Strong job markets will keep loan growth at an acceptable rate
After growing by 1.8% in the first quarter, the loan portfolio saw a 0.7% decline in second quarter 2022. According to the earnings presentation, management expects loans to grow by between 4% and 6 percent in 2019. This target seems reasonable given the performance of the first-half. This target is also lower than the historical trend.
Peoples Bancorp anticipates that strong job markets will support loan growth in the coming quarters. Peoples is primarily based in Ohio and Kentucky. The unemployment rates in all three states are at an all-time low.
Overall, I anticipate that the loan portfolio will increase by 5.6% in 2022. Peoples Bancorp’s last report estimated that there would 8.1% loan growth by 2022. My estimate of loan growth has been revised downward due to poor performance in the second quarter and an escalating outlook. I anticipate that loan growth will remain the same in 2023 than it was in 2022’s second half.
Peoples Bancorp depends on acquisitions for growth. The company doesn’t have any M&A transactions at the moment so I consider only organic loan growth an investment thesis. If the management has M&A plans, I’d be even happier.
Mark-to-market Securities for Further Erode Equity Book Value
The large investment portfolios of people have led to significant unrealized losses. Rising rates have reduced the book value of fixed-rate, available for sale securities. This loss on mark to market, according to applicable accounting standards, has flowed directly into equity. The earnings presentation reveals that the tangible book value per share decreased to $16.21 in June 2022 from $19.61 in December 2021.
Unrealized losses for the second half of 2022 will increase even more after the Federal Reserve raised the fed funds rate by 75 basis points in July. In the remainder of the year, a further 75 basis points increase is anticipated. Below is a summary with tangible book value for each share of my estimates for balance sheet.
Topline’s Rate Sensitivity is Marred by Flexible Deposit costs and a Large Securities Account
Rate-sensitive yields are very high on earning-assets. The following factors can make the net interest margin moderately rate-sensitive.
Deposit mix. As variable-rate interest bearing deposits made up 62% (or 62%) of all deposits as of June 2022, the average deposit cost will rise quickly.
Large balance. Investment securities accounted for 23% of earnings assets at the end of June 2022. These securities are typically fixed-rate securities which can reduce the average earnings-asset yield if rates rise.
These factors are the reason I expect that the margin will increase by 20 basis points in 2022 before stabilizing in 2023. Since my last report, my margin estimate has grown by 20 basis points. This is due to the greater-than-expected growth in the second quarter.
Normalized Provisioning Probably for Quarters Ahead
Peoples Bancorp reported a net reverse of $780million for the second quarter 2022. This was more than I expected. This led me to reduce my year-end provision expense. I also decreased my loan growth forecast, as mentioned above. Due to lower expected loan additions provisioning for loan losses will also be reduced.
The average provision expense for total loans was 0.1% between 2017 and 2019. From 2017 to 2019, the average provision expense was 0.1%. The average provision expense was 0.1% of total loans from 2017 to 2019. I expect that the provision expense will return to this level in the second quarter 2022, and throughout the year 2023. Due to the large reserve release in the first half, the normalized provisioning for the second half of 2022 won’t be adjusted for full year provisioning.
Earnings Growth expected to be 60%
Margin expansion and loan growth in mid-single figures will drive earnings growth. The large loan loss reserve release during the first half of 2022 will also drive earnings. Peoples Bancorp will report 2022 earnings at $3.47 per share, which is a 60% increase year-over-year. In 2023, I expect earnings of $3.54 per share. This is a 2% increase over last year. Below is my income statement estimate.
Peoples Bancorp’s last report estimated 2022 earnings of $3.05 per share. My earnings estimates increased as I revised my net interest margin estimates upwards, and also changed my net provision estimate.
Actual earnings may differ from estimates due to uncertainties and risks associated inflation and consequently, the timing and magnitude of interest rate rises. Further, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.
Peoples Bancorp Attractive Dividend Yields & Price Upside
Peoples Bancorp has a 4.8% dividend yield and a $0.38 quarterly dividend rate. Based on earnings and dividend estimates, the 2022 payout ratio is 43%. This is lower than the average payout ratio of 56% over five years. Although there is potential for a rise in dividends, I believe that my investment thesis will remain safe if the dividend does not change.
Peoples Bancorp is valued using both historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples. The stock traded at an average price to tangible ratio of 1.58 throughout its history.
Multiplying the average P/TB multiplied by the forecast tangible share price per share of $15.2 yields $24.0 as the target price for 2022. This price target assumes a 24% decrease in August 12 closing prices. Below is a table showing how sensitive the target prices to the ratio P/TB are.
Multiplying the average PE multiple by forecast earnings per share (3.47) gives us a target price of $48.0 for 2022. This price target represents an increase of 52.3% in price compared to the August 12 closing prices. Below is a table showing how sensitive the target prices to the P/E ratio.
The combined target prices for both valuation methods are equally weighted. This results in a combined price of $36.0 This means that there is a 14.2% increase in the market price. Add the forward dividend yield to get 19.0% expected return. Peoples Bancorp is one company that I recommend.