Q1 2023 NBT Bancorp Inc. Earnings Call
Speaker 1: You you.
Speaker 2: Good day, everyone. Welcome to the NBT Bank Corp. First quarter to 2023, Finanza Results Conference Call. This call is being recorded and has been made accessible to the public and accordance with the sex regulation F.T.
Speaker 2: Cars funding presentation slides can be found on the company's website at nbtankorps.com.
Speaker 2: Before the call begins, NBC's management would like to remind listeners that, as noted on slide 2, today's presentation may contain forward-looking statements as defined by the Security and Exchange Commission.
Speaker 2: Actual results may be heard from those presented.
Speaker 2: In addition, certain non- GAAP measures will be discussed. Reconcilations for those numbers are contained within the appendix out to these presentations.
Speaker 2: At this time, all participants are in a listen-only mode. Later, we will conduct a question-in-answer session. Instructions will follow at that time. As a reminder, this call is being recorded.
Speaker 2: I would now like to turn the conference over to NBC, back-door president, NCEO John H. Watt, Jr. for his opening remarks. Mr. Watt, please stick in.
Speaker 3: Thank you, Bella. Good morning and thank you all for participating in our earnings call covering MBT Bank Corps's first quarter, 2023 results.
Speaker 3: Joining me today are MBT's Chief Financial Officer Scott Kingsley, our Chief Accounting Officer Net for Herds and our Treasurer, Joe on Desco.
Speaker 3: In a volatile macro environment, we are pleased with our operating results for the first queue of 2023.
Speaker 3: including earnings per share of 88 cents.
Speaker 3: Return on average assets of 1.3% and return on average tangible common equity of 17.2% excluding merger expenses and securities losses.
Speaker 3: We drove 5% annualized loan growth with our commercial banking, business banking, residential solar and indirect auto businesses all contributing.
Speaker 3: In the markets we serve, it is clear to us that our customers are successfully navigating the challenging operating environment and we are on the ground helping them every day. Looking forward, loan pipelines across the platform are active, but are moderating.
Speaker 3: Credit quality remains strong across our commercial and consumer businesses. Non-performing assets are at all time lows.
Speaker 3: We are happy to report today that both total deposits and core deposits grew in Q1, driven in part by seasonal growth of municipal deposits.
Speaker 3: Scott will talk more about this growth and about the diversity and granularity of our deposit base that is the hallmark of our franchise. In addition, we enjoy access to significant and diverse liquidity sources and our capital levels are strong.
Speaker 3: We have provided detail on the accompanying slides.
Speaker 3: Our net interest margin did experience pressure in the first quarter due to repricing actions that positioned NBT to stay competitive in our markets. With that said,
Speaker 3: Relative to our peer group and the broad market are cycle to date deposit beta as of the end of March rose to a modest 12%.
Speaker 3: The work to support our customers in connection with the multi-year ramp-up of the New York chip corridor continues.
Speaker 3: In central New York, Micron is moving swiftly to complete the planning necessary to bring its fab plant out of the ground. In the Mohawk Valley, Wolf Speed has commenced work on the addition to its fab plant to support new contracts with the U.S. Department of Agriculture, the National Institute of Agriculture, and the National Institute of Agriculture.
Speaker 3: Jaguar and Mercedes-Benz for chips and EV vehicles.
Speaker 3: The economic growth up and down the chip corridor will continue to build over the next five years and beyond, and NBT is uniquely positioned to support that growth.
Speaker 3: During the quarter, we continue to execute on our long-term growth plans, and in particular, we are making progress towards our planned acquisition of Salisbury Bancorp.
Speaker 3: On April 12th, Salisbury shareholders voted to approve the merger with NBT.
Speaker 3: This is a significant and positive milestone.
Speaker 3: As we announced in December , we expect this transaction to close late in the second quarter, subject of course to regulatory approval.
Speaker 3: This month, NBT was named one of Forbes Best Banks for 2023. Of the U.S. Banks recognized by Forbes, NBT is the highest ranked bank based in New York State. During volatile times, our team excels in this designation.
Speaker 3: Scott, I'll turn over to you now to speak in greater detail about our financial performance in the first quarter. And following Scott's remarks, we will take your questions.
Speaker 3: Thank you, John , and good morning. Turning to the results overview page of our earnings presentation, our first quarter gap earnings per share were 78 cents and 88 cents per share, excluding 10 cents per share of combined acquisition expenses and securities losses.
Speaker 4: Excluding the impact of acquisition expenses and securities losses, first quarter results were two cents a share higher than the linked fourth quarter and three cents a share below the first quarter of last year.
Speaker 4: The 18% improvement in net interest income from the prior year first quarter was the result of solid organic loan growth and higher asset yields from the continued increases in the Fed funds rate.
Speaker 4: Our net interest margin in the first quarter of 2023 was 3.55%, which was up 60 basis points from the first quarter of 2022. We recorded a loan-loss provision expense of $3.9 million in the first quarter compared to $600,000 of provision in the first quarter of 2022.
Speaker 4: or a six cent per share difference.
Speaker 4: Our reserve coverage stood at 1.21% of loans at March 31st, compared to 1.24% at December 31st, 2022, and 1.18% at the end of March of last year.
Speaker 4: The next page in the next shows trends in outstanding loans.
Speaker 4: Total loans are up $114 million for the quarter or 1.4% and included growth in both our consumer and commercial portfolios. Lone yields were up 28 basis points from the fourth quarter of 2022, reflective of higher yields on our VeroVo rate portfolios, as well as higher new volume rates.
Speaker 4: Our total loan portfolio of $8.26 billion remains very well diversified and is evenly balanced between consumer and commercial outstanding.
Speaker 4: Total deposits of $9.68 million were up $185 million from the linked fourth quarter, but were down 7.5% from the end of the first quarter of 2022, which was a high point for us. The decrease in deposits from last year's first quarter was $8.68 million.
Speaker 4: managed by NVT.
Speaker 4: Our retention of core operating relationships has remained very high and we continue to successfully add new relationships in the first quarter.
Speaker 4: Although deposit balances have declined from early 2022, they are still 23 percent higher than the pre-pandemic first quarter of 2020.
Speaker 4: During the fourth quarter of last year, we shifted from an excess liquidity position to a net overnight borrowing position, which continued into the first quarter of this year.
Speaker 4: Our quarterly cost of total deposits increased to 47 basis points in Q1 compared to 17 basis points in the linked fourth quarter. Our total cost of funds increased from 37 basis points in the linked fourth quarter to 75 basis points in the first quarter of this year. In addition, our total cost of deposits for the month.
Speaker 4: of March were 62 basis points and total cost of funds were up to 88 basis points.
Speaker 4: We have also added a summary of our deposit mix by type which illustrates the diversification and granularity of our customer base. In addition, in the appendix to the presentation, we have provided a table of our available funding sources compared to estimated, uninsured and uncollateralized deposits.
Speaker 4: which provides a coverage ratio of 149% at quarter end.
Speaker 4: The next slide looks at the detailed changes in our net interest income in margin. First quarter net interest income was $4.7 million below the linked fourth quarter results, with a third of that decline related to two last days in the quarter, and the remaining remaining two thirds reflective of increases in funding costs moving up faster than improvements and earning asset yields.
Speaker 4: Although we believe our granular deposit funding profile remains a core strength, we would expect continued pressure on net interest margin results for at least the next couple of quarters.
Speaker 4: Our cycle-to-date deposit beta through the end of March has been 12% with total funding beta of 13%.
Speaker 4: Retaining and growing core deposits will continue to be a critical element of our ability to manage net interest margin results.
Speaker 4: The trends in non-interest income are summarized on the next page. Excluding securities losses, our fee income was up 6% from the linked fourth quarter to $36.4 million and was $6 million lower than the first quarter of 2022.
Speaker 4: Our Wealth Management Insurance and Retirement Plan Administration businesses experience seasonal growth and revenue generation from the fourth quarter.
