,180 19,280 3.7 % Industrial 5,778 5,277 11,055 2.1 % Other (a) 23,614 32,274 55,888 10.9 % Construction $ 246,941 $ 267,976 $ 514,917 100.0 % Commercial real estate, other: Retail facilities: Owner occupied 40,232 730 40,962 2.7 % Non-owner occupied 125,408 2,125 127,533 8.4 % Total retail 165,640 2,855 168,495 11.1 % Office buildings and complexes: Owner occupied 74,125 2,418 76,543 5.0 % Non-owner occupied 82,279 2,780 85,059 5.6 % Total office buildings and complexes 156,404 5,198 161,602 10.6 % Light industrial facilities: Owner occupied 103,268 2,329 105,597 7.0 % Non-owner occupied 40,746 726 41,472 2.7 % Total light industrial facilities 144,014 3,055 147,069 9.7 % Mixed commercial use facilities: Owner occupied 53,737 546 54,283 3.6 % Non-owner occupied 55,731 566 56,297 3.7 % Total mixed commercial use facilities 109,468 1,112 110,580 7.3 % Lodging and lodging related: Owner occupied 14,533 1,222 15,755 1.0 % Non-owner occupied 91,538 50 91,588 6.0 % Total lodging and lodging related 106,071 1,272 107,343 7.0 % Apartment complexes 96,890 54,135 151,025 10.0 % Warehouse facilities: Owner occupied 36,718 2,077 38,795 2.6 % Non-owner occupied 28,064 223 28,287 1.9 % Total warehouse facilities 64,782 2,300 67,082 4.5 % Assisted living facilities and nursing homes 53,333 250 53,583 3.5 % Education services: Owner occupied 16,896 98 16,994 1.1 % Non-owner occupied 30,395 5,558 35,953 2.4 % Total education services 47,291 5,656 52,947 3.5 % Restaurant/bar facilities: Owner occupied 22,262 — 22,262 1.5 % Non-owner occupied 11,471 298 11,769 0.8 % Total restaurant/bar facilities 33,733 298 34,031 2.3 % Healthcare: Owner occupied 22,030 459 22,489 1.5 % Non-owner occupied 10,112 — 10,112 0.7 % Total healthcare facilities 32,142 459 32,601 2.2 % Other (a) 413,750 16,382 430,092 28.3 % Commercial real estate, other $ 1,423,518 $ 92,972 $ 1,516,450 100.0 % (a) All other total exposures by industry are less than 2% of the Total Exposure. 63 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, 2022 and December 31, 2021. Additional information regarding Peoples' loan portfolio can be found in "Note 4 Loans and Leases." COVID-19 Loan Impacts Small Business Administration Paycheck Protection Program In March 2020, the CARES Act created a new loan guarantee program called the PPP targeted to provide small businesses with support to cover payroll and certain other expenses. Loans made under the PPP are fully guaranteed by the SBA. The PPP loans also afford borrowers forgiveness up to the principal amount of the PPP covered loan, plus accrued interest, if the loan proceeds are used to retain workers and maintain payroll and/or to make certain mortgage interest, lease and utility payments, and certain other criteria are satisfied. The SBA will reimburse PPP lenders for any amount of a PPP covered loan that is forgiven, and PPP lenders are not be held liable for any representations made by PPP borrowers in connection with their requests for loan forgiveness. The PPP expired on May 31, 2021 and no new originations have been or will be made under the program; however, forgiveness proceeds will continue to be received until the loans are paid in full. Peoples is a PPP participating lender, and the PPP loans originated (including $23.4 million acquired in the Premier Merger as of the merger date) are included in commercial and industrial loans. Peoples also recorded deferred loan origination fees related to the PPP loans, net of deferred loan origination costs, which will be amortized over the life of the respective loans, or until forgiven by the SBA, and will be recognized in net interest income. The following table details Peoples' PPP loans and related income at and for the years ended December 31: (Dollars in thousands) 2022 2021 2020 PPP aggregate outstanding principal balances $ 2,458 $ 89,307 $ 374,753 PPP net deferred loan origination fees 27 2,210 7,851 Amortization of net deferred loan origination fees 2,183 13,025 7,516 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 allocations being made to specific loans and pools of loans, the entire allowance is available for all losses incurred within the loan portfolio. The following details management's allocation of the allowance for credit losses at December 31: (Dollars in thousands) 2022 2021 2020 Construction $ 1,250 $ 2,999 $ 1,887 Commercial real estate 17,710 29,147 17,536 Commercial and industrial 8,229 11,063 12,763 Premium finance 344 379 1,095 Leases 8,495 4,797 — Residential real estate 6,357 7,233 6,044 Home equity lines of credit 1,693 2,005 1,860 Consumer, indirect 7,448 5,326 8,030 Consumer, direct 1,575 961 1,081 Deposit account overdrafts 61 57 63 Allowance for credit losses $ 53,162 $ 63,967 $ 50,359 As a percent of total loans 1.13 % 1.43 % 1.48 % 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-purchase credit deteriorated leases 64 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 aforementioned the reduction in the allowance for credit losses. During 2021, the allowance for credit losses grew 27% when compared to 2020, which was largely due to the Premier Merger and the North Star Leasing acquisition, and the related need to establish an allowance for credit losses on those portfolios, coupled with organic growth in loan balances during 2021. The North Star Leasing acquisition added $3.3 million to the allowance for credit losses at the acquisition date, of