Nbt Bancorp Inc Q1 FY2022 Earnings Call

Good day, everyone. Welcome to the NBT Bancorp, First Quarter 2022, 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 NBT Bancorp.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 discussed. Reconciliations for these numbers are contained within the appendix of today's presentation. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. 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.

Good morning. And thank you all for participating in our Earnings Call covering NBT Bancorp's First Quarter 2022 results. Joining me today are our Chief Financial Officer, Scott Kingsley, and our Chief Accounting Officer, Annette Burns. We are extremely pleased with our results for the first quarter of 2022, including earnings per share of $0.90, return on average assets of 1.32%, and return on average tangible common equity of 16.9%. Loan growth was strong and in excess of what we typically experience in our markets at the start of the year. Our commercial business generated $250 million in loan originations. We also experienced an uptick in line of credit usage. It's clear to us that our customers are successfully navigating the challenging operating environment and we are there to help them. Loan pipelines across our platform were strong and active in the first quarter, going into the second quarter; commercial pipelines are particularly robust. The first quarter performance of our Sungage solar fintech partnership and the rebound of indirect auto are also notable. Generally, C&I, CRE, and consumer loans, including mortgage, all grew. Our fee-based businesses continued their strong performance with total non-interest income at nearly 35% of total revenue for the first quarter. NBT is getting it done because we have a talented and dedicated team across our seven states footprint from the Poconos to the White Mountains and beyond, and their work makes our success possible. Their focus on our customers is our competitive advantage, validated by two powerful, independent third-party acknowledgments this month. In the J.D. Power 2022 U.S. Retail Banking Satisfaction Study, NBT Bank ranked number two in the New York tri-state region. This is a significant confirmation of our strategies around customer engagement and satisfaction. NBT Bank was also named one of Forbes' World's Best Banks for 2022. Of the U.S. banks recognized by Forbes, we are the highest-ranked bank based in New York State and the highest-ranked bank operating in Connecticut and Vermont. Finally, this quarter, we welcomed a new executive to the leadership team. Randy Sparks joined us on the executive management team as our General Counsel. So with that said, Scott, I will turn the call over to you, and we can talk in greater detail about our financial performance in the first quarter, and following Scott's remarks, we look forward to taking your questions.

