PEBO - Peoples Bancorp: Strong Topline Growth On The Cards

• Strong job markets will help loan growth remain at mid-single-digit levels through the end of 2023.
• Variable deposit costs and a large securities balance will limit the impact of interest rates on net interest income.
• Higher interest rates will increase unrealized losses on the securities portfolio. Therefore, the equity book value per share will likely continue to slip in the remainder of this year.
• The December 2022 target price suggests a high upside from the current market price. Further, PEBO is offering a high dividend yield.

Earnings of Peoples Bancorp Inc. ( PEBO ) will most probably surge this year on the back of mid-single-digit loan growth. Further, the net interest margin will expand significantly, thereby lifting earnings. Moreover, the first half’s large provision reversal will support earnings for this year. Overall, I'm expecting Peoples Bancorp to report earnings of $3.47 per share for 2022, up 60% year-over-year. Compared to my last report on the company, I've revised upwards my earnings estimate as I've increased my margin estimate and changed my net provision expense estimate. For 2023, I'm expecting earnings to grow by 2% to $3.54 per share. The year-end target price suggests a high upside from the current market price. Therefore, I’m maintaining a buy rating on Peoples Bancorp.

Strong Job Markets to Keep Loan Growth at a Decent Level

After growing by a strong 1.8% in the first quarter, the loan portfolio grew by a disappointing 0.7% in the second quarter of 2022. As mentioned in the earnings presentation , the management expects loans to grow by 4% to 6% this year. This target seems reasonable given the first half’s performance. It is also much below the historical trend.

Strong job markets in Peoples Bancorp’s operating regions will likely support loan growth in the quarters ahead. Peoples mostly operates in Ohio, Kentucky, and West Virginia. All three states have unemployment rates that are at record lows.

Overall, I’m expecting the loan portfolio to grow by 5.6% in 2022. In my last report on Peoples Bancorp, I estimated loan growth of 8.1% for 2022. I've revised downwards my loan growth estimate because of the second quarter’s performance as well as a deterioration in the outlook. For 2023, I'm expecting loan growth to continue mostly at the same level as the second half of 2022.

Peoples Bancorp has historically relied on acquisitions for growth. As the company doesn't currently have any ongoing M&A transactions, I have only considered organic loan growth for my investment thesis. If the management announces any M&A plans, then total loan growth will beat my expectations.

Mark-to-market of Securities to Further Erode Equity Book Value

Due to a large investment securities portfolio, Peoples has racked up significant unrealized losses amid the rising-rate environment. Increasing rates have lowered the book value of fixed-rate, available-for-sale securities. This loss on mark-to-market has flowed directly into equity after bypassing the income statement, as per relevant accounting standards. The tangible book value per share declined to $16.21 per share at the end of June 2022 from $19.61 at the end of December 2021, as mentioned in the earnings presentation.

During the second half of 2022, the unrealized losses will increase even further as the Federal Reserve raised the fed funds rate by 75 basis points in July. I'm also expecting a further 75 basis points hike in the remainder of the year. The following table summarizes my balance sheet estimates, including the tangible book value per share.

In my last report on Peoples Bancorp, I estimated earnings of $3.05 per share for 2022. I've increased my earnings estimate because I've tweaked upwards my net interest margin estimates and changed my net provision estimate.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.

Attractive Dividend Yield and Price Upside

Peoples Bancorp is offering a dividend yield of 4.8% at the current quarterly dividend rate of $0.38 per share. The earnings and dividend estimates suggest a payout ratio of 43% for 2022, which is below the five-year average of 56%. Although there is room for a dividend hike, I’m assuming no change in the dividend for my investment thesis to remain on the safe side.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Peoples Bancorp. The stock has traded at an average P/TB ratio of 1.58 in the past, as shown below.

The stock has traded at an average P/E ratio of around 13.9x in the past, as shown below.

Equally weighting the target prices from the two valuation methods gives a combined target price of $36.0 , which implies a 14.2% upside from the current market price. Adding the forward dividend yield gives a total expected return of 19.0%. Hence, I’m maintaining a buy rating on Peoples Bancorp.

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