BHB - Bar Harbor Is Recovering And We See Upside

2023-07-24 13:41:09 ET

Summary

• It was a difficult spring for regional banks.
• Bar Harbor Bankshares saw pressure on margins in Q2 as costs of deposits have risen, hurting return metrics, but the bank remains very profitable.
• A new repurchase plan should reduce the float.
• Loan and deposit growth remains.

Bar Harbor Bankshares ( BHB ) is an expanding regional bank in the New England area, and we believe it could be an attractive investment in the next market selloff. Regional bank stocks have been crushed in 2023 due to pain and pressure on their balance sheets stemming from the rapidly increasing rate environment. We continue our coverage of regional bank Q2 earnings with this quality company.

The stock, and the company, has been resilient, and it is working to improve. We anticipate further market declines due to overly optimistic earnings estimates, more interest rate hikes, and potential selling waves in the coming weeks. However, the bank's strong financials, high interest rates, and robust loan demand suggest that even in a mild to moderate recession scenario, the financial sector may offer significant opportunities as net interest margins, while having peaked, remain quite strong. Although fee income has declined due to fewer loan originations and applications, we expect newer loans with wider spreads to be highly profitable. We anticipate a robust environment for stocks and banks as a whole in late 2023 and in 2024, especially if we can avoid a recession. Therefore, investors may consider scaling into this bank as it has corrected and is finding its footing once again.

Let us discuss the performance and our continued buy rating on the name.

Topline Expansion

In its just-announced Q2 report , Bar Harbor demonstrated continued revenue growth with a notable increase in loans and margins during Q2. Revenues reached $37.8 million, reflecting a strong 6.5% year-over-year growth. Margins have peaked in the sector and have since been pulling back, though margins did expand from a year ago 3.22%. This is down over 50 basis points in 2023 however from the peak, from the pain we have seen from the need to pay depositors more for their money. It is very competitive out there. But the 3.22% margins, as well as non-interest income and fees, led to a net income of $10.8 million or $0.71 per share, compared to $10.5 million or $0.70 per share in the previous year. Shares are starting to come back from spring lows, but we would prefer to see a pullback in shares again to get a better price. The company has done well and continues to pay a nice 4.4% yield. On top of that, the bank plans to buy back 5% of the float through a very recently announced repurchase plan .

Loans and Deposits

Analyzing Bar Harbor Bankshares' loan and deposit trends, we find encouraging signs of growth in loans, with an increase of $64 million, driven by commercial loans that grew $56.4 million. Residential loans were about flat due to low production. Consumer loans dropped by $1.7 million from the end of the first quarter 2023 due to the runoff of balances associated with the repricing of home equity lines of credit to the higher interest rate environment. Total loans reached $3.0 billion at the end of the quarter. Deposits also grew from the sequential quarter to $3.09 billion from $3.05 billion. This is positive.

Return Metrics

In terms of return metrics, Bar Harbor Bankshares performs well. As mentioned, the dividend yield is approximately 4.4%, and shares tend to appreciate quickly during market rallies, making timing key for investors. The return on assets has shown significant improvement, though has dipped in 2023 as the cost of deposits has weighed. The return on assets came in at 1.10% while the return on equity also hit 10.49%. This was weaker than a year ago, however, so we will be watching to see if we have bottomed on these metrics or if there is continued erosion. This may be dependent on the economy, of course. That said, and likely not surprising at all, the efficiency ratio is at its highest in a year at 60.25%. The non-performing asset ratio, however, decreased to 0.17% from 0.21% from a year ago, which is positive. Net charge-offs were near zero, and the provision for credit losses was a paltry $0.75 million.

Take Home

In conclusion, Bar Harbor Bankshares is a robust regional bank with a strong dividend yield, growing loans, and positive return metrics. While we may have seen the peak earnings power for a while given the higher costs of deposits and pressure on consumer loans, for the long term, we like the bank. The bank's asset quality is strong, and the current decline in share prices presents an opportunity for investors to consider scaling in during market weaknesses.

For further details see: