NBT Bancorp Inc.

Good day, everyone. Welcome to the NBT Bancorp second quarter 2021 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 two, today's presentation may contain forward-looking statements as defined by the Securities and Exchange Commission. Actual results may differ materially 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. Anyone requiring operator assistance can press the star key and then zero on your touch-tone telephone. 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 for joining us today for NBT's earnings call covering our second quarter 2021 results. Here with me today are NBT's Chief Financial Officer, Scott Kingsley, our Chief Accounting Officer, Annette Burns, and our Treasurer, Joe Andesco. I'd like to first welcome Scott as he joins me in hosting the first of what will be many NBT earnings calls. As you all know, he is a proven and successful leader in the small and mid-sized bank space, and based on the reception to our announcement that he is joining our team earlier this month, he needs no further introduction. Many thanks to Annette for serving in the role of Interim Chief Financial Officer. Her consistent leadership and depth of experience will support a seamless transition for Scott. Across the markets we serve, we are seeing building momentum and strengthening local economies. Our team is driving loan growth and although there is volatility in the churn, the commercial pipeline is strong with commercial loans growing at an annualized rate of 4%. Several of our consumer pipelines are also strong, including mortgage and solar, and we expect to benefit from pent up demand over the balance of the year. In our wealth business, AUM and AUA ended the quarter at a record level of $9.8 billion, driving higher fee-based revenue. Our capital continues to build with tangible book value up 4% for the quarter and up 10% from the prior year. Our strong capital base allows for optionality to fund dividends, further organic growth in New England, and to engage in other strategic activities. And on the subject of capital allocation, our Board of Directors voted to approve an increase in the quarterly dividend to $0.28 per share in support of our commitment to enhancing long-term shareholder value. Since our last call, we welcome Dave Brown, President and CEO of the Capital District YMCA, as our newest director. We look forward to having Dave add his perspective to the discussions at our board tables. As we start to put time and distance between the worst of the pandemic and our return to the office, I want to extend thanks to the entire NBT team for their unwavering commitment and many sacrifices throughout the crisis that impacted every aspect of their life. The team has pivoted quickly from supporting our customers and communities through the worst of this period to full-on execution of our strategic growth plans. in the second half of 2021. To talk in greater detail about our second quarter financial performance, I will turn the call over to Scott. Following his remarks, we will take your questions. Scott, it's all yours.

Thank you, John. I'm feeling great, happy to be rejoining the fray, and very pleased to be part of the team at NBT. Turning to slide four, our second quarter earnings per share were 92 cents. These results were driven by favorable credit results and strong fee income. We had a negative provision of $5.2 million. Charge-offs remained very low at seven basis points. Our reserve coverage decreased slightly to 1.38% excluding PPP loans from 1.48% at the end of the first quarter. Outside of credit, we continue to be pleased with our underlying operating performance Pre-provision net revenue was up 3% as compared to the first quarter of 2021. Slide 5 shows trends in outstanding loans. On a core basis, excluding PPP, loans were up approximately $61 million for the quarter. As John suggested earlier, commercial activity has steadily improved and we continue to have good momentum in several of our businesses. Line utilization remains a headwind, but new originations have been fairly brisk. As a reminder, we have additional information on PPP lending on slide 13 in the appendix of today's presentation. Our total PPP balances are currently at $360 million. With forgiveness well underway for the 2020 vintage loans, we have recognized $19.1 million in fees associated with PPP lending, and we have $12.6 million in unamortized fees remaining. We expect the bulk of these to be recognized in the second half of this year. Moving to slide 6, deposits were down $31 million for the quarter, as seasonally expected, with our demand deposits up $87 million. Customer balances remain elevated from liquidity associated with various government support programs. Next on slide 7, you'll see the detailed changes in our net interest income and margin. As we suggested last quarter, net interest income dollars remained consistent as compared to the first quarter. The NIM was down 17 basis points with compression in asset yields partially offset by lower funding costs. Excess liquidity net of PPP activity continued to be a drag on our margin but we again remind ourselves that low-cost core funding should always be viewed as a long-term value driver. Looking forward, as assets continue to reprice in a low-rate environment, we would expect to continue to see some additional core margin pressure. As such, as we deploy liquidity into more productive earning assets over the next several quarters, we would generally expect continued stability in net interest income results. Slide 8 shows trends in non-interest income. Excluding securities gains and losses, our fee income was up link quarter at $39 million. More broadly, non-spread revenue was 33% of our total revenue, which remains a key strength for NBT, and we like each of the non-banking businesses we're in and continue to believe that they are all investable. Retail banking fees were up link quarter due mostly to higher card-related activities. Wealth had another strong quarter on new business wins and market appreciation. Insurance services and retirement plan administration fees were consistent and additive to our mix. Turning to the non-interest expense slide, page 9, our total operating expenses were $71 million for the quarter, and we continued to demonstrate effective cost awareness. We did incur $1.9 million, or 3 cents a share, of non-recurring costs in the quarter, including an estimated legal settlement. We'd expect core operating expense to drift modestly upward over the course of the year, especially as our footprint continues to reopen more fully and the operating environment normalizes. On slide 10, we provide an overview of key asset quality metrics, excluding the impact of PPP Net charge-offs remained lower than historical norms at seven basis points. Both NPLs and NPAs declined this quarter. We are continuing to benefit from our conservative underwriting, and thus far, observed credit metrics have been much better than what would have been suggested by the CECL models this time last year. On slide 11, we provide a walk forward of our reserve. Clearly, the economic outlook continues to improve, but uncertainty remains elevated. Including PPP, our allowance to loans ratio was 138 basis points, an appropriately conservative estimate of the credit risk in our portfolio today. We continue to believe that the path of charge-off activity will return to more historical norms and, along with expected balance sheet growth, will likely be the drivers of future provisioning needs. As I wrap up prepared remarks, some closing thoughts. We started 2021 on strong footing, and we are pleased with the fundamental results of the first half of the year. Stable net interest income, good results from our recurring fee income lines, and sustained expense discipline are the clear highlights. Moreover, our credit quality metrics continue to exceed expectations. With that, we're happy to answer any questions you may have at this time.