2023-12-08 16:38:49 ET
Summary
- Premier Financial Corp. experienced a tough year due to increased costs of deposits, but the bank is now in a healthier position.
- The bank's Q3 2023 performance showed growth in loans and deposits from last year and strong asset quality metrics despite the uncertain environment.
- Return metrics are stabilizing and expected to improve.
- Juicy high-yield for income-thirsty investors.
Premier Financial Corp. ( PFC ) is a regional bank and insurance company. The stock took a breather along with the entire sector this year, as margins were pressured from the need to pay much more for deposits. While loans continue to grow, and the yields are expanding, new loan issuance and average yield did not keep pace with the rise in the cost of deposits, weighing on margins.
It feels like a distant memory, but we also had a small banking crisis back in March, which shook the industry. Now, the bank is in a healthier position. The rise in the cost of funds seems to be about done, as interest rates largely appear like they have peaked. The market is pricing in rate cuts. If rates are cut, the first thing you will see is a cut to the interest rate for savings and interest-bearing checking at banks. It will be swift, while rates on loans will come down more slowly, thereby expanding the margin in our estimation.
In this column, we check back in on PFC stock and the recently reported earnings which show improvement in many key metrics. Specifically, despite a tough year for banks, the return metrics are strong here. On top of that, the dividend yield is definitely attractive at 5.7%. The bank has also raised its dividend each year over the last few years.
Premier Financial Corp. Q3 2023 performance
In Q3 we saw the bank expand its deposit base, grow loans, and while margins have been pressured, they held up fairly well. The headline performance on the Q3 report came in slightly above expectations , though this came with revenues that were expected to be down. In Q3 2023, Premier reported top line revenues of $67.5 million, falling 15.6%, but this was above estimates by $2.6 million. Overall performance for banks was rather decent in Q3; many of the better banks showed some sequential improvement, but Premier had a strong report in our estimation.
The provision for credit losses flipped from $4.0 million to a credit of $0.8 million in Q3 2022. That was strong. This comes despite more overall loans on the books, and the general macro situation. The bank had been preparing for increased delinquencies given recession fears, but metrics are holding up by and large. You have to love that when you have an income name like this paying you 5.7% with the opportunity for ongoing capital gains. Net income of course followed the top line a bit lower, hitting $24.7 million or $0.69 per share.
The decline was driven by lower net interest income from last year, but we saw sequential improvement. Net interest income was $54.3 million, which was up 0.5% from $54.1 million in Q2 2023 but down 14.5% from $63.5 million in Q3 2022. And it looks like margins have now troughed. Net interest margin was 2.73% up one basis point from 2.72% in Q2 2023 but down 67 basis points from 3.40% a year ago when we were in a peak margins situation for banks.
Premier Financial Corp loans and deposits grew in Q3
Premier Financial actually saw some strong growth since last year. Loans are up to $6.97 billion from $6.2 billion last year. However, they were about flat from Q2 2023. Still, this is a much higher loan base of growth during a very questionable time for banks. Deposits grew as well, dispelling any fear of a run on banks that was speculated on earlier this year. Total deposits increased 4.1% annualized, or $71.2 million, during Q3 2023, primarily due to a $92.3 million increase in customer deposits, which was up 5.6% annualized, offset partly by a decrease of $21.1 million in brokered deposits. There is a lot of competition for deposit dollars right now so this is impressive.
The bottom line is that more deposits translates to more assets on hand to lend out to customers. We love having more deposits now because the bank will be able to lend this money out at much higher rates going forward, increasing the average yield on loans, while the cost of funds is likely to hold about firm since rate hikes are essentially done.
Premier Financial Corp asset quality metrics
The asset quality metrics are pretty strong here. The allowance for credit losses to total loans was just 1.14% at the end of Q3 2023, the same level from a year ago. This means that there has not really been an increased risk for losses. That is welcomed news. Non-performing assets totaled $39.9 million, or 0.47% of assets, which was an increase from $37.6 million in the sequential Q2, and up from $33.6 million a year ago. Some of this stems from having another $700 million of loans on the books. However, loan delinquencies decreased to $17.2 million, or 0.24% of loans from $19.0 million in the sequential quarter.
We also watch return metrics and Premier boasts attractive returns. Of course, with lower revenue and income, it is no surprise these metrics are down from a year ago, but showed stability from the sequential quarter. The return on assets was 1.14%, down from 1.36% a year ago but up from 1.13% in Q2 2023 on a core basis. The return on equity was down from 12.2% a year ago to 10.43%, but up from 2023 lows of 8.07% experienced earlier this year. The return on tangible equity was 15.54%. We see these metrics slowly improving as we move forward as we project margin improvement.
Finally, book value is $25.74, up from $24.32, a year ago. Tangible book value improved to $17.09 from $14.82 last year as well. At $22 per share, we are trading at a premium, but the premium is built in due to the growing book value and projected future improvement.
Final thoughts
This was a really tough year on banks, especially regional ones. We have highlighted a number of regional banks with strong income potential, and PFC fits the bill. We appear to have troughed in operational performance. The 5.7% yield is attractive. Return metrics are up off the 2023 lows, margins look set to expand, and asset quality remains strong despite uncertainty. We like Premier Financial Corp. as another option for income if you are still looking for a regional bank to diversify your income holdings.
For further details see:
Premier Financial Corp.: An Income Cash Cow For Your Portfolio