KBRA Affirms Ratings for Northern Bancorp, Inc.

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Woburn, Massachusetts-based Northern Bancorp, Inc. (“Northern” or “the company”). KBRA also affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for the subsidiary, Northern Bank & Trust Company ("the bank"). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by the company’s earnings outperformance driven by a strong NIM largely due to above average loan yields derived from competitive scale in a niche C&I segment (QSR franchisees), as well as a higher C&D lending mix (12% of total loans). Despite the higher risk profile of the loan portfolio, the company’s credit loss performance is “best in class”, and Northern has performed significantly better than peers. Furthermore, Northern’s margin has been supported by a leveraged balance sheet as average loans represent 91% of average earning assets at 2Q24, driving NII expansion. That said, similar to many peers, deposit competition has pressured the funding profile causing the bank to increase utilization of higher cost funding sources as brokered deposits account for 24% of total funding at 2Q24. However, earnings have also been supported by the company’s ‘branch-lite’ model which has contributed to below-average operating expenses (<2% of average assets at 2Q24) driving an efficiency ratio of 44% at 2Q24. That said, KBRA acknowledges Northern’s spread reliant funding model as the company historically displays below peer noninterest income revenue (4% of operating revenue). Furthermore, the ratings reflect management’s disciplined management and demonstrated ability to maintain capital metrics tracking ~200 bps above similarly rated peers at 13.7% as of 2Q24. While we recognize the company’s comparatively higher risk appetite evidenced by a concentrated loan portfolio and an elevated risk-weighted density (92% at 2Q24), regulatory capital levels remain strong, bolstered by Northern’s strong track record of consistently generating solid earnings with ROA averaging 1.92% over the past five years. Additionally, the company has prudently managed its overall investor CRE portfolio to levels well below the regulatory guidance threshold at 197% of RBC as of 2Q24. Internal capital generation is further supported by comparatively lower dividend payouts and limited external pressure for shareholder distributions given the company’s closely held private ownership structure. KBRA expects Northern to maintain capital metrics at current levels despite modest loan growth given the better than peer loan yields that are largely anchored by the franchisee lending niche. The ratings consider the increase in NPAs to beyond historic norms, although metrics are expected to improve as the bank recognizes resolutions and payoffs. Despite elevated NPAs, credit losses have been historically minimal attributable to management’s proactive credit practices and solid recourse protection. The bank experienced a foreclosure of a large multifamily loan in 2Q23 resulting in a significant increase in NPAs to 2.84%, although, this was an idiosyncratic event which we do not consider indicative of systemic credit concerns. Additionally, greater earnings retention capacity is reinforced with higher reserve coverage (1.84% of total loans) and above peer regulatory capital ratios, reflecting solid overall loss absorption capacity relative to the risk profile.

Rating Sensitivities

Positive rating momentum is unlikely given the challenging operating environment, though, increased scale and diversification, improved fee income streams, and stable credit quality combined with the maintenance of outperformance of earnings and capital metrics could be viewed favorably over the longer-term. Conversely, should credit quality measures deteriorate beyond expectations or should the company report meaningful losses or unfavorable trends over the coming 12 months, adverse rating action could ensue. Additionally, if the company is unable to maintain earnings moderately above peers, increase utilization of non-core funding sources, or if the company exhibits capital regression, the ratings may be pressured.

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