Q3 2022 NBT Bancorp Inc Earnings Call

October 26, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Yeah.

Oh.

Good day, everyone and welcome to the MBT Bancorp third quarter 2022 financial results Conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC's regulation FD corresponding presentation slides can be found on the company's website at N V T Bancorp Dot com.

Before the call begins in <unk> management would like to remind listeners that as noted on slide two today's presentation may contain forward looking statements as defined by the Securities and Exchange Commission actual results may differ from those projected.

In addition, certain non G. A a P measures will be discussed reconciliations for these numbers are contained within the appendix of today's presentation. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time as a reminder, this call is being recorded I would now like to turn the conference over to <unk>.

<unk>, President and CEO , John <unk> Junior for his opening remarks, Mr. Watt. Please begin.

Thank you Todd and good morning, and thank you for participating in this earnings call covering MPT Bancorp's third quarter 2022 results.

Joining me this morning are <unk>, Chief Financial Officer, Scott, Kingsley, and our Chief Accounting Officer.

Yes.

And an interest rate environment that is volatile and where economic.

Macroeconomic conditions are constantly changing we are extremely pleased with our results for the third quarter of 2022, including earnings per share of <unk> 90.

Return on average assets at one 3% and return on average tangible common equity landing up 17, 1%.

Let me take a moment to highlight activity in our business and in the markets we serve.

We are excited to be in a position to support the commercial retail banking and other financial service needs of the Central New York market as Micron technology makes a transformational investment in this region.

The announcement earlier this month that micron will invest as much as $100 billion over the next 20 years to boost production of memory chips represents the largest private investment in New York State history.

The new upstate factory will create tens of thousands of jobs.

Our franchise is uniquely positioned to play a role in the growth that is being created in the upstate New York Chip corridor running through our core markets from greater Syracuse to the Mohawk Valley in the capital District.

Globalfoundries will speed and now micron all engaged in chip fabrication have and will continue to generate growth.

We are working hard to support our customers and the communities, we serve who will be the beneficiaries of that anticipated growth.

As you will hear from Scott later. This morning, we are actively and favorably managing our cost of deposits and cost of funds generally while maintaining high levels of liquidity to fund further loan growth.

We continue to enjoy success in our lending businesses with annualized loan growth of 9% through Q3.

It's clear to us that our commercial and small business customers continue to successfully navigate the challenging operating environment in the face of supply chain issues tight labor markets and inflation.

Our residential solar lending business had a strong quarter driven in part by the extension and increase in federal tax credits through the inflation reduction Act passed in early August .

Our fee based businesses reported solid results despite headwinds in the fixed income and equity markets.

Although we are very mindful that the forward environment is likely to be volatile we continue to observe a strong consumer.

Balances in personal checking accounts have held steady in the quarter and credit quality in the consumer loan portfolio is very healthy.

Delinquency across all consumer loan categories as well below pre pandemic levels.

As we head into the last quarter of 2022, we are well positioned with strong liquidity and capital levels and a diversified business mix highly effective risk management practices and a team of experienced professionals.

So Scott I'll turn to you for more detail on our performance in the third quarter and after Scott's remarks, we will take your questions. Thank you John and good morning, everyone turning to the results overview on page four of our earnings presentation. Our third quarter earnings per share were <unk> 90, which was up <unk> <unk> from the <unk> 86 a share.

<unk> in the third quarter of 2021, and two cents a share higher than the linked second quarter of 2022. These results were achieved despite a $2 $5 million decline in PPP income recognition compared to the third quarter of last year or <unk>.

And at $1.0 million decline in PPP income from the second quarter of 2022 or two cents a share.

The improvement in net interest income over the two comparative quarters was the result of solid organic loan growth incremental deployment of a portion of our liquidity into investment securities. The continuation of historically low funding cost.

And.

Continue to I'm, sorry, and continued increases in the federal reserve's targeted fed funds rate, we recorded a loan loss provision expense of $4 5 million in the third quarter compared to a provision benefit of $3 3 million in the third quarter of 2021 or <unk> 14 per share swing.

Net charge offs in the third quarter were $1 3 million or seven basis points of loans compared to <unk> 11 basis points of loans in the third quarter of 2021, and four basis points of net charge offs in the linked second quarter.

Our reserve coverage increased slightly to $1 two 2% of loans from one to zero percent at the end of June which provided for loan growth and some deterioration in economic forecasts.

The next slide page five shows trends in outstanding loans on a core basis, excluding PPP loans were up $141 million for the quarter and included growth in both our consumer and commercial portfolios.

Loan yields were up 25 basis points from the second quarter of 2022 reflective of higher yields on our variable rate portfolios as well as new hire new volume rates.