which $493,000 was established for PCD loans as part of the acquisition accounting, and the remainder was established through the recording of a provision for credit losses. The Premier Merger added $28.6 million to the allowance for credit losses during the third quarter of 2021, of which $16.9 million was established for PCD loans as part of the acquisition accounting, and the remainder was established using provision for credit losses. Also during 2021, economic factors and loss drivers improved compared to 2020, and had a positive impact on the CECL model. The allowance for credit losses as a percent of total loans was relatively stable at December 31, 2021 compared to December 31, 2020, and was mostly due to the composition of Peoples' loan and lease portfolio. The 2020 allowance for credit losses was impacted by the COVID-19 pandemic, and the resulting impact on economic forecasts utilized in the CECL model. 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: 65 (Dollars in thousands) 2022 2021 2020 Allowance for credit losses, January 1 $ 63,967 $ 50,359 $ 25,868 Gross charge-offs: Construction 16 — — Commercial real estate, other 489 387 528 Commercial and industrial 943 1,057 1,565 Premium finance 124 45 3 Leases 2,585 1,434 — Residential real estate 668 385 353 Home equity lines of credit 88 197 103 Consumer, indirect 2,233 1,756 1,923 Consumer, direct 363 152 187 Consumer 2,596 1,908 2,110 Deposit account overdrafts 1,246 575 673 Total gross charge-offs 8,755 5,988 5,335 Recoveries: Commercial real estate, other 297 204 200 Commercial and industrial 49 26 2,521 Premium finance 13 — — Leases 420 339 — Residential real estate 84 143 302 Home equity lines of credit 45 41 12 Consumer, indirect 328 253 302 Consumer, direct 47 112 49 Consumer 375 365 351 Deposit account overdrafts 200 177 186 Total recoveries 1,483 1,295 3,572 Net charge-offs (recoveries): Construction 16 — — Commercial real estate, other 192 183 328 Commercial and industrial 894 1,031 (956) Premium finance 111 45 3 Leases 2,165 1,095 — Residential real estate 584 242 51 Home equity lines of credit 43 156 91 Consumer, indirect 1,905 1,503 1,621 Consumer, direct 316 40 138 Consumer 2,221 1,543 1,759 Deposit account overdrafts 1,046 398 487 Total net charge-offs $ 7,272 $ 4,693 $ 1,763 (Recovery of) Provision for credit losses, December 31 (a) (2,904) 731 26,254 Initial allowance for PCD assets $ (629) $ 17,570 $ — Allowance for credit losses, December 31 $ 53,162 $ 63,967 $ 50,359 Net charge-offs (recoveries) as a percent of average total loans: Construction — % — % — % Commercial real estate, other 0.01 % — % 0.01 % Commercial and industrial 0.02 % 0.03 % (0.03) % Premium finance — % — % — % Leases 0.05 % 0.03 % — % Residential real estate 0.01 % 0.01 % — % Home equity lines of credit — % — % — % Consumer, indirect 0.04 % 0.05 % 0.05 % Consumer, direct 0.01 % — % — % Consumer 0.05 % 0.05 % 0.05 % Deposit account overdrafts 0.02 % 0.01 % 0.02 % Total 0.16 % 0.13 % 0.05 % 66 (a) Amount does not include the provision for unfunded commitment liability. Net charge-offs as a percent of average total loans for 2022 increased to 0.16% compared to 0.13% at 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. During 2021, net charge-offs as a percent of average total loans increased to 0.13%, compared to 0.05% for 2020. This increase was driven by the additional net charge-offs related to lease balances, coupled with the impact of a recovery of $2.5 million on a single commercial loan relationship during 2020, which lowered the ratio for that period. Prior to the acquisition, North Star Leasing was experiencing net charge-off rates of around 3% of average lease balances, and Peoples anticipates that net charge-off levels will increase in future periods as the net charge-offs for the leasing division return to this historical rate. The following table details Peoples’ nonperforming assets at December 31: (Dollars in thousands) 2022 2021 2020 Loans 90+ days past due and accruing (a): Construction $ — $ 90 $ — Commercial real estate, other 167 689 — Commercial and industrial 130 1,139 50 Premium finance 504 865 589 Leases 3,041 — — Residential real estate 917 805 1,975 Home equity lines of credit 58 50 82 Consumer, indirect — — 39 Consumer, direct 25 85 17 Consumer 25 85 56 Total loans 90+ days past due and accruing 4,842 3,723 2,752 Nonaccrual loans (a): Construction 12 6 4 Commercial real estate, other 9,522 16,849 8,744 Commercial and industrial 3,145 2,505 4,017 Leases 3,178 1,581 — Residential real estate 8,517 8,016 6,080 Home equity lines of credit 680 687 708 Consumer, indirect 2,026 1,302 883 Consumer, direct 200 273 160 Consumer 2,226 1,575 1,043 Total nonaccrual loans 27,280 31,219 20,596 67 (Dollars in thousands) 2022 2021 2020 Nonaccrual troubled debt restructurings (TDRs): Commercial real estate, other $ 2,599 $ 218 $ 367 Commercial and industrial 317 1,067 2,175 Residential real estate 979 1,631 2,295 Home equity lines of credit 140 352 159 Consumer, indirect 150 272 190 Consumer, direct 8 6 11 Total nonaccrual TDRs 4,193 3,546 5,197 Total nonperforming loans (NPLs) 36,315 38,488 28,545 OREO: Commercial 8,730 9,105 — Residential 165 391 134 Total OREO 8,895 9,496 134 Total nonperforming assets (NPAs) $ 45,210 $ 47,984 $ 28,679 Criticized loans (b) $ 191,355 $ 194,016 $ 126,619 Classified loans (c) 89,604 106,547 72,518 Asset Quality Ratios: Nonaccrual loans as a