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NBT Bancorp Inc
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Good day, everyone. Welcome to the NBT Bancorp's Second Quarter 2023 Financial Results Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC Regulation FD. Corresponding presentation slides can be found on the company's website at nbtbancorp.com.
Before the call begins, NBT'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 Securities and Exchange Commission. Actual results may differ from those projected.
In addition, certain non-GAAP measures will be disclosed. Reconciliations for these numbers as contained within the appendix of today's presentation. At this time, all participants are on 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 NBT Bancorp President and CEO, John H. Watt, Jr. for his opening remarks. Mr. Watt, please begin.
Thank you, Jonathan, and good morning, and thank you all for participating in this earnings call covering NBT Bancorp's second quarter 2023 results.
Joining me today are NBT's Chief Financial Officer, Scott Kingsley; and our Chief Accounting Officer, Annette Burns. There is no doubt that we entered 2Q in an environment overshadowed by volatility at the macro level, which had an impact on the banking industry. Throughout this period, NBT is focused on our customers and communities, and our results demonstrate the success of this approach.
By mid-quarter, we experienced higher visibility that gives us confidence about our forward momentum. Importantly, in early July, we were pleased to announce that NBT received the regulatory approvals necessary to proceed with our acquisition of Salisbury Bank. We've scheduled the closing for August 11 with a simultaneous core systems conversion. Our integration team is prepared to ensure a seamless experience for the Salisbury customers and we are excited to welcome our new colleagues who will join NBT at that time.
Let me take a moment to highlight second quarter activity across our businesses. We achieved commercial and consumer loan growth at an annualized growth rate of 5%. That growth was diverse with our commercial lending and indirect auto businesses leading the way.
Our residential solar business has moderated significantly as our planned evolution to a fee-based servicing platform commenced during the quarter. Like the rest of our industry, our cost of funds has risen as the deposit book reshuffled.
In 2Q, we experienced the seasonal contraction of our municipal book as well. Nevertheless, deposits have grown since December 31, and our funding sources are robust. We have plenty of headroom to execute our 2023 plan and beyond. The full-cycle deposit beta landed at 17% at the end of the quarter. We continue to enjoy high retention levels, and we experienced growth in the retail deposit accounts during the quarter.
Our fee-based businesses continued their solid performance with total non-interest income at nearly 30% of total revenue for the second quarter. In connection with our fee-based focused strategies, EPIC, our national benefits recordkeeping and administration firm acquired the assets of Charlotte-based Retirement direct on July 1. This organization adds $2 billion in client assets and over 500 individual retirement plans to the Epic base, along with a team of talented professionals.
Although we are very mindful that the forward environment is likely to continue to be volatile through six months, we observed a resilient consumer and small business owner. Credit quality at NBT remains strong and continues to perform at levels better than those we experienced prior to the pandemic.
During the quarter, there were several impactful announcements along the Upstate New York chip corridor that will drive long-term economic growth across our core markets.
In the capital region, GlobalFoundries announced a large and strategic partnership with Lockheed Martin to produce silicon chips for use in their defense and aerospace segments. At the end of the quarter, Menlo Microsystems announced a major investment in a fab manufacturing facility in Ithaca, New York to produce its ideal switch chips. These recent announcements are in addition to the very vibrant activity up and down the corridor this year previously discussed in our earnings calls. We anticipate continued growth and transformation of the economy in our core markets as a result.
As we head into the back half of the year, NBTs offense in part driven by the integration of Salisbury into our successful business model. We are well positioned with strong liquidity and capital levels, a diversified business mix, highly effective risk management practices and the team of experienced professionals.
Scott, I'll turn the call over to you now to talk in greater detail about our financial performance for the second quarter. And following Scott's remarks, we'll take your questions.
Thank you, John, and good morning. Turning to the results overview page of our earnings presentation. As John indicated, our second quarter earnings per share were $0.70, excluding the impact of acquisition expenses and securities losses, we generated earnings per share of $0.80 compared to $0.89 in the second quarter of last year and $0.88 in the linked first quarter.
Despite higher levels of interest income and noninterest income as well as lower core operating expenses, the continuation and acceleration of higher funding costs resulted in the decline in net earnings for the quarter. Tangible book value per share of $21.55 at June 30 was $0.56 higher than the second quarter of 2022 and $0.03 higher than the linked first quarter.