Speaker 4: Card service's income was consistent with the linked fourth quarter, but declined $3.9 million from the first quarter of 2022, driven by the bank being subject to the debit interchange provisions of the Durban amendment to the Dodd-Frank deck, beginning in the third quarter of last year.
Speaker 4: Turning now to nine interest expense, our total operating expenses were $78.7 million for the quarter, which was $6.4 million or 9.2% above the first quarter of 2022, excluding merger-related expenses in the first quarter of this year.
Speaker 4: Total operating expenses were consistent with the linked fourth quarter of last year. Souries and employee benefit costs of $48.2 million were 1.9% higher than the linked fourth quarter due to seasonally higher payroll taxes, stock-based compensation expense, and merit pay increases which were effective in March.
Speaker 4: We'd expect core operating expenses to be relatively consistent over the next several quarters as each quarter of 2023 has the same number of payroll days.
Speaker 4: We expect to fill many of our open positions in support of our customer engagement and growth objectives, subsequent to the closing of our pending merger with Salisbury Bank Court.
Speaker 4: On the next slide we provide an overview key at the quality metrics. A walk forward of our loan loss reserve changes is also available in the appendix to the presentation.
Speaker 4: As I previously mentioned, net charge-offs were 19 basis points in the first quarter of 2023 compared to 18 basis points in the prior quarter.
Speaker 4: In the selected financial data summaries provided within the earnings release, we have summarized the components of quarterly net charge-ups by line of business. Consistent with the previous four quarters, first quarter net charge-ups were concentrated in our other unsecured consumer portfolios, which are in a planned runoff status.
Speaker 4: Both NPLs and NPAs declined again this quarter. Our allowance for loan losses to total non-performing loans reached 539% at the end of the first quarter.
Speaker 4: As I wrap up prepared remarks, some closing thoughts. We entered 2023, expecting to experience incremental pressure on funding costs, which started in the fourth quarter of last year. The additional market volatility and uncertainty that arose in early March accelerated those pressures and has continued.
Speaker 4: Positive results from our recurring fee income lines, stable credit quality outcomes, and diligent operating expense management allowed us to continue to report solid fundamental results in the first quarter, despite lower levels of that interest income.
Speaker 4: Our capital accumulation results over the past several quarters continue to put us in an envy both position as we consider growth opportunities for the remainder of 2023 and beyond. With that, we're happy to answer any questions you may have at this time. Bella? Thank you. Anyone with a question at this time can press tar 11.
Speaker 2: And just a correction, you may ask more than one question.
Speaker 2: And our first question comes from the line of Alex Taradol.
Speaker 5: I first of all, I was just wondering if you could just give us a little commentary on what NBT's experience in your various markets were to some of the reaction to some of the events in turmoil in the banking industry in the middle of March.
Speaker 3: Well, happy to talk about that. You know, as you see in the disclosures here, the customer base here is broad, diverse.
Speaker 3: and granular and the focus on 250 and above for most of those customers was not all that relevant.
Speaker 3: average deposit account size here, obviously relatively modest, which is something that is a hallmark of our franchise I might add. So the customers we did talk to were larger rate sensitive.
Speaker 3: concerned about ensuring they were achieving the appropriate yield on their funds. And, oh, by the way, a question or two about the environment in which we were operating in the week during those two bank failures. But generally speaking, pretty stable.
Speaker 3: You know, the inbound that we received was very supportive. Several of the customers I got on the Zoom with thanked me and noted that if they were customers at large money setter banks, they wouldn't be on the Zoom with the CEO of the bank.
Speaker 3: And they value that and that's our value proposition, right? Those relationships we have across that customer base. So.
Speaker 3: Things obviously have settled down and as I suggested in my comments, we're on offense here. We often, as you know, Alex, take advantage in periods of disruption. Plenty of capital here, plenty of ability to...
Speaker 3: Step into a vacuum that's created during that disruption and we're looking at opportunities to do that.
