People Bancorp Continues to Perform Well in a Challenging Environment

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Written By Dean McHugh

Peoples Bancorp, headquartered in Marietta, Ohio, is a small but robust bank with over 100 years of history. Despite having total assets that do not exceed the $10 billion threshold, PEBO has been proving its resilience and outperforming its peers in the current high-interest-rate environment.

While the typical issues of rising deposit costs and declining profitability are present, the magnitude of these problems is relatively low for PEBO.

Outperforming Peers

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PEBO’s net interest margin is notably higher than that of its peers, with a gap of at least 100 basis points. This significant advantage is mainly due to the bank’s ability to fund itself at a relatively low cost.

The cost of deposits for PEBO is below the average for its peer group, allowing the bank to achieve a better spread on investments for the same rate.

Although there is a continuous shift of capital from non-interest-bearing deposits to interest-bearing deposits, the latter remains cheaper than average, mitigating the impact on profitability. Non-interest-bearing deposits, while declining, still account for 22% of total deposits.

According to management, this trend is expected to continue unless there is a rate cut, but the estimated range for the net interest margin in 2024 remains high, between 4.10% and 4.30%. The balance sheet’s relative neutrality means that even if rates were raised or lowered by 75 basis points, the impact on profitability would be minimal.

PEBO’s Good Liquidity

PEBO also has sufficient liquidity to take advantage of current market opportunities. Unlike some peers with a rigid financial structure due to a Loan to Deposit Ratio above 100%, PEBO’s ratio stands at only 84.70%.

Growth prospects for 2024 look promising, particularly in the segments that showed the most growth in the first quarter: premium finance, Commercial & Industrial (C&I), and Commercial Real Estate (CRE). As CEO Tyler Wilcox stated during the Q1 2024 conference call, there is an expectation of continued growth in these areas across various markets, including Louisville, Lexington, Washington D.C., Columbus, Cleveland, and Cincinnati.

The bank expects total loan growth between 6% and 8% compared to 2023, despite the risks associated with increasing CRE loans during a challenging period for commercial properties.

PEBO has managed its exposure to the CRE market well, maintaining a CRE concentration risk well below the 300% threshold and below the peers’ average.

Dividend Analysis

PEBO’s current dividend yield is an attractive 5.37%, significantly above the industry average of 3.30%. The bank’s 10-year dividend growth rate (CAGR) stands at 10.47%, although growth has slowed in recent years, reflecting macroeconomic conditions. The recent increase in dividends was only 2.21%, indicating caution about future growth rates.

Despite the slowdown, the dividend appears sustainable, supported by a well-capitalized position (Common Equity Tier 1 ratio of 11.69%) and a Dividend Payout Ratio just under 50%. This conservative approach is likely due to the current macroeconomic environment and the presence of $226 million in unrealized losses on AFS and HTM securities, which impacts the growth potential of TBV per share.

PEBO: An Attractive Investment

Credits: DepositPhotos

PEBO is a sound bank with a low cost of deposits and a net interest margin higher than that of its peers. While the prospects for loan growth are strong, dividend growth prospects are more subdued. The bank’s financial stability, combined with its current economic valuation, makes it an attractive investment. PEBO’s P/E and P/B ratios are lower than both its peers and its historical values, despite decent growth prospects.

In the short to medium term, PEBO is expected to perform well, though it has consistently underperformed the S&P 500 in the long term. Investors must carefully evaluate the opportunity cost, as a simple investment in the S&P 500 might yield higher long-term returns.

However, for those seeking a high and sustainable dividend yield in the short term, PEBO remains a valid option.


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