The next page shows trends in outstanding loans. Total loans were up $94 million in the second quarter and $208 million for the year or 5.1% annualized and included growth in both our consumer and commercial portfolios.
New origination yields have continued to move meaningfully higher. Our total loan portfolio of $8.36 billion remains very well diversified and is evenly balanced between consumer and commercial outstandings, reflective of customer demand in our markets.
Total deposits of $9.53 billion were up $34 million from the end of 2022, but were down 1.6% from the prior quarter, reflective of seasonal municipal outflows. The company continues to experience migration from its no interest and low interest checking and savings accounts into higher-yielding money market and time deposit instruments.
Our retention of core operating relationships has remained very high, and we continue to successfully add new customers and accounts this quarter. Even though deposit balances have declined from early 2022, second quarter end 2023 deposits are 25% higher than the pre-pandemic second quarter of 2019.
Our quarterly cost of total deposits increased to 85 basis points compared to 47 basis points in the linked first quarter and total cost of funds increased to 122 basis points in the second quarter compared to 75 basis points in the linked first quarter. In addition, our total cost of deposits for the month of June were 92 basis points, and our total cost of funds were up to 131 basis points.
We have also included a summary of our deposit mix by type, which illustrates the diversification and granularity of our customer base. In addition, the appendix of the presentation, we have provided an updated table of our available funding sources compared to estimated uninsured and uncollateralized deposits, which provides a coverage ratio of 158% at quarter end.
The next slide looks at detailed changes in our net interest income and margin. Second quarter net interest income was $6 million below the linked first quarter results and up $1.5 billion from the second quarter of 2022.
Although we believe our granular deposit funding profile remains a core strength, we would expect some continued pressure on net interest margin results for at least the next couple of quarters. Retaining and growing core deposits will continue to be a critical element of our ability to manage net interest margin results.
The trends in non-interest income are summarized on page eight. Excluding securities losses, our fee income was up $300,000 from the linked first quarter to $36.7 million, but was $5.6 million lower than the second quarter of 2022.
Our wealth management and retirement plan administration businesses experienced productive growth and revenue generation from the first quarter of this year. Card services income increased seasonally from the linked first quarter, but declined $4.6 million from the second quarter of 2022, driven by the banks being subject to the debit interchange provisions of the Durbin Amendment to the Dodd-Frank Act beginning in the third quarter of 2022. The diversification of our revenue generation sources is the core strength of the company.
Turning to non-interest expense, our total operating expenses were $77.6 million for the quarter, which was $1.5 billion or 2% above the second quarter of 2022, excluding $1.2 million of merger-related expenses in the second quarter of this year.
Total operating expenses were lower than the linked first quarter. Salaries and employee benefit costs of $46.8 million were 2.7% lower than the linked first quarter due to seasonally higher payroll taxes and higher stock-based compensation expense experienced in the first quarter of 2023 and as well as a lower level of incentive compensation in the current quarter.
On a standalone NBT basis, we'd expect core operating expenses to be relatively consistent over the next couple of quarters as each quarter of 2023 has the same number of payroll days. We do 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 Bancorp in mid-August. We have remained deliberately conservative on staffing levels this year, understanding the opportunity that the combination with Salisbury presents.
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.
Net charge-offs were 17 basis points in the second quarter of 2023 compared to 19 basis points in the prior quarter. In the selected financial data summaries provided with the earnings release, we have summarized the components of quarterly net charge-offs by line of business.
Consistent with previous quarters, second quarter net charge-offs were concentrated in our other unsecured consumer portfolios, which are in a planned run-off status and represented 68% of total net charge-offs for the quarter.
Non-performing loans to total loans were nine basis points lower than the second quarter of 2022 and non-performing assets to total assets were five basis points lower than the second quarter of last year. Our allowance for loan losses is more than five times the level of non-performing loans at the end of the second quarter.
As I wrap-up prepared remarks, some closing thoughts. We began 2023, expecting incremental pressure on funding costs, which started in the fourth quarter of 2022. The additional market volatility and uncertainty that arose in early March has continued to accelerate those pressures.
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 second quarter, despite lower levels of net interest income.
Our capital accumulation results over the past several quarters continue to put us in an enviable position as we consider growth opportunities for the remainder of 2023 and beyond. We also remain very excited and optimistic around the performance enhancement opportunities that the combination with Salisbury Bancorp will create.
With that, we're happy to answer any questions you may have at this time. Jonathan?