Speaker 5: Great, that's helpful. I want to ask also for your comments on thoughts around credit quality. It has been a lot of concern nationally about office exposure. If you could give us what your office exposure is and also talk about why some of your markets might be different from...
Speaker 3: some of the areas that are maybe of more concern. Well, I think Scott referenced a disclosure in our slides on office. So let's just knock that right off. We're in tertiary markets, right? The return to the office has not been a drama.
Speaker 3: diversify portfolio of office and tertiary markets. The tenants are for the most part suburban medical and professional tenants, and the average loan size there, 2.2 million. So we think we have that well managed, and we conducted stress tests there recently, and we feel good about their...
Speaker 3: output. Otherwise, the portfolio is pretty diversified across many different asset classes with multi-family being the largest and, oh, by the way, the demand for housing in these markets is still very strong.
Speaker 3: So we're feeling pretty good about our exposure across multi-family. Residential construction is something that we think about in connection with the chip corridor. We'll see how that plays out in the future, but we have our eye on that.
Speaker 3: And finally, hospitality has been pretty strong for us as well. So right now, the sponsors we do business with are strong, diversified, and we do not detect any material deterioration, maybe around the edges a little bit of concern with covers with um...
Speaker 4: Some of the markets were in but not material in all Now it's got I'll just add that you know you know our markets pretty well from Portland Maine to Southern New Hampshire You know back into you know the Alvinies and Syracuse and Binghamton's of the world Just not a lot of single tenants large downtown office only structures in most of those cities So you know for us I think it's something that's
Speaker 5: in a quote unquote normalization of charge off level given your various portfolios.
Speaker 4: Yeah, it's a great question Alex. So I would frame it this way that you're right. Our charge-up has been very much concentrated in our other consumer lending portfolios, our long-term relationship with the Springstone Financial Lending Club. Those portfolios are in a net run-off position. So I think what you'll see over time, as those run down, you'll just see a lower level of charge-offs over the next year, year and a half. Thank you.
Speaker 4: I think that for us, so much of that picture is casted by employment characteristics. So we're probably most sensitive to employment, one, how we reserve for these things, and two, just how we experience losses.
Speaker 6: Great, thanks for taking my questions.
Speaker 2: Thank you, Allie. Again, as a reminder, please press TAR 111.
Speaker 2: Thank you, Alex. Again, as a reminder, please press tar 11 on your telephone and wait for your name to be announced.
Speaker 2: Your next question comes for the line of Steve Moss of Craymond Chains. Your line is now open. Our first question comes for the line of Steve Moss of Craymond Chains. Our first question comes for the line of Steve Moss of Craymond Chains.
Speaker 7: Good morning. Good morning. Good morning, Steve.
Speaker 7: Maybe just starting off on loan growth here, you still had good growth in the pace of Resi Solar here this quarter. Just kind of curious as to where that may level off or any updated thoughts around there. I hear you guys in terms of loan growth moderating, just kind of where you see POC to strengthen.
Speaker 3: pockets of weakness. Sure, let me talk about our residential solar first. I think we mentioned in the last call that we've reached a level that from a concentration perspective on our balance sheet that has caused us to look in and say, how do we diversify our relationship here with engaged to continue to help them originate but to...
Speaker 3: bring other investors into the picture and allow us to earn servicing income as a function of that. And that migration to that model is underway. There will be a little bit more growth in the next quarter, I think, in that portfolio and then level off.
Speaker 3: And by that time, several of those investors, which have expressed interest in our under negotiation right now, could be at the table and we'll assume a servicing role and that will add to our fee income, which is part of our long term plan here. With respect to other growth, you know, inside the chipcourt.
Speaker 3: and for the large hospital development going on in downtown Utica. So that's promising. I would expect more of that in Central New York. In New England generally, do we see a moderation of the...
Speaker 3: number of opportunities to finance multi-family we do and for all the obvious reasons borrowing costs inflation labor costs all of those things have caused smart sponsors that we do business with to be thoughtful about how they want to achieve a return so
Speaker 3: We've got a big focus on the CNI side right now and particularly in New England, a marketing effort that is very targeted and we're moving quickly there. With that said, last year, loan growth was for us well above the median. And you know, I think this year we should think about it more.