percent of total loans (d) 0.67 % 0.78 % 0.76 % NPLs as a percent of total loans (d)(e) 0.77 % 0.86 % 0.82 % NPAs as a percent of total assets (d)(e) 0.63 % 0.68 % 0.59 % NPAs as a percent of total loans and OREO (d)(e) 0.96 % 1.07 % 0.84 % Allowance for credit losses as a percent of nonaccrual loans (d) 168.91 % 184.00 % 195.24 % Allowance for credit losses as a percent of NPLs (d)(e) 146.39 % 166.20 % 180.14 % Criticized loans as a percent of total loans (b)(d) 4.07 % 4.33 % 3.72 % Classified loans as a percent of total loans (c)(d) 1.90 % 2.38 % 2.13 % (a) On January 1, 2020, Peoples adopted ASU 2016-13 and implemented the CECL model. The accounting for PCD loans under CECL resulted in the movement of $3.9 million of loans from the 90+ days past due and accruing category to the nonaccrual category as of January 1, 2020. (b) Includes loans categorized as special mention, substandard or doubtful. (c) Includes loans categorized as substandard or doubtful. (d) Data presented as of the end of the year indicated. (e) Nonperforming loans include loans 90+ days past due and accruing, troubled debt restructured loans and nonaccrual loans. Nonperforming assets include nonperforming loans and OREO. Compared to December 31, 2021, Peoples' NPAs decreased to 0.63% of total assets at December 31, 2022. 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. Nonperforming assets grew 67% during 2021 compared to 2020. This increase was primarily driven by the Premier Merger. At the same time, criticized loans, which are those categorized as special mention, substandard or doubtful, grew $67.4 million, or 53%, while classified loans, which are those categorized as substandard or doubtful, increased $34.0 million, or 47%, compared to at December 31, 2020. These increases were also due to the Premier Merger. Based on the provisions provided by the CARES Act, on March 22, 2020, federal and state government banking regulators issued a joint statement, with which the FASB concurred as to the approach, regarding accounting for loan modifications for borrowers affected by COVID-19. In this guidance, short-term modifications, made on a good faith basis in response to COVID-19, to borrowers who were current prior to any relief, are not considered TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment which are insignificant. Under the guidance, borrowers that are considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. In addition, modification or deferral programs mandated by the U.S. federal government or any state government related to COVID-19 are not in the scope of ASC 310-40. 68 On August 3, 2020, federal and state banking regulators issued a joint statement, encouraging financial institutions to consider prudent accommodation options to mitigate losses for the borrower and financial institution beyond the initial accommodation period. In this guidance, institutions should also provide consumers with available options for repaying missed payments at the end of their accommodation to avoid delinquencies, as well as options for changes to terms to support sustainable and affordable payments for the long term. These considerations should also include prudent risk management practices at the financial institution based on the credit risk of the borrower. Peoples is actively working with its customers to address any further accommodation needs while carefully evaluating the associated credit risk of the borrowers. The majority of Peoples' nonaccrual commercial real estate loans consists primarily of owner occupied commercial properties. In general, management believes repayment of these loans is dependent on the sale of the underlying collateral. As such, the carrying values of these loans are ultimately supported by management's estimate of the net proceeds Peoples would receive upon the sale of the collateral. These estimates are based in part on market values provided by independent, licensed or certified appraisers periodically, but no less frequently than annually. Given the volatility in commercial real estate values, management continues to monitor changes in real estate values from quarter-to-quarter and updates its estimates as needed based on observable changes in market prices and/or updated appraisals for similar properties. Peoples discontinues the accrual of interest on a loan when conditions cause management to believe collection of all or any portion of the loan's contractual interest is doubtful. Such conditions may include the borrower being 90 days or more past due on any contractual payments or the availability of updated information regarding the borrower's financial condition and repayment ability. All unpaid accrued interest deemed uncollectable is reversed, which would reduce Peoples' net interest income. Interest received on nonaccrual loans is included in income only if principal recovery is reasonably assured. Interest income on loans classified as nonaccrual and renegotiated at each year-end that would have been recorded under the original terms of the loans was $1.7 million for 2022, $1.3 million for 2021 and $1.6 million for 2020. No portion of these amounts was recorded during 2022, 2021 or 2020. Overall, management believes the allowance for credit losses was appropriate at December 31, 2022, 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) 2022 2021 2020 Non-interest-bearing deposits (a) $ 1,589,402 $ 1,641,422 $ 997,323 Interest-bearing deposits: Interest-bearing demand accounts (a) 1,160,182 1,167,460 692,113 Savings accounts 1,068,547 1,036,738 628,190 Retail CDs 530,236 643,759 445,930 Money market deposit accounts 617,029 651,169 591,373 Governmental deposit accounts 625,965 617,259 385,384 Brokered deposits 125,580 104,745 170,146 Total interest-bearing deposits 4,127,539 4,221,130 2,913,136 Total deposits $ 5,716,941 $ 5,862,552 $ 3,910,459 (a) The sum of amounts presented are considered total demand deposits. 