Premier Financial Bancorp: Needs more attention

Traditionally, many banks follow organic growth but a few choose to depend mostly on inorganic growth. Premier Financial Bancorp, Inc. (Nasdaq:PFBI) is one of the latter.  Premier is a multi-bank holding company with two subsidiaries: Citizens Deposit Bank & Trust and Premier Bank, Inc.  PFBI operates thirty five branches in Kentucky, Ohio, West Virginia, Washington D.C., Maryland and Virginia.

Have the intentions of a growth friendly environment created by the government been fulfilled in the way that was anticipated?  Things appear to be happening slower than the government had planned, but the environment has definitely helped holding companies like Premier. However, do not expect everything to be positive for conservative investors who do not take much risk to reap higher rewards as there are a few bumps in the road that will stop them in the middle. For the opposite type of investors, they will like the results.

With loan growth of 3.9% in 3Q2013, Premier posted net income growth of 62.8% and EPS growth of 23.7% in the same period.

The 2013 performance was largely a result of cost cutting measures and reserve releases. The provision for loan losses declined to $ 50,000 in the third quarter 2013, from $ 1.26 million same quarter 2012, that is 96% decline.  

After three quarters from the end of 2012, Premier’s nonperforming assets declined by 21.9% and the recoveries outpaced the charge-offs in the nine months of 2013, which boosted Premier’s earnings. This was not real growth; such improvements cannot drive earnings very long. Besides, the growth friendly environment set to expire slowly will take away those benefits in the future.

PFBI grows by acquiring community banks. It acquires them at the start of about a five-year period and consolidates them during the rest of it. This is like bulking up the balance sheet and seeing an immediate effect on earnings and improved assets quality. While this is a catalyst for its growth, it also possesses some risks for Premier. One can’t rule out the possibility that Premier acquires troubled community banks that deteriorate its present position in the current spree of acquisitions. If that happens, investors will have to wait for at least two or three years to earn meaningful returns.  PFBI’s previous acquisition spree was completed on October 1, 2009, with the acquired banks accounting for 57.5% of Premier’s overall non-performing assets on September 30, 2013. It is easy to understand the effects of those prior troubled community bank acquisitions.

Since the circumstances have changed significantly with a growth friendly environment in place, many banks have improved their credit quality and are in a good position. But the low interest rate environment also decreases the interest margins of banks and with the mortgage business struggling, one can expect that Premier might acquire some troubled banks in the current acquisition spree just started. If that happens, such acquisitions will be at a significant discount to their real value, making Premier a better investment for long-term investors as it starts consolidating the acquired banks. If it acquires slowly growing banks or the above level, then there will be a significant improvement in the earnings of Premier in the next two years immediately.

After successfully completing the consolidation of the previously acquired banks, Premier appears to have started acquiring community banks again after more than five years. It entered into a definitive agreement with Gassaway Bancshares, Inc., to acquire its subsidiary Bank of Gassaway, and this acquisition is expected to be complete in the second quarter of 2014.

More than 85% of the bank’s income comes from interest income. That means interest rates will have higher leverage on overall income. When the interest rates start rising (near future), it will have a higher impact on the earnings of Premier in the long run. This makes Premier a better investment destination for those who are looking for banks that are less dependent on mortgage refinancing. The net interest margin for the first nine months of 2013 was 4.33%.

Premier is trading at 0.79 times book value and has posted EPS of $1.07 in the first nine months of 2013. It has a better chance of trading at a higher valuation in the long-term (more than 3 years) in both of the acquisition situations previously discussed. The problem with an acquisitions growth strategy is that it can’t predict the state of Premier after the acquisitions if the condition of the banks it is going to acquire is unknown. This makes an investment in Premier uncertain for the short term, but for long-term investors, Premier will be a better opportunity at the current levels.