Our total loan portfolio of nearly $8 billion remains very well diversified and it's evenly balanced between consumer and commercial outstandings.

Moving to the slide on deposits, we were down $110 million or one 1% from the end of the second quarter. During the quarter. We also introduced a short term treasury product designed specifically for certain customers excess liquidity that resulted in nearly $100 million of deposits moving off.

Our balance sheet.

Our quarterly cost of total deposits increased to nine basis points compared to seven basis points in the linked second quarter interest bearing deposits moved up from 11 basis points to 14.

The next slide looks at detailed changes in our net interest income and margin net interest income increased $16 $8 million as compared to the third quarter of last year and was up $6 $9 million from the second quarter of 2022 reflective of higher yields on earning assets reported third quarter net interest.

<unk> was $3 five 1% up 30 basis points from the linked second quarter, and 63 basis points higher than the third quarter of 2021.

Looking forward with interest rates expected to continue to rise the yields on our variable rate, earning assets are expected to continue to move higher. We also expect to reinvest our loan and securities portfolio cash flows at levels above our current blended portfolio yields.

We believe our deposit funding profile as best in class, we would expect increased levels of deposit beta in the fourth quarter and going forward our.

Our balance sheet still continues to be asset sensitive and as such we would expect to see incremental opportunities for additional core margin improvement for at least the next couple of quarters.

The trends in noninterest income are summarized on page eight excluding securities gains and losses, our fee income was down 8% from the third quarter of 2021 to $37 3 million and lower by $4 $9 million from the linked second quarter.

Broadly non spread revenue was 28% of our total revenue in the third quarter of 2022 and remains a key strength and the value driver for MBT.

Our retirement plan administration wealth management and insurance agency businesses reported year over year revenue increases driven by productive organic growth and higher activity based fees.

Comparisons to the linked second quarter were net lower principally reflective of the inherent headwinds of declining equity market valuations card services income decreased $3 $4 million from the third quarter of last year and $4 $1 million from the linked second quarter, driven by the bank being subject to the provisions of the <unk>.

An amendment to the Dodd Frank Act beginning in the third quarter, which caps are per transaction compensatory opportunity for debit card interchange activities.

Turning now to noninterest expense, our total operating expenses were $76 $7 million for the quarter, which was $3 8 million or five 2% above the third quarter of 2021.

Salaries and employee benefit costs of $48 $4 million were up nine 5% over the prior year and included merit related salary increases as well are higher as well as higher performance based incentive compensation accruals.

Total operating expenses were also $575000 higher than the linked second quarter of 2022 reflective of one additional day of payroll.

We would expect core operating expenses to drift modestly upward over the next several quarters as we continue our efforts to fill a higher than historical level of open positions in support of our customer engagement and growth objectives. We would also anticipate somewhat higher than historical levels of merit based compensation increases in early 2023.

In addition to investing in our people, we expect to continue to invest in technology related applications and tools in order to advance our customer facing and processing infrastructures.

The next slide we provide an overview of key asset quality metrics a walk forward of our loan loss reserve changes is also available in the appendix of the presentation as I previously mentioned net charge offs were seven basis points of loans in the third quarter of 2022 compared to four basis points in the prior quarter, both NPL and NPA <expletive>.

Client again this quarter, we are continuing to benefit from our conservative underwriting and have continued to experience higher than historical levels of recoveries.

As I wrap up prepared remarks, a couple of clothing, a couple of closing thoughts. We started 2022 on strong footing and we are pleased with the fundamental results achieved improving net interest income solid results from our recurring fee income lines and exceptional credit quality outcomes have more than offset higher levels of noninterest expense.

Which has allowed for productive gains in operating leverage our capital accumulation results over the past several quarters continue to put us in an enviable position as we consider growth opportunities for the balance of 2022 and beyond.

With that we're happy to answer any questions. You may have at this time Tanya.

Certainly.

If anyone with a question Ken Press Star one one on your Touchtone telephone.

One moment, while we compile our Q&A roster.

And our first question will come from Alex toward all of Piper Sandler.

One moment.

And Alex your line is open.

Good morning, guys.

Good morning, Alex.

I wanted to start with some of your comments on the Micron investment, which I saw a couple of weeks ago and.

It was kind of curious about I'm glad you brought it up but it seems like $100 billion is a pretty meaningful investment in the Syracuse area can you just talk a little bit about sort of.

Maybe how that could play out in terms of.

Additional projects that are being done and then sort of what what kind of infrastructure might actually need to be brought in or built in terms of housing and other things that.

It kind of just provide all those jobs that you alluded to and then maybe just kind of bring it back home to us and just talk about sort of your positioning.

