What You Should Know About Premier Financial Bancorp, Inc.’s (NASDAQ:PFBI) Risks
Premier Financial Bancorp, Inc. (NASDAQ:PFBI) is a small cap stock with a market capitalisation of US$209m. As a company operating in the financial services sector, it faces the risk of bad loans, also formally known as credit risk. Small banks are directly affected by macroeconomic events as the ability for borrowers to repay their loan depends on the stability of their salary and level of interest rates. Since bad debt is written off as an expense, it impacts Premier Financial Bancorp’s bottom line and shareholders’ value. I will take you through some useful measures of bad debt and liabilities in order to properly analyse Premier Financial Bancorp’s risk level before you invest in the stock.
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How Good Is Premier Financial Bancorp At Forecasting Its Risks?
Premier Financial Bancorp’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. If it writes off more than 100% of the bad debt it provisioned for, then it has inadequately estimated the factors that may have added to a higher bad loan level which begs the question – does Premier Financial Bancorp understand its own risk? With a bad loan to bad debt ratio of 52.13%, Premier Financial Bancorp has under-provisioned by -47.87% which is below the sensible margin of error, illustrating room for improvement in the bank’s forecasting methodology.
How Much Risk Is Too Much?
If Premier Financial Bancorp does not engage in overly risky lending practices, it is considered to be in good financial shape. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. Loans are written off as expenses when they are not repaid, which comes directly out of Premier Financial Bancorp’s profit. Since bad loans only make up 2.49% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.
Is There Enough Safe Form Of Borrowing?
Premier Financial Bancorp profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to the relatively stable interest rate and amount available. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Premier Financial Bancorp’s total deposit to total liabilities is very high at 97% which is well-above the prudent level of 50% for banks, Premier Financial Bancorp may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
Next Steps:
Keep in mind that a stock investment requires research on more than just its operational side. Below, I’ve compiled three relevant aspects you should look at:
Future Outlook: What are well-informed industry analysts predicting for PFBI’s future growth? Take a look at our free research report of analyst consensus for PFBI’s outlook.
Valuation: What is PFBI worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether PFBI is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
