NBT Bancorp Inc.

Today's conference is scheduled to begin shortly. Please continue to stand by. Thank you for your patience. Thank you. 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'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 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 touchtone 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. 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 90 cents, return on average assets of 132, and return on average tangible common equity of 16.9 percent. 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, CNI, 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-state 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, and that was 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 very 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 welcome the 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'll turn the call over to you, and we can talk in greater detail about our financial performance in the first queue. 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 10 cents 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 $600,000 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 first quarter end 2022 were just over $50 million. With forgiveness almost complete for both the 2020 and 2021 vintage loans, we recognize $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 continue 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, and we continue to add new accounts. On slide seven, 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, but 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 improvements. In addition, our balance sheet continues to exhibit a meaningful level of asset sensitivity. Slide 8 shows trends in non-interest income. Excluding securities gains and losses, our fee income was up 4% on a late 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 NDTs. 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, once fully implemented, that these changes will reduce service charge fee income by approximately a 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 7 cents a share. Turning to non-interest expense on slide 9, 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 seasonably 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 I previously mentioned, NED charged us for 14 basis points of loans in the first quarter of 2022, basis points in the prior quarter. Both NPLs and NPAs 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 CECL 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.