KBRA Affirms Ratings for NBT 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 Norwich, NY-based NBT Bancorp Inc. (NASDAQ: NBTB or “the company”). In addition, KBRA 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 its subsidiary, NBT Bank, National Association. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

NBTB’s ratings are anchored by a historically durable, lower-cost funding profile that has reflected highly granular deposit relationships and lower price sensitivity compared to many KBRA banks since the Fed rate tightening cycle began. Strong diversity and scale of differentiated fee-generating businesses also represents a rating strength, with fee income consistently generating ~30% of total revenues (or an average of ~1.10% of average assets since 2019), outperforming most peers in the rating category. Taken together with the immense value of lower total deposit costs (~1.60% in 1Q24, inclusive of a robust 30% NIB deposit mix), this affords the company less pressure to reach for loan yield, leading to what we characterize as a lower credit risk profile. Similar to many peers, NIM continued to edge lower, given the ongoing shift in the funding mix and, more recently, slower loan growth. However, owing to the aforementioned contributions from fee revenues, the company has largely generated ROA (1.00% in 1Q24) in line with the KBRA peer average in recent periods. The ratings also reflect NBTB's solid, long term, through the cycle credit quality performance, underpinned by disciplined underwriting, granular loan portfolios, and minimal CRE concentrations. Office loans aggregated to a manageable 4.9% of loans at 1Q24, with suburban medical and professional services-related businesses representing a large portion of the tenant base. Additionally, the office CRE maturity wall appears well laddered with just 12% of the portfolio scheduled to mature over the next two years. While charge-offs have been modestly higher in recent periods, partly stemming from a small legacy consumer finance portfolio that is in runoff, consumer lending verticals have historically generated solid risk-adjusted margins. That said, we expect overall losses to trend towards more normalized levels in the foreseeable future. However, relatively stable earnings expectations and sufficient reserve coverage (1.19% of loans at 1Q24) provide adequate first line loss absorption buffers, in KBRA’s view. Capital protection as measured by the CET1 ratio (11.7% at 1Q24) is suitable for the risk profile, albeit ~40 bps below the KBRA peer average. However, we recognize that the CET1 ratio had been prudently managed prior to the all-stock Salisbury Bancorp, Inc. acquisition (in the low 12% range). Given management guidance of modest loan growth and limited appetite for share repurchases, we anticipate capital to trend towards pre-merger levels by YE24.

Rating Sensitivities

Sustaining peer-level or higher profitability through an economic downturn while maintaining stable credit quality measures in line with or better than normalized levels, and managing capital ratios, particularly the CET1 ratio, above the peer average may lead to positive rating momentum over time. Additionally, further maturity of and depth in non-legacy markets would be viewed positively. Conversely, material or unanticipated deterioration in asset quality leading to meaningful earnings pressure, a more aggressive approach to capital management resulting in materially below average capital measures, or substantial degradation in the funding profile could negatively impact ratings.

To access rating and relevant documents, click here.

Methodologies