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. Total demand deposits comprised 48% of total deposits at each of December 31, 2022 and December 31, 2021. The variance was driven by decreases of (i) $113.5 million in retail certificates of deposits, (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. The significant increase in deposits between December 31, 2021 and December 31, 2020 was largely due to deposits acquired in the Premier Merger. Total demand deposits comprised 48% of total deposits at December 31, 2021 and were 43% of total deposits at December 31, 2020. At December 31, 2021, the period-end deposit increase of $2.0 billion, or 50%, compared to December 31, 2020, was primarily due to deposits acquired from Premier. Also, throughout 2021 and 2020, customers maintained higher balances due to changes in customer habits in light of the COVID-19 pandemic, as well as fiscal stimulus funds and PPP loan proceeds. As part of its funding strategy, Peoples hedges 90-day brokered deposits with interest rate swaps. The swaps pay a fixed rate of interest while receiving three-month LIBOR, which offsets the rate on the brokered deposits. As of December 31, 2022, Peoples had thirteen effective interest rate swaps, with an aggregate notional value of $125.0 million, of which $125.0 million were designated as cash flow hedges of brokered deposits, which 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. 69 Peoples' governmental deposit accounts represent savings and interest-bearing transaction accounts from state and local governmental entities. These funds are subject to periodic fluctuations based on the timing of tax collections and subsequent expenditures or disbursements. Peoples normally experiences an increase in balances annually during the first and third quarter, corresponding with tax collections, with declines normally in the second and fourth quarter of each year, corresponding with expenditures by the governmental entities. Peoples continues to emphasize growth of low-cost deposits that do not require Peoples to pledge assets as collateral, which is required in the case of governmental deposit accounts. The maturities of retail CDs with total balances of $100,000 or more at December 31 were as follows: (Dollars in thousands) 2022 2021 2020 3 months or less $ 54,471 $ 71,374 $ 55,402 Over 3 to 6 months 39,031 74,529 56,516 Over 6 to 12 months 58,342 83,094 36,448 Over 12 months 110,972 90,864 70,452 Total $ 262,816 $ 319,861 $ 218,818 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) 2022 2021 2020 Short-term borrowings: FHLB overnight borrowings $ 400,000 $ — $ — FHLB 90-day advances — 40,000 — Current portion of long-term FHLB advances — 15,000 20,000 Repurchase agreements 100,138 111,482 53,261 Total short-term borrowings 500,138 166,482 73,261 Long-term borrowings: FHLB advances 34,158 85,825 102,957 Vantage non-recourse debt 53,147 — — Junior subordinated debt securities 13,788 13,650 7,611 Total long-term borrowings 101,093 99,475 110,568 Total borrowed funds $ 601,231 $ 265,957 $ 183,829 Total borrowed funds, which include overnight borrowings, are mainly a function of loan growth and changes in total deposit balances. Peoples continually evaluates the overall balance sheet position given the interest rate environment. Total 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. During 2021, Peoples' repurchase agreements grew when compared to 2020 mostly due to accounts associated with the Premier Merger. Peoples also acquired additional junior subordinated debt securities in the Premier Merger, leading to the increase in long-term borrowings compared to 2020. 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, 2023 through an amendment in March 2022. 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, 2022 decreased 7% when compared to at December 31, 2021, which was 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. At December 31, 2022, 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. 70 During 2021, total stockholders' equity grew 47% when compared to 2020 mostly due to the issuance of $261.9 million in common shares related to the Premier Merger, in addition to net income of $47.6 million, which was partially offset by dividends paid to shareholders of $31.2 million. 