In that market.

And and how and how you guys are in fact positioned well to benefit from it.

So thanks for that question and we are excited about it as as the whole geography transformational announcement, it's a transformational commitment.

Those of you who follow <unk> know that we are at our best when we're playing a long game and this is a long game that we intend to be involved in for a long time.

Couple of facts about around what is going to happen here $100 billion investment in four facilities on a campus in the town of claim North of Syracuse, We have a branch network that is ideally positioned in and around Syracuse, and particularly north Syracuse up to US we go cow.

Johnny.

It will be there to serve the additional workforce and the additional population that is projected to grow. There. Initially 9000 jobs are likely to be created on the site over the next 20 years.

Along with that is a projected 40000 indirect jobs to support the supply chain construction.

And other support necessary to.

In our region, a large and sophisticated manufacturing operation like that one.

We understand New York plans to spend $200 million on road and infrastructure improvements.

Our sweet spot we have in our portfolio.

Contractors, who do that work all day long every day roadwork sewer work.

Who also are involved in setting up the electric network. So.

We intend to be there to support them. It looks like we will see airport expansion.

Micron in New York State will also make 500 million.

Community benefit investment over time up at Syracuse University, another $10 million investment.

It's semi conductor program.

All of that very significant and material.

You hit on one of the areas, where I think we.

Can participate and plays to our strength the residential.

<unk> product.

Geography, where the acceleration of homebuilding, both multifamily and individual homes is likely to take off immediately were already aware of land speculation around the site here that.

We know developers are positioning themselves for that growth.

We think that on the business banking side, there are lots of opportunities for support businesses here as this project takes off we're also committed to the community.

Have a team looking at how we can help to develop.

The workforce, that's going to be necessary to.

Populate this plant and related businesses.

We have seen our executives who are plugged in at the economic development level mine only in Central New York, but in the Mohawk Valley and down in the capital District, who also gives us visibility into what the needs are so.

Lots of layers, there are lots of opportunity.

Lots of positive momentum for a geography that has experienced sluggish growth over the last 25 or 30 years.

Thanks, that's a great comprehensive answer there.

Towards the tracking that progress.

Seeing how it plays out.

Our next question Scott I was hoping that you know.

One of the questions that a lot of banks are getting is just in terms of liquidity and you've kind of touched on a little bit but with your securities portfolio and your cash position can you just talk a little bit about cash flows that are coming off the securities portfolio over the next several quarters.

I guess early 'twenty three 'twenty four.

That will help to support the loan growth.

You may soon.

Sure Alex happy too.

As a reminder, most of our investment portfolio is cash flowing instruments. So maury.

Mortgage backed securities.

Moes.

That is paying down on a monthly basis.

And I think our anticipation is monthly cash flows off the investment portfolio to the tune of about $20 million.

To a certain extent.

Just based on where.

Underlying yields are and some of those instruments, we wouldn't expect much prepayment activity or slower than historical terms, but I think we're pretty comfortable with 20%. So to your point over a 12 months period a quarter billion dollars of.

Cash flow opportunity realm.

Relative to our liquidity at the end of the third quarter, we were still a very modest seller of funds to the federal reserve at quarter end.

We had some days, where we were a small borrower funds and we've had some days in October where we been a small borrower funds, but we're managing that very tactically.

I think we know the spots in our deposit portfolio.

We probably will have to participate in some slightly higher yields for our customers now that we have been through 300 basis points and if you are prognosticating 375 by the middle of next week.

It's all having very fast Alex as you know seven months to get to a $3 75.

Don't be anybody on any call that has experience doing that.

That's just that's a new phenomenon.

But so do we think that in the next 100 up for the next $1 25 to $1 50 up our deposit beta will be larger than the one we've reported to date, we absolutely do.

How fast that needs to go we have a very granular deposit base and not only do we take a lot of solace in the size of $35, 37% noninterest bearing deposits, but we really like our interest bearing checking and interest bearing savings accounts that are priced on average below <unk>.

Five basis points, so they need to move up a little bit they probably do then they need to move up to.

It's likely wholesale borrowing rates will look like absolutely not.

So that's kind of how we're framing that Alex and Thats why we probably think we got a little bit of margin improvement in the fourth quarter and maybe that spills into next year's first quarter and then obviously too early to prognosticate what happens on the funding side for periods after that.

Great. Thanks, Thats my questions for now.

Thank you Alex.

One moment.

And our next question will come from Chris O'connell of K BW, Chris Your line is open.

Good morning.

I think I missed it in the opening comments, but did you give but just the exact breakdown of what the Pvp and excess liquidity impact was versus last quarter.

