Q2 2023 NBT Bancorp Inc Earnings Call

August 1, 2023

And is that asset yield pricing catching up is that because of the variable rate loans that are finally get re pricing with some of the fed moves or is that new loan growth or widening spreads or can you maybe just talk through that a little bit.

Sure. So so kind of a quick review, we've got about $2 billion worth of adjustable rate assets that will move with them with the fed rate change.

So we should get a little bit of lift on that based on the July decisioning from the fed.

But probably as important or maybe even more important as we think out a little bit longer term, we've got about $1 $6 billion of cash flows coming off the existing portfolios that have the opportunity for repricing into new instruments.

And what we're observing is that the ability to reprice our instruments above current portfolio yields has consistently been in that 150 to 175 basis points above blended yield.

So just natural movement or natural cash flows and natural servicing tends to be in our favor relative to asset repricing.

Okay, that's great and is that primarily.

Due to loan growth or is there some component of security reinvestment as well in there.

On the loan side right now our current thinking is that we are not adding to the securities portfolio. We would like to look at the combined balance sheet for NBC in Salisbury before we make any more decisioning on that.

That makes sense.

With the small acquisition that you did the retirement direct acquisition can you just help us figure out if that's going to result in any real financial impact its always a little bit difficult to tell from.

These transactions based on the AUM size and the.

The number of customers.

Youre right I think for US, we're kind of thinking around the $2 $5 million annual.

Revenue opportunity from this small transaction.

And that.

GAAP accretion in the first couple of years when you have a transaction that that's small that most of the.

Most of the purchase price ends up in an amortized intangible it's pretty modest what we really like about this transaction.

We're partnering with somebody who was pretty good at what they were doing albeit smaller than epic.

But it extends our presence into the southeast where obviously demographic changes are very positive.

Got it and as the operating expenses associated with that included in that expense guidance that you gave earlier as well.

I would sense that.

Think about this way Alex if that's if it's a $2 $5 million.

Opportunity, it's probably generation has the capability to generate a 20 or 25% operating margin. So it kind of work from there.

That's great and then a final question for me just in terms of that liquidating portfolio do you have a sense for how long that's going to take or how long that'll be a drag.

In overall loan balances and then as it relates to power.

Yes.

Think it goes we think the part that's running off we think has about about 18 more months of.

Of outcome and those would have been the relationship that a long standing relationship we had with spring stone, which became part of lending clubs several years ago.

So again these are assets that we're comfortable with from a historical perspective, but they're just in it since they are in a runoff status to the extent that we're experiencing losses, which is not unusual when something's getting to the end of its life.

From that perspective, we're just calling that out because it tends to be more proportional piece of actual outcome for us.

Yes, that's the full $200 million in other consumer that's running off.

It is.

And what do you expect in terms of the.

Charge offs I know, there's a lot of the charge offs. This quarter associated with that is that the expectation that a similar level of charge offs will continue going forward and I guess wanted to get done does that free up some ACL to be to be released I guess.

Yes, it happens naturally Alex so as these things pay off the need to have a reserve as the loans actually pay off.

But I think from now until the conclusion of the runoff of those portfolios. We think we generate enough net interest income to cover our losses, but it's not significant.

Okay, great. Thanks for taking all my questions.

Thanks, Alex.

Thank you one moment for our next question.

And our next question comes from the line of Steve Moss from Raymond James Your question. Please.

Good morning.

Good morning, Brian .

Maybe just.

Just circling back on on the margin and the combination here with Salisbury.

I think you kind of alluded to Scott, but just are you.

Could you just give us thoughts around the restructuring of the balance sheet or your securities portfolio or their securities portfolio.

Sure. So Steve So Salisbury core margin results are lower than our core base, which that's been the case since we made the announcement they had always set a slightly lower margin than.

And then we enjoyed.

Because we will have obviously purchase accounting adjustments the likelihood is that that core margin reverts back to market, which is probably in line with where we are.

<unk> Barry has about $180 million of investment securities today.

Well that we will be marking to market.

Carried at Mark to market today, but we will be marketing them for purchase accounting purposes. So we will have that opportunity to consider whether we want to reposition those assets that will have been already marked it down.

Or whether we want to run those off.

Ed.

Inexperienced the accretion attached to that selfish.

Selfishly, Steve if we can turn something into cash earnings as opposed to Accretable earnings.

And not damage ourselves or dilute ourselves relative to the market execution that we're motivated to do that no question.

Relative to the rest of.

The outcome from.

The Salisbury standpoint.

When we announced in December that we thought that the transaction could be just under 10% accretive to <unk> results.

Despite meaningful changes in interest rates and other things over the last eight or nine months, we're still pretty confident with that level. So we think from a from a contribution standpoint, we think we should be able to expect about 10% accretion.

Okay great.

And then in terms of.

On the loan growth side, you guys had pretty good loan growth this quarter, even with the.

Solar moderating.

Moderating here, just curious how you or what.

The opportunities Youre seeing out there how youre feeling.

About the loan pipeline.

And inland pricing.

