NBT Bancorp Inc. (NASDAQ:NBTB) Q4 2022 Earnings Call Transcript January 24, 2023
Operator: Good day, everyone. Welcome to the conference call covering NBT Bancorp's Fourth Quarter and Full Year 2022 Financial Results. This call is being recorded and 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. 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. And 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.
John H. Watt, Jr.: Thank you, Chris, and good morning, and thank you for joining our earnings call covering NBT Bancorp's fourth quarter and full year 2022 results. Joining me today are NBC's Chief Financial Officer, Scott Kingsley; our Chief Accounting Officer, Annette Burns; and our Treasurer, Joe Ondesko. We achieved superior operating results for the full year 2022, defined by strong loan growth in connection with our strategy to build scale and create higher operating leverage. We're very pleased to report operating earnings per share of $0.86 for the quarter and $3.55 for the year, excluding acquisition-related expenses and securities losses. Return on average assets was approximately 1.3% with return on tangible common equity for the year at 16.9%.
In a year underscored by volatile interest rate movements and unfavorable equity and fixed income market returns, we're pleased that our operating results drove total shareholder returns of over 15% in 2022. Also, in line with our strategies around scale building, we were very pleased to announce an agreement to acquire Salisbury Bancorp in December. This all-stock transaction is expected to close in the second quarter of 2023, pending the required regulatory and Salisbury shareholder approvals. Loan growth was 10.2%, with our commercial and residential solar lending businesses finishing strong in the fourth quarter. Credit quality remained strong throughout the year with nonperforming loans down 4% in the fourth quarter. In 2022, our customers continued to embrace digital services with a 94% cumulative increase in consumer digital adoption since the start of 2020.
Across our markets, our commercial and business banking customers are active and their sentiment is generally optimistic. Projects funded by the 2021 infrastructure bill are moving ahead in upstate New York and our customers are bidding and winning their fair share: the planning work associated with the Micron chip fab plant build out near Syracuse has begun; and in Utica, New York, Wolfspeed recently announced a new large chip fabrication contract with Mercedes. NBT is preparing on many fronts to support our customers and communities across the Upstate New York chip corridor over the next five years. Yesterday, our Board approved a $0.30 dividend payable on March 15. In 2022, it's notable that we marked 10 consecutive years of annual dividend increases and continued our commitment to providing consistent and favorable long-term returns for our shareholders.
So, I'll conclude my remarks by emphasizing that it was the talented and dedicated team at NBT who made our 2022 results possible. We could not be more optimistic about how well that team has positioned us to enter 2023. With that said, I'll turn the meeting over to Scott, who will walk you through the detail of our last quarter and the prior year. Scott, I'll turn it over to you.
Scott Kingsley: Thank you, John, and good morning, everyone. Turning to the results overview page of our earnings presentation, our fourth quarter earnings per share were $0.84, and $0.86 per share excluding the $0.02 per share of acquisition expenses we incurred in the quarter related to our previously announced combination with Salisbury Bancorp. Fourth quarter operating results were consistent with the $0.86 a share reported in the fourth quarter of 2021 and $0.04 a share lower than the linked third quarter of 2022. These results were achieved despite a $7.5 million decline in PPP income recognition compared to the fourth quarter of last year or $0.13 a share. The improvement in net interest income over the two comparative quarters was the result of solid organic loan growth, incremental deployment of a portion of our excess liquidity into investment securities in the first half of the year and higher asset yields from the continued increases in the Federal Reserve's targeted Fed funds rate.
We recorded a loan loss provision expense of $7.7 million in the fourth quarter compared to $3.1 million expense in the fourth quarter of 2021 or an $0.08 per share difference. Fourth quarter 2022's loan loss provision was also $3.2 million or $0.06 a share higher than the $4.5 million provision recorded in the linked third quarter. Net charge-offs in the fourth quarter were $3.7 million or 18 basis points of loans compared to 22 basis points of loans in the fourth quarter of 2021 and 7 basis points of net charge-offs in the linked third quarter. Our reserve coverage increased slightly to 1.24% of loans from 1.22% at the end of September, which provided for loan growth. The next page shows trends in outstanding loans. Total loans were up $245 million for the quarter and included growth in both our consumer and commercial portfolios.
Loan yields were up 38 basis points from the third quarter of 2022, reflective of higher yields on our variable rate portfolios as well as new higher volume rates. Total loan portfolio of $8.15 billion remains very well diversified and is evenly balanced between consumer and commercial outstanding. Total deposits were down $423 million from the end of the third quarter and ended the year $739 million below the end of 2021 or 7.2% lower. The decrease in deposits was primarily concentrated in certain larger, more rate-sensitive accounts. The effects of tighter monetary policy, inflation and higher rate alternatives, including a laddered treasury security strategy deployed by our wealth management group for our own customers, continue to weigh on balances.
