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 Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by Northern's earnings outperformance underpinned by a robust NIM driven by above-average loan yields from its scale in a niche C&I segment (QSR franchisees), as well as a higher concentration in C&D lending (13% of total loans). Margin performance has also benefited from a leveraged balance sheet, with average loans representing 91% of average earning assets at 2Q25, though cost of funds remain elevated as heightened deposit competition and a loan-to-deposit ratio of 105% at 2Q25 have impacted reliance on higher-cost wholesale funding sources. Operating efficiency remains a strength, attributable to the 'branch-lite' model helping to keep expenses below peers (<2% of average assets). Additionally, despite a comparatively higher-risk loan mix, Northern's credit loss trend has outperformed peers. Capital management further supports the ratings, with CET1 tracking nearly 300 bps above similarly rated peers at 15.5% as of 2Q25. While the company maintains a comparatively higher risk appetite - reflected in a concentrated loan portfolio and an elevated RWA density (93% at 2Q25) - capital strength is reinforced by Northern’s consistent earnings generation, with ROA averaging 1.93% over the past five years. KBRA notes that the company is reliant on spread income given below-peer noninterest income (4% of operating revenue). The company has prudently managed its IOCRE portfolio, maintaining exposure at 189% of RBC. Capital protection is further bolstered by a comparatively lower payout ratio tied to its private ownership structure, and KBRA expects Northern to maintain capital metrics at current levels. The ratings consider the rise in NPAs above historic norms; however, credit losses have been minimal, reflecting management's proactive oversight and solid recourse protections. Moreover, loss absorption capacity is supported by a higher reserve coverage ratio (3.57% of total loans) as well as significantly above peer regulatory capital levels, mitigating the company's elevated risk profile.

Rating Sensitivities

Positive rating momentum is unlikely over the medium term. However, increased scale and diversification, improved fee income streams, and stable credit quality combined with above peer earnings and capital metrics would be viewed favorably over the longer-term. Conversely, should credit quality measures deteriorate beyond expectations, including material losses or unfavorable trends, an adverse rating action could ensue. Additionally, if the company is unable to maintain earnings moderately above peers, increases utilization of non-core funding sources significantly, or if the company exhibits capital regression, the ratings may be pressured.

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