Yes, so Chris PPP for the quarter was only half a cent per share we're basically through that.

And that compared to I think $1 million of PPP income in the second quarter, and I think $2 5 million in.

In the third quarter of 'twenty, one so that's basically I think we're at 99% forgiveness <unk> extinguishment of our instruments were down to under $10 million of.

PPP loans still on the balance sheet.

To your question.

We had a much lower level of.

Cash equivalents or overnight and short term investments, mostly sitting at the fed than we did in the second quarter.

So that was probably six to eight basis points of the margin change.

But as you can probably appreciate that as the fed was raising rates to the extent that we had money at the fed it was having a higher yield.

Versus the no yield activity, we had early in the beginning of the year.

So from a practical standpoint, as I just mentioned to Alex.

Think of our balance sheet.

It's fairly neutral today relative to excess liquidity and we think just natural cash flows off the loan portfolio and the investment portfolio, probably keep us in that straddled neutral stage.

For at least a quarter or two.

Chris did I hit that.

Just a follow up yes, no that's great.

And then just on the deposit flows this quarter and kind of looking ahead at the overall size of the balance sheet going forward.

You mentioned the treasury.

Linked product.

And then.

I think they were supposed to be some muni inflows seasonal coming in this quarter just what's the outlook I guess on what Youre seeing from your customers there and.

How much deposit growth.

Would be your target going forward and I guess, what are you willing to.

To pay up on that.

So lot to that question. So let me just let me see if I can take that in order.

So I would tell you that in terms of in terms of our deposit base call. It $10 billion as of the end of September .

Of which about $7 billion resides in noninterest checking low interest checking and low interest savings. So we're actively managing the other three three.

$3 billion.

And those include institutional our larger commercial customers that historically have been a little bit more interest rate sensitive than the broad based retail customer base.

They are.

<unk> of retail and small business banking money market funds, we probably think we need to push that up a little bit to acknowledge the fact that we will have benefited on the asset side.

Between 300 400 basis points very shortly.

So we expect some there.

We have a.

A little over $1 billion municipal portfolio. Your observation is correct. The third quarter for US is normally a municipal inflow quarter, we were closer to neutral this year.

And why I point that out is that I think a lot of the municipalities have also found alternative money market consolidators out there.

Essentially the brokered world that allows them to keep their money in our money market yield.

Thats may be north of 2% or maybe even a little bit higher and we clearly don't have a product on our balance sheet today that gets close to that what's important for us is to continue to keep the core accounts core checking core operating accounts.

And if the customer takes some of their excess liquidity and takes it off the balance sheet for a handful of months so be it we'll have some optionality with those customers.

Similar to what we did with.

Some of our commercial customers on this.

Short term ladder Treasury instrument. It was the right thing to do for the customer to give them an opportunity for a higher yield we just didn't have that instrument on our balance sheet today.

When we get a little bit later into the cycle. Maybe early next year, maybe we find that that sexually net productive for us to bring some of that back on do we think we'll bring it back on it current short term treasury yields probably not.

But someplace between where we are today and that number is not out of the question but.

But more than anything Chris we were looking to create opportunities for us to own the optionality.

And I think Thats, an important feature going forward, we've had very little in loss customer outcomes. We may have had some excess balances leave our balance sheet.

The last thing I'll mention is some of our customers are recognizing that they can use their existing liquidity to actually deleverage a little bit and we.

We had a handful of decent size instances of that in the second quarter or even the third quarter I'm sorry.

So there's a little bit of that going on to customers figuring out that there is a little bit more there.

They can actually earn theres, a net benefit that's higher by just using up some of their excess liquidity on leverage so kind of a combination of lots of moving pieces, Chris but again, we're completely engaged from a tactical standpoint on all fronts there.

Got it yeah. That's that's.

Really helpful. I appreciate the color there.

And then last one for me.

Just on the on the fee items.

I was surprised pleasantly that wealth.

Wealth management held up really well this quarter given the broader market declines.

Then.

Little bit of pressure on the.

Harman plan I'm sure from similar items.

And it looks like there had been kind of came in line with expectations here, but maybe just given all the moving parts. If you could provide a little bit of an update on those those items Chris.

Chris happy to on that so before we accept your.

Your nice comments relative to wealth management holding up the third quarter for US does have has some activity based billing in it services that we provide that we built for once a year in our third quarter to the tune of about three years or $400000. So we were probably closer to neutral for the quarter, which to your point given the headwinds in the equity market is a pretty good outcome.

It means we had some decent new asset generation, new account generation that offset some of that headwind.

The retirement plan administration side, we have actually had some activity based.

Income this year.

Planned document changes and stuff that tends to happen every five to six years in the cycle too.