Happy to take that one Steve good morning.

I'll first talk about commercial.

Yes.

The activity is really.

Active right now in terms of.

Opportunities to bid on situations that perhaps.

Mid second quarter didn't exist, but.

Momentum at the end of <unk> into <unk> is a lot higher.

It's very competitive but.

The pipeline is a little lower than it was first Q and this time last year, but nevertheless, active and it's across all seven states in its C&I and still.

Sorry, as well so we feel pretty good about.

Momentum in the commercial business business banking also small business owners very active right now those tend to be full.

Accounts when we.

Full relationships when we acquire them so.

Not only will that be.

Financing opportunities, there's a pause.

The opportunities Treasury management there.

That pipeline has been strong in.

Month over month, we've observed.

Really nice closing level, so I think thats going to continue through the rest of the year.

And on mortgage.

Seasonally is up but certainly not at the levels. It was last year.

So.

Obviously thats the rate environment.

But it's active.

So generally speaking we feel after.

Optimistic about hitting our internal.

Targets and.

We feel optimistic about the markets in which we are doing this business.

From a pricing perspective, you heard C. You heard Scott earlier that.

We finally have experienced some of the more irrational competitors capitulating.

And there.

Realizing what true market levels are.

That's enabling us to.

Ensure that.

What we're quoting is going to provide us a yield that is appropriate given our cost of funds.

No.

The rationalization of the market.

Feels good to us.

Okay, Great and then one more question just going back to the $1 6 billion of cash flows you guys expect.

The loan portfolio as that for over 12 months or 24 months.

That's over one year ago.

Okay great.

Alright, Thank you very much.

Steve because of the diversification of our portfolios <unk> got much faster cash flows and things like indirect auto as an example, so.

We're pretty comfortable with that unemployment basis.

Great I appreciate all the color there thanks.

Thanks, Steve.

Thank you and Thats a reminder, ladies and gentlemen, if you have a question at this time, Please press star 111.

One moment for our next question.

Next question comes from line of Chris O'connell from K VW. Your question. Please.

Hey, good morning.

Good morning, Chris.

So just wanted to.

Touch based on the let's.

I'd say the whole deal.

And.

Or what the impact is on the fee and expenses.

Once the deal closes and I know it causes mid quarter. So maybe just talking about their first full quarter impact.

As well as.

How quickly the cost saves will come through on the Opex side, given the conversion date, so tight to the merger close.

Yes, Chris obviously released their results.

The tail end of last week.

And which were very much in line with the numbers, we had seen from an expense and generation of income outcome over the last several quarters.

So we're still comfortable that we think we can achieve about a 30% cost save.

From a from a vendor outcome and from the integration of our two combined companies.

I wouldn't expect that we would see much accretion in the first quarter. It to your point, it's a mid quarter. The third quarter, we will have a lot of noise in it to begin with between acquisition expenses and us getting the purchase accounting marks correct before the end of the third quarter.

I would think that we will start to experience somewhere a little bit above half to three quarters of those cost saves expectations in the fourth quarter with the objective of having full run rate of that savings starting at the beginning of the year.

Okay. That's helpful.

And then can you just talk about how much of the.

Core noninterest bearing deposit mix shift.

<unk> seen.

And how much it's kind of slowed as far as <unk>.

April versus May versus June July and kind of where you see that heading in the back half of the year.

Yes, Chris So there was some exaggerated inflection that came out of March going into April .

And.

The silver lining in that hole.

Im frameworks, we got to have a lot of really good discussions with our customers.

Ed.

I think understanding our customers' objectives relative to safety because I don't think anybody question, whether NPT was the safe spot for their money.

But just other opportunities to have further discussion with them as to what their longer term plans were.

So we experienced a little bit more than I think in terms of because of the mix of our deposit portfolio, there's probably still a little bit of latent activity, that's going to come through on the retail side, we're not all retail deposit holders have shifted their mix or shifted the excess deposits or excess.

That they have into higher interest bearing instruments.

I think tended to be because of balance because of low balance outcomes tended to be a.

A bit more conservative relative to that shift.

What we really don't know and this process is have we reached the end of surge deposits from the pandemic.

So we continue to monitor that and we continue to track that but.

But at the same point in time, we're still at levels that are a little bit above where we started pre pandemic. So we're paying a lot of attention to that for obvious reasons. So in.

In terms of further prognosticating that could we see more people headed for an interest bearing outcome I think we could do I think it will be as meaningful as it was in the second quarter I don't.

Got it that's all.

Paul.

And I may have missed it earlier, but did you guys.

Good.

Scott NIM for June .

And if not could you.

Chris We just we've made the comment that cost of deposits for the month of June were 92, and that we were $1 31, and total cost of funds just to try to give you a little bit of an extension of that trend line from the blended quarter.

Are you guys willing to provide.

And then for Jim.

It's probably a little bit lower than the average for the quarter.

Okay got it thanks.

Thank you one moment for our next question.

And our next question comes from the line of Matthew Breese from Stephens. Your question. Please.

Hey, good morning.

