NBTB - NASDAQ

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.

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.

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, Steve.

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.

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. 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, Matt.