2022 happens to be a year of that cycle. So some of our decline in the third quarter was just that we had more robust activity in the second quarter.

About 40% to 45% of the revenues of the retirement plan administration space do have market based influence attached to them. So if the first $50 to 55% are our our billing of our revenue opportunity is.

At billing for Sensus Asexually participation in the plan. The other 40% 45% is based on market yields so were getting X per participant plus basis points on assets.

So I mean I expect that you'll.

Typically see the market our billing cycle runs probably a quarter behind that so our billings for the fourth quarter, probably based on <unk>.

Broad S&P outcomes that ended the third quarter.

So there might be a little bit more pressure on that going into the fourth quarter, but again, we're getting reasonable growth there people are adding new accounts.

And then on the.

On the banking side of fees.

What we what.

We communicated some time and at the end of the second quarters that we did make some adjustments to our overdraft non sufficient funds programs, which we think probably cost us a cent per share per quarter. So.

So we experienced a little bit of that in the third quarter.

And then our estimate relative to the debit interchange outcome was pretty close we were saying somewhere between 15 and $15 5 million, we're probably still pretty close to that number of transactions has actually gone up but obviously.

Our opportunity with more than cut in half.

Really helpful. Appreciate it thanks for taking my questions.

Thanks, Chris.

And as a reminder, if you have a question. Please press star one on your Touchtone telephone.

Again for any questions. Please press star one one on your telephone.

I would now like to turn the call back to Mr. <unk> for his closing remarks.

Thank you Tanya and thank.

Thank you all for participating in our call.

For all of your great questions and we look forward next quarter or two.

Bringing you.

Up to speed on our.

<unk> full year end results.

And.

With that said.

Thank you and have a great day.

Thanks, everybody.

Thank you Mr. Why this concludes our program you may disconnect have a great day.

The conference will begin shortly.

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[music].

<unk> slides can be found on the company's website at MBT Bancorp Dot com.

Before the call begins <unk> management would like to remind listeners that as noted on slide two today's presentation may contain forward looking statements as defined by the Securities and Exchange Commission actual results may differ from those projected.

Additionally, certain non G. AAP measures will be discussed reconciliations for these numbers are contained within the appendix of today's presentation. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time as a reminder, this call is being recorded I would now like to turn the conference over to <unk>.

<unk>, President and CEO , John H <unk> junior for his opening remarks, Mr. <unk>. Please begin.

Thank you Tania and good morning, and thank you for participating in this earnings call covering MBT Banc Corp's third quarter 2022 results.

Joining me. This morning are <unk>, Chief Financial Officer, Scott, Kingsley, and our Chief accounting officer and that Burns.

And an interest rate environment that is volatile and where economic.

Macroeconomic conditions are constantly changing we are extremely pleased with our results for the third quarter of 2022, including earnings per share of <unk> 90.

Return on average assets at one 3% and return on average tangible common equity landing at 17, 1%.

Okay.

Let me take a moment to highlight activity in our business and in the markets we serve.

The new upstate factory will create tens of thousands of jobs.

Globalfoundries will speed and now micron all engaged in chip fabrication have and will continue to generate growth.

We are working hard to support our customers and the communities, we serve who will be the beneficiaries of that anticipated growth.

We continue to enjoy success in our lending businesses with annualized loan growth of 9% through Q3.

Yes.

Our residential solar lending business had a strong quarter driven in part by the extension and increase in federal tax credits through the inflation reduction Act passed in early August .

Our fee based businesses reported solid results despite headwinds in the fixed income and equity markets.

Although we are very mindful that the forward environment is likely to be volatile we continue to observe a strong consumer.

Balances in personal checking accounts have held steady in the quarter and credit quality in the consumer loan portfolio is very healthy.

Delinquency across all consumer loan categories as well below pre pandemic levels.

So Scott I'll turn to you for more detail on our performance in the third quarter. After Scott's remarks, we will take your questions.

Thank you John and good morning, everyone turning to the results overview on page four of our earnings presentation. Our third quarter earnings per share were <unk> 90, which was up <unk> <unk> from the 86, a share reported in the third quarter of 2021, and two cents a share higher than the linked second quarter of 2022. These results were achieved despite a <unk>.

$2 $5 million decline in PPP income recognition compared to the third quarter of last year or <unk>.

At $1.0 million decline in PPP income from the second quarter of 2022 or two cents a share the.

And.

<unk> I'm sorry in continued increases in the federal reserve's targeted fed funds rate, we recorded a loan loss provision expense of $4 5 billion in the third quarter compared to a provision benefit of $3 $3 million in the third quarter of 2021 or <unk> 14 per share swing.

