2023-03-06 11:13:54 ET
Summary
- Premier Financial Corp has a low Price to Book ratio of .98X.
- Premier Financial Corp's loan portfolio grew significantly in 2022, resulting in strong revenue growth.
- Premier announced a 3.3% dividend increase in January 2023.
Interest rates continue to soar! Banks continue to adjust to the rising costs of deposits and the changing lending landscape in this rising rate environment. In my view, the banking sector is presenting investors with some great buying opportunities. There are some great opportunities to add banks that are undervalued with high dividend yields. In today's article, we will review Premier Financial Corp. ( PFC ). We will review the recent earnings release and valuation using the Dividend Diplomats Dividend Stock Screener.
About Premier Financial Corp.
Premier Financial Corp. is an $8.5B bank headquartered in Ohio. The bank's market includes Ohio, Michigan, Indiana, Pennsylvania and West Virginia. Premier Financial Corp. grew significantly a couple of years ago as a result of a Merger of Equals (MOE) of two large Ohio community banks.
The MOE allowed the bank to strengthen its balance sheet and allow the institution to offer more services to its customers. The larger the bank, the larger the loans the bank can offer via higher lending limits. Further, this bank can now offer other services to cross-sell its products. That is the beauty of a bank that is less than $10b in assets. Customers can receive the full-suite of banking services that cannot be offered by small institutions while the bank can avoid the complex products used by the "Too Big to Fail Banks."
Recent Financial Performance & Dividend Increase
On January 25, 2023, Premier Financial Corp. released its fourth quarter and year to date earnings. The results were very strong!
Let's start with the income statement. On a quarterly basis, the bank experienced strong revenue growth in the fourth quarter compared to the third quarter. Total interest income grew to $80,725,000 from $73,104,000. That is 10.4% growth rate. On an annual basis, interest income grew 14%. This is the power of higher interest rates. The following chart breaks down the quarterly interest income earned by the bank. Look at how much loan and security interest income grew each quarter.
Interestingly, while the bank experienced top line interest income growth, the bank saw its net income in 2022 decrease. In 2022, the bank's net income declined to $102,187,000 from $126,051,000 in the previous period. What were the primary drivers of the decline in net income? Here are some of the drivers:
- Increased Total Interest Expense - The bank's top line benefited from rising interest rates. Unfortunately, the bottom line was negatively impacted due to the rising cost of deposits. The market for consumer deposits is extremely competitive and banks everywhere are raising rates to attract deposits. Interest expense on deposits in 2022 was $24,909,000, up from $13,482,000. The competitive consumer deposit not only increased the cost on deposits, it also forced the banks to incur interest expense on FHLB Advances to fund the bank's balance sheet growth. Interest expense on FHLB Advances was $6,550,000 in 2022, up from $23,000 in 2021. Clearly, Premier was hit with a double whammy for deposit expense.
- Increased Provision for Credit Losses - Provision expense was $12,503,000 in 2022 compared to a ($6,733,000) in the previous period. Provision expenses are climbing across the sector as banks prepare for worsening credit quality and a looming recession. This is a consistent trend across the entire banking sector
- Decline in Mortgage Banking Income - Mortgage banking income decreased to $9,871,000 in 2022 from $21,925,000 in 2022. Similarly to the last bullet point, mortgage banking came to a screeching halt in 2022 as rates rose and demand dwindled.
Earning over $100 million in 2022 was impressive and we definitely don't want to lose sight of that accomplishment. Now, let's take a quick look at the bank's balance sheet as of December 31, 2022. As we mentioned early, Total Assets for the bank were $8.5B as of December 31, 2022. That was a huge increase from $7.5B the previous year.
The primary driver of the balance sheet growth was the bank's strong loan growth during the year. Total loans, net, increase to $6.4B at December 31, 2022 from $5.2B the year before. The following table from the company's earnings release provides a detailed breakdown of the bank's loan growth by category.
Shockingly, the bank experience strong mortgage growth in the period, despite rising interest rates and softening real estate demand across the market. The main drive of the bank's loan growth, however, was the Core commercial loan portfolio, which grew nearly $700m during the period. The new loans are booked with higher interest rates and is the predominant reason why the bank's top line interest income grew so strongly in the current period.