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 is applied during the first two years of application. For the first two years of the phase-in period, 100% of the transition adjustment due to ASU 2016-13 is excluded for regulatory capital purposes, along with 25% of the increase in the allowance for credit losses compared to the January 1, 2020 allowance for credit losses. In year three of the phase-in, 75% of the transition adjustment, and the cumulative 25% increase in the allowance for credit losses compared to January 1, 2020, are excluded from regulatory capital, while 50% and 25% of these amounts are excluded in years four and five, respectively, under this phase-in period. Under the risk-based capital rules, in order to avoid limitations on dividends, equity repurchases and compensation, Peoples must exceed the three minimum required ratios by at least the capital conservation buffer. These three minimum required ratios are the common equity tier 1 capital ratio, tier 1 risk-based capital ratio and total risk-based capital ratio. Peoples had a capital conservation buffer of 5.06% at December 31, 2022, 6.06% at December 31, 2021 and 6.50% at December 31, 2020. As such, Peoples exceeded the minimum ratios, including the capital conservation buffer, at December 31, 2022. The following table details Peoples' actual risk-based capital levels and corresponding ratios at December 31: (Dollars in thousands) 2022 2021 2020 Capital Amounts: Common equity tier 1 $ 604,566 $ 577,565 $ 409,400 Tier 1 618,354 591,215 417,011 Total (tier 1 and tier 2) 662,421 648,948 456,384 Net risk-weighted assets $ 5,071,240 $ 4,614,259 $ 3,146,767 Capital Ratios: Common equity tier 1 11.92 % 12.52 % 13.01 % Tier 1 12.19 % 12.81 % 13.25 % Total (tier 1 and tier 2) 13.06 % 14.06 % 14.50 % Tier 1 leverage ratio 8.92 % 8.67 % 8.97 % 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. 71 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) 2022 2021 2020 Tangible equity: Total stockholders' equity $ 785,328 $ 845,025 $ 575,673 Less: goodwill and other intangible assets 326,329 291,009 184,597 Tangible equity $ 458,999 $ 554,016 $ 391,076 Tangible assets: Total assets $ 7,207,304 $ 7,063,521 $ 4,760,764 Less: goodwill and other intangible assets 326,329 291,009 184,597 Tangible assets $ 6,880,975 $ 6,772,512 $ 4,576,167 Tangible book value per common share: Tangible equity $ 458,999 $ 554,016 $ 391,076 Common shares outstanding 28,287,837 28,297,771 19,563,979 Tangible book value per common share $ 16.23 $ 19.58 $ 19.99 Tangible equity to tangible assets ratio: Tangible equity $ 458,999 $ 554,016 $ 391,076 Tangible assets $ 6,880,975 $ 6,772,512 $ 4,576,167 Tangible equity to tangible assets 6.67 % 8.18 % 8.55 % 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. The tangible equity to tangible assets ratio declined during 2021, compared to 2020. This reduction was mainly due to the acquisition of North Star Leasing, for which no stockholders' equity was issued and additional goodwill and intangibles were recorded. Future Outlook Peoples improved its performance considerably during 2022, recording record annual net income while reaping the benefits of the market interest rate increases and prior acquisitions. Peoples was recognized by Newsweek as the 2023 Best Small Bank in the state of Ohio as well as a Best Bank To Work For 2022 by American Banker. Peoples intends to keep this momentum moving into 2023, with a focus on strengthening the pipeline of referrals between lines of businesses for new clients, as well as growing the specialty finance lending and leasing portfolios, while also working to seamlessly integrate the Limestone Merger into Peoples' current operations. Peoples has been able to capitalize on the recent mergers and acquisitions by (i) substantially reducing its efficiency ratio, (ii) building on its positive operating leverage by growing revenues and (iii) offering state of the art technology to new clients. Management believes it can continue these trends with the pending Limestone Merger while expanding its business into larger markets in Kentucky to be in position to continue to provide a profitable return for shareholders during 2023. During 2023, net interest income is expected to grow due to the Limestone Merger and organic growth, as well as the full year benefits of higher market interest rates as loans reprice to the newest rate. Net interest margin expansion is expected to slow in 2023 when compared to 2022, as Peoples will need to increase its funding costs in future periods. Net interest margin for 2023 is projected to be between 4.50% and 4.65%, which assumes modest increases in rates for 2023 as compared to year-end 2022. Peoples projects total revenue growth to be between 20% and 25% in 2023, which includes the impact of the pending Limestone Merger. Total non-interest income, excluding net gains and losses, growth is projected to be between 10% and 15% in 2023 compared to 2022, which includes the impact of the Limestone Merger. Total non-interest expenses, excluding acquisition-related expenses, for 2023 are expected to increase 20% compared to 2022. The efficiency ratio is projected to be between 55% and 57% for 2023, including Limestone. Peoples will continue to place importance on loan growth. Peoples anticipates that the annual loan growth for 2023, compared to 2022, will be between 25% and 30%, including Limestone balances. Peoples' annual organic growth without the acquired loans from Limestone, will likely be between 5% and 7%. Net charge-off rate during 2023, compared to 2022, is expected to increase by roughly 5 basis points. The balance sheet mix of Peoples will be continually evaluated in an effort to mitigate exposure risk, as interest rates are anticipated to increase during 2023. 