Speaker 7: kind of how are you thinking about that pace of decline in the margin here just given a much different environment.
Speaker 4: So, Steve, I would kind of frame it this way that, needless to say, our net interest margin was higher in January than it was in March and that differential was on the funding cost side. You know, we are picking up a little bit of earning asset yield as we reprice new volume or replacement volume that hits the balance sheet. The Fed Fund rate changes on our commercial variable rate portfolio.
Speaker 4: for the second quarter. And the question is, how much of that can we fight off with asset yield improvement? So that's the real question for us. I think new assets are going on to the books at the right yields across all of our portfolios. We are not today reinvesting cash flows into the investment portfolio, so we're taking off.
Speaker 4: liquidity available for loan growth because again I think we're still seeing you know again to John's point mid single-digit opportunities which are fine for NVT.
Speaker 7: Okay, that's helpful. Maybe just in terms of also thinking about repricing, I'm on the loan side, it's 20, 25% loans are variable, but just kind of curious, what's the pace of fixed loans repricing and just kind of how do we think about that dynamic here going forward?
Speaker 4: I think what we've been using, Steve, across our portfolios, because remembering that outside of commercial that does have a proportion of loans that are adjustable or variable, most of the rest of our loan portfolios are fixed. So residential mortgage is largely fixed. Indirect auto is largely fixed. The residential is mostly fixed.
Speaker 4: So, you know, from that perspective, I think we'd think about the total amount of our assets that reprice over a one-year period to be in the neighborhood of $2 billion of change. So, you know, in addition to the variable rate portfolio moving with that funds rates, online, we woke up, you were looking under the
Speaker 4: expectations of where cash flow zone has definitely slowed down. Does that then contribute to quite frankly a little bit slower runoff in the long portfolio on a legacy basis which means growth might be a touch higher, probably does. But that's kind of how we think about it. I think for us to, you know, we have a small portion of our funding profile that is, you know, essentially whole-
Speaker 4: just wondering if you guys have any chance, either the LTVs or debt service coverage on the Office portfolio. Steve, we can get that to you offline. We've done some very detailed reviews in that portfolio. We've probably haven't done a 100% portfolio review, but we can get you those numbers. Thank you.
Speaker 7: All right, I appreciate that. Thank you very much. Thank you. Appreciate questions.
Speaker 2: And your next question, Compton line of Chrisso, Connell of KBW, your line is now open.
Speaker 8: Good morning. Good morning, Chris. Good morning, Chris.
Speaker 7: Follow up on the on the security support portfolio. Appreciate the color on the cash flows upcoming for the remainder of 2023. I was hoping you guys could provide what the duration was for the AFF and HGM portfolio.
Speaker 4: So Chris, for us across all the portfolios, we waited average life duration in around five years.
Speaker 4: So Chris, for us, across all the portfolios, weighted average life duration in around five years. Great.
Speaker 4: all the portfolios at weighted average life duration in around five years. Great. And...
I was wondering if you guys had to spot in for March. Month of March in the 345 range. Okay, great. And then you guys mentioned I think expenses would be flat.
give or take an organic basis for the remainder of the year. Was that just compensation expense? Or was that total overall expenses? So I think it's overall. And here's how I would frame this, Chris. First and foremost, obviously as John mentioned, we're preparing ourselves for hopefully getting regulatory approval and getting the pending Salisbury trends.
compensation expense and what I would call the first third of our merit change was processed in the first quarter. So going into the second third and fourth quarters we'd be thinking about the second two-thirds of that merit change, a slightly lower level of payroll tax contribution.
And unusually, the number of payroll days and every quarter in 2023 are actually the same. So I think as we think about some of the seasonal costs that we incur in winter months as a bank base in the Northeast, some of those go down in the next few quarters, but some of our activity-based costs relative to customer engagement.
It's helpful. And on this cell is very deal close.