Certainly. [Operator Instructions] One moment for our first question. Our first question comes from the line of Alex Twerdahl from PSC. Your question, please.
Hey. Good morning guys.
Good morning, Alex.
It sounds to me, Scott, from the comment that you made on the cost of deposits in June, that maybe the funding costs are starting to level out a little bit. And I'm just trying to put it all together with your comments that you expect NIM pressure to continue and just trying to figure out, do you think that sort of that pressure is going to be at the same level that we saw in the second quarter, or do you think that it's going to -- with those funding costs may be abating a little bit, then maybe that pressure, while still there will moderate a little bit in the third and fourth quarter.
So Alex, what we're observing is that cost of funds has continued to move up, but we are getting some relief on the asset repricing side. So back to your question relative to that, do I think that the pressure is abating a little bit? I do, but I also think that's largely related to asset repricing catching up, where the level of funding cost changes actually coming in late in the second quarter and into the third.
And is that asset yield price catching up? Is that because of variable rate loans that are finally getting repricing 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 kind of a quick review, we've got about $2 billion worth of adjustable rate assets that will move 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 re-pricing into new instruments. And what we're observing is that the ability to re-price 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 re-pricing.
Okay. That's great. And is that primarily due to loan growth, or is there some component of security reinvestment as well in there?
It's all 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 NBT and 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. It's always a little bit difficult to tell from -- from these transactions based on the AUM size and the size of the number of customers?
You're right. I think for us, we're kind of thinking around the $2.5 million annual revenue opportunity from the small transaction. And GAAP accretion in the first couple of years when you have a transaction that that's small, that most of the purchase price ends up in an amortizable intangible it's pretty modest. What we really like about this transaction is 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 is the operating expense 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 generated -- has the capability to generate 20% or 25% operating margin, so kind of work from there.
That's great. And then 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 will be a drag on overall loan balances? And then --
We think it goes -- we think the part that's running off, we think, has about 18 more months of outcome. And those would have been the relationship that a long-standing relationship we had with Springstone, which became part of Lending Club several years ago. So, again, these are assets that we're comfortable with from a historical perspective, but they're just in the -- since they're in a runoff status to the extent that we're experiencing losses, which is not unusual when something is getting to the end of its life. From that perspective, we're just calling that out because it tends to be a more proportional piece of actual outcome for us.
Yes. And 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 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 once that's done, does that free up some ACL to be released, I guess?
Yeah. 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 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.
Good morning, Steve.
Maybe just circling back on the margin and the combination with Saulsbury, I think you kind of alluded to it, Scott. But just are you -- could you just give us thoughts around the restructuring of the balance sheet or your secure portfolio or their securities portfolio?
Sure. So Steve, so Saulsbury's core margin results are lower than our core base, which that's been the case since we made the announcement, you know, they had always had a slightly lower margin than we enjoyed. Because we'll 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.
Saulsbury has about $180 million of investment securities today that will -- that we will be marking to market, carry that mark-to-market today, but we'll be marking 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 down or whether we want to run those off and experience the accretion attached to that.
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 of that, we're motivated to do that. No question.
Relative to the rest of the outcome from a Salisbury standpoint, when we announced in December that we thought that the transaction could be just under 10% accretive to NBT's results, despite meaningful changes in interest rates and other things over the last 8 months or 9 months, we're still pretty confident with that level. So we think 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 here. Just curious how you're -- what the opportunities you're seeing out there, how you're feeling about the loan pipeline and loan pricing?
Happy to take that one, Steve. Good morning. I'll first talk about commercial. 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 2Q into 3Q 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 and it's C&I and still CRE 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 there be financing opportunities, there's deposit opportunities, treasury management there. And that pipeline has been strong. And month-over-month, we've observed really nice closing level. So I think that's going to continue through the rest of the year.
Mortgage seasonally is up, but certainly not at the levels it was last year. So, obviously, that's the rate environment. But it's active. So generally speaking, we feel 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 Scott earlier that we finally have experienced some of the more irrational competitors capitulating and they're realizing what true market levels are, and 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. So that 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 from the loan portfolio. Is that for over 12 months or 24 months?
That's over one year.
Over one year. Okay, great. All right. Thank you very much.
Steve, because of the diversification of our portfolio is you've got much faster cash flows in things like indirect auto as an example. So we're pretty comfortable with that on a blended basis.
Great. I appreciate all the color there. Scott, thanks.
Thanks Steve.
