KBRA Affirms Ratings for Premier Financial Corp.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Defiance, Ohio-based Premier Financial Corp. (NASDAQ: PFC) ("Premier Financial" or "the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its main subsidiary, Premier Bank. The Outlook for all long-term ratings is Stable.

The ratings are reinforced by Premier’s relatively strong earnings profile, with ROA averaging just under 1.40% from 2018-2022, which has been supported by a healthy NIM, favorable noninterest income levels, and below average operating expenses. While PFC’s profitability has decreased in 2023 due to NIM headwinds from its liability sensitive balance sheet positioning, core performance has remained solid, with core ROA above 1.00% for 1H23. Moving forward, returns will likely remain pressured given the expectation of continued NIM compression, though the pace of NIM decline is expected to be much slower than prior quarters, in part, due to the balance sheet hedges implemented in 2Q23. Moreover, lower NII will be partially offset by an improvement in operating efficiency from the sale of the company's insurance agency, First Insurance Group ("FIG"), in the second quarter, as well as internal cost-savings initiatives. With that said, revenue diversity will be reduced following the sale of FIG, with core noninterest income (excluding the gain on sale of the insurance agency) representing 16% of total revenues for 1H23, excluding insurance commissions, compared to averaging 26% from 2018-2022. Notwithstanding a pandemic-driven credit issue that resulted in slightly higher NCOs in 4Q21 and 2Q22, which was due to a student loan servicer borrower that was impacted by the government intervention and pause with student loan payments, we view PFC’s credit performance in recent years as comparatively solid. The NCO ratio has averaged a modest 6 bps since 2018, which illustrates management’s knowledge of local markets and borrower base, as well as their conservative underwriting practices. Moreover, the loan book is relatively diverse, with a manageable exposure to investor CRE and a minimal concentration in the troubled office sector. KBRA also recognizes the company’s quality funding base, with core deposits generally representing more than 90% of total funding prior to the Fed’s QT measures (82% as of 2Q23) and stronger loan growth over the past year. However, PFC reflects a relatively higher portion of public funds (17% of total) that are higher cost and larger in size, though appear to have longevity, which provides some assurance around the stability of the relationships. Despite this, uninsured balances and cost of deposits remain below peer. Premier Financial also reflects a more leveraged balance sheet, with loans-to-earning assets averaging 85% since 2018 (85% as of 2Q23), which results in lesser readily available liquidity on-balance sheet, though we view contingency funding sources as adequate in the context of growth prospects, deposit flows, and uninsured deposit levels. Given the higher RWA levels from the aforementioned higher level of loans, this has usually resulted in risk-based capital measures tracking below peer, though following the sale of FIG, the CET1 ratio increased to 10.8% as of 2Q23, which we view as adequate for the rating category. Moving forward, management intends to continue to build capital given the uncertainties in the industry.

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