Net charge offs in the third quarter were $1 3 million or seven basis points of loans compared to 11 basis points of loans in the third quarter of 2021, and four basis points of net charge offs in the linked second quarter.

Our reserve coverage increased slightly to one 2% of loans from $1. Two zero percent at the end of June which provided for loan growth and some deterioration in economic forecasts.

Loan yields were up 25 basis points from the second quarter of 2022 reflective of higher yields on our variable rate portfolios as well as new hire new volume rates.

Our total loan portfolio of nearly $8 billion remains very well diversified and it's evenly balanced between consumer and commercial outstandings.

The balance sheet.

Our quarterly cost of total deposits increased to nine basis points compared to seven basis points in the linked second quarter interest bearing deposits moved up from 11 basis points to 14.

<unk> was $3 five 1% up 30 basis points from the linked second quarter, and 63 basis points higher than the third quarter of 2021.

Although we believe our deposit funding profile as best in class, we would expect increased levels of deposit beta in the fourth quarter and going forward our.

Our balance sheet still continues to be asset sensitive and as such we would expect to see incremental opportunities for additional core margin improvement for at least the next couple of quarters.

28% of our total revenue in the third quarter of 2022 and remains a key strength and value driver for MBT.

Our retirement plan administration wealth management and insurance agency businesses reported year over year revenue increases driven by productive organic growth and higher activity based fees.

An amendment to the Dodd Frank Act beginning in the third quarter, which caps are per transaction compensatory opportunity for debit card interchange activities.

Turning now to noninterest expense, our total operating expenses were $76 $7 million for the quarter, which was $3 8 million or five 2% above the third quarter of 2021.

Total operating expenses were also $575000 higher than the linked second quarter of 2022 reflective of one additional day of payroll.

In addition to investing in our people, we expect to continue to invest in technology related applications and tools in order to advance our customer facing and processing infrastructures.

On the next slide we provide an overview of key asset quality metrics a walk forward of our loan loss reserve changes is also available in the appendix to the presentation as I previously mentioned net charge offs were seven basis points of loans in the third quarter of 2022 compared to four basis points in the prior quarter, both NPL and NPA.

<unk> declined again this quarter, we are continuing to benefit from our conservative underwriting and have continued to experience higher than historical levels of recoveries.

As I wrap up prepared remarks, a couple of clothing, a couple of closing thoughts we starting 2022 on strong footing and we are pleased with the fundamental results achieved improving net interest income solid results from our recurring fee income lines and exceptional credit quality outcomes have more than offset higher levels of noninterest expense.

<unk>, which has allowed for productive gains in operating leverage our capital accumulation results over the past several quarters continue to put us in an enviable position as we consider growth opportunities for the balance of 2022 and beyond.

With that we're happy to answer any questions. You may have at this time Tanya.

Certainly.

Yeah.

If anyone with a question Ken Press Star one one on your Touchtone telephone.

One moment, while we compile our Q&A roster.

And our first question will come from Alex we're at all.

Sandler.

One moment.

And Alex your line is open.

Good morning, guys.

Good morning, Alex.

I wanted to start with some of your comments on the Micron investment, which I saw a couple of weeks ago and.

It was kind of curious about I'm glad you brought it up but it seems like $100 billion is a pretty meaningful investment in the Syracuse area can you just talk a little bit about sort of.

Maybe how that could play out in terms of.

This all projects that are being done and then sort of what what kind of infrastructure might actually need to be brought in or built in terms of housing and other things that.

Kind of just provide all of those jobs that you alluded to and then maybe just kind of bring it back home to us and just talk about sort of your positioning.

In that market.

And and how and how you guys are in fact positioned well to benefit from it.

So thanks for that question and we are excited about it as is the whole geography.

Transfer <unk>.

<unk> announcement, it's a transformational commitment.

Those of you who follow <unk> know that we are at our best when we're playing a long game and this is a long game that we intend to be involved in for a long time a.

Couple of facts about around what is going to happen here $100 billion investment in <unk> facilities on a campus in the town of Clay North of Syracuse, We have a branch network that is ideally positioned in and around Syracuse, and particularly north Syracuse up to US we go cow.

Any.

We'll be there to serve the additional workforce and the additional population that is projected to grow. There. Initially 9000 jobs are likely to be created on the site over the next 20 years.

Along with that is a projected 40000 indirect jobs to support the supply chain construction.

And other support necessary to.

In our region, a large and sophisticated manufacturing operation like that one.

We understand New York plans to spend $200 million on road and infrastructure improvements.

Our sweet spot we have in our portfolio.

Contractors, who do that work all day long every day roadwork sewer work.

Who also are involved in setting up the electric network. So.