Thank you, John, and good morning. Turning to Slide four of our earnings presentation, our first quarter earnings per share were $0.90, which was consistent with the first quarter of 2021, excluding securities gains and losses and $0.04 a share higher than the fourth quarter of last year. These results were achieved despite a $4.2 million or $0.08 a share decline in PPP income recognition compared to the first quarter of last year and a $5.6 million decline in PPP income from the fourth quarter of 2021 or $0.10 a share. The increase in net interest income over the two comparative quarters of last year was a result of solid organic loan growth and productive incremental deployment of a portion of our excess liquidity into investment securities. Despite this improvement in earning asset mix, the company still carried a significant level of overnight funds at the Federal Reserve at quarter-end, leaving us with still more improvement opportunities. We recorded a loan loss provision expense of $600 thousand in the first quarter compared to a provision benefit of $2.8 million in the first quarter of 2021, and a provision expense of $3.1 million in the fourth quarter of last year. Net charge-offs in the first quarter were $2.6 million or 14 basis points of loans compared to 13 basis points of loans in the first quarter of 2021 and 22 basis points of loans in the linked fourth quarter. Our reserve coverage decreased to 1.18% of loans from 1.24% at the end of 2021. Slide 5 shows trends in outstanding loans on a core basis, excluding PPP loans, were up $202 million for the quarter and included strength in both our consumer and commercial portfolios. Our total PPP balances as of the first quarter in 2022 were just over $50 million, with forgiveness almost complete for both the 2020 and 2021 vintage loans. We recognized $2 million of interest and fees associated with PPP lending during the quarter and have approximately $1.6 million in unamortized fees remaining. We would expect most of these remaining fees to be recognized in the next two quarters. Excluding PPP recognition, loan yields were down just one basis point from the fourth quarter of 2021, meaning new volume rates and blended portfolio yields were essentially the same by first quarter end. Moving now to Slide six, deposits were up $227 million for the quarter and included growth in municipal deposits as seasonally expected. Customer balances continued to remain elevated from liquidity associated with various government support programs, as well as higher consumer savings levels. Our quarterly cost of deposits declined to seven basis points. On Slide 7, you'll see the detailed changes in our net interest income and margin. Net interest income increased $1.2 million as compared to the first quarter of last year and was up $5.4 million excluding PPP recognition, reflective of year-over-year loan growth and additional investment securities purchases. Reported first quarter net interest margin was 2.95% and 3.17%, excluding PPP income recognition and the impact of excess liquidity. Looking forward with interest rates rising across the yield curve, earning assets are expected to begin to reprice at levels above our blended portfolio yields in the second quarter, and as such, we would expect to see some opportunities for core margin improvement. In addition, our balance sheet continues to exhibit a meaningful level of asset sensitivity. Slide 8 shows trends in non-interest income, excluding security losses. Our fee income was up 4% on a linked-quarter basis to $42.8 million. More broadly, non-spread revenue was 35% of our total revenue in the first quarter of 2022 and remains a key strength and value driver for NBT. Our wealth management, insurance, and retirement plan administration businesses experienced strong year-over-year growth from new business wins, market appreciation, and certain seasonal activity-based revenues. Banking fees improved almost 17% from the pandemic-impacted first quarter of 2021, principally from higher card-related services. During the quarter, the company made some adjustments to certain customer non-sufficient funds processing practices and expects that once fully implemented, these changes will reduce service charge fee income by approximately one cent per share per quarter. Also, as a reminder, the bank will be subject to the provisions of the Durbin amendment to the Dodd-Frank Act beginning in the third quarter of this year, which caps our per transaction compensatory opportunity for debit interchange. We estimate this will reduce quarterly debit card interchange income by approximately $3.7 million or almost $0.07 a share. Turning to non-interest expense, on Slide nine, our total operating expenses were $72.1 million for the quarter, which was $4.3 million or 6.3% above the first quarter of 2021. Salaries and employee benefit costs of $45.5 million were up 9% over the prior year and included merit-related salary increases, as well as higher performance-based incentive compensation accruals compared to a much more muted first quarter of last year. Total operating expenses were lower than the linked fourth quarter of 2021, reflective of two less payroll days, as well as certain seasonally higher costs incurred in the fourth quarter, consistent with historical trends. We'd expect core operating expenses to drift upward over the next several quarters, including the full-quarter impact of 2022 merit-related wage increases, which were awarded in March, as well as our continued efforts to fill a higher-than-historical level of open positions in support of our customer engagement and growth objectives. In addition to investing in our people, we expect to continue to invest in technology-related applications and tools in order to advance our customer-facing and processing infrastructure. On Slides 10 and 11, we provide an overview of key asset quality metrics and a walk forward of our loan loss reserve changes. As previously mentioned, net charge-offs were 14 basis points of loans in the first quarter of 2022, compared to 22 basis points in the prior quarter. Both non-performing loans and non-performing assets declined again this quarter. We are continuing to benefit from our conservative underwriting and certainly observed credit metrics have been much better than would have been suggested by the seasonal models 12 to 24 months ago. We continue to start each quarter with the underlying assumption that the combination of loan growth and net charge-offs will be a proxy for the provision for loan losses before the consideration of any changes in macroeconomic conditions and forecasts, which have continued to exhibit improvements since late 2020. As I wrap up my prepared remarks, some closing thoughts: we started 2022 on strong footing and we are pleased with the fundamental results achieved in the first quarter. Stable to improving net interest income, solid results from our recurring fee income lines, sustained expense discipline, and exceptional credit quality outcomes have been clear highlights. Our capital accumulation results over the past several quarters continue to put us in an enviable position as we consider growth opportunities for the balance of 2022 and beyond. With that, we're happy to answer any questions you may have at this time.

Thank you. One moment for questions. Our first question comes from Alex Twerdahl of Piper Sandler. Your line is open.

Hey, good morning, guys.

Morning.

Morning.

First off, following your commentary on the NSF fee changes you made during the quarter, can you just talk to us a little bit about exactly what you did and why you did it?

So we spent a lot of time over the last several years adjusting our programs to be more indicative of what the customers' needs are and what the market's expectations are for providing that service. To answer your question specifically for the quarter, what we did was look at the way we assess what we call unavailable funds fees. This means we could actually see that the customer either has a historical pattern or a live deposit that's likely to hit their account over the next couple of days. Our actions were to modify our processing to acknowledge that or to provide some grace period relative to letting the customer avoid a fee when we have an expectation that the account will be supplied enough to cover the overdraft.

That's great color, thanks, Scott, and then following up on your commentary, John, about the commercial pipelines being particularly robust going into the second quarter. Can you just talk maybe a little bit about the geographies that you are seeing strength in and the types of customers? Do you think there's sustainability as the year progresses, especially as rates start to move higher?

Sure, happy to do that. We sat with the leaders in each of the seven states in our platform last week and went through the pipelines. In every one of those markets, we see a nice mix of C&I, small business, and CRE, which was previously heavily focused on multi-family. We've seen that tempered because of uncertainty in the supply chains and labor costs and other issues associated with multi-family construction. However, we see very basic manufacturing clients who are building a new line in their factory or improving the technology they use to create efficiency in the plant floor. This is across the platform; no specific region leads the other. In an upgrade environment, I still think there's headroom here; we are still operating in historically low rate environments. The pipelines indicate that our customers have figured out how to manage in this difficult operational environment and do what they need to make their businesses successful, and we're here to help them from Maine to Connecticut across Northern New England, and in our core region of Upstate New York and Northeastern Pennsylvania.

