KBRA Affirms Ratings for Alpine Banks of Colorado

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Glenwood Springs, Colorado-based Alpine Banks of Colorado (OTC: ALPIB) ("Alpine" 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 its main subsidiary, Alpine Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by Alpine’s low-cost core deposit base that has been a hallmark of its balance sheet for many years, representing 85% of total funding as of 1Q24. Total deposit costs have remained below peer averages at 1.74% for 1Q24 compared to 2.36% for all KBRA publicly traded banks, aided by the bank’s solid deposit market share in its operating markets, ranking in the top five for the state of Colorado, and healthy level of noninterest-bearing accounts (31% of total). Additionally, the bank maintains a solid liquidity position with ample cash on-balance sheet (6% of total assets) and a below peer loan-to-deposit ratio of 68% as of 1Q24, offering a degree of funding flexibility - as such, management has not needed to significantly increase wholesale funding utilization to offset deposit outflows as excess liquidity leaves the banking system and account balances normalize. That said, Alpine has not been immune to pricing pressures within the deposit base, largely due to deposit migration into higher yielding products, contributing to 94 bps of NIM compression to 2.90% for 1Q24 since peaking at 3.84% in 4Q22, resulting in weakened earnings performance (ROAA at 0.64% for 1Q24). Prospectively, we expect NIM to continue to be weighed down until deposit pricing pressures abate, though we note that NIM compression has slowed in recent quarters. Offsetting NIM headwinds, Alpine maintains a respectable level of revenue diversity, with noninterest income representing near 20% of revenues the past five years, which is largely comprised of more stable/recurring sources. Despite an idiosyncratic uptick in NPAs, which we believe does not present any material loss content as its a sizable residential real estate property in a desirable location, credit quality remains a strength with negligible NCOs, which has been supported by minimal exposure to vulnerable lending segments as well as management’s disciplined underwriting. With the potential for a weakening credit environment, we believe that Alpine is well situated given its lower level of investor CRE (194% of total risk-based capital as of 1Q24), notably, a minimal amount of office exposure (5% of loans including owner-occupied), and solid reserve position. The company has steadily rebuilt risk-based capital metrics with CET1 at 11.9% as of 1Q24, though we note that TCE remains below peers given the larger investment securities portfolio representing ~27% of total assets, which, as anticipated, results in a higher level of negative AOCI.

Rating Sensitivities

An upgrade is not likely over the medium term, though continued market share gains and geographic expansion paired with stronger-than-peer profitability/capital and continued credit outperformance could result in positive rating momentum over the longer term. Furthermore, a rating downgrade is not expected, though asset quality deterioration, declines in capital metrics beyond peers, or substantial degradation in the funding profile that results in continued NIM headwinds could negatively impact ratings.

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Methodologies