72 Total deposit balances are expected to grow between 20% and 25%, primarily due to the deposits acquired in the Limestone Merger. Peoples expects annual organic growth without the acquired deposits from Limestone to be between 2% to 4%. Throughout 2022, deposits 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. Management believes Peoples is in position to continue the trend throughout 2022 of meaningfully exceeding all current analyst estimates for 2023 EPS. The anticipated benefits of the Limestone Merger as well as organic growth are anticipated to put Peoples in an advantageous situation to further improve its performance throughout 2023. For more information regarding risks and uncertainties that could impact the projections described, please refer to "ITEM 1A RISK FACTORS" of this Form 10-K. Interest Rate Sensitivity and Liquidity While Peoples is exposed to various business risks, the risks relating to interest rate sensitivity and liquidity are major risks that can materially impact future results of operations and financial condition due to their complexity and dynamic nature. The objective of Peoples' asset-liability management function is to measure and manage these risks in order to optimize net interest income within the constraints of prudent capital adequacy, liquidity and safety. This objective requires Peoples to focus on interest rate risk exposure and adequate liquidity through its management of the mix of assets and liabilities, their related cash flows and the rates earned and paid on those assets and liabilities. Ultimately, the asset-liability management function is intended to guide management in the acquisition and disposition of earning assets and selection of appropriate funding sources. Interest Rate Risk Interest rate risk ("IRR") is one of the most significant risks arising in the normal course of business of financial services companies like Peoples. IRR is the potential for economic loss due to future interest rate changes that can impact the earnings stream, as well as market values, of financial assets and financial liabilities. Peoples' exposure to IRR is due primarily to differences in the maturity or repricing of earning assets and interest-bearing liabilities. In addition, other factors, such as prepayments of loans and investment securities, or early withdrawal of deposits, can affect Peoples' exposure to IRR and increase interest costs or reduce revenue streams. Peoples has assigned overall management of IRR to the ALCO, which has established an IRR management policy that sets minimum requirements and guidelines for monitoring and managing the level of IRR. The objective of Peoples' IRR management policy is to assist the ALCO in its evaluation of the impact of changing interest rate conditions on earnings and the economic value of equity, as well as assist with the implementation of strategies intended to reduce Peoples' IRR. The management of IRR involves either maintaining or changing the level of risk exposure by changing the repricing and maturity characteristics of the cash flows for specific assets or liabilities. Additional oversight of Peoples' IRR is provided by the Board of Directors of Peoples Bank, which reviews and approves Peoples' IRR management policy at least annually. The ALCO uses various methods to assess and monitor the current level of Peoples' IRR and the impact of potential strategies or other changes. However, the ALCO predominantly relies on simulation modeling in its overall management of IRR since it is a dynamic measure. Simulation modeling also estimates the impact of potential changes in interest rates and balance sheet structures on future earnings and projected economic value of equity. The methods used by ALCO to assess IRR remain largely unchanged from those disclosed for the year ended December 31, 2021. 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: 73 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 in Economic Value of Equity (in Basis Points) December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 300 $ 13,000 4.4 % $ 24,903 11.7 % $ (82,959) (5.4) % $ (24,232) (2.0) % 200 8,716 3.0 % 16,312 7.7 % (55,809) (3.6) % (16,541) (1.3) % 100 4,380 1.5 % 7,899 3.7 % (28,157) (1.8) % (5,308) (0.4) % (100) (11,404) (3.9) % (8,615) (4.1) % (21,124) (1.4) % (91,568) (7.4) % (200) (27,659) (9.4) % (13,203) (6.2) % (80,484) (5.2) % (170,092) (13.8) % (300) (43,728) (14.8) % (13,203) (6.2) % (152,152) (9.8) % (170,092) (13.8) % 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, 2022, 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, 2022, 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, 2022, the bear steepener scenario resulted in an increase in both net interest income and the economic value of equity of 0.1% and 3.0%, respectively. The bear flattener scenario highlights the risk to net interest income and the economic value of equity when short-term rates rise while long-term rates remain constant. In such a scenario, Peoples' variable rate asset yields along with deposit and short-term borrowing costs, which are correlated with short-term rates, increase, while long-term asset yields and long-term borrowing costs, which are more correlated with long-term rates, remain constant. Increased deposit and funding costs would be more than offset by increased variable rate asset yields; resulting in an increased amount of net interest income and higher net interest margin. At December 31, 2022, the bear flattener scenario resulted in an increase in net interest income of 0.6% and a decline in the economic value of equity of 1.9%. During 2022, Peoples' Consolidated Balance