KBRA Affirms Ratings for Bar Harbor Bankshares

13 Oct 2023   |   New York


KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Bar Harbor, Maine-based Bar Harbor Bankshares (NYSE American: BHB or “the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for the lead subsidiary, Bar Harbor Bank & Trust. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings reflect favorable asset quality performance over time, including a nominal credit loss history, underpinned by disciplined underwriting, a selective borrower base, and a management team with extensive experience and market knowledge across the footprint. While we acknowledge a comparatively higher investor CRE mix, including office exposures representing 8% of loans, collateral appears adequately supported. Earnings in recent periods have been solid, with ROA (1.20% in 1H23) tracking above the rated peer average since 2021, reinforced by a diverse revenue profile (noninterest income above 20% of revenues, driven by wealth management), comparatively lower cost of deposits, and a meaningful increase in net interest income, partly driven by a shift in the earning asset mix. The latter is consistent with management’s long-term balance sheet strategy of transitioning into a more commercial-centric and core deposit funded banking model. In common with many peers, NIM compression has been meaningful since 4Q22 given the heightened funding and competitive pressures stemming from the ongoing Fed rate hikes. With that said, NIM has tracked slightly higher than the rated peer average year-to-date, supported by the aforementioned lower-cost deposits, which are anchored by granular relationships, a relatively dense and more rural retail branch network, and a respectable NIB deposit mix (20% of total deposits at 2Q23). The funding profile at 2Q23 reflected a slightly lower core deposit mix (78% of total funding) relative to many peers, with brokered deposits and FHLB borrowings rising to 6% and 11%, respectively, of total funding. However, we recognize the significant reduction in noncore funding utilization compared to pre-pandemic periods and expect management to prudently manage balance sheet leverage through disciplined loan growth. Secondary liquidity capacity is more than sufficient with cash and unencumbered securities (combined 13% of total assets) providing solid on-balance sheet buffers and backstopped by ample contingent liquidity (FHLB and brokered deposit availability totaling ~$1.0 billion at 2Q23). Regulatory capital protection as measured by the CET1 ratio (10.7% at 2Q23) has been stable since the prior year, albeit tracked modestly lower than the average of the rating category as of 2Q23. While capital is sufficient for the risk profile, given the slightly above peer CRE concentration and RWA density, KBRA’s expectation is that the CET1 ratio will be managed closely in line or above peers in the foreseeable future. Stock buyback activity has been muted since 2020 with near term appetite for repurchases appearing limited.

Rating Sensitivities

A rating upgrade is unlikely in the intermediate term. Sustaining above peer earnings with greater fee income scale and maintaining substantially higher core funding levels could lead to positive rating momentum over time. Better than peer CET1 and TCE ratios must also be consistently demonstrated. Conversely, asset quality deterioration in the form of elevated level of nonperforming loans or outsized credit losses, material contraction in capital ratios, substantial earnings weakness, or meaningful degradation in funding measures could have negative rating implications.

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