Good morning, Matt I was hoping we could parse the NIM just a little bit more.

First question is with <unk>, Barry and I don't know if you can provide it over the first year or six months, but some frame of reference for expected accretable yield would be helpful.

So hard to do right now Matt we're two weeks away from closing the transaction clearly interest rates today, it would generate a higher level of accretable yield and what we announced in December but because we're so close and we don't.

And because their portfolio has actually repriced itself over the last nine months.

Self.

We're a little.

Probably a little bit shy to provide anything along that line, we probably don't have a better estimate for that.

Will it be substantial it will be.

And what we announced in December was that we thought about half of our GAAP occur.

Accretion would come from Accretable yield the combination of Accretable yield on securities and loans offset by the fact that we would be creating a core deposit intangible.

We're pretty comfortable sticking with that from a guidance standpoint, some of the numbers themselves have changed a little bit.

That still seems to make sense to us.

On a core basis, excluding accretable yield where you expect the NIM to settle out I think you would.

Intimated that they were about on par with each other and so I guess, what I was tying that comment too was as you talked about some NIM pressure over the next couple of quarters, you meant on a core basis versus all in with declining accretive.

Absolutely I did yes.

Okay and do you do you have any idea of where that core NIM might shake out on a on a first full combined quarter.

Not have not gotten to that yet okay.

And I'll be really I don't want to be coy about this but be straight up with us is that it really depends on whether we keep all of the things that are on their balance sheet today, including their securities or whether we decide to liquidate their securities after they've been marked.

That will make a significant difference just given the size of that balance sheet.

Understood Okay.

Looking back through past hiking cycles and.

Thinking about it might be different.

The cycle, just given the overall rate move, but I'd be curious your thoughts on.

When the fed basically puts in place its last hike how long after that.

Do you see deposit costs start to flatten out.

For your institution and do you think Thats a good proxy for this cycle.

Yeah, it's probably a good proxy I mean this is the acceleration of this cycle is obviously something we haven't seen before but I think it's fair to say that two quarters. After the fed has put their stake in the ground is we're done.

We should probably be getting to the end of the pressure that would come on the funding side.

Have to pay attention to the detailed attributes of where your mix is.

<unk>.

We will continue to do that but in all honesty the mix of our balance sheet today isn't radically different than the pre pandemic balance sheet debt MPT was operating from.

Okay.

Appreciate that and then on page 16.

Provide an updated one year interest rate sensitivity.

Assuming like a lot of your peers up 100 or down 100 is really tied to a parallel shift.

It feels more like we might just get the short end of the curve moving.

Likely in a downward direction next.

If we were to get that type of move.

How does sensitivity change and how does the NIM react.

Reasonable question.

I think that if you if the if the front end of the curve comes down from a fed action, but the midpoint of the curve in the longer end starts to actually stay where it is today or slightly higher we shouldnt be the net beneficiary of that outcome, just remembering where we price from.

Think about it today.

Most customers today would like us to price to the three five or seven year point of the curve.

But we're having to pick up incremental funding today from the short end of the curve. So.

It could be a little bit detrimental today, so we think that could actually be beneficial to us on a longer term basis.

Got it alright.

Last one for me.

John I appreciate the updates on the chip quarter.

It seems as time goes on there is more and more going on in your neck of the woods.

I know, it's a long term effort, but I'd be curious.

These things have occurred and some of them are already shovels in the ground.

What if any sort of tangible benefits tangible changes can you reference.

That have impacted the local community or or your bank balance sheet.

Happy to do that.

Go to the capital District, where our global crossing has im sorry, Globalfoundries has been.

Producing for 12 years, we have experienced population growth in those markets. We've experienced growth in multifamily housing single family family and residential all of which we participate in from a financing perspective, we've experienced deposit growth in those Sip codes.

And we see.

Vibrant buildout of the support.

<unk> system around global foundries.

Our houses logistics companies other infrastructure all of which our customers are engaged in building and maintaining over time.

So the model in the capital district is likely to be repeated in <unk>.

Central New York once Micron gets up and is producing and that a higher level over a longer period of time.

So we see that.

We've done some internal analysis on that subject, we want to make sure we have those numbers type before we share them.

More broadly, but clearly.

The growth in capital District is.

Driven in large part.

By what we see around that plant and as a function of if successful.

<unk> run there.

And do you have for reference the amount of dollars Globalfoundries is committed to that market versus what micron is set in terms just to provide some some.

Since for scale and size.

So.

The micron investment by multiple of two or three times larger when it is completed as announced if it happens the way they.

Planned that it should be.

Be significantly larger than what goes on with Globalfoundries.

I'll leave it there. Thank you for taking my questions.

Sure.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to John <unk> for any further remarks.

Thank you Jonathan and thank you all for participating in this call.

We look forward to talking with you at the end of third Q and being able to fill in some of the blanks associated with the combination with Salisbury.

We'll get that done in the next two weeks and then be in a position to.

Have some concrete discussion around it so.

Thanks.

Have a good day.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

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Q2 2023 NBT Bancorp Inc Earnings Call

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