That's great. Thanks. Just a final question for me. One of your competitors earlier this week talked about a slowdown in some of the conversations regarding M&A. I'm curious how your appetite has changed for M&A given the changing environment, and do you agree that the pace of conversations in the Upstate New York market has slowed a bit?

Well, I want to comment on the strategy of our competitor, although I did read that comment. What I will say is that the conversations we noted in our last earnings call continue, and across the platform there are potential opportunities that strategically fit in our growth plans. If the timing is right, and the conditions are right, and the valuation is right, we would engage. I spend a lot of time having conversations with various partners, and that continues. The short answer is, we're not experiencing what was noted in the transcript of our competitor.

Great. Thank you for taking my questions.

Thanks, Alex.

Our next question comes from Matthew Breese of Stephens Incorporated. Your line is open.

Good morning.

Good morning, Matt.

I was curious that you mentioned expectations for margin expansion, given the historically very strong deposit beta and loan yields coming on the books at higher rates plus remix. Could you comment on the extent we might see margin expansion through the end of the year, particularly if we get 200 basis points of Fed hikes?

Good question, Matt. We probably haven't done much prognostication thinking 200 is nearest to us right now. We have a little over $2 billion of variable rate instruments on the commercial side that will get that benefit lock-step. The reset dates might not exactly align with the Fed changes, but we will see some benefit. We have $2 billion to $2.25 billion worth of cash flows off our earning asset base that we would get an opportunity to find assets with slightly higher yields. Our core accounts may stay lower for longer, but we anticipate margin expansion will be methodical, even with rising rates.

Got it. And switching to loan growth, it was interesting how diverse loan growth was this quarter. Can we see mid to high single-digit growth out of the bank this year?

I'm very optimistic. I think we need another quarter to have more visibility. We're optimistic about the way the year started and what's in the pipeline. There are many variables that could affect it overall. We may not see every category repeat the same quarter, but we are comfortable driving the expectations set out in our last earnings call.

I was looking for a bit more help on expenses. You had mentioned expenses could drift higher. Can you be more specific with where you think they might drift to?

Yes, at the end of last year, I think I provided some guidance in the $73 million to $74 million per quarter. Those numbers are still in line. We're likely to see expenses creep up, including the full-quarter impact of merit-related wage increases, which were awarded in March. We expect expenses to be up because of underlying technology projects underway and other discretionary expenses that tend to be higher late in the year. I suspect we creep back into that $73 million to $74 million window by next quarter.

In regards to credit, you had solid metrics this quarter. Are you seeing any incremental signs of distress, particularly at the consumer level? If there are 200 basis points of Fed hikes, at what point would you worry about credit quality deteriorating?

Great question. We are not seeing material negative movement in either past due or charge-offs; they remain very low. Retail checking accounts still show excess balances, indicating customers can absorb additional rate hikes. However, we are prepared for normalization; its effects could manifest over time. As rates go up, we are being cautious but feel confident in our current standing.

I expect that backdrop gives us comfort with an 1.18% coverage ratio on the portfolio and solid coverage for non-performing loans. Credit quality is healthy and recovery is evident in asset valuations. Therefore, we feel good moving forward, despite potential increases.

Right.

I appreciate your insights. Thank you.

I appreciate it, Matt.

Thanks, Matt.

Our next question comes from Chris O'Connell of KBW. Your line is open.

Hey, how's it going, guys?

Morning.

Good morning. To start, about the buyback: you had a strong quarter and indicated a good start in Q2. How should we think about the buyback going forward and regulatory capital?

Great question, Chris. We did buy a couple hundred thousand shares to address natural equity plan creep anticipated in 2022, and we also bought an additional 200,000 early in Q2 at attractive prices. We're also accruing capital a bit faster than forecasted, so our capital utilization is on track. We focus on Tier-1 capital as that’s what our principal regulator, the OCC, typically inquires about.

The retirement plan administration noted a seasonally strong quarter. Is there anything in particular driving that? Will it reverse a bit in Q2?

First quarter is typically the most robust quarter for our retirement plan administration business, with more new customers onboarding and strong activity-based revenue opportunities. If we see the same results in Q2, we will be very pleased. However, we are investing in that space to continue to enable larger revenue tracking and anticipate some market impact from volatility.

Back to the margin: when you reported the excess liquidity NIM calculation, what free excess liquidity level or amount is being considered?

We estimate excess liquidity ended the quarter around $900 million, but realistically today it’s likely closer to $600 to $700 million. We anticipate that with rising rates, some large institutional customers may seek alternative instruments. We will stay close to those customers as it's important.

Great, thanks for taking my questions.

Thank you, Chris.

Thanks, Chris.

I'm not showing any further questions. I would now like to turn the call back to John Watt for his closing remarks.

Thank you. Thank you all for taking the time this morning to hear the story of first-quarter at NBT. As I started, we are proud of how we began the year and have a lot of momentum, which is all a function of the team executing. Thank you again for your time, and we look forward to hearing from you in the next quarter. Thanks, Operator.

Thank you, Mr. Watt. That concludes our program. You may now disconnect and have a great day.