Prepared by Stephanie, Analyst at BAD BEAT Investing
We have provided an overview of the key metrics of many undercovered regional banks of late. The financials offer tremendous upside in a post-COVID world in our opinion. Sector-wide, we have seen how low rates have weighed, and pressure on bond yields have kept these stocks down for months despite the broader averages rebounding so sharply. However, in just the last few days, bond yields are moving, and the outlook for banks has improved. It will still be a choppy ride as we head into the winter before a vaccine is widely available. That said, we strongly believe that this is a sector you should be buying for the long term.
While loan-loss provisions have spiked this year on fears of the potential inability of borrowers to repay their loans, this risk seems to be diminishing, especially on the widespread hopes that we are moving past COVID next year. One name that has crossed our attention is Bar Harbor Bankshares (BHB). The bank has recently reported earnings, and with a 4% dividend yield, we like the stock, but think there are some risks that suggest you should wait for a pullback to buy. In this column, we check in with Bar Harbor and review the key metrics you should be looking for in any banking institution.
Solid revenue growth
Thanks to solid loan activity, increased deposits, and decent margins, the bank saw revenues continue to improve. In Q3, the company reported a top line that rose from Q3 2019. With the present quarter’s revenues of $34.8 million, the company registered a 15.6% increase in this metric year over year. Many other regional banks have seen flat to down revenues versus last year, while others saw increases. This was one of the larger increases in revenues we had seen. Let us take a deeper look into Bay Harbor here.
The increase in revenues year over year was tempered by an increase in loan loss provisions from last year (but they were down sizably from last quarter). While an increased provision from last year was baked into estimates, the results impressed. Bar Harbor saw net income of $8.4 million or $0.56 per share compared to $5.0 million or $0.32 per share in the same quarter of 2019. The adjusted measure of core income increased 30% to $9.2 million, or $0.61 per share in the third quarter of 2020 compared to $7.3 million or $0.47 per share. That was great; further, book value improved.
Book value suggests the stock is still attractive
We like to buy quality banks when they are near or below book value. A few weeks ago, Bar Harbor was trading near book value but now the stock is rocketing higher. With this move, it is expensive value-wise.
The bank’s stock is $24.11 which is up significantly in the last few weeks but remains attractive relative to book value. Book value per share was $27.09 at the end of Q3 2020 compared to $26.56 at the end of Q2 2020. We love to see this movement. Still, shares are expensive when we consider tangible book value per share. Most bank stocks are valued higher than tangible book value. Tangible book was $18.56 at the end of Q3 2020 compared to $18.18 at the start of the quarter. A continued low interest rate environment has had a positive impact on the fair value of the bank’s holdings. We think the stock is attractive overall.
Loans fell but deposits grew
Surprisingly we saw loan balances decline. Loan balances in Q3 2020 decreased by $20.7 million, largely due to secondary market sales and prepayments of residential mortgages offset by total commercial loan growth. Mortgage loan originations totaled $86.5 million from new and refinancing activity given the lower interest rate environment, which was a benefit.
One thing we noted here was that during the quarter nearly all residential originations were sold in the secondary market to generate fee income. Total commercial loans grew at an annualized rate of 13% led by commercial real estate loans, offset by a decrease in commercial and industrial loans. The decrease was primarily due to just one customer, as detailed in the release, with loans totaling $39.8 million that were refinanced to a lower principal of $25.0 million along with an open line of credit.
Deposits, however, were up solidly. Total deposits increased 21% on an annualized basis due to growth from new accounts and an overall decrease in customer spending given current market conditions. As a result, the loan to deposit ratio improved to 92% in Q3 2020 compared to 101% in Q2 2020.
Asset quality matters
Loans are a strength, but only if they are performing. If they are at risk of default, they are an obligation, not a strength.
Loan-loss provisions increased to $1.8 million from $893 thousand in the same quarter of 2019. While overall credit quality in the loan portfolio remains strong, the increase in the reserve is indicative of the continued commercial loan growth and higher economic adjustments reflecting elevated risk from COVID-19. We should also point out that unlike a lot of other regional banks, the provisions were also higher than the $1.35 million in Q2 and $1.11 million in Q1 2020.
Digging further, the allowance for loan losses to total loans ratio for Q3 expanded to 0.66% from 0.60% in Q2 2020, based on commercial loan growth and adjustments to reflect current economic conditions. Past due and delinquent loans as a percentage of total loans decreased to 0.77% from 0.83% at the end of Q2. As of September 30, 2020, total outstanding deferrals, which primarily consist of interest-only forbearance, were $78.7 million or 3% of total loans, with consumer mortgages representing $4.6 million of the total or less than half a percent of the consumer portfolio. This is something to keep an eye on.
As we have seen with a number of regional banks, this was another mixed quarter in the sector. Overall asset quality is still showing risks with the commercial and hotel exposure. Still book value improved nicely in the quarter, and revenues and earnings expanded over last year. The stock would be a better buy under $20 in our opinion, but is still about fairly valued looking at book value and of course tangible book. For now we are neutral on the name, but believe it is going to see a strong 2021.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.