The Massive Decline In Premier Is A Huge Buying Opportunity (NASDAQ:PFC)

Our members have been discussing our public buy call on Premier Financial (NASDAQ:PFC) last year. When shares were at $26 we encouraged buying every $0.75 lower. We were unable to get a real position here because shares were rallying in large part following the call. But the company just reported earnings which were admittedly mixed, but the stock collapsed 13% on the news. This is an overreaction in our opinion. But, it knocks the stock a few legs into our buy zone. It is time to buy this regional bank and insurer. Let us discuss the results which sparked this selloff

Premier Financial Corp. Q4 2022 performance

In Q4 we once again saw the bank grow its deposits and expand loans, and generate decent margins. Premier Financial Corp. is performing well. However, the headline performance on the Q4 report came in below expectations. The revenues were up slightly from a year ago.

In Q4 2022, Premier reported top-line revenues of $77 million. The bank saw a 3.9% increase in this critical metric year-over-year, but this was well below estimates by $3.4 million. We have covered a ton of banks this earnings season but we have to tell you Premier had a really mixed report in our estimation. Keep in mind that this is a regional bank that is on the smaller size, so they are subject to revenue fluctuations quarter to quarter. That said, the key metrics are not as bad as the market reaction would have you believe. The provision for credit losses spiked to $2.8 million rising from a provision of $2.0 million in Q4 2021. This was a primary reason for the earnings miss. A lot of this provision increase was due to more overall loans on the books, as well as the general macro situation, as the bank joins so many others in preparing for increased delinquencies given the expectation of a recession in 2023. That said, net income for Q4 2022 was $25.3 million or $0.71 per share. This was up from $0.69 per share a year ago, but well below estimates for $0.81 per share.

Earnings were also driven by increasing net interest income of $62.8 million, which is up 9.3% from a year ago. We expect net interest income to continue to improve moving forward, and earnings will be fueled even further by loan growth.

Loans and deposits grew in Q4

Unlike many other banks this season, Premier Financial actually saw some strong growth in both loans and deposits in Q4. In fact, loans spiked $239.0 million, or up 15.1% over Q4 2021. This growth came from strength across all categories except PPP loans which will simply continue to decline. Residential mortgages and commercial loans have been strong. Overall, loan demand is strong even with the huge increases in interest rates and the Fed taking action to slow the economy.

We also know that more deposits means more assets on hand to lend out to customers, and deposits for Premier actually grew. Deposits were up $100.4 million or 6.0% annualized. What is more, asset quality metrics are strong.

Strong asset quality metrics

The quality metrics for Premier’s assets were strong as well. One key metric to watch is the bank’s allowance for credit losses. The allowance for credit losses to total loans was just 1.13% at the end of Q4 2022. This was a 1 basis point improvement from a year ago, and a 13 basis point improvement from Q3. On top of that, non-performing assets increase commensurate with the huge increase in loans. The non-performing assets totaled $34.4 million, or 0.4% of assets, which was a rise of $33.6 million from Q3, but a decrease from $48.2 million a year ago. Loan delinquencies, however, did increase to $18.3 million, or 0.3% of loans, up from $13.2 million in Q3, and from $12.3 million a year ago. This was a bearish point but it is only a mild bearish point.

Return metrics were mixed. The return on assets fell to 1.21% from 1.34% in Q4 2021. The return on equity rose from 9.70% to 11.46% quarter-over-quarter. The return on tangible equity jumped too, and was really impressive at 18.64%, up from an already strong 14.49% last year. We see these metrics being strong through 2023, though if recession is moderate or strong, we could have a weak Q1 and or Q2, but we suspect things ramp back up in Q4.

Finally, book value is $24.94, rising from $24.32 in the sequential Q3, meaning the premium to book is now gone. The stock is also attractive relative to tangible book, but at a premium. Tangible book was $15.47 rising from $14.82 a year ago.

Take home

The bottom line is that while this was a mixed quarter the stock is overreacting. The dividend just got hiked and we are yielding 5.2% here going forward. The key metrics were not nearly as bad as the stock’s reaction. While it was a murky quarter, we think you need to buy this stock here.