Sheet was positioned to benefit from rising interest rates in terms of the potential impact on net interest income. The table illustrates this point as net interest income increases in the rising rate scenarios. Peoples has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for Peoples 74 making fixed payments. As of December 31, 2022, Peoples had thirteen interest rate swap contracts, with an aggregate notional value of $125.0 million. Additional information regarding Peoples' interest rate swaps can be found in "Note 15 Derivative Financial Instruments." An asset/liability model used to produce the analysis above requires assumptions to be made such as prepayment rates on interest-earning assets and repricing impact on non-maturity deposits. These business assumptions are based on business plans, economic and market trends, and available industry data. Management believes that its methodology for developing such assumptions is reasonable; however, there can be no assurance that modeled results will be achieved. The asset/liability model along with key modeling assumptions are subjected to a third-party review annually for effectiveness and regulatory compliance. Liquidity In addition to IRR management, another major objective of the ALCO is to ensure sufficient levels of liquidity are maintained. The ALCO defines liquidity as the ability to meet anticipated and unanticipated operating cash needs, loan demand and deposit withdrawals without incurring a sustained negative impact on profitability. A primary source of liquidity for Peoples is deposits. Liquidity is also provided by cash generated from earning assets such as loans and investment securities. Peoples also uses various wholesale funding sources to supplement funding from customer deposits. These external sources provide Peoples with the ability to obtain large quantities of funds in a relatively short time period in the event of sudden unanticipated cash needs. However, an over-utilization of external funding sources can expose Peoples to greater liquidity risk, as these external sources may not be accessible during times of market stress. Additionally, Peoples may be exposed to the risk associated with providing excess collateral to external funding providers, commonly referred to as counterparty risk. As a result, the ALCO's liquidity management policy sets limits on the net liquidity position and the concentration of non-core funding sources, which includes wholesale funding and brokered deposits. In addition to external sources of funding, Peoples considers certain types of deposits to be less stable or "volatile funding." These deposits include special money market products, large CDs and public funds. Peoples has established volatility factors for these various deposit products, and the liquidity management policy establishes a limit on the total level of volatile funding. Additionally, Peoples measures the maturities of external sources of funding for periods of one month, three months, six months and twelve months, and has established policy limits for the amounts maturing in each of these periods. The purpose of these limits is to minimize exposure to what is commonly termed rollover risk. An additional strategy used by Peoples in the management of liquidity risk is maintaining a targeted level of liquid assets. Management defines liquid assets as unencumbered cash (including cash on deposit at the FRB of Cleveland), and the market value of unpledged U.S. government and agency securities. Excluded from this definition are pledged securities, non-government securities, non-agency securities, municipal securities and loans. Management has established a minimum level of liquid assets in the liquidity management policy, which is expressed as a percentage of total loans and unfunded loan commitments. At December 31, 2022, Peoples maintained liquid assets of $251.3 million, representing 3.1% 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, 2022, Peoples maintained liquefiable assets of $480.6 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, 2022, Peoples had a ratio of 3.71 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, 2022, Peoples had a ratio of 4.18 times, which was within policy limits. Peoples maintains multiple contingent sources of liquidity including secured wholesale funding lines and unsecured brokered deposit networks. Peoples' primary sources of secured wholesale funding are the FHLB of Cincinnati and the FRB of Cleveland. As of December 31, 2022, Peoples had unused collateral-based borrowing capacities of $241.1 million and $264.1 million, respectively, available with the FHLB of Cincinnati and the FRB of Cleveland. Together, these unused borrowing capacities represent 4.3% of total assets and unfunded loan commitments. Additionally, Peoples had $107.9 million of unpledged loan collateral eligible to secure additional borrowing capacity with the FRB of Cleveland. Disruptions in the sources and uses of cash can occur which can drastically alter the actual cash flows and negatively impact Peoples' ability to access internal and external sources of cash. Such disruptions might occur due to increased withdrawals of 75 deposits, increases in the funding required for loan commitments, a decrease in the ability to access external funding sources and other factors that would increase the need for funding and limit Peoples' ability to access needed