Credit quality for the bank remained strong as well. Non-performing loans actually decreased during the period ($34M at 12/31/2022 compared to $48M at 12/31/2021) and the allowance for loan losses decreased as well. Monitoring Premier's loan performance will be critical in 2023 to ensure that the bank's assets are performing strong and they are not trending to more losses than reserved in the period.
In addition to the strong earnings results, Premier also announced a solid dividend increase. The bank increased its dividend by 3.3%. This further bolsters the bank's very strong dividend yield.
To summarize the results. Premier experienced great loan growth in 2023 that propelled an increase in revenue in 2022. However, even though the bank realized strong net income, it was down year over year due to the slowdown in mortgage banking activity and the rapid rise of the cost of deposits.
Dividend Diplomats Dividend Stock Screener
Let's run Premier Financial Corp. through the Dividend Diplomats' Dividend Stock Screener . We built our stock screener as a simple way to help us, and all of you, identify undervalued dividend stocks to research further and buy!
The Dividend Diplomats Dividend Stock Screener examines the following metrics and is what we use to determine whether a company is considered an undervalued dividend growth stock.
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P/E Ratio (Valuation) and P/B Ratio for Banks
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Dividend Payout Ratio (Safety)
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Dividend Growth Rate and History (Longevity)
For this analysis, I will use the company's 3/3/23 close price of $24.55/share, 2023 EPS estimates of $2.91/share, and an annual dividend of $1.24/share.
1.) Price-to-Earnings (P/E) and Price to Book Ratio (P/B) - This metric is used to see if the company is undervalued. According to my source , the S&P 500 P/E ratio is 21.63x. PFC's P/E Ratio is 8.43X. That is much lower than the market!
For banks, we also look at the Price to Book Ratio (P/B). We love banks with a P/B between 1X - 1.15X. In that zone, we consider a bank truly undervalued. PFC's Price to Book Ratio is currently .98X. PFC is trading BELOW the range we usually look for in banks!
2.) Payout Ratio - We use a 60% target payout ratio in our analysis, as we believe 60% provides a strong blend of yield and ability to continue growing their dividend going forward. We also consider it 'Perfect" payout ratio when it is between 40% and 60%. That range provides the perfect blend of reinvesting earnings in the business and paying shareholders a nice dividend.
PFC's payout ratio is 42.6%. Boom. Perfect.
3.) Dividend Growth Rate - We already mentioned that PFC just announced a 3.3% dividend increase. this was the bank's 10th consecutive dividend increase. PFC has a history of strong dividend increases as well. Despite the fact this was a small increase, the bank's five-year average dividend growth rate is 18.17%. With that said, I'm expecting the bank's dividend growth to resemble the 2023 increase versus the five-year average.
4.) Dividend Yield - The bank's current dividend yield is 5.05%
Summary
After reviewing the bank's recent performance and the metrics in our stock screener, the decision is simple. I'm going to be buying shares of Premier Financial Corp and building a strong position in my portfolio. The bank's dividend yield is phenomenal. Furthermore, the payout ratio is very manageable and provides the bank plenty of room to sustain and grow its dividend through a tough economic cycle.
This isn't just about the dividend, though. The bank's valuation is extremely attractive given the fact that the bank is trading below book value. The bank is growing its loan portfolio despite some of the recent economic headwinds facing the region and the bank's loan portfolio is performing well.
What are my expectations for the stock in the year? How will it hold up in the coming year? That is the million dollar question. While we don't have a crystal ball, the bank is positioned to maintain a strong position in 2023. The bank's current problem loan portfolio is low and delinquencies remain at low levels. However, the bank still has a strong Allowance for Loan Losses (1.13% at 12/31/2023) to cover an uptick in performance. The allowance for credit losses is 211% of the non-performing assets as well.
In the short-term, I do expect net income to remain flat or decrease slightly due to the rising costs of deposits. Luckily, the bank has a perfect payout ratio. Even if earnings declines 20%, the bank will still have a strong payout ratio. I'm not at all worried about the safety of the dividend.
As mentioned earlier, I'll be buying Premier Financial. If the price falls, I'll continue to grab more shares and lower my cost basis!
I look forward to Comments from other investors. What do you think about Premier Financial Corp? Are you buying at the bank's current valuation, or are you just watching like me? Do you think this is a perfect bank stock?
For further details see:
Premier Financial: A Great, Undervalued Bank With A 'Premier' 5%+ Dividend Yield