We intend to be there to support them. It looks like we will see airport expansion.

Micron on New York State will also make 500 million.

Community benefit investment over time up at Syracuse University, another $10 million investment.

If semi conductor program.

All of that very significant and material.

You hit on one of the areas, where I think we.

Can participate and plays to our strength in residential mortgage product.

Geography, where the acceleration of homebuilding, both multifamily and individual homes is likely to take off immediately were already aware of land speculation around the site here that.

But we know developers are positioning themselves for that growth.

We think that on the business banking side, there are lots of opportunities for support businesses here as this project takes off we're also committed to the community.

Have a team looking at how we can help to develop.

The workforce, that's going to be necessary to.

Populate this plant and related businesses and.

We have seen our executives who are plugged in at the economic development level not only in Central New York, but in the Mohawk Valley and down in the capital District, who will also give us visibility into what the needs are so.

Lots of layers, there are lots of opportunity.

Lots of positive momentum for a geography that has experienced sluggish growth over the last 25 or 30 years.

Thanks, that's a great comprehensive answer there.

Towards the tracking that progress.

Seeing how it plays out.

Our next question Scott I was hoping.

One other questions that a lot of banks are getting is just in terms of liquidity and you've kind of touched on a little bit but with your securities portfolio and your cash position can you just talk a little bit about cash flows that are coming off the securities portfolio over the next several quarters.

No.

I guess early 'twenty three 'twenty four that.

That will help to support the loan growth.

That you made.

Sure Alex happy too.

As a reminder, most of our investment portfolio is cash flowing instruments, so mortgage backed securities Cmos.

Stuff that is paying down on a monthly basis.

And I think our anticipation is monthly cash flows off the investment portfolio to the tune of about $20 million.

To the to a certain extent just.

Just based on where.

Cash flow opportunity realm.

Relative to our liquidity at the end of the third quarter, we were still a very modest seller of funds to the federal reserve at quarter end, we had some days, where we were a small borrower funds and we've had some days in October where we been a small borrower funds, but we're managing that very tactically.

I think we know the spots in our deposit portfolio.

Probably we will have to participate in some slightly higher yields for our customers now that we have been through 300 basis points and if you are prognosticating 375 by the middle of next week.

It's all have been very fast Alex as you know seven months to get to a $3 75.

I'll be anybody on any call that has experience doing that.

That's just that's a new phenomenon.

But so do we think that in the next 100 up for the next $1 25 to 150 up our deposit beta will be larger than the one we've reported to date, we absolutely do.

How fast that needs to go we have a very granular deposit base and not only do we take a lot of solid and the size of 35%, 37% noninterest bearing deposits, but we really like our interest bearing checking and interest bearing savings accounts that are priced on average.

Below five basis points, so they need to move up a little bit they probably do then they need to move up to what is likely wholesale borrowing rates will look like absolutely not.

So that's kind of how we're framing that Alex and Thats why we probably think we get a little bit of margin improvement in the fourth quarter, maybe that spills into next year's first quarter and then obviously too early to prognosticate what happens on the funding side for periods after that.

Great. Thanks, Thats all my questions for now.

Thank you Alex.

One moment.

And our next question will come from Chris O'connell of K VW, Chris Your line is open.

Good morning.

I think I missed it in the opening comments, but did you give us just the exact breakdown of what the Pvp.

Excess liquidity impact was versus last quarter.

Yes, so Chris a PPP for the quarter was only half a cent per share.

We're basically through that.

And that compared to I think a $1 million of PPP income in the second quarter, and I think $2 5 million in the third quarter of 'twenty. One. So that's basically I think we're at 99% forgiveness indoor extinguishment of our instruments were down to under $10 million of PPP loans still on the balance sheet.

To your question.

We had a much lower level of.

Cash equivalents or overnight and short term investments, mostly sitting at the fed than we did in the second quarter.

So that was probably six to eight basis points of the margin change.

But as you can as you probably appreciate that as the fed was raising rates to the extent that we had money at the fed it was having a higher yield.

<unk> the no yield activity, we had early in the in the beginning of the year.

So from a practical standpoint, as I just mentioned to Alex.

Think of our balance sheet is as fairly neutral today relative to excess liquidity and we think just natural cash flows off the loan portfolio and the investment portfolio, probably keep us in that straddled neutral stage.

For at least a quarter or two.

Chris did I hit that.

Just a follow up.

No that's great.

And then just on the deposit flows this quarter and kind of looking ahead at the overall size of the balance sheet going forward.

You mentioned the treasury.

Linked product.

And then.

I think they were supposed to be some muni inflows seasonal coming in this quarter just what's the outlook I guess on what Youre seeing from your customers there and.