Thank you. [Operator Instructions] And our next question comes from the line of Chris O’Connell from KBW. Your question please.
Hey good morning. So just wanted to touch base on the SAL deal, and for what the impact is on the fee and expenses once the deal closes, and I know it closes mid-quarter. So maybe just talking about their first full quarter impact and as well as how quickly the cost saves will come through on the OpEx side given the conversion date, so tide to the merger goes?
Yeah. Chris, so they obviously released their results at 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 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, to your point, it's a mid-quarter. The third quarter 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'll start to experience somewhere a little bit above half three-quarters of those cost save 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 non-interest bearing deposit mix shift that you've seen? And how much it's slowed as far as 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 whole time frame was we got to have a lot of really good discussions with our customers. And I think understanding our customers' objectives relative to safety because I don't think anybody questioned whether NBT was a 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 or not all retail deposit holders have shifted their mix or shifted the excess deposits or excess liquidity that they have into higher interest-bearing instruments. They, I think, tended to be because of balance, because of low balance outcomes tended to be a bit more conservative relative to that shift.
What we really don't know in 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 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 terms of further prognosticating that, could we see more people headed for an interest-bearing outcome? I think we could. So I think it will be as meaningful as it was in the second quarter? I don't.
Got it. That's helpful. And I may have missed it earlier, but did you guys give the spot NIM for June?
Yes. I think we just -- Chris, we just -- we made the comment that cost of deposits for the month of June were 92, and that we were 131 on 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 the NIM for June?
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 Inc. Your question please.
Hey. Good morning.
Hi. Good morning, Matt.
Hey. Good morning, Matt.
I was hoping we could parse the NIM just a little bit more. First question is with Salisbury, 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 would generate a higher level of accretable yield than what we announced in December, but because we're so close and we don't -- and because their portfolio has actually repriced over the last nine months itself. We're a little -- we're 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 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. I mean some of the numbers themselves have changed a little bit, but that still seems to make sense to us.
On a core basis, excluding accretable yield, where do you expect the NIM to settle out? I think you had intimated that they were about on par with each other. And so I guess what I was tying that comment to 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 accretable yield?
Absolutely. I did.
Okay. And do you have any idea of where that core NIM might shake out on a first full combined quarter?
Have not gotten to that now. And I'll be really -- I don't want to be coy about this, but straight up with this 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 to past hiking cycles and thinking about -- it might be different in this 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 that's a good proxy for this cycle?
Yes. It's probably a good proxy. I mean, this is -- the acceleration in 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 that we're done, we should probably be getting to the end of the pressure that would come on the funding side.
We have to pay attention to the detailed attributes of where your mix is. And so we'll 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 that NBT was operating from
Okay. I appreciate that. And then on Page 16, you provide an updated one-year interest rate sensitivity. I'm assuming like a lot of your peers up 100 or down 100 is really tied to a parallel shift, 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?
It's a reasonable question. I think that if you -- if the front end of the curve comes down from a Fed action, but the midpoint of the curve and the longer end starts to actually stay where it is today or slightly higher, we shouldn't be the net beneficiary of that outcome. Just remembering where we price from Think about it today that most customers today would like us to price to the three, five, or seven-year point in the curve -- but we're having to pick up incremental funding today from the short end of the curve. So it can be a little bit detrimental today. So we think that could actually be beneficial to us on a longer-term basis.
Got it. All right. Last one for me. John, I appreciate the updates on the chip corridor. It seems as time goes on, there's more and more going on in your neck of the woods. I know it's a long-term effort, but I'd be curious as these things have occurred and some of them have already shovels are in the ground. What if any sort of tangible benefits, tangible changes can you reference that have impacted the local community or your bank balance sheet?
Happy to do that. Well, let's go to the Capital District where Global Crossing has -- I'm 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 residential, all of which we participate in from a financing perspective. We've experienced deposit growth in those ZIP codes, and we see a vibrant build-out of the support ecosystem around GlobalFoundries, warehouses, 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 Central New York once Micron gets up and is producing and at 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 tight 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 its successful 12-year run there.
And do you have for reference the amount of dollars GlobalFoundries has committed to that market versus what Micron is set in terms of -- just to provide some sense for scale and size?
So the Micron investment by a multiple of two or three times larger when it's completed, as announced, if it happens the way they have planned that it should be significantly larger than what goes on with GlobalFoundries
Great. 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 Watt 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 banks associated with the combination with Salisbury, and 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, and 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.