NBTB - NASDAQ

Thank you, John and good morning. Turning to the results overview page of our earnings presentation, our first quarter GAAP earnings per share was $0.78 and $0.88 per share excluding $0.10 per share of combined acquisition expenses and securities losses. Excluding the impact of acquisition expenses and securities losses, first quarter results were $0.02 a share higher than the linked fourth quarter and $0.03 a share below the first quarter of last year. 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. 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 or $0.06 per share difference. Our reserve coverage stood at 1.21% of loans at March 31 compared to 1.24% at December 31, 2022 and 1.18% at the end of March of last year. The next page in the deck shows trends in outstanding loans. Total loans were up $114 million for the quarter or 1.4% and included growth in both our consumer and commercial portfolios. Loan yields were up 28 basis points from the fourth quarter of 2022, reflective of higher yields on our variable rate portfolios as well as higher new volume rates. Our total loan portfolio of $8.26 billion remains very well diversified and is evenly balanced between consumer and commercial outstandings. Total deposits of $9.68 billion 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 the high point for us. The decrease in deposits from last year’s first quarter was primarily concentrated in larger more rate-sensitive customers. In many cases, those customers opted to move a portion of their excess liquidity into higher yielding off-balance sheet money market or short-term treasury instruments, many of which are managed by NBT. Our retention of core operating relationships has remained very high and we continued to successfully add new relationships in the first quarter. Although deposit balances have declined from early 2022, they are still 23% higher than the pre-pandemic first quarter of 2020. 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. 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 of March were 62 basis points and total cost of funds were up to 88 basis points. 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, which provides a coverage ratio of 149% at quarter end. The next slide looks at the detailed changes in our net interest income and 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 less days in the quarter and the remaining two-thirds reflective of increases in funding cost moving up faster than improvements in earning asset yields. 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. Our cycle-to-date deposit beta through the end of March has been 12% with total funding beta of 13%. 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 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. Our wealth management insurance and retirement plan administration business experienced seasonal growth in revenue generation from the fourth quarter. Card services 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 Durbin Amendment to the Dodd-Frank Act beginning in the third quarter of last year. Turning now to non-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. Total operating expenses were consistent with the linked fourth quarter of last year. Salaries 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. 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. 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 Bancorp. 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 19 basis points in the first quarter of 2023 compared to 18 basis points in the prior quarter. In the selected financial data summary is provided within the earnings release, we have summarized the components of quarterly net charge-offs by line of business. Consistent with the previous four quarters, first quarter net charge-offs were concentrated in our other unsecured consumer portfolios, which are in a planned run-off status. 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. As I wrap up the 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. 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 net interest income. Our capital accumulation results over the past several quarters continued to put us in an enviable 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?

And, Alex, it’s Scott. I’ll just add that you know our markets pretty well from Portland, Maine to Southern New Hampshire back into the Albany’s and Syracuse and Binghamton’s of the world, just not a lot of single tenant, large downtown office only structures in most of those cities. So, for us I think it’s something that’s very controllable.

Great. And then just to follow up on credit, your charge-offs have been sort of running mid-teens, I guess, over the last couple of years, and that’s a big reduction from where they were pre-pandemic in the kind of the 35 to 40 basis point level. Do you think that charge-offs just over time are going to trend back towards that 35 to 40 basis point level? Or what are your thoughts on "normalization" of charge-off levels given your various portfolios?

Yes, it’s a great question, Alex. So I would frame it this way that you’re right, our charge-offs have been very much concentrated in our other consumer lending portfolios, our long-term relationship with Springstone Financial, LendingClub. Those portfolios are in a net runoff position. So I think what you’ll see over time is as those run down, you’ll just see a lower level of charge-offs over the next year, year and a half. But to your point, will other lines of business such as indirect auto start to move back towards historical numbers, really good historical numbers but will they move back from the levels we’ve been experiencing for the last two and a half years, which have been in the single-digit from a charge off standpoint? I think they probably do over time. But again, I think that for us that is so much – 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.

Great. Thanks for taking my questions.

Thank you, Alex.

[Operator Instructions] Your next question comes for the line of Steve Moss of Raymond James. Your line is now open.

Good morning.

And then on the margin here, Scott I hear you in terms of the way our funding costs were for the month of March, just kind of curious kind of how are you thinking about that pace of decline in the margin here, just given a much different environment?

