BHB - Bar Harbor Is A Tremendous Buy

Summary

• This is a strong regional bank.
• The dividend yield is strong and the bank continues to raise the dividend.
• Return metrics are strong, while asset quality metrics are improving.
• Let the market knock this back, then do some buying.

On the next market selloff, which may be underway now, we love the idea of buying up shares of quality regional bank stocks. Bar Harbor Bankshares (BHB) is a growing New England regional bank in this sector which we think will be an incredible buy if this market keeps selling off like it has. We believe the market will sell off more, because earnings estimates for the market are still too high, and with more interest rate hikes coming, still persistent inflation, and concerns over inflation, we see another set of concerned selling waves as like in coming weeks. But with rates high, and still strong loan demand, with the worst case looking like a mild to moderate recession, we think the financials offer tremendous as net interest margins widen. While fee income has slipped as originations and applications are largely down on varied loans, we see the newest loans issued as being very lucrative thanks to widening spreads. There may be another quarter before we see a recession land, but we are expecting a very strong environment in late 2023 for stocks and the banks as a whole. Let this market fall some again and then consider scaling into this bank. We strongly believe you should be buying in this sector for the medium and long-term on big declines. In this column, we discuss Bar Harbor's just reported earnings which justify a buy here.

Continued revenue growth

Bar Harbor had a strong Q4 with increases in loans and margins. Bar Harbor Bankshares revenues were $41.2 million, the bank saw a strong 10.0% increase in this metric year-over-year. The increase in revenues year-over-year combined with some better margins, margins which expanded to 3.76% from 2.79%. With growing revenue and widening margins Bar Harbor saw net income of $12.5 million or $0.83 per share compared to $9.8 million or $0.65 per share a year ago. These increase demonstrate the strength of this growing regional bank, but we would really love a pullback in shares.

Bar Harbor Valuation

The valuation of the bank stock is pretty reasonable but shares would be much more attractive in the high $20's in our opinion. The bank's stock is $30.42, which is up significantly in the last few months given the big market rally off the fall lows, but are starting to pull back. We would like the stock to come down toward $$27-28 ideally, but shares are still attractive here when we consider ongoing growth. That said, the stock remains attractive relative to book value. Book value per share was $26.09 at the end of Q4 2022 compared to $25.22 to start the quarter.

Shares are slightly expensive when we consider tangible book value per share. Most bank stocks are valued higher than tangible book value. Tangible book value was $17.78 at the end of Q4 2022 compared to $16.69 at the start of the quarter. The company saw a boost as securities held for investment, as well as other comprehensive income unrealized losses of $55.2 million down from $58.7 million. With future loans set to have continued strong margins, we like buying on weakness.

Bar Harbor Bankshares' loan and deposit trends

When we examine regional banks we like to see loan and deposit growth when considering buying a bank stock. Right now, we understand the competition for customer deposit dollars is extremely stiff. Rising rates have helped loan yields but now banks have to pay up to get those deposit dollars as well. That said, loans continue to grow. Loan balances in Q4 2022 increased by $52 million from Q3 2022, which was driven by a nice 11% annualized loan growth. These are the trends you want to see. Loans totaled $2.9 billion at the end of the quarter. Assets under management increased 7% during the quarter.

Deposits were down, but were mostly down in low volume institutional accounts. Total deposits were $3.0 billion to end Q4 versus $3.1 billion to begin Q4. Core deposits in Q4 were down $81 million or 3% driven by a $55.2 million decrease in business checking, demand deposit accounts, and non-personal money market balances. Time deposits decreased $10.8 million too. A lot of these were rate sensitive customers. Ongoing competition for future deposits is expected in the sector.

Return metrics

The dividend yields nearly 3.5%, and is on the rise which is something to keep in mind for your total returns. In addition, shares tend to appreciate quite quickly when the market rallies, so timing your buy is key, and we like scaling in on weakness. Now how about the return metrics of the bank? Well they are impressive. The return on assets was 1.30%, up big time from 1.02% a year ago, and has been up all year. The return on equity was 12.73% up from 9.16% a year ago, and also rose through the year. The efficiency ratio also improve from a year ago when it was 61%, hitting 59%. This is very impressive, as was the improvement in asset quality. Nearly every indicator is trending in the right direction, including asset quality metrics.

A look at Bar Harbor Bankshares' asset quality

Loan-loss provisions increased to $0.68 million from the $0.13 million in provisions a year ago. This was a result of a trend in all banks, preparing in case the recession hits hard and customers do not pay their loans. But so far, repayment has not been an issue. Non-accruing loans decreased 16.7% or $1.3 million to $6.5 million from $7.8 million at the end of the third quarter. On top of that the ratio of accruing past due loans to total loans decreased to 0.09% of total loans, from 0.10% at the end of the third quarter. There was also $0.155 million while net recovery of charged off loans compared to a net charge off $.04 million in the third quarter. The allowance for credit losses increased $0.842 million to $25.9 million but that was mostly because there were so many more loans on the books.

Take home

This is a strong regional bank. The dividend yield is strong and the bank continues to raise the dividend. Loans are growing. Return metrics are strong, while asset quality metrics are improving. Book value is on the rise again, and the decline in share prices is offering an opportunity to scale in on weakness. Let the market pull back, and do some buying.

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