Even though deposit balances declined from 2021, year-end 2022 deposits are still 25% higher than the pre-pandemic end of 2019. During the fourth quarter, we shifted from an excess liquidity position to a net overnight borrowing position. Our quarterly cost of total deposits increased to 17 basis points compared to 9 basis points in the linked third quarter. Interest-bearing deposits moved up from 14 basis points in the third quarter to 27 basis points in the fourth quarter. And our total cost of funds increased 19 basis points from 18 basis points in the third quarter to 37 basis points in the fourth quarter. The next slide looks at detailed changes in our net interest income and margin. Net interest income increased $14.7 million as compared to the fourth quarter of last year and was up $5.4 million from the third quarter of 2022, reflective of higher yield on earning assets.
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Reported fourth quarter net interest margin was 3.68%, up 17 basis points from the linked third quarter and 60 basis points higher than the fourth quarter of 2021. With interest rates expected to continue to modestly rise in the near-term, the yields on our variable rate earning assets are expected to continue to move higher over the next few quarters. We also expect to reinvest cash flows from our interest-earning assets at levels above our current blended portfolio yields. Although we believe our deposit funding profile remains a core strength, we would expect increased levels of deposit beta in 2023. Going forward, retaining and growing deposits will continue to be a critical element of our ability to sustain the significant improvements we achieved in net interest margin during 2022.
The trends in noninterest income are summarized on the next page. Excluding security gains and losses, our fee income was down 17% from $3 million in the linked third quarter. Our retirement plan administration and wealth management businesses revenue decreased a combined $1.2 million, reflective of challenging market conditions as well as certain seasonally higher revenues in the third quarter. Similarly, fourth quarter revenues in our insurance agency are typically lower than the first three quarters of the year and were $450,000 below the linked third quarter. In 2022, on a full year basis, the company's retirement plan administration business recognized $2.5 million of service revenues related to statutory plan document restatement requirements that generally recur on a six-year cycle.
Card services income decreased $3.9 million from the fourth quarter of 2021, driven by the bank being subject to the provisions of the Durbin Amendment to the Dodd-Frank Act beginning in the third quarter of 2022, which caps our per transaction compensatory opportunity for debit card interchange activities. Lower levels of card utilization and changes in transactional mix resulted in lower card services income in the fourth quarter compared to the linked third quarter. In addition, we continue to experience comparatively lower commercial lending fee opportunities in this rising interest rate environment. Turning now to noninterest expense. Our total operating expenses were $79.5 million for the quarter, which was $4.4 million or 5.9% above the fourth quarter of 2021 and $2.8 million or 3.7% higher than the linked third quarter and included $1 million of merger-related expenses incurred during the quarter.
Salaries and employee benefit costs of $47.2 million were 2.3% lower than the linked third quarter, reflective of one less payroll day in the quarter and more favorable experience in certain of our benefit plans. The quarter included some higher seasonal costs, including some external services for several tactical and strategic initiatives. We'd expect core operating expenses to drift modestly upward over the next several quarters as we continue our efforts to fill open positions in support of our customer engagement and growth objectives. We would also anticipate somewhat higher than historical levels of merit-based compensation increases in early 2023, probably 4% to 5%. 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 the next slide, we provide an overview of key asset quality metrics. A walk forward of our loan loss reserve changes is also available at the appendix of the presentation. As I previously mentioned, net charge-offs were 18 basis points in the fourth quarter of 2022 compared to 7 basis points in the prior quarter. In the selected financial data summary provided with the earnings release, we have summarized the components of our quarterly net charge-offs by line of business. Consistent with previous quarters, fourth quarter net charge-offs were concentrated in our other unsecured consumer portfolio, which are in a planned (ph) status. Nonperforming loans declined again this quarter. We are continuing to benefit from our conservative underwriting and have continued to experience higher than historical levels of recoveries.
As I wrap up my prepared remarks, some closing thoughts. We started 2022 on strong footing and are very pleased with the results we achieved. Improving net interest income, additive results from our diversified fee income line and favorable credit quality outcomes have more than offset higher levels of noninterest expense, which has allowed for productive gains in operating leverage. Our capital accumulation results over the past several quarters continue to put us in an enviable position as we consider growth opportunities for 2023 and beyond. With that, we're happy to answer any questions you may have at this time. Chris?
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