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. We are picking up a little bit of earning asset yield as we re-price new volume or replacement volume that hits the balance sheet. The Fed funds rate changes and our commercial variable rate portfolio gave us a little bit of push in the first quarter, but not a ton whether we get another one here next week. So, we get a little bit of offset to that. I will kind of frame it this way that if our cost of funds for the month of March got 88 [ph], probably not unexpected that during the quarter, they get to 1% for the second quarter and then 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 somewhere between $15 million to $16 million a month of cash flows on that side. We’re using that as offset to short-term borrowings today. There are yields that are respectable in the investment portfolio. I think we’ve just tried to leave our excess liquidity available for loan growth, because again I think we’re still seeing – again to John’s point mid-single-digit opportunities, which are fine for NBT.

Okay. That’s helpful. And maybe just in terms of also thinking about re-pricing on the loan side, it’s 20% to 25% of loans are variable but just kind of curious, what’s the pace of fixed loans re-pricing and just kind of how do we think about that dynamic here going forward?

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 are variable, most of the rest of our loan portfolios are fixed. So residential mortgages largely fixed, indirect auto was largely fixed, solar residential is mostly fixed. So from that perspective, I think we think about the total amount of our assets that re-price over a one-year period to be in the neighborhood of $2 billion of change. So in addition to the variable rate portfolio moving with the funds rates, that is that opportunity in terms of re-pricing. Have cash flows slowed down in almost all of our portfolios, they have. There’s not a huge line of people forming right now to pay off their 3.25% mortgage. And with that in mind, our expectations of where cash flows has definitely slowed down. Does that NIM contribute to quite frankly, a little bit slower runoff in the loan 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 – we have a small portion of our funding profile that is essentially wholesale funding, but the difference in cost of funds in the wholesale market right now given all the anxiety in the market, it’s just so much more pronounced in the natural inflection we’re getting in our deposit profile.

Okay. And then one last one in terms of just on office here. 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 probably haven’t done a 100% portfolio review, but we can get you those numbers.

All right. I appreciate that. Thank you very much.

Thanks, Steve. Appreciate the questions.

[Operator Instructions] Your next question comes from the line of Matt Breese of Stephens Inc. Your line is now open.

Good Morning, Matt.

Sorry, if I missed this. Could you give us some sense for projections on overall loan growth through year-end?

Yes, I’ll take that one and John, feel free to chime-in, but so the 5.5% annualized that we experienced in the first quarter had a contribution from Solar Residential, that’s probably a slight amount higher than we would expect for the balance of the year. But do I still think we’re in sort of that 3.5% to 5.5% range on an overall opportunities basis for the year? Yes, I do.

Very helpful.

Matt, I would add to that, that needless to say, in this environment where you’re paying a significant amount more attention to core funding opportunities, the lending that bring core funding opportunities naturally to the table with them are probably a little bit more attractive. So if that’s C&I, on the commercial side, if that’s residential mortgage typically brings a customer relationship on the funding side, certain other lines of business, the chase for core funding with that same customer is just a little bit harder. So I would say that that’s not new news. We’ve probably had that bias for a while, but it’s probably a bit more accentuated right now.

Understood. Okay. And then for your own commercial real estate loans that are coming up for renewal now, from 2018, 2019 how are debt service coverage ratios handling higher rates? How are LTVs reacting to higher cap rates? Have you found that rent increases and NOI increases have kind of buffered any sort of blow here or maybe just give us, some idea for what’s coming up for renewal now. Are the underwriting characteristics as strong as they were back in 2018, 2019?

So Matt, so far so good, right? The other thing that’s obviously happened if you have to remember in 2018 and 2019, so the stuff that’s sort of reaching either the five year points or, so now, most of those were underwritten at rates that were not the pandemic low rates. And in certain cases, as you could probably imagine, even some of those, that were written at low rates after the Fed funds rates dropped to zero before the, start of the pandemic. The customer is sitting a lot of times with a fixed swap protection in some of those instruments. So from a customer protection standpoint, a lot of our customers are in really good shape with that. The other thing I’ll make an observation at is yes, that there, in most of our markets, I think cap rates are probably going up a little bit. And that’s kind of a slow walk. It’s not something that got pronounced and posted immediately in every one of our markets. But remember, the customer is, had a period of time where they’ve been servicing their obligations that have had very low interest rates, so they’ve made meaningful impact on their carry debt, from an overall perspective. So again, I think for us from a blended standpoint, it’s a very positive story. And we don’t have customers that we have on a watch list today because we say it is the valuation of their properties unlikely to be carrying a re-pricing activity.

Great. That’s all I had. I’ll leave it there. Thank you.

Thanks everyone.