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We believe that on the next market selloff following this bear market rally over the last month that one sector which will be an incredible buy is in the regional banks. The financials offer tremendous upside as we have moved from a low rate environment to a much higher rate environment. While the initial shock of these higher rates stymied short-term demand for loans, that demand seems like it will normalize as we move forward and both consumers and businesses adapt fully to a more ‘normal’ rate environment. Banks will be enjoying much better margins on the loans they issue going forward, and this will feed the bottom line.
Bar Harbor Bankshares (NYSE:NYSE:BHB) is a growing New England regional bank we like. It may be another quarter or two of some pressure but we are expecting a very strong environment in 2023. We think you want to own the shares here. Let this market fall some and start scaling into names like this. We strongly believe you should be buying in this sector for the medium- and long-term. In this column, we check in with Bar Harbor’s just reported earnings and review the key metrics you should be looking for in any banking institution.
Strong top-line growth
On the back of loan growth and increased deposits, along with expanding margins, Bar Harbor had a strong Q2. In fact Bar Harbor Bankshares saw revenues continue to improve. In Q2, the company reported a top line that rose from Q2 2021. With the present quarter’s revenues of $35.5 million, the bank saw a strong 10.0% increase in this metric year-over-year. These strong earnings were driven by better return metrics, improved efficiency, as well as strong loan growth.
Revenues help drive earnings growth
The increase in revenues year-over-year led to widening of earnings as well despite an increase in loan loss provisions from last year. While an increased provision from last year was expected as every bank we have covered has increased their provisions in this transitional period for rates and the economy, earnings grew nonetheless. Bar Harbor saw net income of $10.5 million or $0.70 per share compared to $9.4 million or $0.63 per share a year ago. Winning. The adjusted measure of core income matched these GAAP figures. further, book value improved from a year ago, and that is bullish.
Bar Harbor Bankshares’ book value
The bank’s stock is $29.01, which is up significantly in the last few weeks given the big market rally. We would like the stock to come down toward $26 ideally for a real value buy, 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 $26.19 at the end of Q2 2022 compared to $27.11 to start the quarter, mostly falling due to the securities held for sale which are temporary.
Shares are slightly expensive when we consider tangible book value per share. Most bank stocks are valued higher than tangible book value. Tangible book was $17.83 at the end of Q2 2022 compared to $18.72 at the start of the quarter. With future loans set to have much better margins, we think you buy any weakness in the stock.
Bar Harbor Bankshares’ loan and deposit trends
We love to see loan and deposit growth when considering buying a bank stock. Loan balances in Q2 2022 increased by $70 million from Q1 2022, along with a strong 11% annualized loan growth. These are the trends you want to see. Loans totaled $2.7 billion at the end of the quarter, and 70 new commercial customers were brought on. Commercial loans were up $55 million, while residential loans were up over $8 million.
Deposits were up solidly. In fact, total deposits were $3.1 billion to end Q2 versus $3.0 billion to begin Q2. What is more, core deposits grew $60.8 million, or 9% on an annualized basis. This deposit growth was a result of over 800 net new customer accounts being opened. Winning.
Bar Harbor Bankshares’ asset quality
As you know, growing loans are a strength that we look for, but only if they are performing well. If they are at risk of default, these are potential liabilities, not assets. That said, we know loan loss provisions were up.
Loan-loss provisions increased to $0.53 million from the $0.765 million in credits achieved a year ago. The increase in the reserves is something most other banks have done due to the current uncertainty in the market.
We did like the improvement elsewhere as well. The allowance for loan losses to total loans ratio for Q2 was flat at 0.87% quarter-over-quarter. Non-accruing loans however actually decreased to $7.9 million from $9.2 million at the end of Q1. This cut the ratio of accruing past due loans to total loans in half, coming in at just 0.12% vs. 0.25% coming into the quarter.
Strong returns and efficiency’
Taken as a whole this bank is winning. The return metrics are impressive as well. The return on assets was 1.14%, up big time from 0.97% a year ago, and up from 1.0% in Q1 2022. The return on equity was 10.58% up from 8.89% in Q1 2022 as well. The efficiency ratio was a big positive coming in at 59%, improving from 63% last year. Further, the company pays a $0.26 per share dividend, which translates now to a 3.6% dividend yield.
Take home
This bank is improving across the board. Let this market walk the stock back some, then do some buying here.
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