NBT Bancorp Inc.

Good day, everyone. Welcome to the NBT Bancorp First Quarter 2023 Financial Results Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC's 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 discussed. Reconcilations 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 stick in.

Thank you, Bella. Good morning, and thank you all for participating in our earnings call covering NBT Bancorp's first quarter 2023 results. Joining me today are NBT's Chief Financial Officer, Scott Kingsley, our Chief Accounting Officer, Annette Burns, and our Treasurer, Joe Ondesco. In a volatile macro environment, we are pleased with our operating results for the first Q of 2023, including earnings per share of 88 cents, return on average assets of 1.3%, and return on average tangible common equity of 17.2%, excluding merger expenses and securities losses. We drove 5% annualized loan growth with our commercial banking, business banking, residential solar, and indirect auto businesses all contributing. In the markets we serve, it is clear to us that our customers are successfully navigating the challenging operating environment, and we are on the ground helping them every day. Looking forward, loan pipelines across the platform are active but are moderating. Credit quality remains strong across our commercial and consumer businesses. Non-performing assets are at all-time lows. We're happy to report today that both total deposits and core deposits grew in Q1, driven in part by seasonal growth of municipal deposits. Scott will talk more about this growth and about the diversity and granularity of our deposit base that is the hallmark of our franchise. In addition, we enjoy access to significant and diverse liquidity sources, and our capital levels are strong. We have provided detail on the accompanying slides. Our net interest margin did experience pressure in the first quarter due to repricing actions that positioned NBT to stay competitive in our markets. With that said, relative to our peer group and the broad market, our cycle-to-date deposit beta as of the end of March rose to a modest 12%. The work to support our customers in connection with the multi-year ramp-up of the New York chip corridor continues. In central New York, Micron is moving swiftly to complete the planning necessary to bring its fab plant out of the ground. In the Mohawk Valley, Wolfspeed has commenced work on the addition to its fab plant to support new contracts with Jaguar and Mercedes-Benz for chips and EV vehicles. The economic growth up and down the CHIP corridor will continue to build over the next five years and beyond, and NBT is uniquely positioned to support that growth. During the quarter, we continue to execute on our long-term growth plans, and in particular, we are making progress towards our planned acquisition of Salisbury Bancorp. On April 12th, Salisbury shareholders voted to approve the merger with NBT. This is a significant and positive milestone. As we announced in December, we expect this transaction to close late in the second quarter, subject, of course, to regulatory approval. This month, NBT was named one of Forbes Best Banks for 2023. Of the US banks recognized by Forbes, NBT is the highest ranked bank based in New York State. During volatile times, our team excels and this designation is affirmation of our efforts. So NBT is on offense. Historically, our company has performed well in difficult periods in our economy. The team is positioned to do the same in 2023. Scott, I'll turn it over to you now to speak in greater detail about our financial performance in the first quarter. And following Scott's remarks, we will take your questions.

Thank you, John, and good morning. Turning to the results overview page of our earnings presentation, our first quarter GAAP earnings per share were 78 cents and 88 cents per share, excluding 10 cents per share of combined acquisition expenses and securities losses. Excluding the impact of acquisition expenses and securities losses, first quarter results were two cents a share higher than the linked fourth quarter and three cents 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 a $0.06 per share difference. Our reserve coverage stood at 1.21% of loans at March 31st, compared to 1.24% at December 31st, 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 a 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 continue 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 costs 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 and to $36.4 million and was $6 million lower than the first quarter of 2022. Our wealth management, insurance, and retirement plan administration businesses 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 expenses. 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 summaries 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 runoff 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 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 debt 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. With that, we're happy to answer any questions you may have at this time. Bella?