KBRA Affirms Ratings for Bar Harbor Bankshares

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 bank"). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are underpinned by Bar Harbor’s respectable earnings performance with a 5-year average ROA exceeding 1.0%, tracking above the rated peer average (~20 bps) since 2022. The earnings profile is reinforced by its diverse revenue profile driven by fee income averaging 25% of total operating revenue over the last five years. That said, NIM has steadily declined over the last two years, stemming from rising funding costs, as the company has reflected a slightly lower core deposit to total funding mix relative to many peers (76% at 2Q24) and increased wholesale funding utilization to support loan growth. Spread revenue is supported by a low-cost deposit base with total deposit costs of 1.89% at 1H24, 56 bps below peer average, anchored by BHB’s granular relationships in its rural retail branch network. Additionally, while lower than peers, the NIB deposit mix (17% of total deposits) appears durable and has held up well despite macroeconomic environment pressures. Moreover, management’s strategy in shifting the earning asset mix to a more commercial-centric and core deposit funded banking model has bolstered earning asset yields, upholding NIM to levels in line with peers. The company has demonstrated favorable asset quality performance over time, including a nominal credit loss history attributable to disciplined underwriting, a selective borrower base, and a management team with extensive experience and market knowledge across the company’s footprint. While we acknowledge a comparatively higher investor CRE mix (309% of risk-based capital), office exposure is reasonably contained at ~8% of loans and appears adequately supported by underlying collateral and guarantees. Regulatory capital protection (CET1 of 11.4% at 2Q24), in combination with solid loss absorption capacity is, in our view, sufficient for BHB's risk profile. KBRA expects capital metrics to be maintained at levels commensurate with the company’s risk profile and in line with average peer levels.

Rating Sensitivities

A rating upgrade is unlikely in the intermediate term, although sustaining above peer earnings with greater fee income scale and higher core funding levels, while maintaining stable capital ratios could lead to positive rating momentum over time. Asset quality deterioration in the form of elevated levels of nonperforming loans or outsized credit losses, material contraction in capital ratios, substantial earnings weakness, or meaningful increases in wholesale funding sources could have negative rating implications.

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