How much deposit growth.

Would be your target going forward.

I guess what are you willing to.

To pay up on that.

So lots and lots of that question. So let me let me see if I can take that in order.

So I would tell you that in terms of in terms of our deposit base call. It $10 billion as of the end of September .

Of which about $7 billion resides in noninterest checking low interest checking and low interest savings. So we're actively managing the other three the other.

$3 billion.

And those include institutional our larger commercial customers that historically have been a little bit more interest rate sensitive than the broad based retail customer base.

In terms of retail and small business banking money market funds, we probably think we need to push that up a little bit to acknowledge the fact that we will have benefited on the asset side.

300, 400 basis points very shortly.

We expect some there we have a.

Little over $1 billion municipal portfolio. Your observation is correct. The third quarter for US is normally a municipal inflow quarter, we were closer to neutral this year.

And why I point that out is that I think a lot of the municipalities have also found alternative money market consolidators out there.

Essentially the brokered world that allows them to keep their money in our money market yield that's.

Thats, maybe north of 2% or maybe even a little bit higher and we clearly don't have a product on our balance sheet today that that gets close to that what's important for us is to continue to keep the core accounts core checking core operating accounts.

And if the customer takes some of their excess liquidity and takes it off the balance sheet for a handful of months so be it we'll have some optionality with those customers.

Similar to what we did with.

Some of our commercial customers on this.

Short term ladder Treasury instrument. It was the right thing to do for the customer to give them an opportunity for a higher yield we just didn't have that instrument on our balance sheet today.

But someplace between where we are today and that number is not out of the question.

But more than anything Chris we were looking to create opportunities for us to own the optionality.

And I think Thats, an important feature going forward, we've had very little in loss customer outcomes.

We may have had some excess balances leave our balance sheet and.

The last thing I'll mention is some of our customers are recognizing that they can use their existing liquidity to actually deleverage a little bit.

We had a handful of decent size instances of that in the second quarter or even the third quarter I'm sorry.

So there's a little bit of that going on in the customers figuring out that there is a little bit more there.

Got it yeah. That's that's.

Really helpful. I appreciate the color there.

And then last one for me.

Just on the on the fee items.

I was surprised pleasantly that wealth.

Wealth management held up really well this quarter given the broader market declines.

Then.

Little bit of pressure on the.

Assignment plan I'm sure from similar items.

And it looks like there had been kind of came in line with expectations here, but maybe just given all the moving parts. If you could provide a little bit of an update on those those items Chris.

Chris happy to on that so before we accept your.

Your nice comments relative to wealth management holding up the third quarter for US does have had some activity based billing in it services that we provide that we built for once a year in our third quarter to the tune of about three years or $400000. So we were probably closer to neutral for the quarter, which to your point given the headwinds in the equity market is a pretty good outcome.

It means we had some decent new asset generation, new account generation that offset some of that headwind.

The retirement plan administration side, we have actually had some activity based.

Income this year.

Planned document changes and stuff that tends to happen every five to six years in this cycle too.

2022 happens to be a year of that cycle. So some of our decline in the third quarter was just that we had more robust activity in the second quarter.

At billing for Sensus Asexually participation in the plan. The other 40% 45% is based on market yield so were getting X per participant plus basis points on assets.

So I expect that.

You'll typically see the market our billing cycle runs probably a quarter behind that so our billings for the fourth quarter, probably is based on broad S&P outcomes that ended the third quarter. So there might be a little bit more pressure on that going into the fourth quarter, but again, we're getting reasonable growth. There people are adding new account.

<unk>.

And then on the.

On the banking side of fees.

What we what we communicated sometime at the end of the second quarters that we did make some adjustments to our overdraft non sufficient funds programs, which we think probably cost us a cent per share per quarter.

So we experienced a little bit of that in the third quarter.

And then our estimate relative to the debit interchange outcome was pretty close we were saying somewhere between $15 $15 5 million, we're probably still pretty close to that number of transactions has actually gone up but obviously.

Our opportunity with more than cut in half.

Really helpful. Appreciate it thanks for taking my questions.

Thanks, Chris.

And as a reminder, if you have a question. Please press star one on your Touchtone telephone.

Again for any questions. Please press star one one on your telephone.

I would now like to turn the call back to Mr. Watt for his closing remarks.

Thank you Tanya and thank you all for participating in our call.

For all of your great questions, we look forward the next quarter or two.

Bringing you.

Up to speed on our <unk>.

Full year end results.

And.

With that said.

Thank you and have a great day.

Thanks, everybody.

Thank you Mr. Why this concludes our program you may disconnect have a great day.

Q3 2022 NBT Bancorp Inc Earnings Call

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