KBRA Affirms Ratings for NBT Bancorp Inc.

7 Jun 2024   |   New York


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.

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A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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