funds. As a result, Peoples maintains a liquidity contingency funding plan ("LCFP") that considers various degrees of disruptions and develops action plans around these scenarios. Peoples' LCFP identifies scenarios where funding disruptions might occur and creates scenarios of varying degrees of severity. The disruptions considered include an increase in funding of unfunded loan commitments, unanticipated withdrawals of deposits, decreases in the renewal of maturing CDs and reductions in cash earnings. Additionally, the LCFP creates stress scenarios where access to external funding sources, or contingency funding, is suddenly limited, which includes a significant increase in the margin requirements where securities or loans are pledged, limited access to funding from other banks and limited access to funding from the FHLB of Cincinnati and the FRB of Cleveland. Peoples' LCFP scenarios include a base scenario, a mild stress scenario, a moderate stress scenario and a severe stress scenario. Each of these is defined as to the related severity and action plans are developed around each. Liquidity management also requires the monitoring of risk indicators that may alert the ALCO to a developing liquidity situation or crisis. Early detection of stress scenarios allows Peoples to take actions to help mitigate the impact to Peoples Bank's business operations. The LCFP contains various indicators, termed key risk indicators ("KRIs") that are monitored on a monthly basis, at a minimum. The KRIs include both internal and external indicators and include loan delinquency levels, criticized and classified loan levels, the ratios of non-performing loans to loans and to total assets, the total loan to total deposit ratio, the level of net non-core funding dependence, the level of contingency funding sources, the liquidity coverage ratio, changes in regulatory capital levels, forecasted operating loss and negative media concerning Peoples, irrational competitor pricing that persists, and an increase in rates for external funding sources. The LCFP establishes levels that define each of these KRIs under base, mild, moderate and severe scenarios. The LCFP is reviewed and updated at least on an annual basis by the ALCO and Peoples Bank's Board of Directors. Additionally, testing of the LCFP is required on an annual basis. Various stress scenarios and the related actions are simulated according to the LCFP. The results are reviewed and discussed and changes or revisions are made to the LCFP accordingly. Additionally, the LCFP is subjected to a third-party review annually for effectiveness and regulatory compliance. 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. Overall, management believes the current balance of cash and cash equivalents, anticipated investment portfolio cash flows and the availability of other funding sources will allow Peoples to meet anticipated cash obligations, as well as special needs and off-balance sheet commitments. Off-Balance Sheet Activities and Contractual Obligations Peoples routinely engages in activities that involve, to varying degrees, elements of risk that are not reflected in whole or in part in the Consolidated Financial Statements. These activities are part of Peoples' normal course of business and include traditional off-balance sheet credit-related financial instruments, interest rate contracts and commitments to make additional capital contributions in low-income housing tax credit investments. The following is a summary of Peoples’ significant off-balance sheet activities and contractual obligations. Detailed information regarding these activities and obligations can be found in the Notes to the Consolidated Financial Statements as follows: Activity or Obligation Note Off-balance sheet credit-related financial instruments 16 Operating lease obligations 6 Long-term borrowing obligations 10 Traditional off-balance sheet credit-related financial instruments are primarily commitments to extend credit and standby letters of credit. These activities are necessary to meet the financing needs of customers and could require Peoples to make cash payments to third parties in the event certain specified future events occur. The contractual amounts represent the extent of Peoples’ exposure in these off-balance sheet activities. However, since certain off-balance sheet commitments, particularly standby letters of credit, are expected to expire or be only partially used, the total amount of commitments does not necessarily represent future cash requirements. Peoples continues to lease certain facilities and equipment under noncancellable operating leases with terms providing for fixed monthly payments over periods generally ranging from two to thirty years. Several of Peoples’ leased facilities are inside retail shopping centers or office buildings and, as a result, are not available for purchase. Management believes these leased facilities increase Peoples’ visibility within its markets and afford sales associates additional access to current and potential clients. For certain acquisitions, often those involving insurance businesses and wealth management books of business, a portion of the consideration is contingent upon revenue metrics being achieved. US GAAP requires that the amounts be recorded upon acquisition 76 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. 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.