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 strong and historically durable funding profile that reflects a lower-cost, less price sensitive deposit base, a low loan-to-deposit ratio (85% as of 1Q23), and ample on- and off- balance sheet liquidity capacity relative to many peers. With respect to net deposit flows, the company’s 1Q23 period-end deposits were up 2% sequentially, reflecting some seasonality, which appeared consistent with prior years. Similar to most peers, a slight shift in deposit mix reflected some outflows of NIB deposits and increase in CDs. However, reinforced by comparatively higher levels of NIB deposits (35% as of 1Q23), very granular deposit relationships, and solid deposit market share within its large retail footprint, total deposit cost remained attractively low (0.47% in 1Q23). Uninsured deposits less collateralized deposits represented a manageable 22% of total deposits as of 1Q23, with secondary and contingency liquidity totaling ~$3.0 billion (including ~$1.2 billion of unencumbered on-balance sheet liquidity) providing an estimated coverage ratio of ~150%. The ratings also reflect the company’s favorable long term, through the cycle credit quality performance, underpinned by disciplined underwriting, appropriate risk-based pricing, granular loan portfolios, minimal CRE concentration, and relatively conservative internal policy limits. While charge-offs have been modestly higher than some peers in recent quarters, largely stemming from a small legacy consumer finance portfolio that is in runoff, risk-adjusted margin from that asset class is substantial, providing sufficient offset. With that said, we expect overall losses to trend up to normalized levels at some point in the foreseeable future with the Fed’s aggressive quantitative tightening activities compounding ongoing macroeconomic uncertainty. However, we consider total loss absorption capacity as solid with reserve coverage and capital protection levels tracking above peer averages. Regulatory capital has been prudently managed, with the CET1 ratio (12.3% at 1Q23) tracking 70 bps above the average of the rating category in 1Q23. Upon the expected close of the Salisbury Bancorp Inc. ("Salisbury") transaction (late 2Q23/early 3Q23), taking into consideration meaningful interest rate marks within both the loan and securities portfolios, the CET1 ratio is estimated to edge down to a still adequate, lower 11% range. Internal capital generation has been solid and fairly consistent over time, reinforced by an earnings profile that benefits from a coveted lower-cost funding profile and above peer revenue diversification (noninterest income >30% of total revenues or >1.20% of average assets), with several durable and high scale fee verticals that are largely uncorrelated to lending activities.

Rating Sensitivities

Sustaining comparatively consistent profitability through an economic downturn while maintaining stable credit quality measures in line or better than normalized levels, and managing regulatory capital ratios above the peer average could facilitate positive rating momentum. Additionally, further maturity of and depth in non-legacy markets, including successful integration of the Salisbury transaction, 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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Methodologies

Financial Institutions: Bank & Bank Holding Company Global Rating Methodology

ESG Global Rating Methodology

Disclosures

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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