Focus On Surpassing $10 Billion In Assets Will Drive Future Success

Key Takeaways

• Growth in Commercial and Industrial Loans expected to enhance revenue and net margin through higher yields and reduced credit-related expenses.
  
• Focus on noninterest-bearing deposits and asset growth aims to stabilize net interest margin and drive earnings growth.
  
• Increased charge-offs, declining net interest income, and operational inefficiencies could strain earnings and overall profitability if not managed effectively.

Catalysts

Operates as the holding company for Peoples Bank that provides commercial and consumer banking products and services.

• Peoples Bancorp's strategy to increase the proportion of Commercial and Industrial Loans in its portfolio is expected to enhance revenue growth, as these loans typically have higher yields compared to Commercial Real Estate Loans.
  
• The company expects to see lower provision for credit losses in 2025 due to improvements in its small ticket leasing business, which could positively impact net margins by reducing credit-related expenses.
  
• Peoples Bancorp's focus on maintaining and even growing its deposit base, particularly noninterest-bearing deposits, should support a stable net interest margin, especially as it aims to lower deposit costs further.
  
• Anticipated stabilization in the net interest margin within the range of 4% to 4.2% despite potential rate reductions by the Federal Reserve may bode well for maintaining strong net interest income levels.
  
• The company's continued investments and strategic focus on surpassing $10 billion in assets, along with leveraging its robust community presence and market competitiveness, are likely to drive overall earnings growth in the coming years.

Peoples Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Peoples Bancorp's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.5% today to 24.3% in 3 years time.
• Analysts expect earnings to reach $123.0 million (and earnings per share of $3.41) by about January 2028, up from $116.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, up from 9.9x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 1.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.04%, as per the Simply Wall St company report.

Peoples Bancorp Future Earnings Per Share Growth

Risks

• Elevated charge-offs, particularly from the small ticket leasing business, are noted: net charge-off rates rose from around 1.5% to 6.7%, which could continue to strain earnings if not managed down effectively. This increase significantly impacts net margins and overall earnings.
  
• Despite improvements, net interest income declined by 3% in the fourth quarter compared to the linked quarter, primarily due to lower accretion income, leading to net interest margin compression. This decline in net interest margin can pressure overall profitability.
  
• A significant portion (53%) of the loan portfolio is variable rate, which, despite a relatively neutral position on interest rate risk, could still expose the company to margin pressures should rates fall further. This could impact net interest income and net interest margins.
  
• The leasing portfolio is anticipated to remain under pressure, even with expected improvements, given its historically high charge-off rate, which may continue to depress earnings and weigh on the allowance for credit losses if not adequately addressed.
  
• The company's efficiency ratio increased to 59.6% from 55.1% in the previous quarter, driven by lower net interest income and increased non-interest expenses, indicating challenges in maintaining operational efficiency, which could affect net profits.

Valuation

• The analysts have a consensus price target of $36.92 for Peoples Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $33.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $506.8 million, earnings will come to $123.0 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 6.0%.
• Given the current share price of $33.05, the analyst's price target of $36.92 is 10.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.