NBT Bancorp Inc.

Good day, everyone. Welcome to the NBT Bancorp Third 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 note 1, 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. Anyone requiring operator assistance can press the star key, then zero on your touchtone telephone. As a reminder, this call is being recorded. I would now like to turn the conference over to NBT Bancorp's president and CEO, John H. Watt, Jr., for his opening remarks. Mr. Watt, please begin.

Good morning, and thank you for participating in our earnings call covering NBT Bank Corp's year-to-date and third quarter 2021 results. Joining me today are NBT's Chief Financial Officer, Scott Kingsley, our Chief Accounting Officer, Annette Burns, and our Treasurer, Joe Andesco. At NBT, we continue to experience momentum across the markets we serve and a business climate that is generally vibrant, although not without pockets of volatility. despite the ongoing impact of COVID. The headline for today is that we are pleased to report earnings per share of 86 cents for the third quarter, which is a consistent and productive result. Our team increased commercial and consumer loans with growth of 2% on a linked quarter basis, excluding PPP, and we managed our total cost of deposits down to 10 basis points. At the end of the third quarter, the commercial pipeline in the customer acceptance and moving to closing stages was over $300 million. This pipeline covers our seven-state banking platform. Credit quality remains strong as non-performing and criticized assets both declined in the quarter. Our balance sheet is also strong, and our ability to generate capital is robust, with tangible book value per share growing nearly 10% since the third quarter of 2020. The strength of our balance sheet continues to provide optionality to consider the opportunistic and strategic deployment of our capital. With non-interest income to total revenue at 34%, our diversified fee-based businesses had a great quarter. AUM and AUA was $9.7 billion at the end of the queue. Across our New England footprint, we are advancing our organic growth strategy by leveraging the market disruption occurring in that region. We have hired both customer-facing bankers and team members focused on operations and support. We have also started to convert customers and believe we are at the front end of a multi-year growth strategy. In August, we welcome Ruth Mahoney to NBT and our executive management team as the president of Wealth Management. Ruth has more than 30 years of experience in wealth management, private banking, retail banking, and regional leadership. She joins us after many years as a senior banker at Key Corp in New York's Capital Region. We're fortunate to have Ruth on our management team. To walk you through the detail on our third quarter financial performance, I will now turn the call over to Scott, and following his remarks, we'll take your questions. Scott, over to you. Thank you, John.

Turning to slide four, our third quarter earnings per share were 86 cents. These results were driven by favorable credit metrics and strong fee income. We recorded a negative provision of $3.3 million in the quarter. Charge-offs remained very low at 11 basis points. Our reserve coverage decreased to 1.28%, excluding PPP loans, from 1.38% at the end of the second quarter of 2021. Overall, we continue to be pleased with our underlying operating performance. Slide 5 shows trends in outstanding loans. On a core basis, excluding PPP, loans were up approximately $132 million for the quarter, or 1.8%. As John suggested earlier, commercial activity has steadily improved, and we continue to have good momentum in several of our businesses. Commercial line utilization remains a headwind, but new originations have been good. The lack of vehicle inventories has continued to challenge net results in our indirect auto portfolio, and we experienced a decline in outstandings for the fifth consecutive quarter. Also, 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 now around $276 million. With forgiveness well underway for both the 2020 and 2021 vintage loans, we have recognized $21.1 million in total fees associated with PPP lending, and we have $10.7 million in unamortized fees remaining. We expect a significant portion of these to be recognized later this year. Moving to slide six, deposits were up $410 million for the quarter, as seasonally expected, with our demand deposits up $165 million. Customer balances remained elevated from liquidity associated with various government support programs. Our quarterly cost of deposits declined to 10 basis points, and we continued to add new accounts. Next, on slide 7, you'll see the detailed changes in our net interest income and margin. Net interest income dollars decreased $1.5 million as compared to the second quarter, related entirely to lower PPP forgiveness. The net interest margin was down 12 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 are striving to achieve stability in core net interest income results. Slide 8 shows trends in non-interest income. Excluding securities gains and losses, our fee income was up linked quarter to $40.4 million, or 2.6%. More broadly, non-spread revenue was 34% of our total revenue, which remains a key strength for NBT, and we're pleased with the trajectory of each of the non-banking businesses we're in and continue to believe they are all investable. Retail banking fees were up the linked quarter due mostly to higher card-related activities. Wealth and retirement plan administration fees had another strong quarter on new business wins and market appreciations. Turning to non-interest expense, on slide 9, our total operating expenses were $72.9 million for the quarter, and we continued to demonstrate effective cost awareness. We did incur an additional $2.3 million of non-recurring costs in the quarter related to an estimated litigation settlement. We'd expect core operating expense to drift modestly upward over the next several quarters. 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 12 basis points. Both NPLs and NPAs declined this quarter. Observed credit metrics have been much better than what would have been suggested by the CECL models at this time last year. On slide 11, we provide a walk-forward of our reserves. Clearly, the economic outlook continues to improve, but uncertainty remains elevated. Excluding PPP, our allowance to loans ratio was 128 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 my prepared comments, some closing thoughts. We started 2021 on strong footing and we are pleased with the fundamental results of the first nine months of the year. Stable net interest income, good results from our recurring fee income lines, sustained expense discipline, and exceptional credit quality outcomes have been clear highlights. It's also worth mentioning that we've added over $121 million to capital over these last historically challenging seven quarters, while at the same time paying dividends to our shareholders of $82.8 million and buying back $22.1 million of our own shares. These meaningful capital accumulation results put us in an enviable position as we consider growth opportunities for 2022 and beyond. With that, we're happy to answer any questions you may have at this time.